How Does Commercial Lease Pricing Work?

You’ve finally found the perfect space for your business. Before you sign a lease remember that the lease is not likely to be in your favor if the landlord drafted it. Here are some important points to think about before signing a commercial lease.

How is the monthly lease payment calculated?

The most basic equation for calculating lease payment takes the number of square feet times the cost per square foot, then amortizes that over 12-months. For example, if you have 1,000 square feet and the cost per square foot is $12, the annual lease amount would be $12,000. Divided by 12 months the monthly lease payment would be $1,000. Again, this is a simplified scenario. These days most commercial leases include additional factors that affect the final price, such as a monthly percentage of your gross sales, property tax, and rent increases, operating expense escalations, common area charges, etc.

Can the monthly payment go up at any time?

It’s typical that a lease contains what’s known as an “escalation clause” that allows the landlord to pass on increased building operating expenses to the tenants. If your lease contains such a clause you should ask for a cap on the amount the lease payment may rise over a given period of time and an accounting of the items that are forcing the increase.

Will my rent increase every year?

One very important factor to know is if and when, and by how much your rent might go up over the term of the lease. It is expected that rents will increase as property values increase, so most leases include a rent increase on the anniversary date of the lease.
Plus, if your landlord can rent the space for more than you agreed to pay a year ago, he is within his rights to ask for the increase. However, it would be a nightmare if your rent suddenly doubled. You should negotiate the timelines and amounts of increases before you sign the lease. If your landlord balks at this find another space.

Is a personal guarantee required?

What happens if your business goes south and you can no longer afford to make the lease payment? Are you responsible for paying the rent out of your own pocket? Probably so. Most landlords insist on a personal guarantee from the owner or an officer of the corporation. This means that even if you go out of business you are still on the hook for the remainder of the monies owed.

Finally, be clear on every point in the lease.

And if you’re not clear on every point get clarification from your attorney. Exactly how much space are you leasing? What day of the month is the rent due and what’s the extra fee if you’re late? Who is responsible for repairs? What common areas will you have access to? Who is responsible for maintaining things like keeping the shared restrooms stocked with soap, towels, and most importantly, toilet paper?