7 Tips to Get the Best Terms for a Commercial Lease
7 Tips for Getting the Best Terms on a Commercial Real Estate Lease
Getting the best lease terms can be a make-or-break deal for a new or growing business. The wrong terms can lock you into a bad location or a too-high price, or both.
Just starting into business? Don't assume you have to take the offer that's presented. You can always negotiate. Before you start negotiations on that commercial real estate lease, review these tips to get a better deal:
1. Get your own agent.
Don't rely on the landlord's agent to negotiate the best deal for you. Having your own agent gives you someone with your best interests in mind. Look for a good commercial real estate agent and develop a relationship. You never know when you might need that person again.
2. Be ready with your financial plan.
Before you start negotiating, get the financial documents ready so you can be prepared to answer financial questions. If you are just starting into business, you're going to need a backup plan to get the landlord to accept your terms. This includes giving your financial statements and guarantees of payment.
You may need some additional guarantees that you will be able to make the lease payments. Providing a personal guarantee can help. This document means you will have to guarantee that you will personally guarantee to pay the loan if your business can't.
You may also need to find a co-signer, someone else who guarantees to make the lease payments if you can't.
3. Know your essentials.
You must be able to talk the talk. While an agent can help, you should know the difference between COL (cost of living) and CAM (common area maintenance). You may also hear such terms as "TI" or "leasehold improvements" or "build-out." Understanding the differences between terms can help you evaluate what the landlord or agent is telling you.
4. Get a good CAM section.
CAM (common area maintenance) is probably one of the most confusing sections of the lease and you will be surprised by how much you are paying for. CAM areas differ depending on the specific situation. Before you start negotiating, take a walk and ask questions about what areas are common, so you know exactly what you are paying for.
During the negotiation, you should be able to see a list of what's included with CAM costs. Check to make sure you are not paying for things that relate to the landlord's marketing efforts or legal fees associated with negotiating other leases. Other things you may want to strike are any administration fees of more than 3%, paying for benefits for the landlord's employees, build-out costs for other lease units.
5. Get only the space you need.
Agents love to add space to increase your costs, but if you aren't going to use the space right now, don't pay for it. For example, if there are several spaces available, they might say, "We'll give you a deal on the larger space." Make sure you aren't paying for unusable space.
You may want the option to expand, but you don't want to lock yourself into paying for more space than you need. If there's a space available next to yours, put in a "right of first refusal" clause in your lease, so you have the option to first dibs on that space if it becomes available.
6. Review the lease documents.
First, review this article about common commercial lease documents, so you know what's required. Then read all the documents. Yes, you do need to read it. I know, it's a very long (and face it, not very interesting) document, but you do need to know what it is in it. Check the terms. Do not assume they got it right. Make sure that what was discussed is in the lease.
If something you discussed isn't in writing, make sure it gets included. If it's not in writing, make the other party do what they said.
Make sure you check the start date, end date, rent, rent escalation and any other special terms you negotiated for. Also, be sure you know what you are obligated to do. What is the landlord obligated to do? Can you terminate it? Make sure you know what you are getting into.
7. Be prepared to trade.
If you can take the lease for a longer term, you can get a better rate. Consider what you can give up to get other things you need.
Finally, remember that everything is negotiable.
Lease deals are tricky because the person you are negotiating with is an expert. They do this every day. Being prepared and learning the negotiating tricks can even the playing field and get you a better deal on your commercial space lease.