Staring Down a Lease
Signing a lease for space for your business is both exciting and frightening. You will ask yourself: Is this the right place? Does it properly reflect my branding? Do I even like my potential landlord? And, most importantly, Can I afford this space?
When we went on the hunt for office space, we knew what we wanted and what we didn’t want. There are so many acronyms that if you didn’t have a background in real estate, you could easily become overwhelmed and frankly, taken advantage of, by the more unscrupulous landlords out there.
Here are some basic terms you will need to grasp when seeking that right location:
First is CAM, Common Area Maintenance. Many developers try to pass the full cost of the building they own onto their tenants. It is normally a percentage equivalent to what percentage your space is to the overall building. For example, if you occupy 4,000 sqft out of a 40,000 sqft building, you will be responsible for paying 10% of the CAM each year. One of the largest components of CAM can be roof repairs. If you can, make sure the lease CAM excludes any maintenance on a roof. Otherwise, any profits your own business makes could be turned over to pay for expensive roof repairs for your landlord.
Besides CAM, you need to understand the three (3) types of commercial leases:
1.) Gross Lease - Under a gross lease, the tenant pays one fixed monthly fee. That fixed rent includes the base monthly rent, utilities and services such as water, electric, and janitorial, and building operating expenses like property tax and insurance. This is the lease type that we have, one same amount every month, no surprises, it works quite well with a start up business.
2.) Modified Gross Lease - Where a commercial building allows for individual utility meters, one will more commonly find landlords offering Modified Gross Leases. The tenant pays for all its utilities separately from the rent. This has more variability than the Gross Lease but also allows the tenant to directly control the utility expense. The rent amount will normally include property taxes and insurance like a Gross Lease.
3.) Triple Net Lease - This type of lease is most advantageous to the landlord and investor. Rent only includes rent. All utilities are extra and there will be Additional Rent due to cover maintenance, insurance, taxes, the ‘triple’ items of this type of lease. At times, landlords may call all of this either Additional Rent or CAM. Be sure to identify what is included in these items before you sign a Triple Net Lease. My own, previous experience, with this type of lease, was essentially catastrophic to a small dog business I owned with a friend. I learned the hard way, do not follow suit!
This time around, as a small business, when we were looking for space, we specifically wanted to avoid a Triple Net Lease. If taxes or insurance increase significantly in one year as a result of a change in risk profile of the landlord or there is a city reassessment, they are able to pass that along to the tenants. We did not want to be in a position where a large unknown amount could be assessed.
You will have to look harder to find a Gross Lease and it likely will not be in a Downtown Corridor Class A office building. But taking out most of the variability in the other two (2) categories of leases can be most beneficial to a small or burgeoning business. You can stare down these last two (2) categories and make a less intimidating choice with a Gross Lease.
Remember to take control, get educated, and confront your Lease and be its master, don’t let size or reputation of your landlord intimidate you. Keep looking like we did and you should be able to find a more financially feasible option for your start-up or existing small business.
