Do All of the Pieces of Your Commercial Lease Fit Together?
Sandra and Dianne are ready to launch their new retail business. Let’s see, business plan – check, legal filing for business – check, suppliers for inventory – check. Great the puzzle is complete!
Not so fast guys, you forgot the second most important part of the puzzle when starting a business. Finding the retail location and signing a commercial lease.
Second only to employees, a commercial lease is going to be your largest expense. This is a recurring expense even if you make no sales.
A simple mistake made during this process will stay with you for the full length of the lease.
I interviewed 3 professionals, an attorney, a commercial real estate broker, and a commercial insurance agent.
What follows are some of the highlights of those conversations.
By the time you finish you will know what’s important and how to proceed to avoid costly mistakes.
Steve Katkov is an attorney whose specialty is working with small business owners.
The most important factor from Steve’s point of view is to get the lease in writing. A written lease assigns risk to different parties.
Meaning; who is responsible for what, and what happens in the event one party does not perform.
Here are 4 important points Steve made;
If at all possible try to avoid this. They make you personally responsible, even if your corporate entity files for bankruptcy.
Be sure to negotiate the right to sublease the property and spell out the conditions under which the landlord has the right to approve your subtenant.
3) Release of Obligation
In the event you do sublease the property you must make provisions to remove yourself from the lease legally. In the event your subtenant stops paying rent you don’t want to be liable!
4) Arbitration vs Court Action
Even the best of intentions can end up in a heated disagreement. You have a choice of pursuing the matter in court or through the process of arbitration. There are pro’s and con’s of both.
A good attorney is one who helps you achieve your goals while at the same time protecting your interest.
Be sure to hire one that works with small businesses, your divorce attorney is not a good choice!
Bob Johnston graduated from Stanford University and has been involved in commercial real estate his whole career.
During that time Bob has leased over 10,000,000 square feet of commercial space.
Bob is a “tenant representative”, this means Bob works with clients to find and lease commercial space.
This is a very important point, a tenant rep works with you, not the landlord, to get the best possible outcome when locating and negotiating a space.
The second most important fact is that even though a tenant rep is looking out for your best interest, the landlord will pay the fee.
So to recap, you get representation for FREE. That’s a good deal!
Unfortunately most first time business owners are looking for the lowest rental rate they can find.
Bob points out that the advertised rental rate is but one of many expenses and costs that make up the true cost of a commercial lease.
Bob often talks with clients about the “Total Cost Solution”. He will explain all the fixed and variable expenses and how to compare one property to another.
This ensures that his clients get the best overall deal when negotiating a commercial lease.
Bob mentioned 4 key points when it comes to leasing a space;
1) Length of time the process takes
Many small business owners are shocked that it can easily take 6 months to a year to locate, negotiate, and prepare a space before the doors can open for business.
2) Finding the right location
Locating a space that is right for your chosen business often can be the difference between success and failure. The operative words here are “best location” not “cheap location”.
3) Negotiation Factors
There are so many fine points to negotiate there is no way to point them out here. Check out the e-learning product I developed with these three experts.
4) Telling Your Story
When you negotiate a commercial lease the landlord is going to question your ability and experience running a small business.
Be prepared with a story that sells you and your business idea, it could help in the negotiating process.
When it’s time to begin the search for your space your first visit needs to be with a tenant rep.
If you happen to look at a space and start dealing with the listing agent then you are NOT represented.
The listing agent, by law, represents the sellers’ interest. EVERYTHING you tell that agent must be disclosed to the landlord.
Robyn Arneson owns her own insurance firm and has over 30 years of experience in the finance and insurance industry.
In that time Robyn has worked with many small business owners to help craft the right insurance for each business.
It’s a fact that when you lease a commercial space the landlord is going to require a minimum insurance policy of one million dollars.
This covers liability only and is very limited in scope.
Robyn points out that many small business owners, in an effort to keep costs down, often will insure the minimum amount necessary to satisfy the landlord.
What’s not covered is what keeps Robyn awake at night. The irony is full business coverage is within most owners budgets.
3 Types of Business Coverage;
1) Key Policy
This is the liability policy required by the landlord. This is if someone injures themselves on the property and covers nothing for the business.
2) Business Owners Policy
This coverage includes the following
Glass breakage; (think plate glass windows)
Money on Premises; if you get robbed or by employee theft
Loss of business income; in the event of closing for repairs
This is by no means all that is covered but it’s the important things owners don’t think about
3) Rider policies
These are special items that are added to the Business Owners Policy and will increase the amount of insurance premium. Here are two typical inclusions;
Payroll coverage; allows you to pay an employee while repairs keep the business closed
Mechanical coverage; most owners don’t realize when you lease a space you are responsible
for the repair or replacement of heating and air conditioning units.
I asked Robyn when most small business owners contacted her about insurance for a commercial space.
She laughed and said it was the day the lease was going to be signed.
In other words most don’t realize or even think about business insurance as part of a business plan or budget.
I sold residential real estate for 20 years and until I interviewed these three experts for the “Commercial Leasing for Small Business” E-Learning program, I had no idea how complex the process was, or how easy it is to make mistakes that stay with you for the length of the lease.
The take away is this, if you are considering commercial lease space for your business, be it retail, office, or a commercial location, it is extremely important to learn from the experts before starting the process.
Build a relationship with those who are there to protect you from making poor or uninformed decisions.
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