If you are a business owner and are planning to lease retail space, make sure you do not make a costly mistake when choosing your location and negotiating your lease. Two of the most common mistakes retail tenants make when leasing space is not doing the necessary research prior to choosing a location and not utilizing the various professional services available to help during the leasing process.

Before you even start looking for locations, take the time to conduct the proper research and have a clear idea of what you are looking for and what you can afford. First, answer a few simple questions. What is your service or product? Who is your target consumer? What is your budget? What are your future plans? The answers to these questions can help guide your research. For example, you need not consider locations in an area zoned for bars and nightclubs if you are selling children’s toys. Likewise, you can rule out services for the elderly in an area populated by young singles. Your budget should be firmly mapped out and set in stone as well as a general idea of where you see the business in two, five and ten years. When determining your budget, make sure you have a budget set aside for the monthly lease payment as well as for utilities and maintenance. Include a budget for remodeling if necessary. Your future plans can be significant as most commercial leases are for a period of years, not months, with a lower monthly rate common when you agree to a longer lease period.

Finally, while paying for professional services can be an out of pocket expense in the short run, they often payoff ten fold in the long run. Use a market research company to determine where your target consumers are located. Depend on a commercial Realtor to find you the perfect space in the area you have chosen and pay an attorney to review your lease agreement to ensure that you do not make a costly mistake.

Leasing Retail

Property Maintenance

Property owners must make it clear in lease agreements, their responsibilities for maintaining and improving the commercial real estate. If you do not clarify this point in the lease, tenants could make unreasonable demands that you must comply with. Explain in the lease agreement that the tenant is responsible for returning the property to its original condition at the end of the lease terms or risk losing the security deposit.

Use and Exclusivity Clauses

Tenant problems could arise if you do not build in use and exclusivity clauses into your commercial lease contract. Use clauses dictate the type of activities permitted on the premises. Illegal activities must be prohibited to protect your business from liability. Also, if you have a personal aversion to a type of business and worry about the effect on your company’s image, you have the right to forbid the tenant from performing certain activities. If you rent multiple commercial properties, the exclusivity clause prevents you from renting spaces to competing businesses in the same complex or shopping center.

Eviction Process

To protect yourself in the case of tenant issues, build in eviction clauses into your leasing contract. For instance, commercial leases typically give the owner the right to evict a tenant if he violates the lease terms. The violation must be remedied within three to ten days or the eviction process can commence. Non-payment of rents could also launch the eviction process and require tenants to settle rents or be removed from the property.

Consider these important questions:

1.  Is the tenant accepting the premises AS IS and without any build-out obligation from landlord? Even so, the landlord should still represent and warrant that the condition of the premises, building and project comply with applicable laws as of the commencement date, including those relating to disability access and hazardous
materials (including asbestos), and that the building systems serving the premises are in good working order.
2. Is the landlord delivering a cold shell, warm shell or turn-key tenant improvements?
3. Can you describe the line between the work the landlord is to perform (and pay for) and the work the tenant is to perform (and pay for)? Misunderstandings about the parties’ build out responsibilities are a major source of conflict, so be sure to discuss these responsibilities in great detail.
4. What is the tenant improvement allowance and how is it calculated? Per rentable or usable square foot? Is the landlord open to providing an additional allowance which would be amortized and repaid over the term of the lease as additional rent?
5. If the entire allowance is not applied, who gets the remainder? Preferably it would be credited to rent. Alternatively, the funds remain available to the tenant for alterations later in the lease term.
6. Are there any unusual build-out requirements, such as internal staircases, high density file cabinets, showers, training or childcare facilities, satellite dishes or extra HVAC? Have those been approved by the landlord at least in concept?
7. Has the landlord approved the tenant’s finishes?
8. Does the lease provide a mechanism for delivering a punchlist and when is the punchlist due?

The process of locating usable space with a knowledgeable real estate agent is the real start. Have you determined the location that is best for you? Your search will help prepare you and temper expectations greatly. Even if you are contemplating renegotiating a lease at an existing location, or moving to a different space with the same landlord, it is a good idea to comparison shop just to familiarize yourself with what the market trends and prices are.

Know what you want and what you must have.  You must know the maximum and minimum amount of square footage that fits your needs, as well as the floor requirements. Does the nature of your business make the groundfloor a necessity? Is a panoramic view from the conference room important to you? Do you want a build-out of the office from the concrete, meaning totally new floor, carpet, walls, etc.? Is there a security system in existence at the office space? Do you require one? Is the heating and air conditioning individually maintained? If not, how will you be charged for it?

