Location, location, location. Whether yours is a retail business, a manufacturer, or a service provider, where you locate your business can be the difference between success and failure.
More important than where you locate are the terms you negotiate into the lease. Commercial leases typically span an extended period of time – 5, 10, and even 20 years – so you will live with a bad lease arrangement for an awfully long time.
This article outlines the steps that a tenant should consider before signing a commercial lease. Many small business owners make the mistake of assuming that commercial leasing is not much different that residential leasing and leap into a long-term commitment without giving it much thought. But the two are very different and the potential cost of a bad leasing arrangement will haunt the business owner for a long time. Your landlord and his broker know what they’re doing. Smart business owners don’t negotiate their lease agreement without experienced advisors and a detailed plan to follow.
The first step a tenant should take is to find, and hire, a good commercial real estate broker with experience in negotiating leases for similar types of businesses. Discuss with the broker what your interests are and the requirements you have for your business. Most of all, listen to the broker. His experience finding space for businesses similar to yours is likely to refine your search and present you with options and features you never considered.
Together with the broker, the tenant now finds the ideal location. Using the criteria developed with your broker based on your interests and requirements, look at a variety of spaces. Analyze each space and how it will work for your business.
Once the decision is made on the best space, retain an experienced business attorney, preferably one with experience in commercial leasing. Many tenants have learned the hard way that trying to save money on legal expenses by depending on the landlord to provide a lease document becomes very expensive down the road. For the cost of a month or two of lease payments, an attorney will help you get the most favorable terms. Oftentimes your attorney will negotiate terms that are so beneficial that the savings more than pay the legal fees.
The next step is to prepare and present a letter of intent. The attorney will address the major points that should be included in a purchase agreement and define deadlines for the important steps. A letter of intent is much quicker and less expensive than drafting a full lease document and is much easier to use as a starting point for a negotiation.
When the framework of a deal is agreed to, its time for some due diligence. If you need a build-out, an architect or designer should be consulted. The architect will be able to tell you what it will cost to create the space you need. Bring in an engineer to evaluate the structural and mechanical conditions of the space. Check with the local municipalities to make certain that zoning and other code issues will not be a problem.
Do your legal due diligence. Conduct a title search to determine if there are any issues of record that might interfere with your plans and that there are no existing liens that threaten your quiet enjoyment of the space. Consider traffic flow and the affect it might have on your customers’ and employees’ ability to access the business.
By now, you’ve put a lot of time into planning and evaluating your space. When you are convinced that it fits your needs and your budget, it’s time to begin lease negotiations. This is where your attorney will really earn his fees. With information you provide and the framework from the letter of intent, he should negotiate the lease agreement and any ancillary agreements, zoning and variances with the city, and construction contracts for the build out.
Once all of the negotiations are complete and the documents drafted, you should carefully review everything for accuracy. There should be no surprises by now and all of the terms and documents should be familiar; if you don’t understand something or don’t see something you expected, this is the time to bring it up.
All your time and attention to the deal culminates in the signing of the lease. With all of the hard work and care devoted up to this point, you can be certain that your attention can now turn to the running of the business. There will be no surprises, no disappointments.
Finding the perfect space, hiring knowledgeable professionals, and committing to a thorough due diligence process is key to ensuring that your leased space is an asset to your business rather than a constant distraction and detriment to earning the profits you expect.
© 2011 Alden Pearson, P.A. All rights reserved.
