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 an HREA representative by calling (404) 477-0024 or email info@MyHREA.com