Top 10 Leasing Basics:
There are many terms included in leasing that are new to a business owner and having a grasp on the basics will allow the person to move forward in establishing that first lease and getting back to running their business faster.
The following is a list of commonly used terms in leases and offers to lease and will give a small business person a little more knowledge and confidence when leasing a space.
10. Common Types of Leases
- Gross Lease – the tenant pays a flat amount on a monthly basis, similar to renting an apartment. The landlord bears the risk of any fluctuations in operating costs or taxes.
- Net Leases – the tenant pays a basic amount to the landlord plus an additional rent which covers their proportionate cost of operating costs.
- Percentage Leases – the tenant pays a basic amount to the landlord and the additional rent plus the tenant pays a percentage of their sales to the landlord. This type of lease is most common in enclosed retail malls and links the success of the tenant and the landlord.
- Basic Rent – (or Base Rent) this portion of the monthly payment is the landlord’s income which they use to pay for financing and/or make a profit. This rent is expressed as a cost per square foot per year.
- Additional Rent – (sometimes referred to as NNN or CAM or Operating Costs) this portion of the monthly payment is used to pay the tenant’s proportionate share of the expenses such as: taxes, building insurance, utilities, management fees, snow removal and the like.
8. Security Deposit
This provides security for the landlord in case a tenant defaults on their lease or leaves the property in a damaged condition.
7. Personal Guarantees / Personal Covenants
This is a request by a landlord that the tenant, and/or another person, is willing to take personal responsibility if the tenant defaults on payments owed to the landlord. It is the same as a guarantee or co-signer on a mortgage or leasing a car.
6. Tenant Improvements or TI’s
These are the changes that need to be made prior to the subject space being ready for the tenant to conduct business. The calculation and assignment of the costs and the apportioning of the work to be done to complete the TI’s are negotiated by the landlord and the tenant in the offer to lease. Frequently the landlord will attempt to recover its costs of improvements by amortizing the costs of the TI’s into the basic rent, or the TI’s may be paid for by the landlord and used as an incentive to bring in a new tenant.
5. Escape and Relocation
An escape clause provides a tenant who is unsure about their business the option to escape or break the lease at a given time or with a given amount of notice, this option may also kill any incentive that the tenant may want to negotiate. The relocation allows the landlord to move a business within the complex in order to accommodate another larger tenant. The issue here becomes who pays for the moving expenses.
4. Tenant and Landlord Subjects
These are some of the most common subjects included in offers to lease that protect the landlord and tenant and are performed as part of their due diligence before completing their transaction: personal credit check, approval of a city business license, approval of the landlord’s standard blank lease, nature of the tenant’s business, approval of the board of directors, and approval of the franchisor.
3. What is Negotiable?
The short answer is everything, the longer answer is you need to learn what is happening in the market and find out what is negotiable. In a hot market with a low vacancy rate, there may be little or nothing a tenant can get in the way of incentives, however in a slow market with high vacancy, there may be more on the table. Knowing what is being offered in the market will help the negotiations start off at a realistic point.
2. Write Everything Down
The only part of the contract that is enforceable by either the tenant or the landlord is what has been written down and agreed to by both parties. It would be very difficult for a judge to determine the accuracy of a verbal agreement between two parties, so be sure to write down everything that has been agreed to and sign or initial every page that forms part of the contract to prove both parties have agreed to the statements on that page.
1. Professional Advice
Be sure to have a professional leasing agent and/or lawyer look over any contract before entering into it. It may seem straight forward , but knowing what to look for in a contract and to know what is missing and should be there is key to successfully leasing a space for your business.