Commercial real estate leases have a lot more variables than residential leases. Between the ways different businesses use their space and the high percentage of businesses that fail, you have a lot of money to lose if you forget to ask an important question before signing that lease.
The questions you'll want to ask your tenants before signing a lease may vary depending on your property or location, but our list of seven questions to ask a tenant before signing a lease should be a great start.
1. What are all of the services and products you offer?
It's not uncommon for businesses to have a secondary service or product they offer. Some smaller businesses may even have their spouse operating another business in the back.
This can become a big problem if any of these products or services compete with another tenant, especially if there is a clause in their lease that doesn't allow you to lease space to a competing business within the same property. It may even cause conflict if you unknowingly lease space to a competing business.
You should add a clause into the lease that limits tenants' business activities to what you have discussed with them. They would need written permission from you if they wanted to expand their offerings.
2. Do you plan on making any alterations, including paint, carpet, or blinds?
Tenants might not think they need permission for things such as carpet and paint, since it's not changing the layout or structure of the space. However, especially with a shorter-term lease, returning the space to its original condition may be expensive and time-consuming.
Require that they receive written permission for any sort of alterations. You may also want to include a clause in the lease that requires them to return the space to its original condition, at your request, when they leave.
3. How much experience do you have in your industry?
Is the business a startup, or maybe even a crazy business idea they have no experience or knowledge in? If so, you'll want to limit the amount of money you invest into the space to prepare it for them. Some commercial landlords have gotten overly ambitious trying to lease a space and lost a great deal of money when the business quickly failed.
4. Why did you leave your previous location?
If they're an established business that's relocating to your space, you'll want to know why they left their other space. Moving locations can be expensive, and depending on the business, getting customers and clients to come to the new location can be a tough transition. If they're taking on that kind of expense and inconvenience, there's probably a good reason why they left.
It might be as simple as needing a larger space, upgrading to a nicer building, or moving to a nicer part of town. It could also mean that they were removed from their previous lease space due to breaching their lease agreement.
They also may have left because of an issue they had with the landlord or building. That's also important for you to know, so you can avoid causing the same issue and losing a tenant.
5. How well capitalized are you?
One of the most important things for you to know is whether they can afford to stay in business and pay their rent. If all their money is going into the security deposit and first month's rent, will they be able to afford their next rent payment? A lack of capital is one of the most common reasons a business fails.
If you're paying a commission to a real estate agent, paying a lawyer to draft up the lease, or paying to get the space ready for them, you'll be taking a big financial risk by leasing to a business with limited funds.
6. What do your day-to-day operations look like?
What they're doing in the space all day can have an impact on your building and the rest of the tenants. If they have loud sales meetings every morning with the staff shouting in excitement, you could have some other tenants in the building get quite angry. Loud equipment or anything else that can be a noise disturbance can cause a lot of headaches with other tenants complaining, and it may even cost you some other tenants.
If they have any equipment that requires a large amount of electricity, gas, or water, it could be more than your building can handle. If you're leasing out an office space that includes any utilities, include a clause in your lease that charges them for any higher than normal utility usage.
7. How many people do you anticipate having in your space at any given time?
This includes both employees and customers, because both take up parking spaces. If you're already tight on parking, this could be a big problem for the rest of your tenants. This could also cause overflow into the parking lot of an adjacent property, causing issues between you and your neighbor.
If parking is a potential issue, you can add a clause in the lease limiting the number of spaces they can use at any given time. You can also consider reserving specific parking spaces for the employees and customers of each business.
Before you sign the lease
Make sure you're not taking too large of a risk with a new tenant. There's always some level of risk when leasing a commercial space, but you can limit it quite a bit.
Look at the amount of money you're investing and at your best-case and worst-case scenarios. Is the best case worth the amount of money you're investing, considering the level of risk you're taking? How likely do you think it is that it will work out? If the deal is making you more nervous than usual, it may be a sign to walk away.
Committing to a lease is like any other investment. Gather as much information as you can, work the numbers, and assess the level of risk before making your decision.