Farrell: Commercial leases can make or break business

One of the most exciting moments for a business owner is moving into a new space. It also can be one moment an owner eventually could regret.

Whether moving a business from the basement to a space that is more production friendly or simply moving from one building to another, a business owner's negotiations on a commercial lease can be one of the most important parts to the business.

Both from a bottom- and top-line perspective – especially a retail owner – a commercial lease has huge financial consequences for businesses.

While residential leases fairly are generic and contain consumer protections, commercial leases are more open ended with a lot of flexibility, and the leases essentially are caveat emptor, better known as "let the buyer beware."

That can be scary, but it also provides an opportunity for a tenant to make its lease right for them. Before searching for a property or negotiating the lease itself, a business owner should rank priorities – location, rent, length of term, tenant improvements, etc.

An owner's rankings partially will be dictated by the type of business he or she has. A manufacturer will value having a certain amount of space and loading docks, and the owner will care less about the location itself or the aesthetics of the building.

Conversely, a restaurant owner might care about what tenant improvements already exist in the premises or how much the landlord will cover to provide for buildout.

An initial issue in any lease negotiation is the distinction between what are known as a gross lease and a triple net lease. In a gross lease, the tenant is paying the landlord a fixed amount that covers “most” costs of being a property owner. That generically covers taxes and insurance.  Depending on the type of property – single tenant or multi-tenant – it also can cover utilities and/or maintenance.

In a typical triple net lease, the tenant is paying a base rent plus a separate amount for taxes, insurance, and utilities/maintenance; however, the devil is in the details.

Gross lease and triple net (or modified gross) can mean different things to different people. A gross lease doesn’t always mean a tenant only is paying a flat amount to be located there. For example, a person will need to look at the lease details to determine who pays for each utility, maintenance, lawn care and snow removal.

In any negotiation, leverage is key.  So, a business owner needs to be realistic when entering a negotiation. Some terms to consider:

• Exclusivity clause. If the landlord owns or controls the property around the leased premises, a business has to weigh whether it can be restricted from being used by competing businesses or whether such a move would be viewed negatively by the public.

• Co-tenancy clause. If a business owner is counting on another tenant, such as anchor tenant, to provide traffic, he or see could build in a rent reduction if that tenant leaves.

• Personal guarantees. Ideally, a business owner can avoid personally guaranteeing the lease, but that often is not the case, especially for smaller or newer tenants. It might be possible to limit the guarantee through the amount or the length of time that it is valid.

There also are a few useful tips for business owners to consider when entering into a commercial lease. First, an owner should consider using a broker. The biggest advantage brokers provide is market knowledge, which can be key in knowing what leverage there really is.

Try to make the first offer, as it provides an anchor for the negotiated terms. Be the first to concede on a point, especially if it is more important to them. This can show good faith and makes it more likely the other side will concede on something else.

Everything is negotiable. Owners shouldn't assume otherwise simply because it is “boilerplate.” Most importantly, don’t be afraid to walk away. Sometimes, losing the property is the best result.

It is your business’ home, and you have to be able to afford it and be productive in it. So, if those two aren’t present, keep looking.

• Ryan Farrell is a certified public accountant with Zukowski, Rogers, Flood & McArdle in Crystal Lake. Reach him at 815-459-2050.