How to Avoid Common Commercial Real Estate Traps

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It’s unfair to say that all commercial property managers are “out to get” you. However, at the least, you could safely say that they are all out to protect themselves.

Leasing these spaces is their business and how they put food on the table. So, every lease they sign needs to make business sense from them.

Whether they’re trying to get you or simply protect themselves, most commercial landlords will put some things in the lease that you don’t need to agree to, with some wiggle room to negotiate a better deal for yourself.

Here are two of the most common.

The Personal Guarantee

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This is very common and it’s something it has been covered in the Lease Ref Blog extensively. You do not have to sign a personal guarantee, no matter how much your would-be landlord insists that this is a deal-breaker for them.

Yes, the landlord may feel they need to protect themselves in case you default on the lease; particularly if you’re a newer start-up without much credit. However, there are ways to give them that security without putting yourself personally on the hook for every dollar owed on your lease in case of default.

You can do other things such as limiting the personal exposure to 6-12 months instead of the full lease. This would give them more than enough time to find another tenant. Or, you can incentivize the lease for your landlord by taking any free months of rent off the table, or increasing the amount of your deposit.

You can often find a happy medium, instead of putting your personal finances and credit at risk.

A Triple Net Lease

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If this is your first commercial lease as a new business, we would almost always advise you not to sign a triple net or NNN lease. This, again, represents a lot of risk for you as a tenant.

Basically, you would be offered a low rate on your rent in exchange for paying for pretty much every expense that would go into this space. This would include:

  • Taxes
  • Upkeep and maintenance
  • Utilities

It’s important to know that, in most cases, the sum of those expenses can greatly outweigh whatever you save in monthly rent. Or even exceed what you pay in rent! The older your building is, the more the upkeep and utilities will cost. The more prime your location is, the more you are likely to pay in taxes.

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Many have said that it’s all the responsibility and expense of owning property, without the benefits of owning the equity. Quite simply, it’s often just too much for a young business with a somewhat uncertain future to take on.

Of course, these are only 2 of the countless things that could show up in your commercial lease and expose you to too much risk or expense. If you’re not an expert in this area, we highly recommend you hire someone who is.

You may not need a full-blown real estate lawyer. In most cases, you can find a less-costly real estate expert who can read things over and spot any red flags for you.

Doing a bit more homework now can prevent you from being trapped into an unfavorable lease for years to come!