If you’re thinking of taking on warehouse and manufacturing space, you’re at an exciting growth moment in your business—congratulations! But before you move forward with a lease, you’ll need to make sure you have enough funding and working capital to keep up with your monthly lease payment and other expenses.
In this article, we’ll review the costs associated with taking on a commercial lease, what to look for in a lease agreement, and the financing options available to fund your new space.
Real Estate Related Expenses
There are more to monthly lease payments than your rent. Often, maintenance fees and common charges are the responsibility of the tenant, so make sure to ask the landlord what expenses you are responsible for. This will help you better understand how the total cost of the lease will impact your working capital needs and bottom line.
Be sure to also understand your utility costs. Ask if your space is individually metered or if you’re charged by square foot. It is incredibly important that as a tenant you have control and, more importantly, awareness of what you are agreeing to. All expenses should be reviewed and assessed in relation to the lease agreement.
Real Estate Lease Agreement
Negotiating the terms of your first commercial lease is crucial. As a tenant, you should make sure that you have the interest of your business at heart when approaching the term and rental rate that you agree to. Here are some key questions to consider:
- Is the landlord offering you a very short-term lease with no wiggle room for renewal?
- Is the term too long that it will pose a problem if you outgrow the space in the near future?
- How is location affecting your rent – are you paying a premium for a desirable location?
- What type of lease agreement works best for you – gross lease, net lease, graduated lease or other?
- What are my responsibilities in terms of maintenance and repair? Know that commercial leases differ from residential in that tenants are frequently responsible for upkeep for commercial spaces.
- What will happen if I default on my lease or close up shop?
All of these questions need to be asked to ensure that your business has the greatest probability for continued growth and success. Regarding the length of the lease, a best practice is to negotiate a one-to-two year lease with the option to renew. This gives you the flexibility to move to a larger location if your business grows significantly within the lease period.
Many business owners choose to work with a commercial real estate broker who knows the real estate landscape and can bring you a variety of options to consider. It is also critical that you find a knowledgeable real estate attorney you can trust. Your attorney will guide you on the specific language needed in the lease agreement to protect your business.
Protect Your Business
To protect your investment and long-term business interests, it is worth looking into and negotiating some extra clauses to your benefit.
- Sublease – Added flexibility and security by allowing another business to take over your lease.
- Exclusivity clause – Prevents the landlord from leasing surrounding or adjoining space to a direct competitor or someone who might be in the same industry. This is incredibly important if you have a storefront.
It is also essential for you to protect your business with an exit strategy in the unlikely event that you default on your lease or close up shop. Make sure you are clear on what will happen in this scenario between you and your landlord.
Financing options for commercial leases
The process of securing commercial space for your small business can be seamless with careful planning and preparation. Understanding the lease language and additional costs to your operations is a good first step. If in your planning, you find that you’ll need additional working capital or financing to make a commercial lease work, contact your bank or a local Community Development Financial Institution (CDFI) to discuss your financing options. Small business owners often utilize loan programs to finance their expansion into a new commercial space.
Pursuit has a loan program especially for small businesses operating in industrial areas or in the manufacturing industry called the Industrial Neighborhood Business Fund. Get in touch to see if this loan program is an option for you.
Conclusion
Overall, selecting a warehouse or manufacturing space should be a very calculated move for small business owners. While it can create new opportunities for growth, like any major business decision, there are risks involved. Understanding these risks, especially the financial ones, will put you a step ahead.
