The day has finally arrived! You have found the perfect place to begin the next chapter in your business and you are handed a stack of papers to review for your new lease. Before you get to that point, there’s a few things you will want to pay close attention to. Whether you are planning to start a new business, expand or right-size your space, you’ll want to be sure your commercial lease aligns with your business goals. From moving into an office building, restaurant or a retail shopping center space; there are a few things in your lease that will be universally important.
Term is one of the most important items you should know when signing your lease.
The term means the length in time which you and the landlord agree that you will occupy the space. Is it a one-year lease? 5-year lease? Maybe you have a 10 or 10+ year lease. Term is basically how long you have agreed to pay rent and occupy the space. This provision is typically found in the first few pages of a lease. How long you agree to pay rent is not the only thing you need to consider. In many leases, you’re also agreeing to specific hours to keep your lights on and customers/clients coming in and out of space. You might say, “well a landlord is only interested in getting their rent, so if I can afford to pay the rent, it doesn’t matter when I have a business running in the space…right?” Many Landlords, however, especially those that have shopping centers with multiple tenants, share a common building and parking lot and require the stores to be open for minimum days and hours. This is because stores being open breeds activity and ensures the shopping center looks alive and not stagnant. A closed or empty space can be a deterrent to a consumer or send a message that the shopping center may be losing tenants. Therefore, other businesses may be moving away or closing, causing a consumer to go elsewhere. This is bad for your business, bad for your neighbor’s business, and definitely bad for the landlord. You can find what your landlord requires under paragraphs that discuss “Hours of Operation,” “Rules & Regulations,” or sometimes in “Permitted Use.”
Lease Commencement Date vs. Rent Commencement Date. Is there a difference?
You bet there is a difference! This date is not always synonymous with the rent commencement date. This can cause problems if you do not know the difference or are unaware of it in your lease. The commencement lease date is the date when the landlord is able to deliver the space to the tenant and the tenant is then responsible for the space. The rent commencement date is the date which you will start paying rent. Why is there a difference? In some leases, there isn’t a difference. However, in some cases this differentiation is extremely important. One example is on the new construction of a space, where the rent commencement date may be on the earlier date of when the tenant opens for business or an agreed upon specific date. If the tenant isn’t ready, but the landlord has satisfied their construction obligation, the rent starts before the tenant is open. Another example, is if the landlord has given free rent for a period of time on a lease, in which case the lease may commence but the rent commences later. Another factor to remember is once the lease commences, regardless of when the rent actually commences, the tenant is responsible for the space, including insurance, utilities, and liability.
Money: What will you need to budget?
Set/Basic Rent vs. Percentage Rent:
The most common is set, or basic, rent; an equal monthly payment that is due. There is also something called percentage rent; this type of rent sets a certain percentage of gross sales from your business as rent. Percentage rent may be for a short time to assist the tenant in starting their business or it could be for a longer period based upon achieving a certain sales figure, after which the tenant pays percentage rent on sales above the figure in addition to the monthly base rent.
Rent most likely will increase after each year through the life of the term. That annual increase may be a fixed amount or an annual percentage increase. Typically, your landlord or property management company will look at the market in the local and/or regional area and determine the overall rent structure basic rent and /or percentage rent).
A tenant should always look in the lease to see what the late fees may be and when they begin. In some jurisdictions, there may be laws providing how late fees work. Often, it is just set within the lease. Understanding how much the late fee may be and when it kicks in is an important factor for the tenant to know.
Usually the minimum security deposit is equivalent to one months rent. This is a good faith payment to be held by the landlord as a promise to fulfill the obligation of the lease, or in other words; that the tenant will lease and pay on the property described as agreed to in the lease. Security deposits can be refunded at the end of successful completion of the lease.
Unless you have a specific lease that states that your rent will cover the utility bills, these types of bills are another form of “Rent”, or payment. In a “Full Service Lease,” the basic rent includes certain utilities and maintenance. However, in other leases the tenant will be responsible and expected to pay utility bills. These bills include, but are not limited to: Electric, Water, Gas (if applicable), Cable/Internet, Phone, etc.
What is TICAM?:
TICAM stands for Taxes, Insurance, & Common Area Maintenance charges. These are charges incurred by the landlord/property management company that are then passed through to the tenants usually based on a percentage of their leasable space. So if you’re the biggest business in square footage, you’ll most likely pay more than the smallest user tenant. In these charges you will see a percentage of taxes and insurance of the building, trash (if you use a common area dumpster), parking lot maintenance, cleaning of exterior buildings, and/or upkeep of the exterior walkways, landscape, and any other charges that are a common use to your business and your fellow neighbors businesses. Understanding what is in TICAM is important since it is possible for some landlords to add in other management and administrative fees which may be beyond the market for that area. Also, a tenant may wish to negotiate to put a “cap” on all, or some, of the increases in the TICM charges.
Look for Part Two of this article to learn more about Commercial Leases.
To get started finding the perfect space, email or call Lannin at:
[email protected] & 910.508.3886
Lannin Braddock is the COO and co-founder of The Braddock Group. As COO, Lannin is responsible for all operations and processes within the organization. She brings 15 years of Commercial Real Estate experience, including new development, sales, leasing and project management. She has served as the property manager for over 1 million square feet of retail, medical, office, and industrial commercial real estate.
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