5 Common Mistakes to Avoid in Your CRE Lease

Commercial Real Estate leasing is a complex process, and even the smallest oversight can turn into a costly mistake for your business. Here are the five most common mistakes to avoid when signing your CRE lease.

Mistake #1: Only Focusing on Price

When it comes to leasing in commercial real estate, a low price tag can often be a powerful attractor. However, it's crucial to remember that a favorable leasing price is just one piece of a larger puzzle. Focusing solely on the cost and ignoring other vital factors can prove detrimental to your business in the long run.

While an attractive lease price may seem like a winning situation initially, it can also be a sign of hidden drawbacks. For instance, a lower cost might be indicative of a property located in a less desirable area. This could mean low foot traffic, poor transportation options, or inadequate parking, all of which can potentially deter customers and impede your business's success.

A favorable price might also come with a lack of necessary amenities. Does the property provide access to other businesses, such as restaurants, shops, gyms, or banks? The presence of varied business types in the area creates a mutually beneficial environment where customers can be drawn to the area by one business, and that visit can turn into visits to the other businesses in the area.

Further, the building's infrastructure should not be overlooked. A cheaper lease could lead to a space with outdated heating and cooling systems, recurrent plumbing issues, or even insufficient Internet connectivity, which can severely impact your business operations.

Finally, the price could reflect the level of competition in the area. A cheaper lease might situate you in a market that's overcrowded, where differentiating your business from similar options and attracting customers become more challenging tasks.

It is crucial to balance any cost considerations with the overall quality of the space, its location, and its suitability for your operations. A low leasing price might be tempting, but remember to examine all aspects of the property and its surroundings to ensure it aligns with your business's needs and long-term goals.

Mistake #2: Only Focusing on the Aesthetics

On the other end of the spectrum, a common mistake that we see is selecting a location that appears perfect on paper, regardless of the costs. While an aesthetically pleasing property in a prime location can dramatically enhance your business's image and appeal, it's essential not to let the allure of aesthetics overshadow your practical needs and financial realities. Allowing yourself to be captivated by a beautiful space and a fantastic location can be a costly mistake if it's coupled with an exorbitant rent.

High rental costs can drain your financial resources and potentially undermine your business model, making it challenging to maintain profitability. The rent rate should be manageable and align with your business's financial capacity. Remember, an impressive facade or a trendy location won't compensate for the lack of a sustainable and profitable business model.

Moreover, the cost of the lease should be weighed against the benefits it brings. A beautiful building might not necessarily equate to a productive environment or a successful business. Additionally, you should take into account the site's operational costs, such as utilities and maintenance, as they will be part of your ongoing expenses.

The ideal property for your business should strike a balance between aesthetics, cost, and practicality. It should meet your specific needs: being located in an accessible area, having a manageable rent rate, and aligning with your business goals to ensure long-term profitability.

While aesthetics are an important aspect, they should not be the deciding factor when leasing a commercial property. Instead, focus on finding a space that fits your budget, meets your operational needs, and aligns with your strategic business objectives. 

Mistake #3: Not Understanding Lease Terms

Lease agreements can often be complex and filled with industry jargon, but they serve as the bedrock of your leasing experience. Failing to understand the terms and conditions detailed in this legal document can lead to serious complications and unexpected expenses. For this reason, it is essential that you thoroughly comprehend and are capable of meeting your lease terms.

There are various types of leases, each carrying its unique implications for what the tenant and landlord are responsible for financially. For instance, gross leases usually include all costs in the rent, whereas net leases pass some or all of the operating costs to the tenant. Modified gross leases strike a balance between the two. Understanding the type of lease you're signing can drastically affect your cost forecasting and budgeting.

In addition to the lease type, it's crucial to fully grasp the elements related specifically to your rent. This includes not only the rate but also when it's due, what counts as a late payment, the penalties associated with late payments, and conditions for potential rate increases. Misunderstanding or overlooking these aspects can lead to financial surprises that could strain your business.

Another important aspect to understand is who holds responsibility for repairs, maintenance, and tenant improvements. You might assume that the landlord will cover these, only to find out they're your responsibility. This miscommunication could lead to substantial unplanned costs.

If the lease agreement seems too complex or contains unclear terms, don't hesitate to engage a real estate attorney. Their expertise can help ensure you fully comprehend the lease terms and are prepared to meet your obligations.

Comprehending your lease agreement is not a step to be rushed or overlooked. Take the time to understand each clause and its implications, and seek professional advice if needed. This will not only save you from potential legal complications but also ensure a smooth and beneficial leasing experience.

Mistake #4: Not Keeping Track of Dates

Commercial real estate leases are binding legal documents that operate within specific timelines, which can significantly impact your lease agreement and its associated costs. Overlooking these dates can lead to a host of problems, such as an automatic termination of the lease or other significant outcomes that may not be in your favor. This kind of oversight can limit your ability to continue operating your business or even lead to a potentially extended period of being locked into a lease that doesn’t fit your needs.

Every date mentioned in your lease agreement is crucial. Some leases have auto-renewal clauses, meaning they will renew automatically if not explicitly terminated by a certain date. If you're not prepared or willing to continue the lease, not being aware of these dates can put you in a challenging position.

Additionally, renegotiating lease terms or terminating the agreement often requires giving several months' notice. If you neglect these timelines, you may miss opportunities to renegotiate or terminate the lease, leading to continued unfavorable conditions.

If you're considering moving to a new location or want to renegotiate your lease terms, it is usually advisable to start this process at least six months before your current lease ends. This timeframe provides sufficient room to search for a new space, negotiate terms, and navigate potential roadblocks.

Keeping track of dates and adhering to timelines in your lease agreement is an essential aspect of effective lease management. It helps avoid unintended auto-renewals, provides opportunities for negotiation, and ensures your leasing experience aligns with your business objectives.

Mistake #5: Losing Sight of Square Footage

A crucial yet often overlooked aspect of commercial real estate leasing is the square footage of the space. As your business evolves over time, so will your spatial needs. In some instances, you may find your space too large or too small for your operational requirements, leading to inefficiencies or unnecessary costs.

Leasing a space that's too big for your current needs can result in wasted resources, as you're paying for unused square footage. On the other hand, if your business expands and your leased space can't accommodate the growth, it could hinder productivity, restrict operations, and create a cramped and uncomfortable environment for your employees as well as your customers.

To avoid these pitfalls, it's important to regularly monitor your space utilization. Being attentive to how your space is used will help you identify when adjustments need to be made.

If your business's growth indicates the need for more space, start planning for expansion as early as possible. It's better to have additional space ready when needed rather than scrambling to accommodate growth after the fact.

Conversely, if you find a significant portion of your space is consistently underutilized, consider downsizing to a smaller location or subleasing a portion of your space if your lease permits. This can help recoup some of your costs and increase your operational efficiency.

Your leased space should serve your business's needs as closely as possible. Regularly evaluating your space utilization and adjusting accordingly will help ensure that your commercial lease remains an asset rather than a liability. Commercial real estate leasing requires a careful balance of many factors, including price, aesthetics, lease terms, and square footage. By avoiding these common mistakes, you'll be better positioned to secure a lease that lays a strong foundation for your business's success.