You’ve found the perfect commercial space for your business. The location is ideal, the building looks great, and you’re itching to sign that lease. But hold your horses! Rushing into a long-term commercial lease can be a costly mistake if you don’t consider everything. Signing on that dotted line means you’re committing to fixed costs and legal obligations for years to come. Before you take the plunge, let’s go over five key factors you need to think about first. Doing your due diligence now will ensure you make the best decision for your company’s future.
Location, Location, Location: Finding the Right Area for Your Business
You’ve decided to lease commercial space for your business – congratulations! Now it’s time to find the perfect spot.###Accessibility First up, think about how accessible the location is for both your customers and employees. Is there ample parking? Public transit options? Easy highway access? The easier it is for people to get there, the more foot traffic you’ll likely see.
Demographics
Consider your target demographic and see what areas they frequent. If you’re opening a hip cafe, look for up-and-coming neighborhoods with lots of young professionals or creatives. For a kid’s gym, aim for family-friendly suburbs. Matching your location to your demographic is key.
Competition
Do some research on competitors in different locations you’re considering. You don’t want to be right next door to a competitor, but having a few in the general vicinity can actually be a good thing, as it shows there’s demand in that area. Look for a spot that gives you room to stand out.
Costs
Compare rental rates, utility fees, and property taxes in different locations. Some trendy areas may come with a premium price tag. Make sure any additional costs still fit within your budget. Don’t forget to also check if the location has any incentives for new businesses, like tax credits or rebates.
Ordinances
Finally, look into the zoning, permits, and ordinances for locations you’re interested in. Make sure they allow for the type of business you want to operate. Some places may have restrictions on things like store hours, parking, signage, and more. It’s best to know about any red tape before signing a lease!
With some time and research, you’ll find a spot that checks off everything on your list. A great location can make or break a new business, so choose wisely! The effort will be well worth it.
Size Matters: Calculating Your Space Requirements
Before you sign on the dotted line, you need to make sure the space will actually suit your needs. Ask yourself: how much room do you really need for your operations? Do you need space for equipment, storage, employee work areas, meeting rooms, or product display?
Factor in room for growth
It’s easy to feel optimistic when signing a 3-5 year lease, but think about whether your space needs might change over that time. If your business is growing quickly, you’ll want a space that can accommodate expansion. It’s a good idea to overestimate your needs by at least 25% to give you room to scale up in the future without having to move to a new location.
Think about how you’ll use the space
Make a list of how the space will be utilized and the square footage required for each use. For example:
- Offices: 100 sq ft per employee
- Conference room: at least 10’x12’
- Warehouse/storage: depends on your inventory and equipment needs
- Product display: varies significantly based on your industry and offerings
Add up all the required square footage to determine your total space needs. It’s better to overestimate here, as unused space is better than not having enough room for your operations.
Factor in common areas
Don’t forget to budget space for break rooms, hallways, bathrooms, and other shared areas. As a rough estimate, common areas typically take up about 20% of total space in a commercial building. Add that in to get your final square footage requirement.
Finding the right commercial space for your business is key. Do your homework, plan thoroughly, and make sure to consider factors like room for growth to find a space you can call home for years to come. With the right amount of legwork upfront, you’ll be well on your way to signing a lease you can feel confident in.
Read the Fine Print: Understanding the Lease Terms
Before you sign on the dotted line, scrutinize the lease terms carefully. This legally binding document spells out the responsibilities of both the tenant (you) and the landlord. Make sure you understand everything clearly before committing—once signed, you’re typically locked in for at least a year or more.
Length of lease
The lease term dictates how long you’re agreeing to rent the space for, usually 1 to 5 years for commercial leases. If you need flexibility, try negotiating a shorter initial term with options to renew. However, a longer lease may allow you to lock in a lower rent rate. Think about your needs over the next several years to determine what makes the most sense for your business.
Rent increases
Look for specifics on if and when the rent may increase, and by how much. Most commercial leases allow for annual increases tied to the inflation rate or a fixed percentage. Make sure any increases are within your budget, or try to cap them at a maximum percentage. You don’t want to end up in a position where you can no longer afford your space.
Responsibility for utilities and maintenance
The lease should spell out who is responsible for costs like electricity, HVAC, trash collection, and repairs. Often tenants cover utilities while landlords handle structural maintenance. Make sure you understand exactly what is covered to avoid unexpected costs. You may be able to negotiate the inclusion of certain utilities or maintenance items.
