Leasing commercial space for your business is quite possibly just as important as day to day operations. When looking for a place to operate your business, there is much more to consider than the monthly rent. Just because a monthly lease payment is affordable, does not, in and of itself, mean that it is the right deal for your particular business.
If you have ever entered into any kind of legal contract, you know that they can be very lengthy and full of legalese. The reason being is that the landlord’s Attorney is making sure that all bases are covered. If you are not savvy to the meaning of all of this legal jargon, you may find yourself battling with “lease remorse,” after it is too late.
There are many considerations that should be carefully weighed, before putting your John Hancock on the dotted line. Below, I will discuss 5 items that require careful deliberation before signing a commercial lease.
1. Before looking at commercial space, do your homework. Check out the neighborhood to determine if it is a good fit for the product or service you are offering. For example, you probably don’t want to open a sub shop in a location where there will be sub shops on either side, just because the rent is cheap. You know what they say in the real estate industry, “Location, Location, Location!” You want to get the biggest bang for your hard-earned buck and you don’t want to throw your money away.
2. Speaking of money, have a well thought out budget. Know what you can afford and don’t look at places that are out of your price range. Anything over and above what you can afford to spend will cut into your profit margin. Inquire up front how much the rent is and when it is payable. Does the landlord require monthly or quarterly payments? What is the term of the lease? What happens if you have a change of circumstances before the term of the lease expires? Ask about a “break clause.”
3. Rent is most likely going to be one of your highest overhead costs. Be sure you understand what if any other additional fees are required, over and above the actual rent. Unexpected fees can wreak havoc on your bottom line. CAM (Common Area Maintenance) charges are very commonly passed on to tenants in some commercial leasing contracts. VAT (Value Added Tax) rates can also add an extra percentage to lease payments on commercial properties including offices, hotels, retail stores etc. Mixed use properties also have the potential for these fees.
4. By signing a commercial lease that provides for the landlord to have the ability to enter a Confession of Judgement against you, you run the risk of being compromised legally. A confession of judgement is a term that allows the landlord to enter a judgment against you, in a conflict situation, without you having your day in Court. Many states prohibit these types of clauses and/or language; however, the Commonwealth of Pennsylvania does permit this scenario so be on the lookout.
A typical confession of judgement (also called a cognovit note) looks something like this:
“The undersigned irrevocably authorizes any attorney to appear in any Court of competent jurisdiction and confess a judgement without process in favor of the creditor for such amount as may then appear unpaid hereon, and to consent to immediate execution upon such judgement.”
5. Know the difference between a net lease and a gross lease. The terms of a net lease require the tenant to be responsible for regular operating costs. Operating costs can include things like property taxes, property insurance, utilities, trash collection, maintenance and repairs, etc. Often landlords will pass a portion of these expenses on to the tenant. With a gross lease, the landlord assumes responsibility for these expenses.
Make sure you have read and understand the entirety of the lease. If you are not confident in your ability to do so, have an attorney review it for you. Once you have signed the lease, you are legally bound to the terms and conditions.
Ask yourself, all things carefully considered, if you are being realistic and if you have made the best possible deal that suits every aspect of your business. If not, revisit the terms. Contracts are always open to negotiation prior to signing. Just because you are handed a “standard” lease, don’t feel pressured to sign it. Above all, don’t be afraid to walk away if you have any unresolved reservations.
If you need help with a commercial lease, set up a time to talk to someone on our team here.
If you have realized the dream of owning your own business, then you are among the growing number of Americans doing just that. Currently, upward of 14% of Americans own their own businesses.
Opening a business is only one piece of the puzzle. If all goes well, you will have a marketable product or service that appeals to consumers. Once you have established your initial business and opened your doors, don’t fool yourself into thinking you are finished planning.
Being successful in business is not an accident. It requires a lot of planning and careful attention to detail. One thing you don’t want to do is fall into the trap of becoming complacent. Looking ahead in an effort to be proactive, rather than reactive, will serve you well. You always need to be one step ahead, so your business runs seamlessly.
One consideration that should be on your radar is that of company growth and expansion. Often, when a business starts out, there are few if any employees. Many business owners are a one-person operation simply to keep overhead low. So, what happens when your business becomes so successful that you need help?
When the time comes to expand a small business, many key logistics come in to play. Some things you would be wise to consider are finances, demand for your product or service and market saturation. Can your business afford to finance the growth? Will additional overhead reduce your profit margin? Will you be stretching yourself too thin by opening another location? By expanding your business are you selling out your original dream? All of these factors require careful consideration.
So, let’s say that you have considered all of the above and you go forward with expansion. What’s next? Chances are you will need help. Do you hire employees or independent contractors?
Small businesses tend to have a need for a flexible workforce. This is true especially in the beginning stages of any expansion. You don’t want to end up top heavy with employees and not have enough work to go around. You also don’t want to experience a growth spurt and not have enough bodies. If that leaves you scratching your head, you need to weigh your options and decide what is best for your particular business. Below you will find a list of pros and cons to each scenario.
This chart is a guideline for your consideration. If you are considering expanding your small business, it will be well worth your while to make a check list and invest in a consultation with an Attorney that specializes in small businesses. Don’t jeopardize what you have worked so hard to build.
Considerations for Choosing the Business Structure That is Right for You
Over half a million new small businesses are founded each year in the United States. Owning your own business comes with its own unique advantages and, lets face it, it is part of the American Dream.
Small Business owners are afforded many perks of being self-employed. Being in control of your own destiny and managing the perfect work/life balance are among the top reasons people go into business. To quote Marc Anthony, “If you do what you love, you will never work a day in your life.”
Being a small business owner has its risks but also has its rewards. After your small business idea comes to fruition, the next most important consideration is how to structure your business and protect yourself. This is where things can get confusing. It is always wise to consult with an attorney and and/or an accountant to determine how to best safeguard what you have worked so hard for.
Careful consideration is of the utmost importance to make sure you understand all of the tax ramifications associated with how your business is structured. As you know, tax laws frequently change so what may have been true in the past may be different by the time to are ready to get started. Protecting your business from liability, profits and personal property should not be left to chance. Other important considerations include how your business will be managed and what your long-term goals are.
There are several ways to structure your small business. On the left is a chart with the basic pros and cons of each type. An attorney can explain each structure type in further detail and help you with assessing what he/she thinks is in your best interest. Consulting with an attorney can be an important investment in your business.
Although it is possible to convert/restructure your small business after you have opened it, it is always best to do your due diligence prior. By doing so, you can save yourself a lot of time and money.
Sarah E. Holmes is a Philadelphia business attorney and strategist that helps start ups and established businesses looking to expand, protect their assets and increase their profits in an approachable, down-to-earth way.