In the world of business, you want to minimize the number of lessons you learn the hard way. And getting into an unfavorable commercial lease can be a very costly lesson.
You could end up exposing yourself to too much risk, or paying far more money than you should. This type of mistake has actually caused too many businesses to have to close their doors forever.
To ensure that you’re entering your first commercial lease with your eyes wide open, here are 3 things you will want to avoid.
A Personal Guarantee
Even if your would-be landlord insists this is a deal-breaker, do not agree to a personal guarantee in your lease. They may claim that they need to protect themselves because you’re a new and unproven business. However, there are other ways to do so.
Agreeing to a personal guarantee would mean that you’re personally responsible for paying any due rent in the case of a default on the lease. This is simply exposing yourself to far too much risk.
You can come to another arrangement, such as taking any months of free rent off the table, or increasing your deposit.
Overshooting or Undershooting
You need to ask yourself some important questions. One of which is, “Where will my business reasonably be in 5 years?”
You don’t want to be stuck in a conservatively small space as your business starts to grow and scale. That being said, you don’t want to lock yourself into a lease for a huge space that you may or may not be able to use/fill.
Paying Out of Pocket to Improve it
This space is probably not perfect right out of the box and you will most likely want to make some upgrades. This can be very expensive and not something you want to pay for out of your own pocket.
A tenant improvement allowance can help you get the space where you want it to be. However, this typically requires you to spend your own moneyand then get reimbursed after the fact. This could mean too much of your cash flow is tied up in renovations.
Try to negotiate for a cash allowance instead. This means you would get an agreed-on amount of money (typically a dollar value per square foot) to invest into your space.
These are only a few of the things you need to watch out for, but avoiding too much personal responsibility and getting the right size of space are crucial to getting the most from your lease.
If this is your first time leasing an office space, we highly recommend working with a professional who can look over your lease and flag any potential issues for you. They do not necessarily have to be a real estate lawyer. You can work with a commercial lease expert who specializes in reviewing documents for small business owners like you.
Their expertise is very affordable (especially compared to hiring a lawyer) and it can save you thousands of dollars over the duration of your lease.