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<July 2014>

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Commercial Leasing

Every commercial lease should be in writing and include the following details:

·         How much rent is due, including any increases (called escalations).  (You’ll want to know the going rate for space in the neighborhood before you begin negotiating). Escalations should be for specific dollar amounts or tied to a known method of calculation, such as cost of living.  

·         Lease terms and under what conditions you can renew the lease.  A shorter lease means less commitment, but less predictability for the long run.  If location is very important – for example, if you have a retail store – you may want to opt for a longer lease.   

·         Rent includes utilities, such as phone, electricity, and water.

·         Responsible for paying any of the landlord’s maintenance expenses, property taxes, or insurance costs, and if so, how they’ll be calculated.  

·         Required deposit and whether you can use a letter of credit instead of cash.  

·         Description of the space you’re renting, square footage, available parking, and other amenities.  

·         Detailed listing of any improvements the landlord will make to the space before you move in.   

·         Representations made by the landlord or leasing agent, like foot traffic, utility costs, restrictions on the landlord renting to competitors, compliance with Americans with Disabilities Act requirements. 

·         Assurances that the space is zoned appropriately for your type of business.  

·         Whether you’ll be able to sublease or assign the lease to someone else, and if so, under what conditions.  Negotiate the ability to sublease.  

·         How either you or the landlord can terminate the lease and the consequences.

When it’s time to renegotiate a commercial lease, you’ll want to document your reasons for a lower rent or more space improvements with hard facts regarding lower foot traffic than represented or a downturn in your industry.  Some landlords are willing to take a percentage of your sales instead of a flat rental fee when economic times are slow.

As a tenant, you have more leeway when negotiating a commercial lease than with a residential one. Having a lawyer to represent you is important.   A lawyer can also research zoning laws and local ordinances and fill you in on the local real estate market conditions and customs.

Non-Compete Clause
If you run a retail establishment, insist upon a provision that prohibits the landlord from renting space in or near the same retail center to a competitor.

Dispute Resolution
If there is a dispute involving you and the leaser, by what method will it be resolved: mediation, arbitration or court.

Spatial Specifications
How much space is being rented and which areas are included?  It is wise to take a tape measure and confirm the leaser's measurements.  Finding a discrepancy in reported space and actual space is a valuable bargaining tool.  

Default and Termination
Under what conditions can either party free themselves from the lease and what notice requirements are needed?

To attract skilled employees, more employers are allowing pets in the workplace.  Does the lease permit pets?

Prices are always negotiable in commercial leases and may depend on other concessions and general market conditions.  If options to renew are considered, what rent increases are allowable and how are they calculated?

Additional Costs
The cost of utilities, taxes and maintenance are often passed to the tenant.  If you pay them, make certain your portion is in line with the percentage of the building that you occupy.

Build outs
Improvements, modifications, and fixtures added to a rental space are called build outs. Negotiation should include whether these are allowed, which party will pay for them, and who owns them after the lease ends.

The term "sublease" refers to the transfer of less than the entire term of the lease.  Under a sublease, the subtenant is not directly responsible to the leaser, whose recourse against the subtenant is only through the original tenant. If your business fails or the location doesn't match your needs, do you have the leaser's permission to sublet the space to another party?

Term Options
Many new businesses negotiate a short initial lease with one or more options to renew. Options give you the right to stay by notifying your landlord in writing a certain number of days or months before the lease expires.

Leasing Pitfalls
The following factors may adversely affect the tax status of your leases:

·         Rental payments that establish equity or lead to a property title

·         Rental payments that exceed the fair rental value of the property by a wide margin

·         Rental payments that are the equivalent of interest on a purchase

·         Purchase option is exercised at a rate lower than the actual property value. 

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