The more that you require, the less negotiating room you will have. On the other hand, make sure you, or the realtor, find out important information like the occupancy ratio over the last year. Is there square footage available where a lease has fallen through? There are instances in which large corporations rent entire floors, then do not need as much or decide to rent elsewhere. In these cases, the management company of the building will sublet the space – often for less than the going rate for office space in that building. All of these things could be negotiating points in getting the best rent.

Determining the length of the lease.  One year leases are few and far between, with the most typical being three (3) years. It is important that you take your growth potential into consideration. It will not be smart to sign a 1,200 square foot, five (5) year lease when you anticipate tremendous growth and will need 2,500 square feet in three years. It might not be a bad idea to put a clause in your lease that addresses this if much growth is anticipated. This can be done in a variety of ways, which your realtor can address for you.

Have a monetary range in mind.  During the negotiations, you will need to have the amount of rent that you can afford every month. Your search and your realtor should be able to provide you with the current market rental costs for the area in which you want to relocate, or even for renegotiating at your present location. The national average for rent has been noted to be between four (4) and five (5) percent of your total operating costs.

Determine all costs of the lease.  It is essential that you determine the other costs associated with the lease of the space. For instance, what portion of the heating and air conditioning are you responsible for; and what is the average monthly cost. Get types and figures on associated costs, from the landlord and the Realtor – it will not hurt to have them from two sources. As you plan your finances, you do not want any unexpected expense surprises.

One cost that is often overlooked is the common area factor. The common area is all parts in the building that are used by or for all tenants of the building. Usually included are: building lobby, all corridors, janitorial and electrical closets, elevator rooms and rest rooms. The owner determines what percentage of the building these areas represent and adds that percentage to the amount of space, you, the tenant occupies. So, while your rent per leaseable square foot may be $18.00, if there is a 15% common area factor, you actual cost per square foot is going to be $20.70.

Although the previous tasks may seem arduous, the real task is getting final lease approval – that is all parties agreeing on the finer points. You should write down all the things you would like to see in the lease and any specific time frames. You do yourself an immense favor by having a clear cut idea of what you want, which things are negotiable and which things are not.

Be ready to compromise, as it is highly unlikely that the lessor will tailor the lease to your exact specification. It is important that you have a clear idea of those items which you can easily give up, as flexibility is essential to successful lease negotiations. Equally important is not being desperate, or you can end up with a lease on a property which does not fit your needs at all and it will give the lessor all the bargaining power. It is an excellent idea to have your strongest negotiator handle this area, or brush up on your negotiation skills before going in.

At the very least, being knowledgeable about the current market trends for your area, the particulars of the real estate you are looking at and what you want is crucial to obtain a successful lease.

There are many options and terms available when leasing office space. You should always be ready to walk away if the terms are not acceptable to you. In order to make sure you have this option, you must start your search early enough and be thorough. You should have a couple of properties which might work for you, ranked in order of most desirable. successful negotiations are easiest when you have prepared yourself and really know what your needs are.

The 1099 statements will need to be submitted to the service provider, and will also be sent to the IRS.

This means that landlords will need to develop a system for collecting tax identification information, legal names and addresses for contractor they do business with.

The new provision is part of the Small Business Jobs Act that was passed two months ago, and signals a change over existing rules that used to apply only to landlords who rented as a business or trade. Now, anyone who receives rental income is required to disburse 1099 statements. The rules will also include vacation home rentals.

It is estimated that any one landlord will need to prepare a number of these 1099 statements, a dozen or so on average, at the end of each tax season or pay to have a tax preparer do the work. Industry experts fear the requirement will place a financial burden on small landlords, which is an irony given the intention of the jobs law was to help small businesses.

A second tax reporting provision is set to begin in 2012. In this case, landlords will be required to prepare 1099 statements on both services and goods purchased. This requirement, tucked into the health reform law, is the more controversial and attempts have already been made to repeal it. Prior IRS regulations appears to exempt credit card purchases, which are already tracked by banks and card servicers.

The IRS is currently developing regulations to aid taxpayers in compliance with both provisions, but the agency is still in the preliminary stages of rule-making, where it is evaluating public comments to the proposed changes.

First conduct extensive market research intensive enough to do the detective work thoroughly investigating all alternatives and leaving no opportunity uncovered.

Make sure your search covers the following areas: vacancies, rental rates (current), effective rates (long-term), building expenses, leasehold improvement costs and demographic information (if applicable).

If you do this correctly, this process should include:
• Develop availability study of buildings.
• Visit the different local market and conduct examination.
• Examine public domain information, such as: Office guides, market research reports, trade publications, chamber of commerce material, on-line databases, economic development committee analyses.
• Gain market intelligence from wide variety of sources, including: Local brokers, developers, lenders, corporate real estate executives, business leaders, industry trade groups.
• Evaluate all facilities that are consistent with your requirements, as well as “hidden opportunities”.
• Catalog fact sheets on buildings, photographs, floor plans, location map, transportation accessibility and competitors in market.
• Make sure you have information on demographics, traffic patterns and location analyses(if applicable to your business).

