Leasing Commercial Space for My Business – What Should I Know?

Leasing commercial space for your business can be pretty daunting. There are several things you, as a prospective tenant, should think about prior to going down the commercial leasing path. Here, we’ll briefly discuss a few of the more important items you’ll want to understand so you can make the best decision for your company.

1. There is no “standard” lease agreement. For more information on the different types, please click here.
2. Ultimate Responsibility for the lease will likely fall on you PERSONALLY.

Unless your company has a very lengthy and solid financial history, chances are you will have to sign a personal guaranty. It’s a binding contract that essentially shreds your corporate veil (the liability protection afforded to you by your entity) as to the lease agreement. This means that your landlord can come after you personally, and all of your personal assets, to satisfy your company’s obligations under the lease agreement. Pretty scary stuff, I know. But it is better to understand that up front so that you can properly budget and plan for the expenses associated with a lease agreement.

3. Use a Commercial Broker.

A lot of business owners, especially new ones, may be intimidated or, at very least, wary of engaging professional advisors to assist them in a commercial lease transaction. This is especially true when it comes to attorneys who, admittedly, are expensive dates, but more on that in a minute. Commercial real estate brokers are an invaluable part of the leasing process, and can mean the difference between your company obtaining a good lease in your desired location, or getting stuck with an awful agreement with an even worse landlord. Part of a broker’s job is to be educated on the market, including current inventory and rental rates, and to act as your representative through the transaction. Your broker should provide you with information for, and education on, available space based on your specific criteria, and will physically walk you through the spaces you have interest in. Here’s the best part…are you ready? As a tenant, you may not have to pay your broker one red cent! In the Las Vegas market, among others, it is customary for the landlord to pay all of the brokerage fees involved in a lease transaction. Obviously, there are exceptions, but most of the time this is true. One last note here: it is my opinion that a prospective tenant such as yourself should engage a broker that strictly deals in commercial transactions, and even further, one that specializes in dealing with the type of space you will need, whether it be retail space, office space, industrial space, medical office space, etc.

In sum, I think it’s always a good idea to enlist the help of a commercial broker to be in your corner during the transaction, even if you find the space on your own. This is especially true, as, again, you probably won’t have to pay them squat!

4. Financials.

All landlords will require a copy of your company’s financials when entertaining whether or not you are a suitable tenant for their space. Again, if your company is relatively new, or does not have a lengthy and strong financial and credit history, the landlord will also want to see your personal financials to decide whether you afford the lease. In other words, you should have your company’s and personal financial documents organized and ready to be presented to a prospective landlord in pretty much any leasing situation.

5. Letter of Intent.

Once you’ve found that perfect space for your business, your broker will typically submit a Letter of Intent (LOI) to the landlord. The LOI is typically a non-binding (unless it states otherwise) document where you will hash out major deal points of the actual lease agreement to come. Some things to be considered here are: 1) the rent, including CAMs; 2) any free rent; 3) any tenant improvement allowance; 3) the term of the lease; 4) the security deposit; and 5) brokers’ commissions. Obviously, this is not an exhaustive or exclusive list, but you get the idea. The LOI stage will either come after the landlord has reviewed your financials, or happen concurrently with their review of those documents. Again, generally non-binding here, so neither party is obligated to anything at this point. However, some consider it bad form to agree to something in the LOI only to try and exclude or change it in the ensuing lease agreement. Just sayin’.

6. Use an Attorney.

I know, I know, attorneys don’t have the best rep…and they are so expensive, and they only complicate things, and they kill deals, and blah blah blah. Sadly, sometimes that is true, BUT some of us are pretty cool. Plus, your lease is probably a commitment of at least three years, sometimes even as much as ten years, so it’s best to get some professional advice before you sign. It’s truly a wise investment to hire an attorney to help you navigate the leasing process. Whether it’s during or after the LOI stage, we can help negotiate to get you the best deal possible, and if your particular landlord won’t budge on most things, at least you will be educated on exactly what it is you’re getting yourself into should you choose to execute the agreement.

I can’t tell you the number of inquiries we get from tenants stuck in bad leases because they did not take to the time to educate themselves on the leasing process, and the resulting LEGALLY BINDING AGREEMENT.  Once the lease agreement is signed, there’s no complaining about things you are obligated to and should have known about before you signed. And as a side note, and a hard truth for tenants, if, heaven forbid, your business fails, that is not an excuse to get out of a lease agreement. That’s when that personal guaranty might come back to bite you in the booty (or wallet), so it is imperative to educate yourself as much as possible before you take the commercial lease plunge!

Click here to read about common pitfalls in commercial lease agreements.