Well, twice now I've told you I was about to close this series out. And twice now I've gotten my writing schedule mixed up, and skipped messages.
Anyway, I have one more topic to cover in this series before I cap it off, and that topic is commercial leases.
Signing Your Life Away?
If you've never signed a commercial lease before, you probably can't relate to the weight and feeling of finality that comes with signing one of those suckers. Every time I go to a lease signing, I'm both nervous about what I'm committing myself to, and excited about getting a new business venture started.
Unfortunately, that initial excitement about getting your dojo going can cloud your judgement, causing you to gloss over important details and sign a lease that's lopsided in favor of your landlord. And this can lead to tremendous financial issues down the road.
Case in point: We have some friends who train at a local kickboxing school. The owner signed a lease that she didn't read properly and didn't have an attorney review. The lease said she was responsible for all HVAC (heating, ventilation, and air conditioning) repairs.
Since she didn't have a professional building inspector or HVAC tech inspect the space and equipment before she moved in, she was unaware that only one of three HVAC units was working. So, that one unit was cooling the entire space. In Texas, that's an issue, and of course it broke down as well.
Long story short, she couldn't get the landlord to repair the equipment, and she couldn't afford the huge bill to get all three units functioning, so she is closing down her school.
Obviously, this also points to poor management, but that's not really the point here. The point is that a bad lease can kill your business. That's why you want to make sure your lease is written fairly, with no hidden stipulations that will come back to bite you later.
Step #1 In Getting A Fair Lease: Recon
The first step in getting a fair lease is making sure of two things: - That you're getting the space you want at a rate that you can afford.
- That the other tenants in the building are happy with the landlords.
Getting the space you want at a rate you can afford involves several factors that I don't have time to go into in this email. Suffice it to say that you need to shop around, you need to understand your market and local demographics, you need to negotiate well, and so on.
Checking to make sure the other tenants in the building are happy with the landlord is easy. Just walk from space to space and speak with the owner or manager in each space. Ask them if they are satisfied with the space, if the landlord addresses maintenance and other issues promptly, and so on.
If you hear a lot of negative feedback, that's a clear warning sign. Find another location. Trust me, you don't want the hassles of dealing with a crappy landlord.
Step #2 In Getting A Fair Lease: Hire A Pro
Once you've found the right space at a rate you can live with, the next step is to negotiate the lease terms. This will require that you hire someone to negotiate on your behalf, either a real estate attorney or a lessee's agent, who will typically be a commercial real estate broker that you hire to represent you.
Unless you know the broker personally, I highly recommend that you get an attorney to help you negotiate the lease. The reason for this is because many real estate brokers will work both sides of the deal, taking a fee from you and a commission from the real estate management company as well.
And, this means they won't always act in your best interests.
Is it costly to have a real estate attorney review a lease? Yes. A review might cost you a few hundred dollars or more. And to have that attorney negotiate specific terms will cost you even more. But, it will probably be worth it in the end, especially if it means you are not responsible for unforeseen expenses down the road.
Also, at this stage (before you sign) you want to have the space inspected by a professional commercial building inspector. Do not use any company that is recommended by the landlord or property management company. Find your own inspector.
If your inspector finds anything amiss, tell the property manager or landlord that they must get it fixed before you move in. If they refuse, that's a deal-breaker.
Step #3 In Getting A Fair Lease: Understand the Terms
The third step in getting a fair lease is making sure you understand all the terms of the lease. Do this before you sign!
First, read your lease yourself, several times if necessary. Then get your attorney to explain the terms to you. You're paying that lawyer well, so get your money's worth. They should be able to give you a much simpler and clearer explanation of what the lease says, by breaking the legalese down into plain English.
Here are a few things you should look out for in a lease: - Lease length - Is it longer than you are comfortable committing to? In a smaller space, this might be an issue, especially if your school grows rapidly and you need to move to a larger space before your lease is up.
- Renewal clauses - What are the terms of lease renewal and extension? How much can the landlord raise your rent on renewal? Is it even limited in the lease? How much notice do you need to give if you decide to move at the end of the lease? What must you do to get your deposit back? (Note: You almost never get it back, as the landlord almost always finds a reason to keep it. But, it doesn't hurt to try.)
