Top Ten Mistakes to Avoid When Leasing Commercial Space
contact Claire Matten, Sterling CRE Advisors
Your growing business is at the point where it’s time to find a brick-and-mortar location to call your own. The excitement and adrenaline rush of the untapped potential of your future can sometimes make all other details seem insignificant. When is comes time to lease commercial space, we sometimes run into tenants who have regrets over their prior leasing decisions – so, here are some common oversights and ways to avoid them:
#1. Unrealistic Size Requirements
Make sure you don’t bite off more than you can chew. Get a good sense of the number of team members you will eventually need and align it with how long you realistically feel it will take to reach that number. The hiring process can take longer than anticipated so keep in mind your growth rate when deciding how much space you need.
#2. Not Communicating Your Intended Use Right From The Start
In today’s world of ever-changing retail concepts and co-working opportunities, it’s wise to start lease negotiations off on the right foot by being transparent about your intended use for the space. This will spill over into the expected responsibilities of both Landlord and Tenant throughout the term of the lease so it always helps to set a solid foundation early on.
#3. Basing Your Decision Solely On Cost
Sometimes cost does take the primary objective in your leasing decisions, but if possible don’t make it the only item you consider. Consider other items such as convenience for customers/clients, the needs of your current or prospective employees, nearby public transportation, level of visibility, expansion capability, etc. By prioritizing your wants and needs and comparing them across a variety of buildings/neighborhoods you’ll have a better chance of finding economic and operational harmony in your new space.
#4. Not Reading The Fine Print
It’s important to thoroughly review a lease agreement and get clarification on any unclear items before proceeding. We always recommend hiring a qualified real estate attorney to act on your behalf in the lease review. Many times Tenant’s do not fully understand the rent structure and get hit with maintenance/repair costs, unclear CAM fees, a lack of participation from the Landlord on tenant improvement needs, or rent escalations. These items come as a surprise to those who didn’t take the time to thoroughly review their lease agreement.
#5. Rushing Your Decision
Sometimes the search for the right fit can take upwards of 12 to 24 months. Many businesses who have specific space requirements start their search 9 – 12 months out of their target occupancy date. This also gives you additional time for any heavy tenant improvements to be completed before your desired lease commencement date. Smaller users or tenants with more generic requirements typically start to look 3 – 6 months out.
Signing a lease always involves some level of incurred risk, but understanding some potential risk factors can help you make a more informed decision. Line yourself up with your “A-Team” of supporters to save yourself time and money in fairly negotiating a lease for the perfect property.
#6. Not Being Prepared To Show Credit and Financial History
Tenants with high levels of credit and solid financial history are who many Landlords will work to accommodate in bringing them to their buildings. The likelihood of “default” in a tenant with good credit and strong financial history is lower and therefore can help add value to the property using the income approach. That being said, Missoula is full of Landlord’s who are eager to support growing businesses. Don’t be offended if you’re required to provide financials on your business when entering into lease negotiations as often times it’s a risk assessment Landlord’s go through to protect their investment.
#7. Not Working With A Broker
Brokers who specialize in commercial real estate can familiarize you with every available property which might fit your needs. Not only that, they can help maximize value for a tenant by negotiating favorable rates and concessions. Since brokers are paid by the Landlord, this is a benefit that comes at no additional cost to a Tenant.
#8. Not Inspecting the Property
Understanding the exact condition of the current space and how much it will cost to make any repairs could give you a leg up with negotiating with the Landlord as well as help set realistic budget expectations. Examples of items which are important to check are the HVAC system, bathrooms, and lighting.
#9. Misunderstanding Default and Remedy Terms
Understanding the process of how to cure/remedy a breach of lease could be the difference in whether or not it directly impacts your day to day operations. Unexpected events can occur so it’s important to educate yourself on default/breach and cure/remedy language and understand how it could impact your business.
#10. Allowing First-Impressions to Influence Your Decision
There are times when a tenant gets a negative first impression of a property and immediately crosses it off their list. Often when tenants tour space after work later in the afternoon or evening, when the ambient lighting may be darker, the space doesn’t always show well. It’s always best to tour an office space early in the day and when the sun is out. Don’t let the density of existing partitions and furniture cloud the vision you have for your business as often times these are things that can easily be altered. In some instances, a space that a tenant rules out less than a minute into a tour might actually be a great fit for them.