Commercial leases are literally mined with all sorts of traps that can be the potential undoing of both a business and a business owner. I recently attended a session sponsored by NYC Business Solutions and given by Brian Donnelly of DLA Piper that, together with some of the caveats I've learned the hard way in the three commercial spaces I've leased over the course of my business, are worth sharing with entrepreneurs everywhere. Before you start pounding the payment, equip yourself with some basic tools and ideas that can help you to skirt the worst leases lurking in your path.
- Research the areas you're interested in. You may know what area is hot or seemingly well-located for your business, but if you haven't checked things like zoning laws, crime rates, flood-worthiness, etc, of that area you may be starting off on the wrong foot entirely. If you scope the areas in advance, you'll be able to act with assurance when you start visiting places.
- Make a checklist of what you need for actual space. Every business has operating constraints that can be made better, worse, and even possible at all by the space which it occupies. Restaurants need exhaust systems, health clubs need showers, manufacturing companies may require chemical disposal systems or loading docks. Decide what your business' essentials are before you set out to see anything.
- Bring a laser pointer to measure anything you visit. Sure the listing may tell you the square footage, but don't believe it until you've measured for yourself. In every market there is something called a loss factor, which accounts for the difference between useable square feet space and marketed size of the space. This differential varies wildly--from almost no loss, to close to 50%. If you don't know the actual size of the space, you can't be sure you're being charged the correct market price per square foot, which could result in a terribly expensive space.
- Get a Certificate of Occupancy. A space may look perfect to you, and the landlord may be happy to rent it to you, but if your business is not within government norms regarding the occupancy rules of the premise, you'll find yourself in hot water. Occupancy rules affect the types of business, number of people, and operating hours of a given tenant. Even though you can fit 50 people in a given spot, doing so may not be legal. Understand the parameters of your space before you sign on the dotted line.
- Request to see copies of the utility bills for the space. Heating, cooling, electricity, water, waste disposal, all add up fast. Signing a lease without knowing what to expect in terms of monthly expenses can deplete your bank account faster than bringing a bad product to market.
- Check with neighbors to see if they are happy with building, neighborhood, neighbors, etc. The place that looked so idyllic when you visited might have downsides you don't and can't know about until you're in the space--unruly occupants, unresponsive building management, or even unseen safety violations. Asking around is your best bet to deciding whether a space would actually be a good place to put your company.
- Ask for a copy of the lease you are being asked to sign before you hand over any type of deposits or commit to anything. Be sure that the person you are negotiating with is the actual landlord (or has the proper authority of the landlord to negotiate on their behalf). You want to make sure you are dealing with the person truly able to grant you the space.
- Search the lease for hidden expenses. They're literally everywhere. If laws change regarding signage on a facade, and your building is no longer compliant, will you pay to make the update, or will the landlord? If you need to sublet or assign your space, will you have to pay the landlord to review any potential renters? Scrutinize the lease for clauses that seem innocuous but might cause problems for your particular business. Do you need freight elevator service beyond the regular hours of the building? Will it be possible and at whose expense? If the building only allows access from 8am- 6pm, how will the night school you intend to run from it function?
- Cap your expenses wherever you can. If you are responsible for any charges that may change during the course of the lease, try to negotiate for limits on them. If property taxes are increased half way through your lease term, you may pay a percentage or perhaps a flat fee--a flat fee may allow you to better anticipate your budget, but a percentage may keep the expense lower--putting a cap on the expense either way might mitigate your risks. If the landlord charges to review sublet applications based on the value of the proposed lease, you might be better off asking for a flat fee.
- Identify your sticking points. No space is the only space. While the landlord may have the upper hand as the owner of a space, you always have the power to walk away. He wants his space rented as bad as you want to rent. Meeting in the middle is key and that will only happen if you know in advance of the negotiations the points on which you cannot make concessions without putting your business in jeopardy. Hold steadfast to those points and walk away if a particular location can't meet those needs--but be prepared to let the small things ride if you are globally getting what you need in a given deal.
Choosing the right space for your business, for the first time or the fifth, can be a catalyst to growth and stability or an unforeseen Achilles' heel that depletes or destroys you. Do the homework to make sure your lease works for you instead of against you.