Pitfalls of Commercial Leasing that You Need to Avoid

Pitfalls of Commercial Leasing THAT YOU NEED TO AVOID

No entrepreneur or franchiser wants to get trapped in a commercial leasing agreement that cannot be terminated without significant penalties. Here are some of the pitfalls to avoid.

By Sara Jensen

For any entrepreneur or franchiser, commercial leasing means major investments and should require in-depth research and experienced advice. Whether it is hidden costs or a hard-headed landlord, you don’t want to get trapped in a long-term commercial leasing agreement that cannot be terminated without high costs and penalties to you.

Below, we offer some expert advice on some of the most common types of commercial mistakes that can throw you in a pit.

DO NOT PROCRASTINATE We have heard that the early bird gets the worm, but now it's time to put these words into practice. Don't hold off on searching for your commercial space until the last minute. Industry experts say that tenants should start looking for spaces less than 10,000 square

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feet at least six to nine months ahead of time. That’s because it could take you that amount of time to search for a suitable property, perform due diligence, and then come to a lease agreement. In fact, if your space needs to be remodeled or renovated, you can move your timeline by as much as 12 months. The larger the business, the more complicated your leasing process will be, so big corporations and franchisees need to start even sooner

This also goes for renewing your lease. If you put off approaching your landlord until two months before your agreement expires, you will hardly have any time to negotiate better terms as your landlord will know you don’t have time to find another place.

To make sure this doesn’t happen, tenants should look for plenty of other options, familiarize themselves with real estate trends, and start negotiation several months before they need the building.

NOT PERFORMING DUE DILIGENCE No matter how much you try to avoid it, you cannot have a successful commercial leasing agreement if you don't do your homework. Tenants who forego due diligence may later receive some nasty surprises.

In some cases, they will find out that the building is inadequately wired, which could have been factored into the leasing deal if they had known about it beforehand. In other cases, the building’s infrastructure may be old or outdated, which could be inadequate for the business.

One of the most important things to check is the HVAC system which should always be in good working order; otherwise, you will need

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to work the cost of it into your agreement. Also, ensure that the space is safe and meets the Americans with Disabilities Act guidelines. These things need to be addressed as part of the negotiations. Before signing the lease, work with your IT and architectural teams to ensure they have a tenant improvement budget that will work out for the space you want to create.

NOT CLARIFYING LEASE OBJECTIVES One of the worst things you can do is to run out looking for an office space without first consulting with other company executives on the business’ objectives. Some questions that should be asked beforehand should concern what type of brand image they want the space to portray. The layout of the building should also be taken into account, and the executives should decide the breakdown for private and collaborative office space.

Businesses should also consider how much space they need. This is a good time to hire the services of an architect and develop a blueprint that will consider the layout, floor load capacity, and company growth forecast.

A lot of businesses start searching for office spaces without considering these factors and end up either with a very costly hardly filled space or a cramped and dark office that can contribute to low employee morale.

GETTING LOCKED IN A LONG- TERM DEAL Approach long-term commercial leasing deals very cautiously. If you are a business owner, you may think you need a space for several years. But what happens when your business grows or if you want to relocate to another more high-traffic location. You may also decide to downsize or move to a smaller building.

If you don’t take these things into account, you may be locked into a long-term deal and will have no way out except for heavy penalties, which can easily cost as much as the cost of your entire term.

LEVERAGE EXPERIENCE When negotiating the lease, it is a common mistake to assume you will get the best out of the deal. However, your landlord will endeavor to make sure the terms of the lease are in their best interest. In this case, an inexperienced tenant is often at a disadvantage.

To balance it out, tenants should hire the experience and expertise of a qualified lawyer, accountant, or real estate broker.

NOT CONSIDERING BUILD-OUT COSTS When you are vacating a space, you will likely strip it down to blank walls and floors. Foreseeing this, many landlords often push to have new tenants absorb some of the build-out costs.

Even though these costs vary by space to space, the average cost of a progressive space can cost $152.23 per square foot while traditional space can cost $177.06 per square foot. These include standard paint finishes, carpeting, and the lighting for the space. All of these expenses can build up.

SIGNING THE DEMOLITION CLAUSE If you have rented a building that has the potential to be demolished and rebuilt, your landlord may be tempted to sell it to a developer if a good enough opportunity comes to them. If this happens, and you have negotiated terms for a long-term deal, signing the demolition clause may be the worst thing you can do.

A demolition clause states that if the building is being resold, the landlord has the right to ask their tenants to vacate the space within a specific period of time. If you unknowingly sign this clause and your landlord has been lured by the smell of money, you can say goodbye to your five-year renewable lease — and the workspace for hundreds of your employees.

Business owners will not get what they need if they don't do their homework. Now is the time to assiduously plan ahead, clarify your goals, go over the fine print of your leasing contract, and don't forget to get a team of experts on your side. Once that’s done, you can relax in your great new office space.