The success of a business depends on many factors, including the terms of the premises lease.  This post is a discussion of seven of the many important items to negotiate in a business lease before signing it and opening the doors for your business.

The Lease Rate

• Below Fair Market Lease Rate

If you are able to negotiate a below fair market lease rate then you are in good shape, as it gives you a great leg up on being able to get your business to profitability sooner than later.

1. A below fair market lease rate also positively increases the value of your business, which you can determine with professional business valuation.
2. The way to maximize the value of a low lease rate is to negotiate as long of a lease term as you are comfortable with.
3. In retail leases, this could be negotiating a 10 year term or even longer if appropriate for your situation.
4.  To maximize the value of a long lease with a low lease rate is to make sure to negotiate a good lease assignment clause.

• Above Fair Market Lease Rate

If you are not able to secure a favorable lease rate, then you may want to reconsider entering into the lease.  However, there are many circumstances in which there is not much choice but to accept a high lease rate.  In particular, there are some areas that have incredibly high demand, in particular with retail businesses in prime demographic neighborhoods.  In those situations, there are a couple of ways to compensate for this. 

1. Tenant Improvement Credits.  Attempt to negotiate for a significant amount of landlord concessions and reimbursements for the tenant improvements you need to build out the space to suit the needs of your business.  Also, negotiate to get those credits as soon as possible, as much upfront as you can.
2. Negotiate an opt out clause after a certain period.  This way you can terminate the lease in case you are not able to get the business to a sufficient profitability level and would be ready to cut your losses short.
3. Negotiate some free months of rent, perhaps one free month per lease year.

Lease Indexing

Lease indexing is the term used to specify how a lease rate is increased throughout the life of the lease.  Even starting with a below market lease rate can quickly end up to be unaffordable and make your business unappealing to buyers, so pay negotiate this clause carefully.  The two primary factors of lease indexing are:

1. Frequency of increases.  Lease rates can be increased annually, every 18 months or at any other possible interval that is negotiated.  Ideally, a fixed rate is best, where the rate stays the same for as long as possible, including up to the entire life of the lease.
2. Amount of the increases.  This could be a predetermined amount, or it could be tied to an index such as CPI.  If you are going to have your lease indexing tied to a variable figure, then you can consider placing a cap on the increases.  For example, if CPI calls for 4% increase, you can specify that the maximum increase would be no more than 3.5%.  Negotiating a cap on the indexing is a method to protect against extreme spikes in lease rate increases.

Lease Assignment Clause

You will want to be able to transfer your lease when the time comes to sell your business or transfer it to another party for whatever reason that may occur.  Things to consider:

1. How much is the assignment fee?  Make sure it is a reasonable amount.
2. How soon do you have to notify your landlord if you find a buyer for your business?  Keep this time frame in mind when finding buyers to avoid deal killing delays in selling the business.
3. Does the assignment clause include a provision by which the landlord is entitled to a portion of proceeds or profits of the sale of your business?  If so, negotiate this clause as best as you can, as you should have the right to keep your hard earned money.
4. Does requesting an assignment trigger a lease termination clause for the landlord? If so, negotiate this landlord lease termination clause out if you can.  Otherwise, negotiate for the right to deny the lease termination clause as many times as you can for each attempt at lease assignment, because you want to have a valid lease to maintain the value of your business.
5. Qualifications of the buyer and whether or not assignment will not be unreasonably withheld.  Make sure the lease indicates that your landlord is to cooperate with in analyzing the buyer’s ability to operate your business.

Here is an in depth article on the Lease Assignments.

Tenant Improvement Credits

When you sign a new lease for business, you can likely negotiate to have the landlord contribute to the tenant improvement build out costs.   How much a landlord will contribute primarily depends on the length of the lease.  The longer the lease commitment, the more to expect from a landlord.  Another factor to consider is what portion of the tenant improvements that you plan to build will be valuable after your lease expires and you no longer occupy the property.  The portion of your tenant improvements that will survive your occupancy are items that you have more leverage with in negotiations.  A few important points:

1. Negotiate to get the reimbursement from the landlord as soon as possible, with as few string attached to it.
2. Choose your contractor, engineers and architects as carefully as possible, as you want to avoid delays in finishing the tenant improvement build outs.
3. Attempt to negotiate the commencement of lease payments until after you have opened the doors for business.

CAM/NNN Expenses

These are the landlord’s expenses for managing and operating the property that are passed back on to the tenant. CAM/NNN charges include items such as taxes, insurance, property managers, maintenance, etc.  A couple of the items to consider when negotiating a lease:

1. Try to get a cap on these items, in particular the contribution to Real Property Taxes.  For example, when a property is sold, the tax basis is usually reassessed, which means that the rate could jump up significantly.  If this happens the additional assessment is passed on to the tenant, which means an increase to the tenant, often times, it is a substantial increase that makes the lease payments 
2. Request and review periodic CAM/NNN reconciliation statements, so you can keep an eye on the CAM/NNN expenses to make sure it is reasonable.

Here are more details on what comprise CAM/NNN Charges.  And, here is a more in depth article on negotiating CAM/NNN charges.

Personal Guaranty Clause

Signing a personal guaranty clause for a commercial lease, especially in retail leases is a virtual must.  For industrial properties, they are also pretty regularly demanded by landlord.  In case you can’t negotiate your way out of a personal guaranty clause, here are a few points to consider

1. Negotiate that the personal guaranty will expire upon transfer or lease or assignment.
2. If you have to involve other people as guarantors to the lease, try to negotiate a finite period in which they remain as guarantors, such 12-36 months, and they will no longer be involved if the lease is transferred or assigned.
3. Negotiate to have your personal guaranty to expire after a specified period provided that you are in compliance with your lease.

Additional information on negotiating a Personal Guaranty Clause.

Corporate Entity

For legal and tax purposes you may be operating your business through a corporate entity.  If so, you can negotiate to have the lease name your corporation, LLC, or other legal entity be named as the lessee (tenant).  This can be helpful in case there are any major issues that could limit the liability to your corporation or LLC instead of involving  your personal assets.

1. Expect to have to provide a personal guaranty regardless of who is named as the tenant., since you will likely have to accept personally guarantying the lease on behalf of your corporation.
2. Consult legal counsel to get a greater understanding of legal exposure and your liability.

For further assistance with negotiating a commercial lease for your business, contact our Client Care Manager, Sonia Chhabra by telephone (888) 926-9193 or email cs@justelementary.com