Top Five Lease Negotiation Mistakes New Businesses Make
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.
As a new business owner, locating and leasing the right commercial space is vital for your success.
However, the process of negotiating a commercial lease can be complicated, especially if it's your first. You'll also be busy with plenty of other business-related tasks.
Signing a commercial lease that doesn't protect you and your business from potential risks can be an expensive mistake—one that you may be unable to walk away from until your lease term is up.
However, it doesn't have to be stressful or complex.
Here, we'll identify the top five mistakes new businesses often make when negotiating a commercial lease.
We'll also look at why these mistakes are made and how even the busiest entrepreneur can avoid them.
#1 – Negotiating Before Determining Your Needs
One of the most common mistakes new business owners make is entering lease negotiations without clearly understanding their specific needs.
This may result in a lease with terms not addressing your business goals or finances.
This can happen when you view a commercial space, such as an office or retail storefront, that appears to be perfect for you.
When this happens, it's easy to skip reading the small print on your lease as you want to secure the space quickly.
How to Avoid This Mistake
Before you begin viewing spaces for your business, sit down and prepare a basic business plan that defines your goals, budget, and requirements.
Your plan should include space requirements, location preferences, budget constraints, “must-haves,” and business growth projections.
#2 – Failing to Research Market Rents
Another critical error is not researching the current rent pricing for commercial spaces within your desired area.
It's especially important to look at the current and historical rates for the type of commercial space you need, as these will fluctuate at different levels.
For example, office rental rates may be falling in your area if vacancies are rising, while rent pricing for new retail spaces near popular big-box stores may be on the rise.
Without this knowledge, you may end up overpaying for your space or missing out on potential savings.
Even if you've chosen the right home for your business, this could strain your cash flow unnecessarily.
How to Avoid This Mistake
Spend some time checking out quarterly CRE reports online. If you haven't decided whether you'll work with a CRE agent or broker, this can be a smart move if you don't have the time for research or are unsure which sources are reliable and accurate.
Take the time to research comparable properties in your target area. This will give you a realistic idea of what you should expect to pay.
#3 – Focusing on Minor Details Before the Big-Ticket Items
It's easy to get caught up in minor details of a potential rental space before you consider the big picture.
This means you may not review and negotiate the significant aspects of the lease at the right time, which can lead to accepting unfavorable clauses or terms that deal with crucial issues.
How to Avoid This Mistake
Prioritize negotiating the most important aspects of your lease first. These include rent rates, lease terms, and renewal options.
Be sure to find out just what your monthly rent covers and what may require a separate payment, such as the upkeep of shared spaces.
#4 – Not Being Prepared to Walk Away
Some new business owners feel pressured to accept the first offer from a landlord, even if the space could be better for the business, its staff, or customers.
This can result in being locked into a generally unhappy situation, which may include unfavorable terms for an extended period.
The business itself may suffer, especially if customers or clients find the location problematic.
How to Avoid This Mistake
Remember that negotiation is a two-way street. Be prepared to walk away if the terms don't meet your needs or align with market values.
#5 – Not Sending a Letter of Intent (LOI) Before Negotiating a Lease
Some new business owners may be tempted to skip the Letter of Intent (LOI) step to save time. However, this document is crucial in setting the groundwork for lease negotiations.
An LOI clarifies facts for both you and your future landlord, helping you both avoid misunderstandings when it comes time to negotiate a lease.
How to Avoid This Mistake
Take the time to compose a well-crafted LOI outlining the basic terms you seek. This document serves as a roadmap for negotiations and can save time and potential conflicts down the line.
Now that you've taken the time to learn which mistakes to avoid when leasing commercial space, you're ready to begin your search.
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No matter what you decide, you can begin your search right here at MyEListing.com, free of charge.
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