Your lease is the most expensive decision you are going to make. Why?  It is not a desirable or single monthly rent. The small business owner must usually personally guarantee the lease. A 3-year $3,000 per month lease with common area charges is often a $100,000 decision! Technically the value is the present value. No one can predict the future. We recommend you consider the value the gross cash value for that is all that is known.  Make sure you properly use an escalator in formula or minimum (careful) or maximum (that you will pay) and common area charges which can be 20% and often more of your monthly lease.  Prepare for the worst and shoot for the moon.  Remember, when you begin looking, you have nothing so you have nothing to lose. There are other places. There is no magic one place.  Your are in a 50-50 relationship. The landlord needs you and you need them. The agent works for the deal at any price and should not be trusted by either side.  All the agent wants is a done deal, there commission and to say bye-bye. Do not le the lease intimidate you. Yes it was written legally to protect the landlord. Yes every clause is in the landlord’s favor.  Yes every clause can be negotiated.  If you try the first they say is “This is a standard lease and cannot be changed for legal reasons.”  You say, “OK, but we can have an addendum changing clauses or making it fair to both of us.  You are my landlord so I want to protect you. I am your tenant; you want to protect me too, right?   If the other side of a 50-50 transaction will not work with you they do not want you or you are not paying enough money to get their attention.  Try to talk to the landlord yourself, not the agent. Make the agent set up a meeting.  Review every clause advice, then go to the landlord with fair and reasonable requests they can deliver without changing their life or business.

Almost all small business leases require a personal guaranty; a guaranty of the aforementioned $100,000 or whatever is applicable. If the business fails the tenant is responsible for rents until a new tenant is found and may even be responsible for rent differences for years between their rent and the new tenant rent if that rent is lower than the rent the small business owner placed their guaranty.

Most small business owners know themselves, they think they know their products or services, they think they know their customers and they think they know how they fit into the market.  But, pages of legalese in a “standard landlord lease” are not something they know, have experience with or even understand. When discussing terms and conditions they are often told, “this is the standard lease for tenants and cannot be changed or altered.” As stated above, it can be changed as it was written without your small business in mind. If you are on the line for 3-10 years or more you need to make sure the lease terms and conditions dovetail with your needs.  The lease can be altered and should be for the unique small business to be a fair economic relationship. This is a free enterprise transaction between a willing buyer and a willing seller within existing laws and regulations but the tow can do just about anything they want.  Do not abdicate your power as buyer, tenant and a 50% participant.

The lease was written purely for the benefit of the landlord trying to get all they can for their benefit because of legal precedent and “what the market will bear”.

The lease is made up of clauses. Some you may agree with as fair for the landlord. Others can be egregious.  Reviewing each and every clause is critical given the total value of the lease; one should have a professional help them such as a real estate broker or attorney unless they have specific experience as a real estate broker or attorney. Being penny wise too often leads to pound foolish in an uncertain world.

The small business owner is looking to the present and the monumental task of a new lease to start-up or a continuing lease at lease end time for extension.  Because of that focus and their desire for the space now they may even read and not value the import of the clause to them in the future.

Unfortunately, especially start-ups or those buying businesses with wise and prudent financial decisions often take second place to the “proximity and ease of access of the business to the tenant’s home.”  It is interesting how few do their homework to understand the market and the buyers.  They should choose or place their business in the most likely place for profit success and then, if necessary, move closer to the business or devise a traffic plan to travel to and from the business.

It is amazing how many renew a lease on the same or newly offered terms in the new “standard lease” rather than addressing or even considering a move due to the high costs, time and effort of moving to a more suitable position among customers and for the benefit of the business. Compare the options of moving and a new location and its impact on sales to what has been a changed local demographics or customer base over the terms of the existing lease.  Do the numbers or get help, what appears to be a best decision can often be a worst decision when all is taken into account. A lease decision is a very big decision in gross dollars of deposit + monthly rent + escalator + common area times the months of the lease for which the small business owner is usually required to personally guarantee.  That is a big number worthy of doing your homework or getting qualified help.  Spending 1-2% or less of the gross dollars in the decision is not too much to pay for the right decision.   Use your sweat or buy help but do the job right.  Please do not be penny wise and pound foolish.

