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Is A Personal Guarantee for Me?

Is A Personal Guarantee for Me

When entering into a commercial lease, the Landlord often requires a personal guarantee

from the business owner, even if they have formed a corporation or LLC, and may refuse to rent the space without one.  This means that the guarantors will make the lease and other payments if the business fails. Landlords often ask for a personal guarantee from start-ups and other small businesses.  Read very carefully the language about personal guarantees and how long they last and what happens if the business fails and can’t fulfill the remaining payments on the lease.

You may wonder why a landlord wants a personal guarantee.  When landlords have to pay for a large amount of tenant improvements (i.e. constructing the space to your specifications), personal guarantees are usually required.  If you are a small business with plans to grow or are unsure of the future, limit your personal exposure.  Designing the perfect office space shouldn’t be your highest priority.  Find practical space with a reputable landlord.

Statistics show that only 50% of all new small business start-ups will be operating in 5 years. 

If your landlord requires a personal guarantee, negotiate to limit the term of the guarantee or best yet, find a landlord who doesn’t require one, or find a really good broker who can present you to the landlord in a way that makes them feel as if you would be an amazing new, money-making asset to their center.

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Should I Get My Lease Reviewed?

Should I Get My Lease Reviewed?

Regardless of your industry, one of the first and most important agreements you’ll likely sign is a commercial or industrial lease agreement for your business. A lease agreement is also sometimes called a rental agreement. A clear and well-defined lease agreement helps both tenants and landlords understand their obligations and protect their interests.

When leasing a space, it is important to do your due diligence up front. Getting out of a bad lease can expose your business to substantial legal cost and liability. If you find a space at a location and price that works for your business, you should hire an experienced real estate lawyer to ensure that the terms of the lease agreement work for you and fit your plans.

Common Commercial Lease Terms

Term of the Lease – The term describes the length of the lease and its start and end dates. Subject to certain conditions and exceptions, your business is responsible for rent for the length of the term.  It is an agreement between a landlord and a business outlining terms and conditions of property rental. A commercial lease is specific to renters using the property for business or other commercial purposes versus residential use

Rent – The amount you must pay for the space is usually one of the major concerns any business owner has when entering into a lease agreement. Be careful not to get caught off guard by additional fees in your lease agreement, such as utilities, insurance, and taxes. These extra fees will increase your monthly payment, and therefore, you should calculate them into your rental estimate before signing a lease agreement.

Build-out – The process of finishing this raw space is known as the “build-out.” There can be extensive negotiations between the building owner (landlord) and the tenant over what improvements will be made, who will pay for these improvements, who will be in charge of getting the work done, and what will the tenant be permitted (or required) to remove at the end of the lease. Your business may need to renovate the space to suit your needs prior to moving in. Whether this involves extensive construction or slight modifications, your lease agreement should account for these build-outs…including who pays for them and who will own them when the lease expires.

Maintenance – This term identifies whether a landlord or a tenant is responsible for maintenance and repairs. This can vary from lease to lease and can encompass everything from providing for janitorial and handyman services to who pays for compliance with various laws and business codes.

Exclusivity Clause – An exclusivity clause limits your landlord’s ability to lease neighboring premises to your competitors. If you succeed in getting an exclusive clause, you’ll want to make sure that the landlord agrees to enforce it should another tenant breach its restrictive use clause (and thereby step on your exclusive). Your lease should spell out remedies for this type of situation—for example, the landlord might agree to give you reduced rent, an option to reduce the lease term, and no “cure” period (no time in which the neighbor gets to stop the offending activity without consequences). Most importantly, you’ll want an established amount of monetary damages that you don’t have to prove—the last thing you want is to go to court to prove how much business you lost because another tenant moved into your exclusive.

Sublease and Assignment – These provisions provide flexibility for your business to vacate its space without breaking your lease. Subleases and assignments allow a tenant to transfer the lease, or, in the case of a sublease, a part of the lease, to a third party tenant. Typically, a landlord will reserve the right to approve any potential sublease or assignment.

Liability & Indemnification – Indemnity is compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability for damages. The concept of indemnity is based on a contractual agreement made between two parties, in which one party agrees to pay for potential losses or damages caused by the other party. The allocation of risk is a crucial component in any lease agreement. These provisions outline each party’s liability, or responsibility to pay, for any damages, injuries, accidents, etc. that occur on the property. Typically, an indemnity clause in a lease allows the landlord to seek reimbursement, or indemnity, from the tenant for any money paid to a third party as a result of loss or injury on the property. As a tenant, you should be wary of indemnification that includes injury caused by the landlord’s own negligence.

