What You Don’t Know About Your Commercial Lease Can Hurt You
Finding the right space and negotiating the details of a commercial real estate lease is among the most impactful activities a small-business owner can take on. It’s also among the most dreaded. Working with a lease consultant who specializes in your industry (e.g., dance studios or dancewear stores) can ease the pain.
As a small-business owner, you’ve likely signed your fair share of commercial real estate leases. A standard offer to lease must include some 25 critical points, including start date; end date; rent per square foot; where notices are served; whether the tenant will be paying any of the operating expenses. But these stipulations are only the basics—and if you aren’t intimately familiar with lease jargon and real estate tenant incentives you can easily miss out on opportunities to save money and pick up perks.
“It’s hard to be tenacious when you don’t know what to look for,” says Sue Sampson-Dalena of The Dance Studio of Fresno in California. After 19 years of leasing space in a strip mall, she ultimately saved enough to build a new studio and said farewell to her landlord. Now she advises aspiring studio owners as a trusted mentor, so we asked her, along with independent lease consultant Dale Willerton, to share the inside track to making a contract work in your favor.
Start (re)negotiating your lease at least a year in advance.
“It’s better to get bad news far in advance,” says Willerton, co-author of Negotiating Commercial Leases & Renewals For Dummies. If, for instance, you get an unexpected rent increase, you’ll have the chance to explore other options without the pressure of a deadline crunch.
Work with a real estate broker who represents you, not the landlord.
Ideally your broker will be intimately familiar with both your business and your neighborhood. When it comes time to review the lease, consider a lease consultant rather than a lawyer. It is rarely the legality of the lease document that is in question, says Willerton. The lease may include a clause that’s not advantageous for you, but a lawyer who checks only that the lease is perfectly legal might not give it a second thought.
Don’t feel pressured to accept the industry norm for lease length.
Five years is the countrywide average lease length for commercial real estate, although when large buildings are involved, it’s typically seven, or even 10. There’s nothing wrong, though, with requesting a three-year term—or a 10-year one. A shorter lease will give you more flexibility, but a longer one may allow you to lock in a good deal. Willerton advises dance studio owners, for example, to shave the last two months off any lease that takes effect in the fall, coinciding with the studio’s new school year. That way, you won’t have to pay rent for the slow summer months in the lease’s final year.
Always use your LLC or corporation as the tenant.
Otherwise, you can be held personally liable for your business. Your landlord may still require you to use your name as guarantor on the lease, but you can negotiate a time length on your personal guarantee. If you sign a five-year lease, ask that the guarantee only last for the first three years—you’ll have established a respectable track record by then.
Negotiate the size of your lease deposit.
Though any deposit you put down may be applied to your last month’s rent by the landlord (provided there’s no damage to cover or any outstanding rent), you can always finagle that dollar amount down. The purpose of collecting a deposit is often to offset the real estate agent’s fee. A little-known fact: The commission for a broker on a five-year lease is 40 percent more than on a three-year lease. Your landlord would probably be happy to have you sign a three-year lease—it saves him money.
Ask for a tenant allowance.
This is money paid by the landlord to the tenant, for the purpose of making modifications to the space. Willerton recruits a designer and a contractor to inspect the space for his clients and give an accurate quote on a build-out—and then he asks for 100 percent of that amount from the landlord. Sampson-Dalena has a ready-made list of inspection points when she’s considering signing a lease: “Has the building had any foundation problems? Is it properly sprinklered? How’s the HVAC? How old are the other buildings? How’s the roof?”
Build a right of termination into your lease.
If you’re not totally confident that this is the right long-term space for your studio, or if you’re worried about your continued ability to afford the space (economic downturns do happen), include a clause that lets you cancel your lease if your income projections haven’t reached a certain goal by six months or one year into the lease. It’s also a good idea to include a sublet or assignment clause in your lease, too, in case your business starts to flounder further along in the lease.
Create a bidding war.
According to Willerton, too many studio owners stop looking for space and start negotiating as soon as they find something they like. Willerton has his clients circle a dream locale on a map and then helps them find four or five suitable properties in that area. “We invite the landlords or real estate agents to send us a proposal and try to create a bidding war,” he says. “Now the landlords are pursuing you.”
Ask—again and again and again—for midterm rent reductions if you find yourself struggling to make the rent.
“When a studio can’t afford the current lease and I call the landlord to negotiate a rent reduction, the response is always the same,” says Willerton. “‘We didn’t know they were hurting!’” You may have to ask more than once: Willerton notes he once worked for a landlord who wouldn’t consider implementing a rent reduction until the tenant had asked at least five times. Sampson-Dalena arranged with her landlord to pay extra rent during the fall and spring months in order to cover the summer, when her studio wasn’t making nearly as much money. “I was giving him money in advance,” she says. “Why wouldn’t he be happy?”
The Bottom Line
Don’t wait until you need something to contact your landlord. Instead, cultivate an ongoing relationship. Your space is essential for the smooth operation of your business, and your lease is likely to represent one of your most significant investments. Too many business owners don’t develop a rapport with their landlords. “That’s a big disadvantage,” says Willerton. A good relationship with your landlord will buoy your business through not only the good times but also the difficult ones.
Rachel Rizzuto writes the Business column for Dance Teacher and is working on an MFA at the University of Illinois.
Last updated September 23, 2019
