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Leasing Logic

Leasing Logic

March 8, 2006
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" Know both rentable and usable space. "

Unless you happen to be one of the lucky few adult retailers who owns the property where your store is located, you will from time to time have to deal with leases. And no matter how astute a business person you are, you are likely to have a difficult time understanding all the intricacies of a commercial lease.

It is important to remember that commercial leases are always written to the advantage of the landlord. But it is equally important to note that, like most things in business and in life, leases also are negotiable. The first lease a landlord presents is just a starting point. If you know what to watch out for and have included in your lease, you may be surprised at the concessions you can get just by asking.

Here are some things to keep in mind before signing on the dotted line for a new lease or renewing your existing lease.

Always have a lawyer review the lease — and not just any lawyer, but one who specializes in real estate law. Articles like this are helpful, but they are no substitute for expert legal advice.

Don't accept an "as is" lease without a thorough inspection. Unlike residential leases, which typically call for the landlord to deal with issues such as mold remediation, faulty electrical wiring, leaky pipes and compliance with federal and state Americans with Disabilities Act requirements, commercial leases usually place the burden on the tenant. Unanticipated costs related to such repairs can kill a business's profit margins.

Ask for guarantees. Make the landlord stipulate that the property is "in compliance with all applicable laws and regulations" at the time the lease is signed. Also have him or her warrant the physical infrastructure, including heating and AC, plumbing, electrical wiring and ventilation. Of course, you will have to be reasonable regarding the length of the warranty. Few landlords will be willing to warrant the infrastructure for the life of a lease, but you should demand at least a year.

Include notice of payment defaults. Have it written into the lease that your landlord must contact you in writing or by telephone if a payment is late, and give you a specified number of days to pay up after notifying you.

Have utilities metered to your space. Many landlords prefer tenants to pay based on square footage, but that doesn't make sense if you end up, for example, paying the water bill for the coffee shop next door.

Know both rentable and usable space. Rentable space is what you pay for. Usable space is what you can actually use to run your business and typically doesn't include hallways, restrooms, stairwells and other common areas. Yet, you will probably still have to foot part of the bill for maintenance costs for these areas. Be sure you're getting a fair deal.

Understand your renewal. Many landlords prefer long-term leases because they provide guaranteed income. But it is usually in a retailer's favor to add a renewal clause that will allow him to decide whether or not to extend the lease once the initial term expires. For example, you might negotiate a two-year lease with four two-year renewal options, rather than a fixed 10-year lease. This will give you more flexibility and leverage during the life of the lease.

Beware "fair-market" increases. When you discuss renewal options with a landlord, try to negotiate a series of specific rent increases for each renewal term. Renewal options that allow a landlord to raise rents based on fair-market rates can result in large increases — especially if your business operates in an area where commercial space is in demand.

Special considerations for adult retailers:

Check "use" clause in your lease. Most commercial leases clearly spell out the permitted use for a building or property. Make sure this description is broad enough — for example, by including phrases such as "and related goods and services" — so that you don't have to get the landlords approval when you add new merchandise to your inventory.

Check signage rules. It is customary for a landlord to build into a lease specific language covering design, approval, maintenance and removal of signage. Adult stores, in particular, often face disputes with landlords who buckle to pressure from community groups to restrict signage at adult retail stores. Make sure the signage clause in your lease gives you the authority you need to effectively promote your business through signs and displays.


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