Termination – Terminating a lease prior to its expiration without liability can be difficult. However, a lawyer can draft certain provisions—break, modification, breach, buyout and acceleration—into your lease agreement to account for an early exit.

Pricing – Depending on whether you need a lease drafted from scratch or simply reviewed, the cost of a commercial lease agreement can vary significantly. When you hire a real estate lawyer, you can expect to pay around $500 in the state of Georgia for a formal lease draft review.

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Negotiation Mistakes You Should Avoid

Common Commercial Lease Negotiation Mistakes You Should Avoid

The main risks to consider when leasing a commercial office space is time, money, and risk

You must understand which location is going to yield you the best rate and terms. You also want to avoid choosing a bad location or making an erroneous operational decision.  Furthermore, you need to keep in mind what your options are in the event that your business needs to expand, contract, or relocate.  You must also consider how long it will take to find the right location for your business, the time needed to negotiate your terms, as well as how long it will take you to move in and become operational.

Your tenant rep broker can usually create a market survey for you outlining available properties within a week by motivated companies already familiar with the local market.  These are just a few of the preliminary tasks that are done but many other complications, often overlooked, need to be factored into the space acquisition timeline.

 

#1 Allow Enough Time

  • Negotiations can take weeks or even months
  • Once the lease has been fully executed, if the space needs a build-out, you can expect to wait another one or two months
  • Before renovations can begin, permits need to be obtained and can take one to two months
  • Before permits can be obtained, architectural plans must be completed and can take one to two months
  • If new construction is in the plans, that can easily take from 9 months to 1 year to complete

 

 

#2 Don’t Neglect Long-Term Responsibilities

Potential tenants who don’t think about the forecast of what their business requires can prove to be a detrimental problem.  Business owners who only think of solving their immediate needs can face expansion problems way sooner than they expected.  In addition to considering short-term needs such as square footage requirements, floor plan, communications needs, parking, and accessibility, make sure those considerations can expand to the overall vision of growth for your business. By negotiating lease terms which will allow the company to expand, downsize or relocate as circumstances dictate, business owners can avoid the unnecessary headaches, loss of business and costs associated with relocating. Examples of such important lease clauses include:

  • Expansion rights which obligates the landlord to provide the tenant with more space in the event of company growth
  • Cancellation rights which allows the tenant to break the lease under certain conditions such as when the tenant needs to expand and the landlord cannot provide the tenant additional space
  • Extension rights (which is similar to an option) which allows the tenant to remain in the premises
  • Sublet rights which gives the tenant flexibility in that, if they must relocate, they may sublease the space

 

#3 Inadequate Representation

Unless someone in the company is versed in commercial real estate, most businesses will need to find adequate representation through a tenant rep broker.  Lack of representation and industry knowledge combined with time pressures can cause unrepresented owners to make location decisions without being aware of all the choices available to them and make costly errors that cut into their profits.  An experienced and specialized tenant rep broker counterbalances the landlord’s leasing agent and insures that the tenant receives the best possible rates, terms, incentives, and lease clause protections.  What is amazing is that this services comes to the tenant at no cost to the tenant whatsoever.  Tenant rep brokers usually share the leasing fees paid by the landlord.

Using the wrong broker can lead to incomplete information or conflicting loyalties because of hidden agendas or landlord relationships.  You must keep this in mind when working with a large firm because, often times, they represent both the landlord and the tenant which can lead to obviously potential problems.  Business owners who don’t use a tenant rep broker will likely not be aware of all the possible location choices.  This is because experienced tenant rep brokers have developed an extensive network and can find locations that are not yet vacant or on the market.  Lastly, it is super, super, super important to keep your broker informed.  Your broker cannot properly assist you if you have not provided full-disclosure on your situation and your company.  Giving this information to your broker will help them to best negotiate for you and will prevent uninformed decisions from being made as well as lost opportunities.  If you are looking for good representation, click HERE.

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Creating Leverage in Lease Negotiations

Creating Leverage in Lease Negotiations

Are You Creating Leverage?

