| In the last article we looked at a few of the | | | | off the hook because he will still be considered the |
| things you should consider before leasing that first | | | | legal tenant unless his sublessor agrees to sign a |
| office or storefront for your business. To recap, | | | | new lease with the landlord. Hopefully he will just |
| you should not only consider the old standard | | | | have someone else making the lease payments. |
| "location, location, location," but also consider things | | | | Again, the moral to this story is READ THE |
| like sufficient parking, the number of employees | | | | LEASE. Or even better, have an attorney read it |
| who will be working onsite, and future growth | | | | for you. I have learned over the years to never |
| projections. I stressed that it was important not | | | | sign a legal document of any kind without letting |
| to get caught up in the moment. You should take | | | | my attorney review it, especially if the document |
| your time to find the space best suited for your | | | | involves money and my first born child. |
| business for the long haul, not just for today. | | | | Here are a few other points to ponder before |
| This week we'll discuss the most important | | | | signing a commercial lease. |
| aspect of the process: signing a commercial lease | | | | How is the lease payment calculated? The most |
| (insert dramatic music here). One of the biggest | | | | basic equation for calculating a lease payment |
| mistakes many entrepreneurs make when leasing | | | | takes the number of square feet times the cost |
| commercial space is not reading the lease. Forget | | | | per square foot, then amortizes that over a 12 |
| reading the fine print. When it comes to a lease | | | | month span. For example, if you have 1,000 |
| its ALL fine print. | | | | square feet and the cost per square foot is $12, |
| Don't believe me? Let me tell you the true story | | | | the annual lease payment would be $12,000. |
| of my friend, Homer, whose name I have | | | | Divided by 12 months the monthly lease payment |
| changed to protect the ignorant. Homer signed a | | | | would be $1,000. Again, this is a simplified scenario. |
| two year lease on a suite of offices for his | | | | These days most commercial leases include |
| business. As the owner of the business Homer | | | | additional factors that affect the final price, such |
| signed on the dotted line and agreed to personally | | | | as rent increases, operating expense escalations, |
| guarantee payment of the lease and to abide by | | | | common area charges, etc. |
| its terms. Homer moved in and it was business as | | | | Who pays for what? It's important that you |
| usual until the end of the two year lease term | | | | understand exactly what you are paying for. Are |
| drew near. It was then that Homer discovered | | | | you responsible for any costs other than the |
| that failing to read the lease was going to be a | | | | rent? Will you be responsible for paying your own |
| very costly mistake. | | | | utilities, for example? Will you have to pay for |
| Toward the end of the two year lease period | | | | parking privileges or janitorial service? Who |
| Homer decided to relocate, but when he gave the | | | | handles maintenance and repairs? |
| landlord what he thought was the customary 30 | | | | Is there an escalation clause? It is typical that the |
| day notice, he discovered that the lease had | | | | lease contain what's known as an escalation clause |
| automatically renewed for another two year term | | | | that allows the landlord to pass on increased |
| at the 60 day notice point. In other words, Homer | | | | building operating expenses to the tenants. If your |
| didn't realize that the lease required a minimum of | | | | lease contains such a clause you should ask for a |
| 60 days notice to let the landlord know that the | | | | cap on the amount the lease payment may rise |
| lease would not be renewed. Because Homer did | | | | over a given period of time. And if the escalation |
| not know that he was required to give at least | | | | clause is ever activated by the landlord you are |
| 60 days notice of his intent to vacate, the lease | | | | well within your rights to ask for an itemized |
| automatically renewed for another two years. | | | | accounting of the expenses that are being |
| And there was not a darn thing Homer could do | | | | considered as cause for your raise in rent. |
| about it but reach around and slap himself in the | | | | What rent increases might there be? One very |
| back of the head for not taking the time to read | | | | important factor to know is this: if you do renew |
| the lease. | | | | the lease how much can the landlord go up on the |
| What was the landlord's position when Homer | | | | rent? It is expected that rents will increase as |
| pointed out that he had not read the lease and | | | | property values increase. If your landlord can rent |
| therefore was not aware of the 60 day notice? | | | | the space for more than you agreed to pay a |
| The landlord, while sympathetic to Homer's plight, | | | | year ago, he is within his rights to ask for the |
| stuck to his guns and told Homer that he would | | | | increase. However, it would be a nightmare if your |
| have to honor the lease, which meant that even | | | | rent suddenly doubled overnight. Negotiate the |
| if Homer moved out as planned, he was still on | | | | increase before you sign the lease. Most rent |
| the hook for paying the rent for another two | | | | increases are calculated by percentage, not by |
| years. | | | | flat rates. |
| Does the fact that the landlord chose to enforce | | | | Renewals and terminations. Most leases require |
| the lease agreement rather than let Homer off | | | | that you give a minimum of 60 days notice if you |
| the hook make him an evil man? Not at all. From | | | | intend to terminate the lease and vacate the |
| the landlord's point of view, he had no choice but | | | | property. As Homer learned, many leases also |
| to enforce the terms on the lease. He had a | | | | renew automatically for another term unless you |
| signed contract that told him his space was going | | | | give notice within 60 days of expiration. Know |
| to be rented for the next two years. He had not | | | | when your lease expires and the time required to |
| planned on the space suddenly being vacant. Being | | | | give notice. |
| a landlord with unrented space is like being a | | | | Is a personal guarantee required? What happens if |
| business with no paying customers. Empty space | | | | your business goes south and can no longer |
| means no revenue from rental fees which means | | | | afford to make the lease payment? Are you then |
| no money to pay the mortgage payment. As the | | | | responsible for paying the rent out of your own |
| old saying goes, "It's just business..." | | | | pocket? Probably so. Most landlords insist on a |
| Sure, any landlord with a heart might feel bad that | | | | personal guarantee from the owner or an officer |
| Homer was ignorant of the auto-renewal clause, | | | | of the business. This means that even if you go |
| but not so bad that they are willing to risk their | | | | out of business you are still personally on the |
| own financial well-being by having Homer's space | | | | hook for the remainder of the lease. |
| sit vacant. The bottom line is this: whether Homer | | | | Finally, clarify all points. You should be clear on |
| read the lease or not is irrelevant. Homer signed | | | | every point in the lease. And if you are not, ask |
| the lease, thereby agreeing to its terms, and | | | | for clarification. Exactly what space are you |
| therefore he must hold up his end of the bargain, | | | | leasing? Who is responsible for repairs? What |
| period. | | | | common areas will you have access to? Who is |
| As of this moment, Homer is relocating his | | | | responsible for maintaining the little things, like |
| business in spite of not being able to get out of | | | | keeping the shared restrooms stocked with soap, |
| his old lease and he will continue paying the | | | | towels, and most importantly, toilet paper. |
| payment on the vacated space for the remaining | | | | A small detail to consider now, but not when you |
| two year term of the lease or until he can | | | | suddenly find yourself without such amenities at |
| sublease the space. Even then Homer is not fully | | | | the wrong time. |