Answer the following questions by indicating whether it is a strength (S) or weakness (W) of the potential site as it relates to your business. Once you have completed a worksheet for each prospective location, compare the relative strengths and weaknesses of each site to help you choose the best one for your business.

	S	W
Is the facility large enough for your business?
Does it meet your layout requirements well?
Does the building need any repairs?
Will you have to make any leasehold improvements?
Do the existing utilities meet your needs, or will you have to do any rewiring or plumbing work? Is ventilation adequate?
Is the facility easily accessible to your potential clients or customers?
Can you find a number of qualified employees in the area in which the facility is located?
Is the facility consistent with the image you would like to maintain?
Is the facility located in a safe neighborhood with a low crime rate?
Are neighboring businesses likely to attract customers who will also patronize your business?
Are there any competitors located close to the facility? If so, can you compete with them successfully?
Can suppliers make deliveries conveniently at this location?
If your business expands in the future, will the facility be able to accommodate this growth?
Are the lease terms and rent favorable?
Is the facility located in an area zoned for your type of business?

Commercial Leases

If you’ve never been involved in renting commercial space, your first glimpse of a commercial lease may be overwhelming. They are lengthy, full of jargon and unfamiliar terms, and always written to the landlord’s advantage. But they are negotiable. Whether you’re working on the deal yourself or using an agent, the key to successful lease negotiations is knowing what you want, understanding what the lease document says and being reasonable in your demands.

Especially for retail space, be sure your lease includes a bail-out clause, which lets you out of the lease if your sales don’t reach an agreed-on amount, and a co-tenancy clause so you can break the lease if an anchor store closes or moves. If you have to do a lot of work to get the space ready for occupancy, consider negotiating a construction allowance—generally $10 to $25 per square foot—to help offset the costs.

Be sure you clearly understand the difference between rentable and usable space. Rentable space is what you pay for; usable is what you can use and typically does not include hallways, restrooms, lobbies, elevator shafts, stairwells and so forth. You may be expected to pay a prorated portion of common area maintenance costs. This is not unusual, but be sure the fees are reasonable and that the landlord is not making a profit on them. Also, check for clauses that allow the landlord the right to remodel at the tenant’s expense without approval, and insist on language that limits your financial liability.

AGENT AVENUES

Unless you have a significant amount of experience in shopping for commercial real estate, it’s a good idea to use a qualified real estate agent. Whether you are buying or leasing, an agent can help by prescreening properties, which saves you time, and by negotiating on your behalf, which can save you money.

Typically the seller or landlord pays the agent’s commission, which may raise some questions in your mind about loyalty of the agent. However, keep in mind that the agent doesn’t get paid until a deal that satisfies you both is negotiated.

You may opt to use a tenant’s or buyer’s agent whom you pay yourself. In the real estate world, that’s called tenant (or buyer) representation. Especially in tight market situations, it may be to your advantage to invest in an advocate who will negotiate on your behalf. For more information about tenant representation and for help finding someone to assist you, contact the Society of Industrial and Office Realtors in Washington, DC, at (202) 449-8200 or visit sior.com.

Shop for a real estate agent as you would any professional service provider: Ask for referrals from friends and associates; interview several agents; be sure the agent you choose has expertise in the type of property or facility you need; check out the agent’s track record, professional history and reputation; clarify how the agent will be compensated and by whom; and draw up a written agreement that outlines your mutual expectations.

Leasehold Improvements

Leasehold improvements are the nonremovable installations—either original or the results of remodeling—that you make to the facility to accommodate your needs. Such improvements are typically more substantial when renting new space, which may consist of only walls and flooring. Often existing space will include at least some fixtures. Get estimates on the improvements you’ll need to make before signing the lease so you’ll know the total move-in costs and can make a fair construction allowance request.

SPEAKING THE LANGUAGE

Following are some of the leases you may come across:

• Flat lease. The oldest and simplest type of lease, the flat lease sets a single price for a definite period of time. It generally is the best deal for the tenant but is becoming increasingly harder to find. (Caution: Avoid a flat lease if the term is too short; a series of short-term flat leases could cost you more in the long run than a longer-term lease with reasonable escalation clauses.)

• Step lease. The step lease attempts to cover the landlord’s expected increases in expenses by increasing the rent on an annual basis over the life of the agreement. The problem with step leases is that they are based on estimates rather than actual costs, and there’s no way for either party to be sure in advance that the proposed increases are fair and equitable.

