Leasing commercial property is a complicated process, and even the smallest oversight can result in huge losses for your business. Here are the five most common mistakes to avoid when signing a CRE lease agreement.
Mistake #1: Focusing Only on Price
Low prices are often a strong attraction when it comes to leasing commercial real estate. But it's important to remember that a favorable lease price is only one piece of a larger puzzle. Focusing only on cost and ignoring other important factors can hurt your business in the long run.
While an attractive lease price may seem like a win-win situation at first glance, it could also be a sign of hidden shortcomings. For example, a low cost could indicate that the property is in a less desirable neighborhood. This could mean low foot traffic, limited transportation options, and inadequate parking — all of which can alienate customers and hinder your business' success.
A favorable price may also be lacking in the amenities you need. Does the property offer access to other businesses, such as restaurants, shops, gyms, banks, etc. Having a variety of different types of businesses in an area creates a mutually beneficial environment where one business draws customers to the area, and their visit leads to visits to other businesses in the area.
Additionally, don't overlook the building's infrastructure: Cheap rentals may come with outdated heating and cooling systems, frequent plumbing issues, and poor internet connectivity, which can seriously impact your business operations.
Finally, pricing may reflect the level of competition in your area: Low lease rates may mean you're entering a competitive market, where differentiating yourself from similar options and attracting customers will be a tougher task.
It's important to balance cost considerations with the overall quality of the space, its location, and its suitability for your operations. A low lease price may be attractive, but don't forget to consider all aspects of the property and its surroundings to ensure it aligns with your business needs and long-term goals.
Mistake #2: Focusing Only on Aesthetics
On the other hand, a mistake we often see is ignoring the cost and choosing a location that looks perfect on paper. A beautiful property in a prime location can dramatically improve the image and appeal of your business, but it's important not to let the allure of aesthetics fool you into ignoring your actual needs and financial realities. Being seduced by a beautiful space and a great location, combined with exorbitant rent prices, can be a costly mistake.
If rent is too high, it can drain your funds and undermine your business model, making it difficult to maintain profitability. Rent must be manageable and commensurate with the financial capabilities of your business. Remember, an impressive look or a trendy location does not compensate for the lack of a sustainable, profitable business model.
Additionally, the cost of leasing must be weighed against the benefits it brings. A beautiful building does not necessarily translate to a productive environment or a successful business. Additionally, the costs of running the site, such as utilities and maintenance, must also be considered, as they will be part of your ongoing expenses.
The best property for your business should balance beauty, cost, and practicality. It should be located in an easily accessible area, have affordable rent, and meet your specific needs, like aligning with your business goals to ensure long-term profitability.
While aesthetics are an important factor, they shouldn't be the deciding factor when leasing commercial real estate. Instead, focus on finding a space that fits your budget, meets your operational needs, and aligns with your strategic business goals.
Mistake #3: Not understanding the lease terms
Although lease agreements are often complex and full of jargon, they are the foundation of your leasing experience. Failure to understand the terms and conditions detailed in this legal document can lead to serious problems and unexpected expenses. For this reason, it is essential that you fully understand and can comply with the terms of your lease.
There are many different types of leases, each with its own implications regarding the financial responsibility of the tenant and landlord. For example, a gross lease typically includes all expenses in the rent, while a net lease passes some or all of the operating expenses on to the tenant. A modified gross lease balances the two. Understanding what type of lease you enter into can greatly affect how you forecast and budget for costs.
In addition to the type of lease, it is important to fully understand the elements specific to your rental. This includes not only the rate, but also the payment deadline, what is considered a late payment, penalties associated with late payments, conditions under which the rate may increase, etc. Misunderstanding or overlooking these aspects can result in unexpected financial issues that can strain your business.
Another important thing to understand is who is responsible for repairs, maintenance, and tenant improvements. Even if you assume that your landlord will be responsible for these, it may turn out that they are actually your responsibility. This misunderstanding could result in large, unexpected expenses.
If you think your rental agreement is too complicated or contains unclear terms, don’t hesitate to consult a real estate lawyer. Their expertise will ensure that you fully understand the terms of your rental agreement and are prepared to fulfill your obligations.
Understanding your lease agreement is not a step that should be rushed or overlooked. Take the time to understand each clause and its meaning, and seek professional advice if necessary. This will not only help you avoid potential legal complications, but will also ensure a smooth and profitable leasing experience.
Mistake #4: Not recording the date
Commercial property leases are legally binding documents that come into effect within specific deadlines and can have a significant impact on your lease agreement and the costs associated with it. Overlooking these dates can result in a variety of issues, including automatic termination of the lease or other serious consequences to your detriment. Such an oversight can also limit your business's ability to continue operating or lock you into a lease that doesn't suit your needs for a long period of time.
All of the dates listed in your lease are important. Some leases have automatic renewal clauses, which means that they will automatically renew unless you explicitly cancel by a certain date. Not knowing these dates could put you in a difficult situation if you're not ready or willing to continue on in your lease.
Additionally, renegotiating lease terms or terminating a lease often requires several months’ notice. Ignoring these deadlines could mean missing an opportunity to renegotiate or terminate a lease, leaving you at a disadvantage.
If you're considering relocating to a new location or looking to renegotiate your lease terms, it's usually a good idea to begin this process at least six months before your current lease ends. This gives you plenty of time to search for a new space, negotiate terms, and work around any potential roadblocks.
Tracking lease agreement dates and adhering to timelines is an essential part of effective lease management – it avoids unintended auto-renewals, provides negotiation opportunities, and ensures that the leasing experience aligns with your business goals.
Mistake #5: Losing track of area
An important yet often overlooked aspect of leasing commercial real estate is the square footage of the space. As your business evolves over time, your space needs change too. In some cases, the space may be too large or too small for your operational requirements, creating inefficiencies and unnecessary costs.
Leasing a space that's too big for your current needs can result in you paying for unused square footage, which can be a waste of resources. On the other hand, if your business expands and the space you lease can't accommodate your growth, it can lead to reduced productivity, restricted operations, and a cramped, uncomfortable environment for employees and customers.
To avoid these pitfalls, it's important to regularly monitor space usage. Paying attention to how your space is being used will help you identify when adjustments need to be made.
If your business grows and you need more space, start planning for expansion as soon as possible. It's better to have extra space when you need it than to scramble to accommodate growth after the fact.
Conversely, if a large portion of your space is consistently underutilized, consider downsizing to a smaller location or, if your lease agreement allows, subleasing some of your space, which can help you recoup some of your costs and increase operational efficiencies.
Your leased space should serve the needs of your business as well as possible. Regularly evaluating space utilization and adjusting accordingly will help your commercial lease remain an asset and not a liability. Leasing a commercial property requires careful balancing of many factors, including price, aesthetics, lease terms, and square footage. Avoiding these common mistakes will help you secure a lease that will provide a solid foundation for your business' success.
Marc Altieri > Vice President, Leasing and Investments
Marc Altieri joined SimonCRE in 2021 as Vice President of Leasing and Investments, where he is responsible for communicating with tenants throughout the development process, coordinating with brokers and buyers, and ensuring timely and accurate transactions through comprehensive due diligence.
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