While you are looking, keep one thing in mind:
THERE IS NO SUCH THING AS THE “PERFECT” SPACE!
You certainly want to make sure that the space that you lease meets your needs, but you will drive yourself crazy if you go through dozens and dozens of properties searching for the “perfect” space.

Make a list that includes your price range, all the items you must have in your facility, along with the items you don’t want. Take it with you whenever you look at homes, so you don’t get sidetracked.

You will want to thoroughly research the different offerings in your target area. You need to know what people are asking for their lease rates, and most importantly, what they are getting for it as well as their total lease structure. You want to be on the lookout for and avoid problem properties.

Although you certainly don’t have to use one, the services of a good real estate tenant rep broker can be quite valuable during this stage. They can help you with this part of the process.

Once you have a list of spaces that you are interested in, you need to find out more information. There are several questions that you must ask the landlord before you start any negotiations. You need to know as much as possible about the landlord’s position and motivation.
This is done in a formal process with a “RFP” or request for proposal.

This documents asks and gets answers to important questions like:
Who owns the building?
How is the size calculated and how what will the rates be based upon?
Who handles utilities?
Who handles maintenance?
Who handles common area costs?
What about taxes and insurance?
What about the ADA act?
What about tenant improvement allowances?
What about all those legal lease terms like exclusivity, assignment and termination?
When you have answers to these questions, you will have a good feel for the overall terms of the lease. You’ll be in a position to decide if you want to move forward with this space or not.

ANALIZE THE VALUE
If everything looks good, you may want to proceed in the process. The next step is to make sure you understand how the complete offering will work.

This is where the information you learned from the RFP can be quite useful.

There are many different strategies for negotiating, but the one that I have seen produce the best results is not all that difficult. It starts by studying the market data to determine what the fair market value is for the space.

Your objective is to make your offer at a price that is lower than what the landlord has in their mind as their “bottom line”, but is close enough that they say, “Oh, I guess we will go ahead and take it”.
Keep in mind the three basic options that a seller has when presented with an offer:
1) Accept the offer.
2) Reject the offer.
3) Make a counter offer.
This process goes back and forth typically.

The rate is always the focal point of the offer, but there are lots of additional areas that you need to address and pay close attention to also. In your offer, be as specific as possible about every aspect of the transaction. Details that are not clear or are left out can lead to big problems down the road.

Spelling out every detail can save lots of confusion and misunderstandings, and keep you out of a costly court battle!
One area where you need to be especially careful is termination provisions and duties. These are things that must or must not happen in order for you to exit the lease.

Determining the total cost of the lease and comparing it to the other targeted proposals allows you to make an apples to apples decision. Keep one important fact in mind: There is always another space- so long as you have time to find it!

If you start to feel pressured or uncomfortable, step back and review your goals. Don’t let yourself be bullied around. Remember that the landlord usually needs to lease that property a lot more than you need to lease it!

NEGOTIATING THE CONTRACT
After all of the terms and conditions of the contract have been mutually agreed upon by both you and the landlord, you still need to stay on your toes. Many people tend to relax and end up dropping the ball. There are at least a hundred things that can go wrong and foul up the transaction.

This is where you take what was agreed upon informally and transferred to the lease, that is the lease you will be signing to “close” the transaction.

You will want to make sure that all of the terms of the lease have been met, including the build out (renovation) agreement.
All of your preparation and planning will pay off handsomely when you move into your new space!

Once the lease has been signed and the build out has been completed, you are ready to really move! WAIT, what about the move?
That is the subject of another discussion. Pre-move planning should be take place when you are deciding to move or stay. Again, a good tenant rep broker can help you with the pre-planning move and the actual implementation of that move as well as other important items like phones and data lines. DON’T FORGET THIS!!

1.Very Low Down Payment (aka option fee) (1% to 2% vs. 10% to 30%).
2.No Loan Qualification Necessary Up-front.
3.Rent Money Is Working For You (in the form of a Rent Credit).
4.Option Consideration Is often Credited towards the Purchase-100%.
5.Price Is Usually Locked In Up-front.
6.Profits From Any Appreciation (good down market strategy).
7.Time To Check Out The Property (and make sure the roof really doesn’t leak).
8.Time to Check Out the Area and Employment Base
9.Time To Obtain the Best Financing (No pressure, no rush, no bank financing up-front).
10.No Real Estate Taxes To Pay.
11.Buys Time To Develop Credit or Develop Needed Down Payment
12.Quick Move In Time (No Lengthy Closings or Mortgage Approvals. )
14.Rents are Negotiable
15.Tenants/Buyers May be Able to Sell Their Option In the Future!