• Net lease. Like a step lease, the net lease increases the rent to cover increases in the landlord’s costs but does so at the time they occur rather than on estimates. This may be more equitable than a step lease, but it’s less predictable.

• Cost-of-living lease. Rather than tying rent increases to specific expenses, this type of lease bases increases on the rises in the cost of living. Your rent will go up with general inflation. Of course, the prices for your products and services will also likely rise with inflation, and that should cover your rent increases, so this type of lease can be very appealing.

• Percentage lease. This lease lets the landlord benefit from your success. The rent is based on either a minimum amount or a base amount, or a percentage of your business’s gross revenue, whichever is higher. Percentages typically range from 3 to 12 percent. With this type of lease, you’ll be required to periodically furnish proof of gross sales; to do this, you may allow the landlord to examine your books or sales tax records, or provide a copy of the appropriate section of your tax return. Percentage leases are common for retail space.

Negotiating the Lease

The first lease the landlord presents is usually just the starting point. You may be surprised at what you can get in the way of concessions and extras simply by asking. Of course, you need to be reasonable and keep your demands in line with acceptable business practices and current market conditions. A good commercial real estate agent can be invaluable in this area.

Avoid issuing ultimatums; they almost always close doors—and if you fail to follow through, your next “ultimatum” will not mean much. Consider beginning the process with something that is close to your “best and final offer.” That way, your negotiations will not be lengthy and protracted, and you can either reach a mutually acceptable deal or move on to a different property. The longer negotiations take, the more potential there is for things to go wrong.

Business Lease Checklist

After you have chosen a particular site, check the following points before you sign the lease:

• Is there sufficient electrical power?

• Are there enough electrical outlets?

• Are there enough parking spaces for customers and employees?

• Is there sufficient lighting? Heating? Air conditioning?

• Do you know how large a sign and what type you can erect?

• Will your city’s building and zoning departments allow your business to operate in the facility?

• Will the landlord allow the alterations that you deem necessary?

• Must you pay for returning the building to its original condition when you move?

• Is there any indication of roof leaks? (A heavy rain could damage goods.)

• Is the cost of burglary insurance high in the area? (This varies tremendously.)

• Can you secure the building at a low cost against the threat of burglary?

• Will the health department approve your business at this location?

• Will the fire department approve your business at this location?

• Have you included a written description of the property?

• Have you attached drawings of the property to the lease document?

• Do you have written guidelines for renewal terms?

• Do you know when your lease payment begins?

• Have you bargained for one to three months of free rent?

• Do you know your date of possession?

• Have you listed the owner’s responsibility for improvements?

• Do you pay the taxes?

• Do you pay the insurance?

• Do you pay the maintenance fees?

• Do you pay the utilities?

• Do you pay the sewage fees?

• Have you asked your landlord for a cap of 5 percent on your rent increase?

• Have you included penalty clauses in case the project is late and you are denied occupancy?

• Have you retained the right to obtain your own bids for signage?

• Can you leave if the center is never more than 70 percent leased?

• Has a real estate attorney reviewed your contract?

“Tonight, when you
lay your head on your
pillow, forget how far
you still have to go.
Look instead at how far
you’ve already come.”

—BOB MOAWAD,
CHAIRMAN AND CEO OF
EDGE LEARNING INSTITUTE

Essentially, everything in the lease is subject to negotiation, including financial terms, the starting rent, rent increases, the tenant’s rights and responsibilities, options for renewal, tenant leasehold improvements, and other terms and conditions. You or your agent can negotiate the lease, but then it should be drawn up by an attorney. Typically, the landlord or his attorney will draft the lease, and an attorney you hire who specializes in real estate should review it for you before you sign.

It Still Comes Down to You

Technology and statistics are important elements of your site selection decision, but nothing beats your personal involvement in the process. Real estate brokers and economic development agencies can give you plenty of numbers, but remember that their job is to get you to choose their location. To get a balanced picture, take the time to visit the sites yourself, talk to people who own or work in nearby businesses, and verify the facts and what they really mean to the potential success of your business.

Commercial Leases

Leasehold Improvements

Negotiating the Lease

It Still Comes Down to You

Types of Locations

Issues to Consider

Style of Operation

Demographics

Foot Traffic

Accessibility and Parking

Competition

Proximity to Other Businesses and Services

Image and History of the Site

Ordinances

The Building’s Infrastructure

Utilities and Other Costs

Room for Growth

What Can You Expect To Pay?