4 Big Questions to Ask Before Signing your Retail Lease
THE RIGHT (BUT LESS OBVIOUS) QUESTIONS TO ASK BEFORE YOU COME TO TERMS ON RENT
Negotiating an LOI for a commercial space? Negotiate these basic and often overlooked elements before you agree on rent.
1. UTILITIES
It may seem mundane, but the existence of the right utilities should never be presumed. Are the utilities brought into the space? Bringing gas or electric service from another part of the building into a retail space can be surprisingly expensive. If the landlord is not delivering the utilities you need into your space, find out the distance and specifications of the utility service, and have a contractor provide an estimate of the cost to do so. Restaurants require above-average power and water requirements, and adding them later on may be prohibitively expensive, or not at all possible.
2. COMPETING USES
So you found a perfect space for your business with no competitors nearby - for the moment. If your landlord controls the nearby buildings or a shopping center, make sure you request "exclusivity" language in the lease. Think about what type of businesses would most likely take customers away from you and specify that in the lease. Be as broad as possible - a donut shop might take away customers from a cupcake store, so a cupcake exclusivity might not be enough.
3. PERSONAL GUARANTEES
If your company is new, the landlord will likely want your company to sign the lease, but also require you as the owner to personally guarantee the lease, requiring you to continue to pay the rent even if the company closes. Personal guarantees are negotiable, for new businesses they are usually necessary in some form but can often be more limited than originally proposed by the landlord. Most retailers do not personally guarantee the entire lease, but rather the first few years of a lease, then a limited amount thereafter if the business leaves the building, often terminating entirely before the lease expiration. Negotiate carefully, the last expense you need if your business closes is to keep paying rent.
4. ESCALATIONS
The "escalations" term in the lease may seem like an innocuous - and standard - provision, yet it is anything but. Landlords often insert a 3% annual increase in rent, which seems benign. But CPI in 2020 is running at 2%, so your rent grows annually 50% faster than your rent. Consider carefully the last year of the lease, will rent be fair? If you start at $8,000 per month with 3% annual increases on a 10-year lease, your rent will be $10,438 per month. If your escalations are 2%, your rent in year 10 will be $9,560 per month, saving you $878 every month.