Restrictions and renewals
Pay attention to any restrictions placed on your use of the space, signage, or making any changes to the property. The lease should also detail options for renewing for another term or terminating the lease early. Negotiate termination clauses that provide flexibility in case your needs change.
Carefully analyzing the lease terms now and negotiating the best deal for your needs can help avoid hassles, hidden costs, and legal issues down the road. Don’t rush into an agreement you may come to regret—make sure the fine print works for you.
Building Issues: Assessing Maintenance and Repairs
Before you sign on the dotted line, take a good look at the actual building and evaluate its condition. As the tenant, ongoing and emergency maintenance are typically your responsibility—at least financially. Check into the building’s age, repair records, and system updates to know what you’re getting into.
Structural Integrity
Get an professional inspection of the building’s major systems and structure. Check that the foundation, roof, plumbing, and electrical are all in solid working order with no major damage or needed repairs. Ask about the building’s earthquake or natural disaster readiness and any historical damage. You don’t want to be on the hook for a new roof or wiring overhaul in the first few years of your lease.
Age and Wear
Even if structurally sound, older buildings may require more upkeep as components reach the end of their lifespan. See if the HVAC, elevator, security systems and fire safety equipment have been updated recently and are up to current code. Outdated systems can be safety hazards, lead to higher utility bills, and require expensive emergency repairs. Make sure you understand all responsibilities in the lease regarding building systems and ask if there are any upcoming required upgrades you’ll share costs for.
Aesthetics
While less critical, the building’s appearance and interior also matter for your business and customers. Check for any obvious signs of long-term neglect like water damage, rust or mold issues. See if the lobby, hallways, bathrooms and other common areas are in good condition or in need of painting, flooring repairs or lighting improvements. If significant work is needed, try to negotiate a renovation allowance or lower rent into your lease terms.
Looking closely at the building’s physical state before signing a long-term commercial lease is well worth the time and investment. Understanding its current condition and responsibilities for ongoing upkeep will help ensure your business’s new home is structurally sound, safe, comfortable and not filled with expensive surprises. Do your due diligence—it will pay off in the long run.
Cost Considerations: Rent, Taxes, Insurance and Other Expenses
When you’re evaluating a commercial lease, the costs go far beyond just the rent. Several additional expenses can significantly impact your bottom line. Make sure you understand all the potential costs before you sign on the dotted line.
Rent: base vs. percentage
The base rent is the minimum monthly payment in your lease. But many leases also include percentage rent, which means you pay a percentage of your sales over a certain threshold. Get estimates of all rent costs based on your projected revenue to determine if the total rent cost fits your budget.
Property taxes and insurance
Most commercial leases pass on the costs of property taxes and insurance to the tenant. Property taxes can increase over time and are not capped like residential taxes. Insurance provides coverage for the building itself, liability insurance, and insurance for any improvements you make. Factor potential increases in taxes and insurance into your cost analysis.
Common area maintenance (CAM)
CAM charges cover the landlord’s costs to maintain common areas like parking lots, elevators, and hallways. CAM fees are often charged proportionally based on the square footage of your space. Make sure you understand what is included in CAM and that the fees seem reasonable based on the level of services provided.
Utilities
Unless otherwise specified in your lease, you will typically pay for all utilities to your space like gas, electric, water, and trash collection. Compare utility rates in your area to determine potential costs. See if you can find ways to reduce utility expenses through energy efficient equipment or by reducing usage during off-hours.
Additional costs
Other potential costs to budget for include security deposits, parking fees, signage, maintenance, janitorial services, and tenant improvements. Get estimates for all these additional expenses to determine if the total cost of the lease still makes good financial sense for your business.
With some upfront cost analysis, you can avoid unexpected expenses and make sure your commercial lease fits comfortably within your budget. Carefully evaluating all the potential costs will help ensure you start off your lease on the right financial foot.
Conclusion
So there you have it – the five most important things to think about before signing a commercial lease. It’s a big commitment and can have a major impact on your business, so take the time to carefully evaluate all these factors. Talk to other business owners, consult professionals like attorneys and accountants, and negotiate the best possible deal. A little extra effort upfront can save you from costly mistakes down the road. Trust your instincts, do your homework, and make sure the space and terms align with your business goals and budget. The right commercial lease can provide stability and opportunities for years to come. Just don’t rush into it blindly. Be smart, cover your bases, and set your business up for success. You’ve got this!
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