Owners of property like the idea of a tenant who is making a commitment to buy the property. They like knowing that they will have a cash flow for a time under the lease, and get their equity out at the end when the tenant exercises their option.  However, do not expect to get the option for free. Many owners will want non refundable option consideration in order to give you all of these benefits.

The price we pay for this luxury comes high in the form of an electric bill that seems to get higher each month. Just look around and you’ll quickly see why. The number one energy user is the central air conditioning unit, especially if it handles the double duty of both cooling and heating. In warm regions, the AC accounts for more than half of the electric bill.

You could install window units and cool only the used areas of your home, and this is not a bad idea. But, if you’re determined to keep the central unit there are things you can do. If your unit is over 15 years old, consider getting a new one. Today’s models use up to 50% less energy.

If a new model is in your future, make sure it’s sized properly. Consult an air conditioning expert because a unit that’s too big or too small can continue to work inefficiently. Check the energy ratings – the higher the better.

Buy a unit with a programmable thermostat that has a built-in timer. With the timer, you can turn off the AC when you’re gone and set it to restart just before you return. Studies have revealed that it’s cheaper to do this than to have it recycle on and off while you’re not even at home.

Another electric guzzler is the electric water heater tank. Tanks keep heating water 24/7/365 whether you use the water or not. Tankless water heaters are available for both electric and gas homes but do your homework before installing.

You could install a solar water heater but the expensive system may take a while to recover your investment. If you stay with the tank, turn down the temperature and wrap it in a thermal blanket. Also, turn off the tank when you’re out of town and save.

Refrigerator/freezers are both guilty of guzzling electricity, but who wants to return to the old ice box. If yours was made after 2001 it’s probably more energy efficient. If you replace an old one, buy the Energy Star label.

An appliance must exceed federal energy standards by 15% to qualify. Top freezers use less energy than the side-by-side or bottom models. Save even more energy if you can skip the ice maker and dispenser.

We can’t forget the electric dryer which uses about 15% more energy than a gas model. If gas is not an option, buy an electric dryer with a moisture sensor to avoid over drying. When clothes are dry it cuts off.

Don’t forget to clean your lint filter too. Concentrate on these biggest electric guzzlers and you’ll see a dramatic difference in your electric bill. Conservation sure beats doing without.  If your landlord owns these appliances, ask of you can make the modifications or changes first! Of course, it is always best to get it in writing!

Some are afraid to open their phone bill each month and discover how much they went over budget. If you’re spending more than you should, then it’s time to take a good close look at your bill and determine if you really need all those extra bells and whistles.

For instance, ring tones are fun, but do you really need them. Can you do without call forwarding and call waiting? How often do you text message? If you don’t regularly use these extras that you pay for cancel them and save.

It may be time to go totally cellular. More than 15% of households have done just that. Before you take the total cell plunge, analyze your phone bill to see how much you use your landline and then add about 20%. Most people tend to talk more on their cell than the landline. It just seems to be cool and convenient.

Comparison shop. Some providers are not opposed to negotiating for free minutes, lower rates and even free services. There is lots of competition out there but be sure you have the plan that’s right for you even if you pay more. Ask about combining services and a family plan if several phones are needed.

Read the contract carefully including the fine print. Ask questions, but ultimately making the right decisions will be up to you. Make sure the provider rounds to the nearest second, not minute.

If you’ll be talking more in the evening hours make sure you get their definition of night hours. Roaming charges can take a big bite out of your pocketbook and vary with the provider.

Take advantage of the trial period. This can vary from 2 days to 30 days and may be negotiable. This will give you a chance to use the cell phone in your home and see if there are any areas of poor reception. Find out if you can access 911 with your cell.

VOIP (voice over internet Protocol) comes from your Internet provider and transmits calls over the internet. If you make many long distance calls this can be a good choice because it usually provides unlimited local and long distance calls. But, if you have a power failure, most broadband cell phones won’t work.

Another option is the pre-paid phone cards where you pay for minutes in advance. The price range is about $15 to $25. This is good for chatty children with a limited amount of minutes teaching them discipline and budgeting. If you lose the card you lose the minutes and many have an expiration date.

Going totally cellular is an important decision. Be honest with yourself on how much you use the phone. Over estimate rather than under estimate. Avoid long term contracts. Keep an eye out for special limited offers. Good phone service can keep you in touch. But, don’t lose touch with your budget.

Although there are still products like construction/development loans that have not returned to the market,  investors are eager to lend on commercial properties. Most of the underwriting guidelines are different depending upon the property and loan type, which makes commercial financing more complicated.

So where is a good place to find such information? Contact Alan Mayhew at Capital Mortgage Group, 704-664-3611