When a small business owner looks for commercial rental space, they look for the best space and price. Determining the actual cost of a commercial property rental is more complicated than it sounds. Retail space may list at one square footage, but the lease may have more or less space than you thought.
Savvy business owners have a business attorney on call to review their leases. Commercial real estate lease agreements have negotiable clauses and hidden pitfalls for the unwary. Lowering your operating costs and increasing your services is possible if you know what areas to negotiate and where to stand firm.
Hidden Costs and Unseen Expenses
Residential properties come with paid groundskeepers and sometimes utilities. Commercial rental properties generally do not. When you take a lease in an office building or strip mall, you are also responsible for common areas, parking lots, and security. Before you sign a lease, ask about the property's hidden costs and expenses.
- Common area maintenance (CAM): CAM fees may include everything from building janitorial services to landscaping. The base rent may include these fees, or there may be an extra charge. In the latter case, be sure you get charged the correct percentage of the total bill.
- Square footage: When is a square foot not a square foot? When it's measured from the inside of the wall. Some property owners calculate square footage from the inside of the exterior wall rather than the inside of the interior wall. You can't use those extra six inches, so you should not pay for them.
- Office space: Just because there is enough square footage does not mean the building suits your business needs. The interior floor plan of the building matters as much as the total square feet. You don't want to pay for useless odd corners and dead spaces under stairwells.
- Utilities and maintenance: Commercial rent in large buildings, such as shopping centers and high-rise office buildings, may include utilities and maintenance. Having a higher rent than half a dozen maintenance companies and utility workers swarming the place is easier. But you should always check. Smaller buildings may not provide on-site security.
- Rent abatement and escalation: Unless this is a short-term lease, you probably intend to stay for a while. Review your lease's "abatement" and "escalation" clauses carefully. The base rent may increase, but it shouldn't be excessive. Any abatement should be an actual release from rent, not merely a deferment. You don't want to owe a huge sum months or years later.
Negotiating Through Lease Pitfalls
The type of lease you negotiate can make the difference between a profitable year and bankruptcy. Surprisingly, commercial leases have more negotiable clauses than standard residential leases. Savvy small business owners can reduce their monthly rent and improve their cash flow with care. Look for these traps and pitfalls when negotiating your commercial space lease.
- Damage and repairs: Be sure the lease states that the landlord and the tenant can terminate the lease if the damage is irreparable. The lease should make clear that the landlord or property owner handles structural repairs. All parties should know who is liable for any other repairs to the building.
- Operating fees, property taxes, and insurance: The tenant pays only the base rent in a basic or gross lease. In a triple-net lease, the tenant pays all operating fees, property insurance, and taxes. These elements are good negotiating points, depending on your business goals. But you don't want all the costs and none of the benefits of a triple-net lease.
- Fixtures and improvements: Depending on your business type, you may install fixtures and improvements to the property, such as cosmetic elements or specialty equipment. Don't wait until it's time to leave to argue over who this belongs to. Your lease should spell out which fixtures belong to the business and which will remain with the building. The lease should also state who must remove the items.
- Jurisdiction, arbitration, and legal remedies: Real estate investing is a major source of income for many people today. Your property owner may not live in your state or even your country. The lease should make clear which state laws control in the event of legal action. Arbitration clauses should require both parties to agree on a single arbitrator using local rules.
Get Legal Advice for Your Commercial Property Rental
A new business owner needs help when looking for rental property. A business and commercial law attorney in your area can help sort through confusing lease terms and negotiate the best lease for you and your company.