Creative Commercial Lease Financing for Texas Entrepreneurs

Published: 05-30-24    Category: Leasing/Renting

Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.

The state flag of Texas flying in the wind.

If you're considering leaving the corporate world to open your own business, congratulations! Whether you're an entrepreneur with a unique product or service or planning to open your own branch of an established franchise, it's a dream come true.

Being your own boss puts you in charge of plenty of major decisions, such as location. However, you'll also be required to finance start-up costs, which include leasing your first commercial site or space. Be prepared to consider creative solutions for these expenses.

Ideally, you'll choose a state that welcomes new businesses with incentives and has a growing population to support you. Texas offers both of these and more.

Miles and Miles of Texas

It's more than a country swing tune from 1961…there really are miles and miles of the Lone Star State. In fact, there's enough room to house the 8th largest economy among the nations of the world.

One of the state's most famous entrepreneurs, Ross Perot, was born in Texarkana, Texas. After several years as IBM's top salesman, he founded Electronic Data Systems (EDS) in 1962 with a $1,000 loan from his wife, Margot.

It took 77 sales calls for Perot to land his first client. Six years later, EDS became a publicly traded company and made Perot a billionaire.

Many of today's new business owners face a similar challenge as Perot, which is finding financing. In particular, leasing that first commercial space can be a major cash outlay. CRE tenants may be asked to provide a deposit and two months' rent before moving in.

In addition to the lease, more funds will be required for equipment, utilities, incorporation fees, insurance and any staff. This means you'll have to find more than Ross Perot's $1,000 loan to get started, even in Texas' business-friendly environment.

If you don't have sufficient cash to cover start-up CRE leasing costs, it's time to identify some creative financing strategies, such as revenue sharing.

Creating a Win-Win With Revenue Sharing

One way you may be able to negotiate discounts for a commercial lease is to propose a revenue-sharing agreement with your landlord. These are more common with hands-on property managers.

Here is a base outline of a revenue-sharing agreement.

  • These are contractual agreements that provide guidelines for generated revenue, including how it will be distributed between parties.
  • This agreement enables both parties to share risks associated with a new business and can be tailored to suit each party's needs and goals.
  • By distributing revenue generated by the business per a predefined agreement, both parties are motivated to contribute their best efforts to its success.
  • The agreement may be structured so that the new business shares less revenue during its first months in business. This helps ensure cash flow for the tenant at a time when income and profits may be severely limited.

Locating a property owner who may be interested in revenue sharing may take some time, research, and networking. However, if you're interested in leasing space in a building with a high vacancy rate, the owner may be willing to consider it.

You may also have more success with a landlord who has a personal and/or professional interest in your business or whose current tenants would benefit from having you as a neighbor.

Texans are renowned for their friendliness, so be sure to keep this in mind when negotiating.

Another, more common strategy for lowering your leasing costs: landlords offering tenant or lease incentives. Due to some landlords suffering from higher vacancy rates because of the shift to remote work, incentives have become more widespread and creative.

Here are details for you to consider.

Leasing Incentives for Warmer Welcomes

No owner of a commercial building likes vacancies, as this reduces their passive income. They can be especially problematic for owners of retail and office properties.

  • The current tenants of a retail property may see considerably less income because of less foot traffic.
  • Half-empty office spaces may cause vendor tenants, such as coffee shops and restaurants, to move out.

Therefore, a landlord is often willing to encourage new tenants to sign a lease by offering one or more incentives, and Texans are no exception.

You may be offered:

  • Reimbursement of moving costs if you're moving to Texas;
  • Rent-free or reduced-rent periods, usually during the first months of your lease; or
  • Financing remodeling (these are often called tenant incentives).

While some landlords may offer one of these, keep in mind that you're free to do your own negotiations.

You'll have a stronger hand if you have one or more of these handy:

  • Research that helps prove that your business will be successful, especially within your chosen location; and
  • A comprehensive business plan that outlines your lease budget for the first years after opening.

If you'd like to have an additional strategy in your back pocket, consider offering your personal guarantee.

Getting Personal With Lease Negotiations

When you offer your personal guarantee to a potential landlord, you're telling them,“If I can't pay, take my assets.”

A personal guarantee allows a landlord to convert your personal assets into cash to cover rent costs. Additional costs, such as utility and maintenance, may also be recoverable.

If your business is successful, you may be able to request that any personal guarantees be removed after one or two years of on-time payments. You may also choose to offer a cash deposit in exchange for its removal.

Defining the personal assets of any business owner can be tricky, and Texas is no exception. However, the state has its own laws that protect many homes from being seized. It's nicknamed “homestead law”.

Texas offers homeowners protection against debtors that you won't find in many other states. Generally, your family home cannot be seized and sold as part of a personal guarantee agreement. Personal property may also be classified as “exempt” from seizure.

However, a landlord or other creditor may be able to attach a lien.

The exact verbiage for homestead and personal property exemptions can be found online by visiting the Texas Constitution and Statutes online. However, unless you have legal training, this is generally best left to an attorney.

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