A dream commercial space has hit the market. But too often, this space becomes a nightmare for the business owners who sign a bad lease.
Bad leases ruin great spaces every single day. Eager entrepreneurs sign on for terms that they may not fully understand. A year later, they wish they had never even seen the property listing.
Is it because the landlord was looking to put one over on them? Sometimes. However, most of the time it’s because they didn’t (or couldn’t) do the due diligence to negotiate some of the less favorable conditions out of their lease.
Here are a few of the most common things an owner will want to try to remove.
A Personal Guarantee
This is one that sometimes doesn’t show up until both parties are just about ready to sign the dotted line. The would-be tenant could prepare a letter of intent for commercial lease with no mention of this at all. However, at the last second, the would-be landlord drops the personal guarantee clause in there.
Even when the landlord insists that this is a must, there is often room to negotiate. If they’re dealing with a new and unproven business, they may insist they need to protect themselves in case of a default on the lease. However, there are other ways.
A new tenant could try to negotiate a shorter-term of personal exposure, such as 1 year, as opposed to the entire duration of the lease. Or they can increase the amount of their deposit, or remove any months of free rent from the table.
A personal guarantee is simply too much risk for the business owner(s), and avoiding this type of risk is the reason why businesses incorporate in the first place. Even the most reliable of business owners can find themselves in financial peril being unable to fulfill the obligations of the least. Getting everything in writing and signed off on is the only way to keep the owner of the commercial property safe and ensuring they will be paid
A Triple Net Lease
This type of lease may seem like a good idea for budget-conscious start-ups who are looking to keep their costs low. However, they may not see the big picture expenses they are signing up for.
A triple net (NNN) lease would likely give the tenant a very good monthly rate on the rent, in exchange for them paying for most of the other expenses that may include property taxes, repairs, upkeep, or utility costs.
The sum of these other expenses can quickly negate any savings they get on rent each month.
Tenant Improvement Allowance
A tenant improvement allowance gives the business the opportunity to add some upgrades to the property. However, they are typically fronting the money themselves and being reimbursed after the fact. This could lock up cash flow more than expected.
It could be more advantageous to negotiate for a smaller cash allowance, which would simply give a person an agreed-upon amount of money (per square foot) each month to go to improvements. Being able to keep up with maintenance and improvements will allow the property to continue increase in value. A property that is leased for the long-term adding value annually is the ideal scenario for anyone that owns a property whether it is commercial or residential.
A commercial lease can be anywhere from 3-10 years. With a commitment this big, it’s important to read and understand all of the terms of a would-be commercial lease. Otherwise, the business could be signing on for more money or risk than they expected.
This can eat away at their bottom line, or even cause them to go out of business.