From Atlanta Catalyst Magazine, September, 2002 issue
Legalese: On Your Terms
by Robert J. Nebel
Jumping into a commercial lease is more than an agreement. It is a commitment. There are a number of factors to consider before signing on the dotted line. Decisions made in your contract today may help or hinder your bottom line tomorrow. Many will concede commercial leases are filled with paper trails, number crunchers, real estate brokers, attorneys, architects, telecommunications and furniture consultants.
"I hate it," admits Linda Klein, managing partner at Gambrell & Stolz, a law firm that leases space Downtown. "It is like buying a car. You just feel that you are never getting the right deal. It's hard to compare apples to apples."
While commercial leasing may seem intimidating, it doesn't have to be, if you do your homework. Most experts agree the commercial lease can be broken down into three phases: programming, occupancy and after-term.
This is the stage where you need to plan out how much space you need for various aspects of your present and future business needs. "Depending upon your planning horizon, you have to ask yourself, 'Where will my business be in two, five or 10 years, and what will my space needs be in that time?'" says Phil Skinner, an attorney with Arnall Golden Gregory, a law firm that handles commercial leases. "Once you have developed your space utilization program, you can then perform 'test fits' to see how efficiently your program can be deployed in different buildings' floor-plates." Skinner adds it may take a little guesswork, but this type of thinking is beneficial for future performance.
"Where you locate is very important," says Klein. "The 'snob appeal' of a company located in Buckhead or Downtown will simply do better than one near the airport."
It is also in this planning stage where you need to be clear with your out-of-pocket expenses. Fiscal reality is paramount when embarking on a lease. Sam Holmes, executive managing director with commercial real estate provider Insignia/ESG, suggests businesses focus their capital on the core business. "Owning is detrimental to the entrepreneur," says Holmes. "You need to better utilize your capital to grow your business. Plus, ownership takes away the flexibility that growing businesses need to be successful." Holmes contends that investing capital in the business and employees will generate much higher returns over the years than real estate. Also, today's poor real estate market is providing great leasing opportunities, adds Holmes.
Once you've chosen the location, you're ready to draw up a contract and negotiate its terms for occupancy.
When drawing up the contract, you must realize that your responsibilities extend beyond the rent payment during your stay. It is important to lay out in the contract the terms for who is responsible for maintenance and repairs to the facility. "Make it clear who cleans and maintains the space when you are there," says Klein.
For some growing businesses, physical changes to the space are inevitable. Many landlords
place limits on adding or subtracting walls, light fixtures, wiring and other alterations. Negotiate these terms to fit your needs for growth in the leased space.
Choose the type of insurance policy where you are covered in a variety of situations. "One feature everyone should have in their policy is a 'tail,'" says Seth Katz, an attorney with Arnall Golden Gregory. "Let's say someone falls in your office during your lease and they sue two years later. The tail in your policy will cover you."
In some instances, landlords have the capacity to relocate you at their discretion. Monty Harris, managing director of Newmark Southern Region, a full-service commercial leasing and management company, says it's important to have leverage in your negotiations with the landlord. By having this leverage, you possess the power to control the situation by
working in a fair renewal option in the contract, which can protect you from an inconvenient relocation. "Don't let the landlord think you are captive in his space," says Harris. "Let the landlord know you have a second option that works and is believable. You can always threaten to walk away from the deal if it's not to your liking. That gives you leverage."
At the end of occupancy, you are either ready to renew your lease or vacate the premises. Find out how much notice you must give the landlord and set the terms in the contract. In the end, experts agree you must leave the space in "broom-clean" condition. Negotiate what that condition means. "You must remember the landlord has your security deposit hostage after you leave," says Skinner. "Do not be asleep at the switch."
Lastly, understand the pro-rata share or the amount you may owe the landlord during the last calendar year in the lease term. You will either receive a bill for extra expenses incurred during your stay or a refund for the amount you may have overpaid.
The commercial lease is one of the most important transactions in your business plan – second only to your payroll. As tedious as a contract may seem, it is imperative to read and understand its negotiated terms. "I'm a lawyer and these lease agreements are challenging for me to go through," says Klein. "Seek help from the profes-sionals who can help you read the contract – whether it be a tax adviser, accountant or real estate broker."
After the dot-com bust, a wealth of office space has become available, making the current market a "tenant's market." Remember, you have the upper hand in this climate.
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Copyright 2002, by The Leader Publishing Group, Inc., publishers of Catalyst Magazine and Business to Business.
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