How Do I ... Sign an Office Lease?
If a small business owner is ready to step out from the home office to office space, he or she will have to negotiate the murky language of a commercial real-estate lease.
Kathleen McDermott, an attorney based in Northern Virginia who works with start-ups and small businesses in negotiating commercial real estate leases, offers these tips:
What to do before you decide on a location
1. Decide if location is extremely important to you. Do you want an office near your home, in a specific neighborhood, in a mall, a condominium or a high rise, or somewhere near major foot traffic?
2. Find a commercial real estate broker in the area you want to locate in. Understand that this person will represent the landlord's interests, not yours. The key is that brokers know the market, and the upside for the business owner is that the landlord pays the broker.
3. Walk around a particular building to check it out and look for the "managed by" sign to find out contact information.
When you find a spot you like
1. Ask for a copy of the form lease from your potential landlord. Read it and try to understand it. If you don't understand the legalese, find an attorney. McDermott notes that most people have come in contact with an attorney at some point, whether it was when drafting a will, buying a house or dealing with a car accident. Call that attorney and ask for a referral to someone who specializes in negotiating commercial real estate leases. Additionally, each county has a bar association that offers a referral service, such as one in Fairfax County, Va.
2. Visit neighboring shops and tell them you're considering opening a store or office nearby. Ask the store or office managers if they like the location and if the landlord is responsive.
What to look for in a lease
Start-up entrepreneurs should look for flexibility and try to sign as short-term a lease as possible. Many landlords will ask for a five- to 10-year lease, but that means if the business fails the owner could be stuck trying to negotiate a way out of the lease (or paying the rent until a new tenant is found).
Landlords often will ask a business owner to sign a personal guarantee, which means that even if the business goes under, the landlord is able to sue the owner personally. McDermott advises trying to get the guarantee language removed, but acknowledges that could be hard for a start-up.
A landlord may ask for a "percentage lease" -- one in which the landlord and the tenant agree to a minimum amount of growth income and then the landlord will take a percentage over that minimum. The landlord generally will allow a tenant to get up to a certain gross before he dips into it. McDermott says many smaller strip malls will take that provision out of the lease when pressed. The language can be troublesome for a small business, McDermott says, because "a lot of times the start-up doesn't know [how much revenue] it's going to be making and the landlord is going to take a percentage of it."
Have a sense of how much square footage you'll need, but try negotiating a provision that will allow you to sublet the entire space or part of it, if necessary. Many landlords will agree to this, but will request that they approve the new tenant.
Shop around and if it fits your business, talk to the private owner of a condominium office space or a smaller landlord who are likely to be "way more flexible than a larger institutional landlord, retailer or office space."
Understand the details of what you're committing to when signing the lease. For example, you'll need to get an insurance policy that meets the landlord's criteria.
(McDermott is counsel to Alliance Law Group in Tysons Corner, Va. She also has her own private practice in Annandale, Va.)
More Resources Online:
* U.S. Chamber: Office Management Toolkit
* NFIB: Leasing Tips
* AllBusiness: Step-by-Step Guide to Finding Office Space
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