By Jeffrey D. Jones, ASA, CBA, CBI
Most small business owners will have to deal with a landlord or a landlord’s management company when seeking a facility from which to operate their business. This occasion can be when the business owner seeks their first location or when an existing business needs to be moved to another location. Seeking a new lease can be an exciting experience, but there are many pitfalls that need to be addressed when negotiating with a landlord.
When leasing a property, it can be a free-standing building or a space in an office building, a business park, a warehouse, a shopping center, or a shopping mall. There are many common elements to a property lease but there can be some unique elements depending upon the type and use of the property. Some of these elements can be negotiated and some can’t. The following information will summarize the more common elements of a property lease and will address important issues that may need to be negotiated to be sure the business will not suffer due to specified restraints.
The property owner can be an individual or a large investment company who may or may not be located in the same city as the property. When negotiating a lease, you will typically be dealing with a leasing agent who works either directly for the property owner or a management company who has been hired by the property owner to manage the property.
Every lease will have Basic Lease Terms that include the location of the facility to be leased, size of the space being leased, the term of the lease, the rental rate, and the use of the facilities. Additional provisions will typically address the following issues:
- Common Area
- Maintenance Fees
- Real Estate Property Taxes
- Real Estate Insurance Costs
- Utility Charges
- Trash Fees
- Merchant/Tenant Association & Related Fees
- Advertising Fees
- Sign Fees & Regulations
- Construction Costs
- Parking & Common facilities Uses & Restrictions
- Compliance with Laws & Safety Requirements
- Required Liability Insurance
- Regulation of Hazardous Materials
- Landlord’s Liens on Business Assets
- Landlord’s Rights of Access
- Restrictions Regarding Lease Assignment & Subletting
- Lease Default Provisions
- Sales of Premises by Landlord
- Hours of Business Operations
- Security Deposit
- Holding Over Provisions
- Relocation Option
- Broker Fees
The Basic Lease Provisions will be addressed in this article and the Other Lease Provisions will be addressed in a subsequent article. Basic Lease Terms include the following provisions:
- Location – When leasing space in a building, one must take into consideration the type of business and use of the facilities. A retail business will want a high traffic and visable location, whereas a service business that has customer/client traffic will want an easy access location. A wholesale or manufacturing business will be concerned with a location close to its customers and/or near transportation facilities.
- Size of the Facilities – The size of the space to be leased is typically expressed in terms of square feet. Factors that impact the required size of space will include the number of employees, the number of customers/clients who will be coming to the facilities, the amount of office space needed, and the amount of storage space needed.
- Term of the Lease – Most landlords will not lease a facility for less than one year. On the other hand, most landlords will not want to commit to a lease longer than 5 years unless it’s a free-standing building such as a McDonalds, wherein the lease term may be for 20 years. Most landlords prefer 3 to 5 year leases and will usually provide options to renew at the then current market rental rate.
- Rental Rate – The rental rate is typically quoted as a price per sq. ft. either on a monthly or annual basis. The rental rate will be stated either as a gross rent or a net rent. A gross rent means the tenant pays a fixed rental rate and the landlord is responsible for paying all operating costs of the property. Whereas a net rental rate is a base rate that provides the rate of return required by the landlord and the tenant then pays pro rata the property taxes, property insurance, and property maintenance costs. This is often called a triple net lease, because in addition to the base rent, the tenant pays all the operating expenses of the property that include taxes, insurance, and maintenance.
- Use of the Property – All leases will address the allowable use of the property and the restrictions thereof. It is important to review the uses and limitations of the property stated in the lease. Some leases will be subject to use limitations due to exclusive uses granted to other tenants. Some landlords may want to exclude the use of the facilities for businesses that may cause insurance costs to be high, personal preferences such as businesses serving liquor or sexually oriented businesses, and businesses that would generate excess traffic resulting in parking problems. Lease use limitations can sometimes be negotiated with the landlord to allow a specific use.
Before entering into a lease, always read the entire lease and if you do not understand some of the lease terms hire an attorney to help you understand the lease and make recommendations on how to make the lease better for you and your business.
Jeff Jones is the President of Certified Appraisers, Inc. and Advanced Business Brokers, Inc. located at 10500 Northwest Freeway, Suite 200, Houston, TX 77092. He can be contacted by phone at 713-680-3290 or by email at jdj@certifiedappraiser.com.
