Leasing a commercial space can be a daunting but necessary step in moving your business to the next level. In the last 10 years, several real estate search companies have made searching the local inventory accessible to anyone who is looking. This is a good place to start when starting your search for the perfect location for your business. You can search the general location and type of space you want as well as the size and cost of the space. However, this is just the first step. I highly recommend the services of a commercial broker for two reasons. One of them is that not all properties that are available are listed on these websites. A local broker will know how to find those properties. The second is that you will have a chance to develop a good relationship with your broker so that when it comes time to negotiate a lease, you will have the confidence that they are familiar with your business requirements and will help you negotiate beneficial lease terms.
SETTING YOUR BUDGET:
In order to narrow down the properties that might work for your business, you need to set a budget. The budget must consider all costs associated with leasing commercial space, not just “rent”. The following is a list of common expenses:
* Base rent and any annual increases. (ballpark increases for Maui is 3-5% annually)
* CAM or Common Area Maintenance fees. These are costs to operate the building that the landlord passes on to the tenant. Most include building maintenance, building insurance, management, your share of real property taxes*, trash and water, ac maintenance and other smaller costs. There are some properties that also include electricity in their CAM because the building electricity is on one meter and has one source of power. This is most common in office buildings. A few examples on Maui would be One Main Plaza and 2145 Wells Street. For some, this is a low hassle way to go since most office users have similar electricity usage. Others, who might only be in the office a few days a week and won’t use the air conditioning, might find it unattractive. This would be very uncommon in an industrial building or restaurant as electricity usage can vary widely.
* A word about real property taxes: A vast majority of leases I have done on Maui include RPT in their CAM. However, for those that don’t, it can be a MAJOR increase in the cost of your monthly rent. I have found that those landlords who charge RPT separately on top of the quoted CAM costs, generally have very high RPT. Several places in Lahaina near Front street and also high end shopping malls, tend to separate this cost. This isn’t an attempt to fool the tenant but a way to be able to quickly cover a RPT bill that rose significantly without having to wait until the next year’s CAM budget reconciliation. No tenant likes a big bill to cover retroactive property tax increases.
Back to your budget:
* General Excise Tax: This is added to both base rent and CAM.
* Air Conditioning: Is the periodic maintenance of the ac included in CAM? If the AC needs repair or replacement, who pays? It would be an unpleasant surprise to be in your new space only a few months only to have the ac go completely out and need to be replaced at your expense!! It’s tough to amortize a $ 10k ac expense over a 3 year lease.
* Electricity: See if you can find out what an average bill is for the type of size of space you need.
* Trash: If your business generates more trash than your neighbors, the landlord may add a surcharge to cover the cost.
The second part of your Budget planning should be the cost to renovate the space so it’s suitable for your business’s needs. It may be possible to negotiate free rent or for a landlord contribution towards this. Keep in mind a landlord contribution will like to require that you pay for everything upfront, then submit the paid invoices along with lien releases, to the landlord for reimbursement. You should have an idea of what the costs will be to convert a space to suit your needs.
Setting your requirements:
What is the minimum size of space I need to operate? Do I need visibility and/or foot traffic? Do I need ground floor? Does my space need to be ADA compliant? What are my electrical and plumbing requirements? Will I likely need a building permit? If you need a building permit to make the improvements necessary for your business, make sure the location has the parking necessary to get the permit. Difference uses have different requirements.
The Next Step: Once you have found a few possible locations, think about the following:
What are the restrictions? * Hours of operation * Noise * Approved uses * Any product exclusives with other tenant.? * Will I get reserved parking?
While not typically regarded as a restriction, a landlord might not accept your business as a tenant because they may not feel you are a good fit with their other tenants. A landlord looks for a good tenant mix so that the tenants compliment and support each other and do not compete for the same customer.
Once you have found a few locations that could work, the next step is to make an offer to the landlord. Your broker will draft what called a “Letter of Intent”. This spells out the terms you would like to obtain from the landlord as well as to clarify what work you want the landlord to do and what work you will do. It will also contain a Disclosure Clause as to who the broker represents. Make sure you understand this VERY important disclosure. A broker that represents the landlord, cannot help you negotiate the best terms since they cannot work against the landlord. If the broker calls themselves a Dual Agent, they still cannot work for you or against you. They can only draft the paperwork. If you are represented by a broker, they will do their best to negotiate in your best interests. Generally the listing broker splits the commission with the selling broker so being represented doesn’t cost you out of pocket.
The Letter of Intent covers the basics of what you are offering the landlord. This includes the lease commencement date, the rent commencement date, rent concessions, insurance requirements, Options to Renew, tenant improvement allowances, what work the tenant will do and what work the landlord will do. It also includes who will pay for that work. It is a non-binding offer that is still subject to obtaining a fully executed lease.
A tenant can expect that they will be required to provide financials or to complete a credit check. A landlord wants to know that the tenant can handle the rent and has a history of paying their bills. If the credit check comes up a little shaky, it may be possible to increase the security deposit to cover the additional risk to the landlord. Again, a good broker can help to smooth issues that can arise.
A common security deposit amount is one month’s rent including CAM and GET. This is generally due at lease signing along with first month’s rent. This is usually due upfront even if you have negotiated some free rent upfront. Most landlord’s will require a personal guaranty that makes you and your assets liable if you default on the lease. If your business is large enough and has enough assets to give the landlord a comfort level, this may be waived.
The Letter of Intent opens the door to negotiations. A landlord won’t want to spend the time or expense of drafting a lease if the terms haven’t been agreed to upfront. Once the terms have been settled, the landlord will draft a lease.
Most leases are set up with the first few pages spelling out the terms that are unique to the tenant. It will list the space, the size of the space, rent, the use, the deposit and other terms. It will also reference any Exhibits that will be attached to the lease. Common Exhibits will be a Site Plan, an Option to Renew, Rules and Regulations for the building, a Personal Guaranty, Landlord’s Work and Tenant’s Work and Special Conditions.
The “body” of the lease contains sections that are the same for all the tenants. If there are paragraphs in the lease that you do not fully understand, I highly encourage you to have an attorney review it to make sure you don’t get a nasty surprise. If you have negotiated a term that is in conflict with something in the body of the lease, make sure that term gets spelled out in the first few pages or on the Special Conditions Exhibit. Keep in mind that Landlords generally use the same lease for all their properties. Those properties may not be similar enough to conform to all the terms in the lease. Things like hours of operations, hours of ac use, parking, use (think warehouse versus office building)….
While you are reviewing the lease, you should start the process of obtaining premises liability insurance. You will need to list the landlord and management company as additional insureds. The type and amount of insurance will be spelled out in the lease. It can take a week or so to just get a quote from an insurance company so don’t leave this until the last minute. When you have purchased the insurance, the company will issue you a Certificate of Insurance. You will need to provide this to the Landlord/Management company prior to getting access to the space.
Once you have gotten a fully executed lease, your Certificate of Insurance, security deposit and first month’s rent to the landlord, you can move on to the next step of moving in and moving your business to the next level!