Your Commercial Real Estate Lease (part 2)

A Brief Overview of the Basics of a Lease

An initial lease period of (x) years, option periods to extend after the initial period. If the landlord is uncomfortable with the option periods, you may extend your initial period to 7 or even 10 years, depending on your assessment of the area. For a longer lease term, if your business plan and financials are strong enough, you may negotiate for a lower lease amount per square foot. Security over a longer duration is more valuable to the landlord than high dollar, short term, shaky tenants.
When negotiating option periods, your objective is to define your future rent as accurately as possible. To do so, the rent should be adjusted relative to the CPI, and a cap of no more than three percent yearly should be in place.

I recommend asking for a number of months free rent and/or half rent for several months, from the date the Certificate of Occupancy is issued. Your business needs time to get healthy and grow, and this no rent/reduced rent period facilitates that.
When negotiating the buildout, the ideal scenario for you would be that the entire amount will be paid by the landlord. Again, if you have the financials and the business plan, the likelihood of this happening goes up. Even if you don’t have strong statements, you can still get some help here. You may get a percentage of the buildout paid for (ideally the larger ticket items – HVAC, electrical, etc.), or the landlord may factor the amount into your lease and you repay it over time, or a combination. Be careful that any concession on the landlord’s behalf isn’t overcompensated for in your dollars per square foot lease amount. If the landlord refuses to pay for any of the buildout, you may have to get them to move on the free/discounted rent duration, or some other facet of the lease.

You should be able to sublet space in your own space to another small, related business. This may be chiropractic, massage, or physical therapy. All considerations should be included, from insurance and liability to the access to the building allowed to these subcontractors.

There should also be a specific clause in the lease pertaining to your right to assign the lease without undue landlord interference. At any point you decide it is time for you to sell, dealing with a generic right to assign clause is a headache you want to avoid. This is a clause that you may want to have your attorney draw up, to make sure it is strong enough to prevent a problem.

The Lease should contain exclusions that the landlord will not accept competing businesses in the same center or specified area. This should include all other fitness centers, and may include tanning centers, weight loss centers, supplement stores/juice bars, massage therapists, etc.

Signage should not be overlooked by the tenant, as you can be sure that the landlord hasn’t. First, make sure of your legal rights in your community as they relate to signage. Research sign codes and get in writing exactly what those rights and codes are from the landlord. It must be absolutely clear to both parties exactly what the expectations are with the signage. Size, colors, attachment, etc., all have to be defined and understood in order to avoid any last minute surprises due to violations.
One final note, but certainly not lacking in importance, is the required guarantee on the lease. Similar to banks, most landlords will want you to sign as a business, as a personal guarantor, and possibly a co-signor will be needed. It is in your best interest personally to not sign as a personal guarantor, if at all possible. If the business guarantees the lease, and something goes wrong, the business is liable, but you are not personally. If you personally guarantee the lease, then the landlord may come after your personal assets to satisfy the amount of the lease. This is extremely important if you are involved in a partnership or corporate entity in which the financial burden is unbalanced, meaning someone in the group has more to lose financially. The personal guarantee will also reflect directly on each person’s financial statements. This will be very important when you decide, either individually or as a company, to borrow more money. All of this should be addressed in the business plan ahead of time. If the financials are strong, you may be able to sign as a business, and not worry about the personal guarantee. If not, one way to negotiate is to ask for a clause which will let you sign personally for a designated time period, and then if your business and financial statements are healthy enough, to resign as a business only, removing the personal guarantee, and continuing the remainder of the lease.

To increase the likelihood that you sign the lease that you need and are going to get what you pay for, make sure that you:
• Describe in detail the landlord's responsibilities to tenant. For example, a carefully drafted lease will set forth the hours during which heating and air conditioning will be provided and will establish agreed-to temperature and humidity ranges.
• Define what constitutes a default by the landlord and describe the remedies available to the tenant if the landlord fails to perform its obligations. Many landlord lease forms eliminate these provisions entirely or severely water down the remedies available to the tenant.
• Provide a method for quick, inexpensive and final resolution of any disputes over the lease.
• Don’t get too emotional about a space or time frame, and make sure you have your money before you sign for anything.
• Negotiate for the future of your business.

Other ideas to consider further:
• Option to buy property
• Sound proofing the location.
• Rent averaging – lower rate escalating yearly to higher rate.
• Substantial and Partial Destruction and Timely Remedies.

For help with any or all of these issues, contact a Lynx representative by calling (404) 477-0024 or email info@lynxre.com