- CAM charges and Triple Nets - CAM means "common area maintenance" and triple nets are fees charged to tenants to cover real estate taxes, building insurance, and maintenance. Almost every commercial lease will include these fees. Make sure they are limited or stipulated as a percentage of square footage, and that you get copies of CAM and triple net statements for the last few years so you know what you'll be paying. Remember, this is going to be tacked onto your rent, and it will often increase your rent payment by 20% or more.
- Parking - For a busy martial art school, there is almost never enough parking. Make sure there are no limitations on where your clients can park, and check to be sure you have plenty of parking before you sign. And don't fall for that old "they can park next door" bit. The building next door doesn't want your customers parking in their space, and they'll probably start having their cars towed if it becomes an issue.
- Maintenance and Repairs - What responsibilities does each party have for maintaining and repairing broken equipment? The three things you'll always have issues with are the plumbing/sewer, the roof, and the HVAC systems. All three are expensive repairs when something goes wrong, so make sure that it's the landlord's responsibility to fix them.
- Insurance - What coverage are you required to have? Does the landlord's name have to be on your policy? This is pretty standard, but you need to know so you can get it done, so you're not in violation of your lease terms later.
- Natural Disasters - What happens if your space is affected by a fire or other natural disaster? If you can't operate in your space due to damage from a natural disaster, are you released from the lease?
- Fixtures - Fixtures are anything that is permanently attached to real property. Chattel is anything that isn't attached to the property. In most cases, fixtures become a part of the property, and are considered the landlord's property no matter who purchased them. This can be an issue if you are attaching bag stands and other equipment to the walls and ceiling of your space. Make sure the lease states that all your martial arts equipment will be considered chattels (meaning your property) when the lease expires, regardless of attachment to the property. (Note: Mirrors almost always stay with the property when you move, unless specified in the lease.)
Of course, there are dozens of other issues that can arise when negotiating and signing a lease, and I've merely listed the most common issues that come up.
Before you sign, your job is to make sure all these issues have been addressed by your representative and in the lease. Remember that there may be some give and take, and concessions might need to be made to get the lease signed.
This is normal. Just make sure you can live with whatever rights you are giving up, and with whatever responsibilities you are taking on in signing that lease.
Step #4 In Getting A Fair Lease: Have It Reviewed A Final Time
Don't sign the lease they hand you when you go to the signing. Instead, get them to send you official and final copies of the lease for a final review with your attorney, and make sure those are the copies you sign.
Some landlords will switch out the lease at the last moment. At the very least, you should make certain that you are familiar with key sections of the lease that were contested during negotiations, and that the verbiage is the same in the lease you received for review, and in the one you are signing.
If they insist on making you sign a fresh copy of the lease, bring the review copy with you and use it at the signing, comparing each version of the lease page by page before you sign. Take your time. Don't be afraid to make them wait while you review it, line by line.
Only sign when you are certain all the terms you agreed to have been included in the final copy of the lease that you are signing.
Other Considerations
Another reason to hire a real estate attorney to review your lease is because you might need that attorney down the road. Keep their contact info handy.
Also, keep up the maintenance on your space. If you regularly paint it, have drywall repaired, carpets cleaned, broken tiles fixed, and HVAC filters replaced, and document those repairs, you might be able to get reimbursed by your landlord.
At the very least, having that documentation will work in your favor, should you ever get into a legal dispute with your landlord. Keep records of every penny you put into your space.
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Hopefully, this info will help you protect yourself from predatory landlords and property management companies when you sign your next lease. My final advice is that you should do your homework, take your time, and listen to the pros that you hire to advise you.
If they say something fishy is going on, listen to them. You can always find another space, so be patient no matter how hard that might be. Doing so will save you headaches and money down the road.
Until next time,
Mike Massie MartialArtsBusinessDaily.com
Quick-start Guide to My Books and Resources: - Looking for a list of books and resources I've written? Click here! - Need business coaching to grow your dojo? Click here…
P.S. - I swear, this is the last message before I wrap this series up. The final message will be hitting your inbox tomorrow. Stay tuned.
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