In order to get the best deal when looking for commercial space, be sure you are creating leverage in your lease negotiations.  Hiring a broker is the first step you can take toward creating leverage. For example, you can go to the grocery store to purchase milk and notice the price says $2.99.  You can’t take that jug of milk to the cashier and ask to pay $2.00 instead.  She is going to tell you what the price is and insist that you either pay full price or leave the milk. The cashier can be likened to the leasing agent (landlord’s broker).

You, the business owner, would be handled in the same manner if you approach a landlord unrepresented by your own broker. 

They will tell you how much the rent is, determine the condition the space will be delivered in, and  with no input from you.  You can either take it or leave it.  If you have a broker, the landlord understands negotiations will take place at some point and they will be willing participants.

Once you are solid on the location that you want to occupy, let your broker know which property you want.  Your broker will contact the landlord on your behalf and tell them, “Congratulations!  Your property has made my client’s short list.  Send me over your best terms.”  That short email will help you create even more leverage.  The landlord’s broker now understands that you have options in front of you.  They also understand they will to have to offer you a deal with favorably aggressive terms.  They are aware you are “shopping around” and the war begins to attain your business begins.

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So…What is in My Commercial Lease Anyway?

So…What is in My Commercial Lease Anyway

Landlord and tenants sign lease agreements when renting property. What is included in this lease will vary. However, there are certain basics you should know about lease agreements in general. Leasing business space is a major obligation.  The successes or disappointments of your business may ride based upon specific terms of your rental agreement so it is important to gain a basic understand of commercial leases and what is usually included in one. Before you approach a landlord, you should to see how commercial leases contrast from residential leases.  Furthermore, before you sign anything, ensure you comprehend and concur with the fundamental terms of the rent (i.e the length of the lease term), the amount rent, and the floor plan and configuration of the physical space.

It’s crucial to understand from the get-go that, practically and legally speaking, commercial leases and residential leases are quite different.

Here are the main distinctions between them:
  1. Commercial leases are not subject to most consumer protection laws that govern residential leases — for example, there are no caps on security deposits or rules protecting a tenant’s privacy.
  2. Many commercial leases are not based on a standard form or agreement; each commercial lease is customized to the landlord’s needs. As a result, you need to carefully examine every commercial lease agreement offered to you.
  3. You cannot easily break or change a commercial lease. It is a legally binding contract, and a good deal of money is usually at stake.
  4. Commercial leases are generally subject to much more negotiation between the business owners and the landlord, since businesses often need special features in their spaces, and landlords are often eager for tenants and willing to extend special offers.

 

Before you consent to a lease agreement, you ought to deliberately explore its terms to ensure the lease addresses your business’ issues. To begin, ensure you can manage the cost of the lease and that the length of the lease makes good business sense. Additionally consider the physical space. In the event that your business requires alterations to the current space, determine whether you (or the landlord) will have the capacity to roll out the improvements.

Other, less conspicuous items spelled out in the lease may be just as crucial to your business’s success. For instance, if you expect your hair salon to depend largely on walk-in customers, be sure that your lease gives you the right to put up a sign that’s visible from the street. If you are counting on being the only sandwich shop inside a new commercial complex, make sure your lease includes a exclusivity clause that prevents the landlord from leasing space to a competitor.

Many more items are often addressed in commercial leases. 

It would be a good idea to familiarize yourself with the following clauses:

– the length of lease (also called the lease term), when it begins and whether there are renewal options

– rent, including allowable increases (also called escalations) and how they will be computed

– whether the rent you pay includes insurance, property taxes, and maintenance costs (called a gross lease); or whether you will be charged for these items separately (called a net lease)

– the security deposit and conditions for its return

– exactly what space you are renting (including common areas such as hallways, rest rooms, and elevators) and how the landlord measures the space (some measurement practices include the thickness of the walls)

– whether there will be improvements, modifications (called build outs when new space is being finished to your specifications), or fixtures added to the space; who will pay for them, and who will own them after the lease ends (generally, the landlord does)

– specifications for signs, including where you may put them

– who will maintain and repair the premises, including the heating and air conditioning systems

– whether the lease may be assigned or subleased to another tenant

– whether there’s an option to renew the lease or expand the space you are renting

– if and how the lease may be terminated, including notice requirements, and whether there are penalties for early termination, and

– whether disputes must be mediated or arbitrated as an alternative to court.