Imagine this: You’ve left your job of 20 years to pursue your dream of starting a new business and you need to lease space in which to operate. You picked an ideal location and there are several buildings that would be a great fit. You have called the agent’s name on the real estate sign that handles the property you like best and negotiated a great deal. All that’s left is to sign the lease, and you are on your way. What do you need to know first, and what are some of the common pitfalls that you should avoid?
It is important to recognize that a commercial lease is a binding contract, similar in many ways to a residential lease but without as many built-in consumer protections. A commercial lease is generally written to the benefit of the landlord. It is a business transaction, and it is up to you to protect yourself. It is important to have good representation from a lawyer, an accountant and a commercial real estate agent.
Two areas that can impact you in a new location include zoning and understanding the commercial lease rate. Let’s talk about zoning first.
When looking at a commercial building, always check the zoning of the property to make sure that it allows your desired use. Each city has its own zoning ordinance, which is often found on the city’s website. In Newport News, there are 20 different zoning classifications, of which eight are residential, and 10 are commercial. Two of these classifications are in the Oyster Point section of the city. There are dozens of uses provided for in the zoning ordinance, and many of these uses are only allowed in specific zoning classifications. You cannot assume if you want to open an auto dealership in a property next door to another dealership that your property has the same zoning. It is prudent to have your commercial agent help you work with the city zoning department to verify your use and ensure it fits within the guidelines of the zoning for the property you select.
Commercial lease rates in our area are typically described in dollars per square foot per year, making it easy to compare different sized spaces. A novice tenant typically wants to know if the space will work for him or her and to know the amount of the monthly rent. To calculate monthly rent, you multiply the size of the space by the price per square foot to come up with a yearly rate and then divide by 12 months. As an example, a 1,300-square-foot space, leasing for $15 per square foot, would lease for $19,500 per year, or $1,625 per month rent (1,300 x $15 = $19,500/12 = $1,625). Understanding this formula allows you to easily compare spaces of differing sizes and lease rates.
In comparing lease rates, you must also know if the rate quoted is “full service,” a “net” rate or something in between, often called “modified.” When comparing a property advertised at $15 per square foot “full service” with another at $15 per square foot “net” (also identified as NNN or triple net), the full service rate generally means that all utilities, common area maintenance, taxes and insurance are included. The net rate means that all or part of these charges are not included and are over and above the basic rent that you would pay to the landlord. In a typical lease, these charges can add up to several hundreds of dollars more in rent each month. Frequently these additional charges are identified on a different page than where the rent is described, so having an expert on your team who can verify the total amount you will be paying is critically important.
In summary, a new business is an exciting time and filled with hope and opportunity. Be aware that what you don’t know can hurt you. Surrounding yourself with the right team to navigate the terms and conditions in a commercial lease will make all the difference. The steps you take in finding the right location at the right lease rate are as important as learning the nuances of your future business venture.