Make sure that you are aware of these potential hidden costs in a commercial lease. There are few things that are more frustrating for a business owner to deal with than hidden costs in a commercial lease.
The frustration with these hidden costs is due to the impact it can have on the business. Leasing a warehouse or office space or other location for your business is one of the biggest expenses for any business. The last thing that any business owner needs is an extra expense that they were not aware of.
Do your homework on these hidden costs in a commercial lease prior to signing so you can save yourself money and aggravation. You will be glad that you did.
Here are the biggest hidden costs in a commercial lease
Type of lease-
Be mindful of the commercial lease that you sign. There is a lot of things that go into knowing how to lease commercial real estate and lease types are a good place to start. There will be a reference to the type of lease across the top. You should see Net, Triple Net, Gross, Full Service Gross somewhere. Each one has its pros and cons for both the tenant as well as the landlord. It’s important to know which one you’re getting locked into. Make sure you’re signing the right type of lease for your business.
Base rent increases-
The base rent you negotiated typically is only for the first year. It’s common for rent to increase a bit from year to year. However, it’s wise to make sure your annual increase doesn’t exceed the typical 3-4%. You can also renegotiate your lease during on market conditions with the building owners at any time. Don’t be afraid to negotiate on this because the landlord doesn’t want vacant space.
Some landlords will be willing to concede some months of the base rent as an incentive to get you to sign the lease with them. However, it’s important to know that if you fail to fulfill your obligation for the full term you may be liable to pay the abated rent. As an occupant, using the word “free” in the lease is a lot better than “abated” due to repayment exposure. Get as much “free” rent as possible. Avoid the word abated.
All sorts of things like property taxes, insurance, and maintenance costs, for example, fall into this category. As the tenant, you are responsible for paying these expenses. It’s important to determine how these costs are fixed into your lease and monthly payment. It’s often better to get a refund than owe additional money. A major expense to avoid is an increase in property taxes as a result of a sale. It’s important to know how these costs will increase during the lease term.
Common area maintenance (C.A.M)-
These costs can add up in a hurry so they’re important to factor into your budget prior to signing the lease. Lawn mowing, watering plants, tree trim, parking lot cleanup, trash removal, lighting, and more can full under this category. These costs cost can add several hundred dollars or more to your rent every month. Plan accordingly.
Repairs and maintenance-
It’s up to the tenant to repair the heat, air conditioning plumbing, sprinkler system, and potentially more depending on lease type. It’s important to inspect these things prior to signing a lease. The owner must replace these things if the repair cost exceeds a certain percentage, but you’ll probably get billed somehow. Make sure that you do an inspection and review this category well prior to signing a lease.
The tenant is responsible for insuring the building against fire and destruction. You must also carry a level of liability, contents, and loss of rent coverage. Make sure to get quotes prior to signing the lease.
Avoid these expenses or at least limit your exposure
Some of these costs are unavoidable. However, you can be aware of them and limit your exposure quite a bit. For example, you can ask that your C.A.M. charges be capped at a certain annual increase. You can also negotiate property tax increases, in the event of a sale, be limited to a certain percentage. Finally, before you sign the lease, ask for a complete accounting of ALL the expenses in addition to your base rent.
Make sure that you review your lease and the building very well prior to signing the lease. The last thing that any business owner needs are getting surprised by the hidden costs in a commercial lease. Do your homework because it will save you a lot of time, money, and aggravation.
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