Thread by @TravisDHughes

If you own a small business or ever plan to, the following thread is for you.

I present to you...

The @HughesIPartners Guide to Leasing (Abridged Version)

@HughesIPartners Now, let me start by saying this will be fairly comprehensive but by no means exhaustive. Also, there are exceptions to rules. Also, I am neither your broker nor your lawyer.

Understood? Good.

Next, a little about my sources for this thread...

@HughesIPartners ...Me. I am writing this thread based on my own experience as a commercial real estate broker and as a practicing commercial real estate attorney. None of the following was researched, plagiarized or assumed. It is all based on real world experience...

@HughesIPartners ...Why am I tweeting about leases? It's boring, you say? Well, many small businesses fail not due to poor business planning or mismanagement or inadequate marketing, but because of lease defaults.

So, it is imperative that you understand your lease..

@HughesIPartners ...Your lease story begins with a need. Are you established or starting up? Is it a new lease or a renewal of an existing lease? Are you moving to a new building or relocating to another suite in the same building? Why do you need the square footage you're targeting?..

@HughesIPartners ...Once that is clear, you will then hire a broker. Hiring a residential broker for a commercial transaction is like going to see an oncologist for a knee replacement. Same body, different areas of practice. So, let's assume you've made a smart decision there...

@HughesIPartners ...Once you've chosen your 1-3 preferred destinations, your broker will send Landlord(s) an RFP (request for proposal) or LOI. The sides will go back and forth until the general framework of the lease is agreed to. Important - the LOI is NOT a contract...

@HughesIPartners ...However, reneging on terms you've agreed to, even if nonbinding, is poor form and could start your relationship with Landlord on the wrong foot. That's why your broker needs to know his/her stuff.

Moving on, Landlord will ask for your financials. Typically the past 3 years...

@HughesIPartners ...If you have no business credit, your personal credit is messed up, or you can't find a high-credit guarantor (I'll get there later), you need to go back to the start of this thread and wait there until that's fixed. Ok, not really. But you're gonna have NO negotiating power...

@HughesIPartners ...Let's assume your financials are straight. Good. Now, the Landlord sends you the lease. You sign it, open for business, and the money machine starts churning, Scarface style.

Not if you're smart...

@HughesIPartners ...The initial lease Landlord sends to you is a draft. It is written in a way to benefit Landlord the most. How do I know? I draft leases for landlords.

Some drafts are more neutral than others. But none are written in your favor. So, you must advocate for your company...

@HughesIPartners ...This means you should hire a lawyer. Can't afford to spend a few grand on a lawyer? That upfront Security Deposit plus 3 months' rent your broker let you agree to would've covered the cost of about 3 lawyers. But that's all in the past. Find the money and pay the lawyer...

@HughesIPartners ...Let's jump into the DeLorean and go back to about 45 seconds ago.

When looking for space, don't just focus on the space itself. Learn the Landlord!

What is Landlord's plan for the property? Are they looking to hold or flip? Are they even in the U.S.? You have no clue...

@HughesIPartners ...Why does that matter? Well, what will happen if the property starts falling apart? Is Landlord even aware of what's happening there? Is Landlord less likely to pay for repairs or renegotiate your lease because it's looking to sell the property? Things to consider...

@HughesIPartners ...Let's address the nitty gritty. From your perspective, the actual sections of your lease can be divided into three categories: liability, cost and the tenant experience.

Liability is up first...

@HughesIPartners ...Leases, like any contract, are negotiable. However, if any of the aforementioned three categories is less negotiable than the rest, it's liability. A smart Landlord isn't going to jeopardize its entire property for the sake of a tenant...

@HughesIPartners ...Generally, whatever happens inside your suite (the "Premises") is on you. Landlord will make you get Commercial General Liability Insurance to cover injuries and damage to personal property inside the suite. Add property insurance, Worker's Comp, and umbrella coverage...

@HughesIPartners ...Tenant is often obligated to maintain and repair the suite. Landlord must maintain the "common areas," which are the areas on the property that are shared (e.g., parking, lobbies, courtyards). Landlord may want Tenant to remove certain additions to the suite before move-out...

@HughesIPartners ...Now, let's talk costs. You will pay rent, of course. But in what form? Well, if you have a full service gross lease, you will submit one payment that will cover your base rent and your share of the cost to Landlord to run the property (aka Operating Expenses/Costs)...

@HughesIPartners ...There's a variation of that where, in addition to your base rent, you will pay your share of the Operating Expenses, but only up to a certain amount. That amount is called an Expense Stop or Base Year...

@HughesIPartners If you have a "net lease," you will submit two payments; one for base rent, one for Operating Expenses.

What exactly are Operating Expenses? The cost of property taxes, building insurance, and common area maintenance. Landlord passes those costs through to its tenants...

@HughesIPartners ...Now, a good lawyer will break down that definition even further and negotiate what should/shouldn't constitute common area maintenance (CAM). For example, a common point of contention is if capital expenses (e.g., painting the building exterior) should be included in CAM...

@HughesIPartners ...Did you ask for a rent abatement? What's that? It's free rent. No catch. You get to start the first X months of your lease without paying rent. Caveat: If you're a startup/small business, Landlord may get around that by making you pay X months' rent upon signing the lease...

@HughesIPartners ...Why would Landlord agree to a rent abatement? Because they already collected some (if not all) of that money upfront and they want to lease the suite. As you can imagine, rent abatements tend to be greater in down economies. That's why you need to be up on current events...

@HughesIPartners ...Check this out. If you are a restaurant or retail tenant, Landlord may tax you for being successful. You suddenly become a Republican.

I kid, but the tax part is true. It's called Percentage Rent. Landlord will charge you X% on your gross income above a certain amount...

@HughesIPartners ...That means you're going to pay base rent, Operating Expenses AND percentage rent. Quite a haul for Landlord (which is why I always talk about the benefits of owning commercial property and how it can advance a community)...

@HughesIPartners ...Did you know Landlords typically have money set aside to give to tenants who need to construct their suites? It's called a tenant improvement allowance, and it's either given up front or reimbursed to Tenant after construction. More $$ for you if you know what you're doing...

@HughesIPartners ...Speaking of knowing what you're doing. If you're a small business with little to no credit history, Landlord is going to make you cosign the Lease. This is called a guaranty. The person co-signing is called a guarantor. This person is personally liable for ALL of the rent...

@HughesIPartners ...When I say all, I mean for the whole lease term. In other words, if you default, Landlord is going to come looking to YOU to pay all of the rent Tenant owes Landlord from now until the end of the lease term...

@HughesIPartners ...There are ways around that, but I won't go into detail.

Last, but not least, the Tenant Experience...

@HughesIPartners ...Parking. Do you have enough? Do you need reserved spaces?

Landlord access. Landlord will want the right to enter your suite whenever it feels like it. Does that work for you? Probably not. So, you'll need to place restrictions on that...

@HughesIPartners ...And, finally (for today), do you have the right to renew your lease or expand the size of the Premises? If you expect to grow in size, you'll need to negotiate for some expansion space...

@HughesIPartners ...There are plenty of additional lease concepts to cover, such as indemnification, casualty/condemnation, and termination rights, but I may cover those in a Part II, if demand exists. For now, if you have any general questions, feel free to reply or DM...

@HughesIPartners ...If you are interested in this thread and need to lease or purchase commercial property in Atlanta, follow @HughesIPartners and visit the website.