When leasing, learn and know your due diligence process and do it. Get help if you need it.  Let money and intellect make your decisions, not emotion, optimism and eternal hope. This is equally applicable commentary in all countries albeit leasing methods, forms and practices may differ.

A lease is a contract that requires mutual agreement for a win-win partnership of business between landlord and tenant.  Few realize this and often fail to push their position to their future detriment.

Common clauses to watch carefully and to analyze in depth are:

Cancellation Terms & Conditions: Beware the ability of the landlord to cancel the lease for a remodel, for a fire, a sale or other reasons. More often such are used to pressure rent increases or attract new tenants.

Common Area Maintenance: Fees for maintenance of shared spaces in the building or property such as parking lots, hallways, promotional events, and much more.

Competitors: Make sure the landlord can not fill a vacant space I the property with a direct competitor. For example a dry cleaner does not need another dry cleaner at the other end of the complex.  An white table cloth Italian restaurant does not want any other white table cloth restaurant around.

Costs of Build Outs: The space often needs to be prepared for your business. How much is it their cost of doing business and how much is your cost?  Often landlords will do a build out and add amounts to the lease rate including any interest for build outs. Watch their math in computing the additional rent fees for financed build outs.  Many will double count their interest and multiply the principal through escalators.  Remember, “The devil is in the details”. Know the details.  Make money and financial decisions, not emotional decision on eternal hope. No one cares about you other than you, trust no one, not even yourself.

Cumulative Attraction: this is about tenant mix.  Some helps and some do nothing and some hurt.  The Pizza Store and Video Store have cumulative attractions in that they share customers.  For example the Pizza buyer orders their pizza and then visits the video store for the movie while their pizza is cooking.  That is cumulative attraction.  Or, many restaurants, all different are in a food court or on one block, that is cumulative attraction.  Cumulative attraction is a powerful force.  Learn to use the force, let the force be with you.  A location near an entrance to a grocery store might be suitable as the grocery store draws traffic. Ask yourself what-if questions.  What if the older space grocery closes ands is replaced by a used clothing outlet or antique store?  Is that good or bad for your small business?

Hours of Operation: Beware and consider carefully.  The tenant is giving management of their business to the landlord and restricting their own management ability to adapt to the market and their particular customers when the lock themselves into opening and closing hours. Sometimes they make sense, sometimes they are unreasonable.  If you are lunch and dinner why be required ot open for service at 8:00 or 9:00 AM?

Insurance: Landlords often require insurance for damages to their property from the small business tenant.  Many small business tenants gloss over this clause when in reality the small business owner needs to make sure they are not paying for over-insurance.  Insurance rates have gone way up in the past few years. This is no longer an incidental category, insurance is expensive.  Shop and buy what you need but no more. There is a balance between replacement and debt coverage when buying insurance.  Find it and buy accordingly.

Tenant Mix: Make sure you are protected from tenants that would diminish your traffic or value. For example, a religious bookstore does not need or want a drug paraphernalia shop or massage spa near them.

Operating and Design Requirements: Beware.  Make sure you, as tenant, agree with the landlord. Otherwise you are giving management of your operations and appearance to the landlord as well as restricting your options

Other Charges: Make sure you understand the cash impacts up front, in the future and on renewals before you sign and agree to a lease.  Most deposits, if all payments are made on a timely basis, should be returned in two-years and pay interest. Neither is likely to happen if you do not ask.

Parking: Make sure parking is adequate and suitable and that you know where handicap parking is assigned.  The rule is that no one walks more than 100 feet and less than 50 feet from the entrance is desired.  For street parking check on a “loading and or passenger” zone.

Percentage rents: Rents over a certain volume of sales. You take a percentage rent because you are short of cash and under budget. Know that you are betting against yourself and your own success.  The better you do the better they do. It takes intestinal fortitude to stand up for fixed rent and pay the fee when funds are short. If you know your future why bet against yourself?  A percentage rent is a bet against yourself.  If the landlord gets a total of more than 10% (high traffic or visibility location) gross dollar rents then you are working for the landlord, not yourself. If in a mall that can be 15% maximum as you add advertising to rent, the mall advertises.

