Purchasing commercial real estate is an exciting step for most people. They have dreams of renting out the space so that they can gain some passive income. But if you are unable to negotiate a good lease, there will not be any passive income. Here are some tips to help you negotiate a commercial lease, so you can begin your life as a landlord.
First, don’t short yourself. You need to know exactly how much you must have for rent before you ever place an ad in the newspaper. This number must include not only enough to cover the building, but the property taxes, any utilities that you will pay, and any other costs. Plus, you will want some for profit. If you forget to include property taxes, or any of these other costs, you could find yourself in trouble when it is time to pay them. Beyond financial considerations, keep in mind that there are other things which must be considered. Say they are asking for “right to buy”. This is not necessarily in your best interest, and it will be something you want to think about before you agree to it.
Second, do not be inflexible. For example, say the tenant wants a new water heater. Water heaters are inexpensive, even for most commercial applications. If you can install it yourself, you will save a lot of money, but even having it installed is usually a bargain. You should be getting enough in rent money that this water heater does not break your budget, and if it gets them to sign, it was well worth the money. You should be careful and not swing too far in the other direction with this suggestion. If you keep agreeing to item after item, pretty soon, you are losing money. Agree to some things, and charge them extra for others if they consider it something they cannot sign without.
Third, don’t promise something you cannot deliver. In my own commercial building, I had to spend $11,500 on a new air conditioner, because I had agreed to do so. When we signed the lease, I thought there was no way the AC would need replacing. I am still paying off the bill from that mistake, and they will need to sign for several years to make it a good investment. Make sure you can afford whatever you are agreeing to before you agree. It’s not worth it to get a tenant in your building if it leaves you so broke that you have to sell your building.
Fourth, make sure you are doing business with someone that can afford to start one. I was contacted by a man who had no credit, but assured us that he could get a loan from the bank to start the business. And he mentioned this in our first meeting. There is not a bank in the world that will give you enough money to start a business when you have no credit, and I cannot rely on his word that the rent will be paid. Despite the lease, I would be completely unable to collect the rent money, even if he was forced into bankruptcy. The contract, in this case, would not be worth the paper it was printed on. We decided to pass on him as a tenant. It was not personal, but we had serious reservations about his business, and therefore, our business. By no means should you use this as a reason to discriminate against any federally protected status. You should judge each case individually and make sure that their business plan is solid. You don’t necessarily need as many details as a bank would, but you need to protect your own interests.
Fifth, hold the tenants to the lease. I have had an instance where several terms of the lease were not being met. I politely confronted the tenant, who proceeded to argue with me over a clause that actually protected them much more than it did me. I simply informed him that the terms were there when he signed the lease, and those terms will be enforced. Once he understood our position, they have followed the lease, and we have had a very good relationship with this tenant. While there is no need to be nasty about enforcing it, you should not feel any remorse at following the lease. After all, if you are not going to follow the lease, why bother signing it? Your tenants may be upset about it at first, but ultimately, most will realize that it is a good thing. They know exactly what to expect from you, and they know that you are treating them fairly.
Finally, when you are discussing the things that each party wants, make up a “business partner” if you need to, or tell them that you will speak with your lawyer about it. If there is any question about an item, refer it to this imaginary partner or an actual lawyer, until you have time to do some research. It buys you a little bit of time so you are not forced to make a costly decision on the spot.
Certainly, you should have an actual lawyer look over the documents or draw them up. Their expertise is well worth the price. Using these suggestions, you may find yourself well on the way to becoming the real estate mogul you always dreamed of being.