Updated: Oct 14, 2019
Bongiovi Law Firm | Co-written by Gina Bongiovi and Bobby Misko
Thinking about renting office or retail space? Here are five things you, the prospective tenant, should consider before signing ANYTHING.
1. Budget, budget, budget. We only half-joke that renting commercial space is like planning an Italian wedding. If you invite Aunt Theresa, you have to invite Cousin Tony. If Uncle Vito comes, then Cousin Natalie has to come too. When you're considering whether a commercial lease is within your budget, don't just look at the base rent. You have to include Common Area Maintenance fees (CAMs) aka Operating Expenses, utilities, furniture, equipment, insurance, having a body there to work or to greet customers, all the expenses associated with that employee, and the list goes on.
2. Rent payments will likely be your personal responsibility. While you may have an LLC or corporation, and that entity would normally help you keep a corporate veil between you and your obligations, most commercial leases have a required personal guaranty. It's a binding contract that essentially shreds your corporate veil as to the lease agreement. This means that your landlord can come after you personally, and all of your personal assets, to satisfy your company's obligations under the lease agreement. If there are multiple guarantors, keep in mind most guaranty provisions make all "jointly and severally liable" which allows the landlord to come after all of you or just one of you for the entire outstanding balance. So, if you have partners, you aren't necessarily on the hook for only your proportionate share of the lease. It's also important to note that the landlord is entitled to all the rent and other fees contemplated under the lease agreement. Moving out and giving the keys back does not stop the clock on the rent accruing, or prevent the landlord for suing you for what you'd have paid if you had fulfilled the whole lease term.
3. Use a commercial broker. A lot of business owners, especially new ones, may be intimidated or wary of engaging professional advisors to assist them in a commercial lease transaction. However, commercial real estate brokers are an invaluable part of the leasing process and can mean the difference between your company obtaining a good lease in your desired location, or getting stuck with an awful agreement with a jerk of a landlord. Part of a broker's job is to be educated on the market, including current inventory and rental rates, and to act as your representative through the transaction. Your broker should provide you with information for, and education on, available space based on your specific criteria, and will physically walk you through the spaces you have interest in. Here's the best part: As a tenant, you may not have to pay your broker one red cent! In the Las Vegas market, in most cases, it is customary for the landlord to pay all of the brokerage fees involved in a lease transaction. Finally, we recommend seeking a truly commercial broker and not one that does both residential and commercial. It'd be like us saying "we practice law and dentistry". They really are that different. Additionally, commercial brokers usually specialize in a certain type of space - office, retail, industrial, medical, etc.
4. Financials. All landlords will require a copy of your company's financials when determining whether you are a suitable tenant for their space. Again, if your company is relatively new, or does not have a lengthy and strong financial and credit history, the landlord will also want to see your personal financials to decide whether you can afford the lease. In other words, you should have your company's and personal financial documents organized and ready to be presented to a prospective landlord in pretty much any leasing situation.
5. Letter of Intent. Once you've found that perfect space for your business, your broker will typically submit a Letter of Intent (LOI) to the landlord. The LOI is typically a non-binding document which outlines the major deal points of the eventual lease agreement. Some things to be considered here are: 1) the rent, including CAMs; 2) any free rent; 3) any tenant improvement allowance; 3) the term of the lease; 4) the security deposit; and 5) brokers' commissions. Obviously, this is not an exhaustive or exclusive list, but you get the idea. The LOI stage will either come after the landlord has reviewed your financials, or happen concurrently with their review of those documents. Again, generally non-binding here, so neither party is obligated to anything at this point. However, some consider it bad form to agree to something in the LOI only to try and exclude or change it in the ensuing lease agreement.
Bonus Tip! Hire an Attorney. I know, I know, attorneys don't have the best rep…and they are so expensive, and they only complicate things, and they kill deals, and blah blah blah. Sadly, sometimes that is true, but we like to consider ourselves part of the deal makers club. Our job is to make sure the lease terms are reasonable and to ensure you understand the risks you're taking. Also, because your lease is probably a commitment of at least three years - sometimes even as much as ten - it's best to get some professional advice before you sign. Involving an attorney, ideally before the LOI stage, is truly money well spent. Too often we've met with clients who've signed lease agreements they didn't understand and can't get out of.
Gina Bongiovi - Managing Partner of Bongiovi Law Firm, Gina is a Las Vegas native and holds a JD/MBA from UNLV. The company, which just celebrated its tenth year in business, serves as outside counsel to small and medium-sized businesses.
Gina is a recurring speaker at a legal technology conference on topics such as Process Automation and Technology Planning.rtups and small businesses.
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