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Is it better to lease or buy?
This is a good question and needs to be considered carefully. Leasing
almost always will cost more than purchasing. A potential exception is a
luxury car, even though it is used solely for business, can not depreciate
the full purchase cost for taxes. Lease payments are usually totally
deductible. Leasing does not tie up your cash or require you to get a loan.
Leasing provides no resale or salvage value since you do not own it. Almost
all small businesses start out in leased (rented) premises and most use
leased space throughout the life of the business. If location is a major
consideration of the success of the business then consider the risk of the
landlord not renewing your lease. Careful weighing of alternatives and a
cost analysis will help you make the best decision.
To Lease or Not to Lease?
Here are some questions to ask before signing a lease:
- Does the lease specifically state the square footage of the
premises? The total rentable square footage of the building?
- Is the tenant's share of expenses based on total square footage of
the building or the square footage leased by the landlord? Your
share may be lower if it's based on the total square footage.
- Do the base year expenses reflect full occupancy or are they
adjusted to full occupancy (i.e., base year real estate taxes on
an unfinished building are lower than in subsequent years)?
- Must the landlord provide a detailed list of expenses, prepared by a
CPA, to support increases?
- Does the lease clearly give the tenant the right to audit the
landlord's books or records?
- If use of the building is interrupted, does the lease define the
remedies available to the tenant, such as rent abatement or
lease cancellation?
- If the landlord does not meet repair responsibilities, can the
tenant make the repairs, after notice to the landlord, and
deduct the cost from the rent?
- Is the landlord required to obtain non-disturbance agreements from
current and future lenders?
- Does the lease clearly define how disputes will be decided?
- Also see Facts About Leasing Your Equipment, The Benefits &
Pitfalls (Source: 327 Questions to Ask Before You Sign a Lease,
by B. Alan Whitson (B. Alan Whitson Co., (800) 4524480.)
What are some of the Lease terms that I should know?
Lessor- Landlord
Lessee- Tenant
Right of First Refusal- Before vacant space is rented to someone
else, landlord must offer it to the current tenant with the same terms that
will be offered to the public.
Gross Lease- Tenant pays flat monthly amount; landlord pays all
operating costs, including property taxes, insurance and utilities.
Triple Net Lease- Tenant pays base rent, taxes, insurance, repairs
and maintenance.
Percentage Lease- Base rent, operating expenses, common area
maintenance, plus percentage of tenant's gross income (most common for
retailers in shopping malls).
Sublet- Tenant rents all or part of space to another business; tenant
is still responsible for paying all costs to landlord.
Assign Lease- Tenant turns lease over to another business, which
assumes payments and obligations under the lease.
Anchor Tenant- Major store or supermarket that attracts customers to
a shopping center.
Exclusivity Provision- Shopping center can't lease to another who
provides the same product or service that existing tenant does. CAM Common
area maintenance charges including property taxes, security, parking lot
lighting and maintenance; may not apply to anchor tenants in retail leases.
Nondisturbance Clause- Tenant cannot be forced to move or sign a new
lease if building or shopping center is sold or undergoes foreclosure.
What is a commercial lease?
A commercial lease -- as opposed to a residential lease -- is a contract
between a business and a landlord for the rental of building space. A lease
can be for a short term (as little as one month) or long term (up to ten or
15 years), and it can be written or oral (spoken) -- although a lease for
more than a year must be in writing to be legally enforceable.
Are commercial lease terms negotiable?
Most landlords start out asking for lease terms that aren't in a
business owner's best interest, but they are almost always willing to make
concessions. Of course, your bargaining power depends on your local rental
market -- if the market is tight, you won't have a lot of leverage.
While rent isn't usually too negotiable, your landlord may agree to limit
annual rent increases and possibly pay for utilities, repairs, taxes and
insurance. You might also be able to negotiate a shorter lease term, perhaps
with one or two options to renew the lease, and the authority to sublease or
assign the space. Finally, landlords are often willing to pay for necessary
improvements to the building before you move in, especially if you're agree
to sign a long-term lease.
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