Rent Escalator: CPI, fixed percentage or other terms that increase the rents annually. Beware the CPI used by many but has no connection to local market rents.  The other techniques may not be equitable either.

Special Assessments: These clauses apply to upgrades like air conditioning, parking repaving, painting, heating and other infrastructure expenses normally included in the market lease rate but passed on to the tenant to increase landlord profitability.

These are but a few of the hundreds of clauses.

Jane Portman’s and Fred Steingold’s inexpensive Negotiate the Best Lease for Your Business [Paperback]  is an excellent and inexpensive source for help into the details of negotiating your lease for start-up or renewal or even, in today’s markets, renegotiation of the existing lease.  Renegotiate $100 a month reduction for the remaining 30-months is a $3,000 costs reduction.  At a typical 7% taxable profit, that is equal to $42,857 in sales using gross dollars.  Which is easier, increasing sales or renegotiating a lease? Which garners the best return on investment of time and money?

• Small Business Stages: Start-Ups, Beginning And Maturity SMALL BUSINESS – 3 STAGES STAGE 1, The Beginning: Small business begins in a garage, the back of a pick-up, in a van, in a small leased space, a basement or other Spartan space.  Birthing is a tough process of 12-16 hours a day for months, likely a couple of......
• MAKEMI: From Volcanoes to Computers From the bodily depths of Mother Earth emanated the genesis of a small business on the way to become a company; from the volcanoes, from the earthquakes, from the floods, from the ravages of the Bering Sea, from the serenity of Puget Sound, from the cataclysms of Alaska and from......
• USA CHINA Myth 2: Communism is Name Only in China USA CHINA Myth 2: ommunism is not going away. The Chinese are not going to politicize the army. The PRC is the People’s Republic of China (the separate government apparatus, the country), the CCP is the Chinese Communist Party by some or CPC which is the Communist Party of......
• USA CHINA Myth 1: The Party Controls All The People’s Republic of China (PRC), “the Party”, rules under a “Mandate of Heaven”.  Understanding that in Chinese terms and cultural history is not easy. Basically it means rulers rule as long as they keep their contract with heaven to be good rulers.  Like the knights in medieval England......
• Why Makemi Why Makemiweb.com? A Forum for suggestions, criticism, corrections, comments & posts Why Makemi? At Makemi we have a passion for small business. We were grew up in, are educated in, and  we have operated small business for over 50 years. Makemi is a patriotic company that is tired of those......

• How To Create An Irresistible Brand Some business owners never think about branding themselves, or their businesses, but since you are here then you must be different. Read further to find out what you can do to make your brand stand out from the rest and make it appealing to your target audience. Regardless of whether......
• Alameda Marina Alameda Marina is located in Alameda, CA Phone Number: 510.521.1133 Website: http://www.alamedamarina.net/ Email: info@alamedamarina.net Marina Features 530 Wet Berths Pricing for Standard Berths: BOAT LENGTH (LOA)PRICE PER FOOT 22' - 24' $6.50 28' - 32' $7.50 36' - 45 '$8.00 50' Plus $9.00 End Ties & Side Ties $9.00 Covered......
• My Tenant: "I've Lost My Job and I Can't Pay You..." Yesterday was a day for the record books for me. You'd think that getting news that your tenant can't pay you would be the most eventful thing of the day. Long term it was probably the worst news I had, but there was some definite competition. I'll leave the details......
• Yakezie Carnival November 13, 2011- November Edition Welcome to this week’s Yakezie Carnival. This week I as your host have chosen the theme of “November” and here is why. November to many of us means nothing more than turning on the heat, finishing the yard work, and beginning our hibernation from the cold. As common as that......
• Book Review: The Aggressive Conservative Investor By Martin Whitman Martin Whitman is no stranger to finance nerds such as myself.  He is the founder of the well-respected Third Avenue Management fund shop and fund manager of Third Avenue Value (TAVFX), which has absolutely trounced the market averages over the trailing 10 year period.  Indeed, Whitman's fund is one of......

No related posts.