Thursday, February 18, 2010

Top 10 Mistakes of Commercial Tenants

1. Due Diligence – the tenant forgets to check if the leased property is zoned for the intended business use. So the result is that the tenant cannot work in the location they are stuck with by way of the lease.

2. Improvements – the tenant takes the terms of a lease as they are offered without negotiating for either the property being updated to their needs or rent-free months to update themselves. Remember this is a tenants’ market, not a landlords’ so use this to your advantage.

3. Sublease / Assignment – the tenant agrees to a lease without this right. Who knows if your business will be successful. In fact, 9 out of 10 fail. A proper exit strategy is appropriate for risk management.

4. Options – the tenant agrees to a lease for a set term without additional terms or ability to purchase the property. If you are the 1 out of 10 that succeeds, your success will be jeopardized if you are kicked out after your initial term. A proper expansion strategy is appropriate for growth management.

5. Timing - probably the biggest problem faced overall. Tenants think that negotiating and agreeing to a lease is a rush job. If you are intending to open for a specific season allow ample time. If the landlord knows your back is against the wall, they will prey on you.

6. Term - when it is commercial, you need more than a year. You should get at least 3 years because that is the average time for a new company to turn a profit.

7. Restrictions - if the property is one of many spaces, you should ensure that a competitor cannot open next door. This applies mostly in shopping centers.

8. Guarantee - the purpose of a corporation is to minimize your personal exposure to liability. If you do not need to guarantee the lease, do not offer a guarantee. If you do need to guarantee the lease, you may want to think of putting your assets in your spouse's name.

9. Due Diligence - some leases require the tenant to pay all utilities. Get the prior bills and add the average to the cost of your monthly rent before you determine affordability of the leased premises.

10. Self-Help – lots of tenants negotiate and sign a lease without professional help by a licensed attorney. A real estate agent’s help is simply not enough and may even constitute the unauthorized practice of law. The key is to spend a little bit of money now in order to avoid ambiguities and therefore avoid spending a lot of money later when litigation arises.