Part 5 of the “Things we wish we knew” Blog series
By: Tina Oddleifson, Business Advisor
You’ve got a business idea that you’ve been thinking about for a while and suddenly you see the perfect location. You’re convinced your business will not work anywhere other than in that adorable shop on the corner of Main St. You’re envisioning streams of happy customers leaving your store, delighted by what they found inside. You call the realtor, do some quick calculations, and before you know it you’ve signed a multi-year lease.
Sometimes in our excitement or fear of missing out, we forge ahead before thinking through one of our biggest financial decisions. This is why it’s in our top five in our “Things We Wish We Knew” blog series, where we highlight common mistakes we see! Only a thorough and realistic set of financial projections and an understanding of your cash flow and break-even point can help you determine if it’s the right financial move. Beyond the financial impact of a lease, be aware of these ten costly mistakes before you sign.
Moving Too Fast
Failing to thoroughly research the property and location can lead to problems down the road. Take the time to investigate the neighborhood, traffic patterns, parking, public transportation, local regulations, and zoning laws that may affect your business. This also means creating thorough financial projections for your business. A lease is a fixed cost that you are obligated to pay no matter what. Be sure your sales projections are conservative and you have enough working capital in the bank to pay your fixed expenses if things don’t go according to plan.
Building in Contingencies
Often a signed lease is preceded by a Letter of Intent. Be sure to communicate any contingencies for leasing the property such as obtaining zoning approvals, licenses, and getting favorable financing terms.
Skipping Legal Review
Foregoing legal review falls into the “penny wise, pound foolish” category. A local Maine attorney can help you understand the legal implications of your lease. This is especially important if it includes vague, ambiguous or unclear language. Don’t rely on a verbal agreement when it comes to any aspect or changes to your lease, as they are very challenging to enforce legally.
Failing to Negotiate
Many lease terms are negotiable like rent, lease duration, and maintenance responsibilities. If you’re investing in capital improvements that are also beneficial to the building owner (new bathrooms, HVAC improvements, upgrades required by code etc) be sure you negotiate who pays for these. If you need help, ask a real estate attorney or commercial real estate broker.
Ignoring Hidden Costs
Beyond the base rent, you may be responsible for additional expenses like property taxes, insurance, utilities, and maintenance. Overlooking these costs can strain your budget. Be sure you understand your obligations beyond your base rate and find out how much these will cost.
Maintenance & Common Area Responsibilities
Clearly define who is responsible for maintenance and repairs in the lease agreement. Ignoring this can lead to disputes. If your business is in a shared building or complex, understand your obligations regarding common areas, and any associated costs or maintenance responsibilities.
Lease Renewal Terms and Termination Clauses
Lease renewal terms can vary greatly. Ensure you understand your options for extending the lease and any associated rent increases or penalties. Be sure to check if your lease requires that you give written notice for leaving or renewing. In addition, leases often have strict termination clauses. Ignoring these can result in financial penalties or legal issues if you need to vacate the premises early.
Sublease Clauses
If you want the flexibility to assign the lease to another party if things don’t go as planned, make sure your lease agreement permits this. Some leases may prohibit it without landlord approval.
Insurance Requirements
Lease agreements often require tenants to carry specific types and amounts of insurance. Neglecting these requirements can result in violations and termination of the lease agreement.
Documenting Property Condition
Before moving in, document the property’s condition through photos or a checklist. This can help you avoid disputes over damages when you move out. If you plan to install special fixtures such as lighting or plumbing, furniture and equipment and you intend to take them when you leave, be sure this is also documented in the agreement.
Jumping into a lease before you’re ready can lead to much bigger problems down the road. At the SBDC, we can help you do just that. Get started by talking to an SBDC business advisor. By avoiding some of these common mistakes, you’ll have a much better chance of success. Be sure to check our YouTube Channel and Website for webinars and other information on this topic. Stay tuned for the next blog in our “Things we wish we knew series.”
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