By David Brnilovich, Jennings, Strouss & Salmon, P.L.C.
Each year, thousands of new entrepreneurs set out to make their dream of being a business owner a reality. Many will be based in their home until the business is large or profitable enough to support the expense of a commercial space. When that time comes, there are many things to consider for a smooth transition.
This is the first in a series of blogs dedicated to guiding a business out of the home office or garage, and into a leased commercial space. The blogs will not address executive suites or collaborative situations, as they generally do not require the tenant to sign a long-term lease.
If you are an entrepreneur who has determined that your business can no longer operate out of the home, it is time to look for a suitable commercial space. There are many available options for small businesses, including strip malls and shopping centers, industrial parks, warehouses, office buildings, or power centers. Although each of these potential locations is significantly different, the one thing they most likely have in common is that all tenants are required to sign a commercial lease.
It is vital that you do your homework prior to signing a lease. Many issues can be avoided by conducting a little due diligence before choosing a location. Research the available properties on the internet. If your business depends on heavy vehicular or pedestrian traffic, review the online demographics. Many commercial landlords post demographic information on their websites, or are able to provide them if contacted. Make sure the space is located in the demographic your business caters to. For example, a second-hand infant clothing store may not do well in a retirement community. If the potential landlord does not have demographic information, it may be available through the local Chamber of Commerce or Economic Development Agency of the city where the property is located.
After you have reviewed and are satisfied with the demographics of potential spaces, schedule site visits. Conduct multiple visits at various times during the day, especially if your business will rely on evening and weekend traffic. Pay attention to the amount of traffic in the area, particularly around the commercial property you are considering, and in and out of neighboring businesses. If the site is in an industrial park, make note of potential issues, such as whether large trucks, forklifts, or other equipment would impede access to the suite in which you are considering.
During the site visits, assess how the location could benefit your business and, more importantly, impair it. It is easy to see the positives, but it is most important to pay attention to the negatives. Are there businesses in the area that may attract crime or a clientele that could adversely impact your business? Do nearby businesses generate traffic jams, excessive noise or unpleasant odors? Are there businesses that compete with yours? What type of customers do surrounding businesses cater to and will they deter your target clientele? For example, if your business caters to families and children, you may not want to be in the same strip mall as bar.
When you do your site visits, take time to walk around the location to get a sense of the area. Are parking lots and landscaped areas neat, clean and in good condition? Are the public areas well lit at night? Are there multiple entrances and exits for vehicles and pedestrians? Is there adequate parking available? Are there consistently foul odors that emanate from sewers or grease interceptors? If you discover any issues that could hurt your business, cross that location off your list and move on.
During the due diligence process, do not overlook one of the best resources regarding a prospective site – existing tenants. Meet with the other tenants. Chances are they will be as interested in your business as you are in theirs, and they will be more open and forthright than the landlord about particular questions regarding the facility. Inquire whether they have experienced problems with the property, landlord, other tenants, general location, or surrounding areas. Ask if they know why former tenants left and whether they have forwarding contact information. See if they will share how long they have been in the facility, the length of their current lease, and whether they plan to renew. During this process, you will get a feel for the other tenants and how they may impact your business.
There are many issues you need to be sure to address with the landlord. Ask about how the utilities are metered. Are all of the utilities already in place or are you responsible for installation, such as an extension of the gas line or three-phase power? Find out whether the site is served by the city or a private water company, especially if your business uses a substantial amount of water. What is the history of water and sewer expenses? What type of internet service is available? Is there municipal trash service or is it handled by a private company? Are there any specialized refuse providers serving the area to handle biomedical waste or other special substances? Are there currently any major road projects planned for the area? Does the property use a cleaning service? Are there individual restroom facilities or are they shared? Create your own checklist and don’t be afraid to ask questions.
You may want to consider employing the services of a commercial real estate agent who is experienced in representing tenants. Such agents can provide a lot of knowledge about market conditions, available properties, and tenant improvement allowances. Even if you are being represented by a tenant’s agent, you should still do your own research to supplement the information provided by the agent. Once you are satisfied that the property satisfactorily meets the items on your checklist, you will be ready to inquire about the lease.
It is important to note that many landlords use a variation of a standard commercial or industrial lease. As a general rule, commercial leases are written most favorably for the benefit of the landlords. This means that, should something go wrong, the lease will put the burden on the tenant to correct the problem at their own expense. In many cases, the landlord wins and the tenant loses. Do not be misled in believing that you do not have the power to negotiate a lease to include terms that will protect your interests.
Part II of this series will discuss some of the common commercial lease provisions that a small business should pay particular attention to and attempt to negotiate.
David Brnilovich is a member with the law firm of Jennings, Strouss & Salmon, PLC. His practice includes real estate, construction, corporate governance, small business formation, dissolution, purchases and asset sales, estate planning and estate planning litigation. Mr. Brnilovich can be contacted at email@example.com or 602.262.5898.