3 Things to Avoid in Your First Commercial Lease

Written by Posted On Sunday, 18 August 2019 03:12
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A bad location has caused countless businesses to go under over the years. However, a bad commercial lease has likely been the cause of even more closures.

The wrong location can kill your business if you’re a retail store or restaurant. But, a bad lease can cripple any type of business in any sector, from a welding shop to a law firm.

To make sure you’re not paying too much money or signing on for unfair terms, here are a few things you will want to avoid in your business’ first commercial lease agreement.

Paying Your Own Money to Improve the Space

In most cases, you will be able to negotiate some sort of allowance to improve the space. You can take a deep dive into this issue with this great guide to Leasehold Allowances that we invite you to read.

 

Most startup businesses are pretty strapped for cash in the early days. This means that paying your own money to improve the space could actually hurt your business. That money could be put to better use elsewhere, whether you’re getting it back or not.

 

 

We highly recommend you negotiate for a cash allowance instead of a tenant improvement allowance. That way you’re simply being given $X per square foot of your space to improve it, instead of being reimbursed after the fact.

 

At the same time, a tenant improvement allowance can also lead to delays, email strings and conversations before you get your money. When you’re running a financially lean start-up, those are all things you can do without.

A Triple Net Lease

The triple net (or NNN) is very seldom a good idea for your first space. This is a long-term lease that essentially puts you on the hook financially for anything to do with the space, such as taxes, utilities, and upkeep/repairs.

 

As a new business, it is very unlikely that:

 

1.       You can reasonably commit to a lease this long

2.       You have the cash flow or resources to invest in this space

 

This type of lease is often offered with a significant rent reduction, so it may be tempting. However, these savings are often very quickly wiped out by the money you need to pay to cover (essentially) everything else.

A Personal Guarantee

Your would-be landlord may not mention this, until it is time to put ink to paper and sign the lease.

 

They may want to add this to protect themselves in the case that your business defaults on the lease. Even if they insist that this is a deal-breaker, there are always ways to work around it. You can do little things, such as:

 

  • ·         Ask for less improvement allowance

    ·         Take any free rent or other incentives out of the lease

    ·         Increase the deposit you pay

 

At the very least, cap the length of the exposure (cut it to 1 year, instead of the entire lease), or have the condition expire after the first year of the lease, when you and your landlord know each other a bit better.

 

These are 3 things that can literally put you out of business. Don’t let your first business lease be your first big business mistake.

 

Be sure to work with someone who can look at your lease and advise you of any red flags!

Paying Your Own Money to Improve the Space

In most cases, you will be able to negotiate some sort of allowance to improve the space. You can take a deep dive into this issue with this great guide to Leasehold Allowances that we invite you to read.

 

Most startup businesses are pretty strapped for cash in the early days. This means that paying your own money to improve the space could actually hurt your business. That money could be put to better use elsewhere, whether you’re getting it back or not.

 

We highly recommend you negotiate for a cash allowance instead of a tenant improvement allowance. That way you’re simply being given $X per square foot of your space to improve it, instead of being reimbursed after the fact.

 

At the same time, a tenant improvement allowance can also lead to delays, email strings and conversations before you get your money. When you’re running a financially lean start-up, those are all things you can do without.

A Triple Net Lease

The triple net (or NNN) is very seldom a good idea for your first space. This is a long-term lease that essentially puts you on the hook financially for anything to do with the space, such as taxes, utilities, and upkeep/repairs.

 

As a new business, it is very unlikely that:

 

1.       You can reasonably commit to a lease this long

2.       You have the cash flow or resources to invest in this space

 

This type of lease is often offered with a significant rent reduction, so it may be tempting. However, these savings are often very quickly wiped out by the money you need to pay to cover (essentially) everything else.

A Personal Guarantee

Your would-be landlord may not mention this, until it is time to put ink to paper and sign the lease.

 

They may want to add this to protect themselves in the case that your business defaults on the lease. Even if they insist that this is a deal-breaker, there are always ways to work around it. You can do little things, such as:

 

·         Ask for less improvement allowance

·         Take any free rent or other incentives out of the lease

·         Increase the deposit you pay

 

At the very least, cap the length of the exposure (cut it to 1 year, instead of the entire lease), or have the condition expire after the first year of the lease, when you and your landlord know each other a bit better.

 

These are 3 things that can literally put you out of business. Don’t let your first business lease be your first big business mistake.

 

Be sure to work with someone who can look at your lease and advise you of any red flags!
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