Things to Consider: Commercial Lease Terms

A commercial lease is one of the biggest investments a small business can make.  Just read what the U.S. Small Business Administration has to say about it: https://www.sba.gov/starting-business/choose-your-business-location-equipment/leasing-commercial-space.   It is worth thinking carefully about a lease before getting into one.

The most obvious expenditure in a lease is rent.  But rent is not as straightforward as it seems.   Most commercial rent is “net” of expenses. This means that the rent may not be all that is owed.  It may also include other expenses that may be passed through to the lessee.  Typical pass through expenses include insurance, taxes and common area maintenance(“CAM”).

Since terms other than the basic rent can lead to expenses, it is worth considering them carefully.  Is the insurance requirement too burdensome?  Can the company afford the common area maintenance that it needs to pay for?

Even though some of these expenses may be scary, a “gross” lease may not be preferable.  In a lease like that, the landlord is responsible for things like taxes, insurance and CAM.  But it may end up costing more than the itemized expenses would have. 

Instead, it is worth considering each term and its implications; only then can someone make an informed decision.

For instance, CAM terms may be negotiable because repairs may be shared pro rata among all tenants or because major repairs and improvements already need doing.  The landlord may be willing to adjust terms because they want to fill the space. 

It is worth considering all the costs in a lease going in.  And if you do not understand terms, you can always ask for help.