As a business owner or entrepreneur, you may find negotiating the ideal commercial lease for your new office space intimidating. After all, the lease agreement sets the foundation for your relationship with your landlord and outlines crucial rules, regulations, and contingency plans for potential issues.
While it is crucial to discuss the obvious business terms of a lease, such as base rent, annual rent escalations, electricity and insurance clauses, free rent concessions, and landlord’s work and concessions, there are many other lease terms that are often overlooked but have a significant impact on commercial tenants throughout the lease term.
To ensure the success of your business, it’s crucial to pay close attention to the articles and clauses in your commercial lease. Failing to do so can have severe consequences, including increased real estate costs and other negative impacts. To prevent these issues, make sure to avoid these six common mistakes that can occur when reviewing a commercial lease.
1. Not Planning Ahead
Prospective tenants often underestimate the time and effort required to find the perfect location and negotiate a favorable lease. Rushing into a lease agreement without adequate research and planning can lead to unfavorable terms and significant financial losses. To avoid these pitfalls, take the time to research the market thoroughly and explore all available options.
When looking for a new location, timing is a crucial factor that should never be overlooked. To ensure a successful search, it’s essential to allocate sufficient time for the following tasks:
- Identifying and touring potential locations: This process involves visiting and assessing different spaces to find the one that best meets the business’s specific needs. Businesses should consider factors such as location, size, accessibility, and cost.
- Negotiating business terms: This step involves exchanging proposals and counter-proposals with the landlord or property owner until reaching a mutually acceptable agreement. It’s important to have a clear understanding of the terms and conditions of the lease or purchase agreement.
- Finalizing the lease agreement: To finalize the lease agreement, businesses must work with both the landlord’s and the tenant’s attorneys. This step ensures that the lease terms are favorable and protect the interests of both parties.
- Building out the space: Building out the space involves allocating sufficient time for building plans, permit applications, bidding out work, and the actual build-out process. The amount of time required for build-out may vary depending on the size and complexity of the space. Therefore, businesses should allocate more time for larger spaces and specialized build-outs.
2. Leasing Commercial Space in an Ill Suited Building
Location is a critical factor in the world of real estate, especially when it comes to businesses. The location of a business can determine its success or failure. Therefore, it’s important to be flexible when deciding on a neighborhood or a specific building.
One of the worst mistakes a business can make is deciding on a specific building before entering negotiations. This can result in a lack of leverage when it comes to negotiating with the owner. If the owner knows that the business has its heart set on a particular building, they may feel less inclined to compromise and may not offer favorable terms.
To avoid this mistake, businesses should keep an open mind and explore different options before settling on a specific building. This can give them more leverage during negotiations, as they will have other options to consider.
Emotional attachment to a specific space can be problematic and leave you vulnerable during negotiation. Landlords and leasing agents have no obligation to do you any favors. To avoid this, explore multiple spaces and allow yourself some flexibility. Take the time to consider different options to ensure that you select the best location for your business rather than settling for a suboptimal space because of emotional attachment or time constraints.
3. Not Understanding the Lease Terms
In any industry, knowledge is power. Unfortunately, tenants who lack market knowledge when searching for office space can enter into commercial lease agreements without fully comprehending the meaning of each term and its potential implications. Failing to understand lease terms can lead to problems down the line, including unforeseen costs or responsibilities.
To avoid such issues, tenants should conduct thorough research and ask questions throughout the negotiation process. They should seek to understand the market and the various applicable lease terms and conditions. Lease terms include fees like base rent and concessions and items such as maintenance responsibilities, property upgrades, and subleasing rights.
By thoroughly understanding the lease agreement, tenants can better control their finances and avoid unpleasant surprises. Additionally, it’s important to remember that negotiating a lease is a two-way street, and tenants should feel free to request changes or ask for clarification on any issues.
4. Not Considering the Build-Out Costs and Taxes
To ensure a successful and cost-effective commercial lease agreement, be aware of all potential expenses that may arise. One aspect to consider is the build-out of the office space. While some landlords may offer to build out the space for the new tenant, others may provide a blank canvas and expect the tenant to cover some of the build-out costs. Be sure to clarify expectations with your landlord regarding build-out costs and negotiate accordingly.
Another factor to consider is the building’s real estate tax. Knowing what percentage of the tax falls under the tenant’s responsibility and what happens if the tax rate goes up is essential. Without this information, landlords may increase the tenant’s portion of the tax more than is proportional to the tax hike. Therefore, it’s vital to negotiate with the landlord and clearly understand the tax responsibility and how they will handle it in case of any increases. By doing so, tenants can avoid unexpected expenses and ensure a fair lease agreement.
5. Inadequate Inspection of Potential Space
Before committing to a commercial lease, it is important to schedule a tour of the office space you are considering. A thorough inspection of the HVAC system, lighting, bathrooms, pantries and other amenities will help you assess the condition of the space and identify any necessary repairs or upgrades. It is also essential to determine who will be responsible for the cost of these upgrades and the completion timeline.
During the tour, feel free to ask the landlord about future repairs. While tenants are responsible for repairing or replacing fixtures in their office space, landlords are typically responsible for repairing infrastructure and common areas.
Additionally, inquire about any other amenities or services the landlord provides, such as cleaning or security. This information can help you decide on the space and its suitability for your business needs.
6. Not Using the Right Representation
To navigate the complexities of the New York City commercial real estate market and negotiate the best commercial lease agreement for your business, it’s important to have experience in this area. If you lack this expertise, consider hiring a commercial real estate professional. Avoid working with a residential broker for commercial lease, or a retail broker for office space, as the NYC commercial real estate market is complex and brokers often have specific specialties.
A good commercial broker can save you time, money, and stress. They know the ins and outs of the industry, can help you understand market trends, and have access to properties not advertised to the general public. Furthermore, a broker can assist you in negotiating lease terms that protect your interests and maximize your benefits, such as rental rates, concessions, and renewal options.
Are you looking to set your business up in a prime New York City location? Are you dreaming of a modern building with state-of-the-art amenities? Contact us. We’ll show you a worthwhile space that fits your business needs. To learn about available office space, call Metro Manhattan Office Space at (212) 444-2241 or email us at [email protected].