This post is part of our Business scenario series. Read the entire series here on the Clover blog, and check back for more tips and tactics.
So, you want to open a storefront. Congratulations! Whether you’re opening a business for the first time, expanding out of your home office, or bringing your online business to the real world, signing a commercial lease can be daunting. Real estate is a big business expense, so how can you find and negotiate the best commercial lease with confidence?
We’re here to help. But first, before even considering a lease, it’s mission critical to choose the the right location for your business. Check out this post for top tips on finding the perfect area for your commercial lease.
Next, it’s time to negotiate the commercial lease terms. Like any business deal, it helps to get some basic terms and background under your belt so you know what to expect before heading into a lease negotiation. Here’s what you need to know.
1. Know the basic terms and structures of commercial leases.
There are many different types of commercial leases, and knowing what you’re being offered is half the battle. Here are a few of the biggest business lease terms you need to know.
- Single Net Lease or Net Lease: where the tenant pays utility and property tax, while the landlord pays for maintenance, repairs, plus insurance.
- Net-net Lease or Double Net Lease: where the tenant is responsible for utilities, property taxes, and insurance premiums, while the landlord pays for maintenance and repairs.
- Triple Net Lease: where the tenant is responsible for all the costs of the building, and the landlord only pays for structural repairs.
- Full Service Gross or Modified Gross Lease: where the tenant and landlord split most of the costs of owning and operating the building (the “base rent”). This is common for multi-tenant buildings.
Wondering what type of lease is the best lease? There’s no right answer! Each business is different, and your needs will change whether you’re a restaurant, salon, or retailer. The key thing to understand within each of these lease structures is precisely what, besides rent, you are responsible for paying each month.
2. Understand your needs.
As a business owner, you probably have a pretty good vision for how your business will grow in this new space. It’s crucial, however, to make sure that your vision is specific. Have a solid business strategy and plan for growth so you know how much space you need, how much you can afford, and for how long you intend to lease the space. Many commercial leases are multi-year agreements. If you’re hesitant to sign up for that long, consider doing a pop-up shop to test the location.
Determining the size of the space you need will also help you get a sense of your budget. Many commercial lease options are priced per square foot. To know how many square feet you need, you’ll need to determine the number of customers or the size of your workforce to be sure the layout is just right. As a benchmark, “restaurants and retail locations typically require 15 square feet per customer on average.” An office may require more: roughly 100 – 150 square feet per employee.
3. Make sure to get the initial offer in writing.
An easy, common mistake many first-time business owners make is to present a counteroffer before seeing the lease terms in writing. Never start a negotiation without knowing precisely what cards are on the table. If a leasing agent verbally tells you the terms, ask for something in writing so you can review every subclause, any hidden costs, and the standard leasing information. Without something in writing, you could be at risk to counter too high or too low (or be liable for agreeing to something you didn’t understand up front). It can also be helpful to have a lawyer look over the agreement before putting in your counteroffer.
4. Prepare a counter-offer.
This is the part that can feel scariest for most first-time renters. Real estate agents fully expect you to make a counter-offer to their initial proposal; this is part of the business negotiation. Experts suggest being bold during this phase. Always ask for more than you think you want. Want three months free rent? Ask for five! Areas where you might negotiate can include the initial deposit, the lease length, and free months if you sign a longer agreement. During your negotiation, it’s a good idea to get lease proposals from a number of properties and leasing agents so you can compare and contrast the different prices and options available. Let them compete for your business.
5. Build a safety net.
There are a couple things you can do to protect your business if you’re a little shaky on your ability to negotiate the best lease possible. First, make sure your lease includes an “out” clause, meaning you can get out of the agreement if the need arises. This can take the form of an “option to sublease” or a shorter lease length with an option to renew. You should also protect your business with insurance and by double checking zoning laws before moving into the business space. Some landlords include insurance in the agreement, but you need to be confident you know what that insurance covers. Check out this article for the lowdown on additional insurance coverage.
Negotiating a business lease can be intimidating, but it’s all part of the experience of being a business owner. Whether you’re a retailer or restaurateur, Clover is here to help you find success in your new location! We can’t wait for the grand opening.[image: Depot Town, Ypsilanti by F.D. Richards on flickr]
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