Lease Length

When our three year lease is up for renewal, we might have the option of renewing it for longer. When we bought the business, the landlord (who is wonderful) offered a seven year lease, but we dialed it back to three. I'm pondering the pros and cons of doing either, and it mostly hinges on what would happen in the unhappy event we'd have to close shop, or if the building sold. We're not able to buy the building, which owns ours and two other businesses, so that's out of the question. Really. But if we have the chance to get a longer lease, is that good?

It seems like it would offer the assurance of knowing we'd have the space, but what does happen when a business has to close? Are they stuck paying for whatever years they couldn't be there? If you're rolling your eyes right now, that's fine, but maybe someone else wonders this same thing, so I'll be the brave one who asks it. We plan to frame until we're little wrinkled-up old people, but I'm trying to think of the possibilities.

 

How desirable is your space? Are there vacancies in your building or on your street? That answer will tell how easy it would be to find another tenant and mitigate your risk.

If you crash and burn you could be sued for tent through the like of the lease. Don't count on your landlords lawyer or accountant being a nice guy.

There are a hundred ways a small mom and pop shop can crash and burn. 30 years in retail and seen most of them.

In my experience three years doesn't sound too bad.

Doug

 

All of this is negotiable. I have had a lease with a 1 year personal guarantee, six month personal guarantee and no personal guarantee. Some leases require payment of rent until the end of the term, even if the business closes. There is nothing standard when it comes to leases and everything is negotiable.

If they require a full guarantee, I would probably go with two three- or four- year terms rather than one for seven.

 

Shayla,
You'd have to do a little math (ugh) and a little fortune telling.......
1: Is the area you are currently in a growing area or stagnant, or worse in decline (based on basic demographics of the what typical retail framing customer is), if so then staying where you are is probably the least expensive option for you.
2: Typically signing a longer lease returns a lower or slower increase to the cost of square footage.
3: Moving can be much more costly to a business than most think - usually involves more time than you think, and carrying two lease payments for a month.
4: Is the landlord willing to give you an incentive to stay for 3 more years, if so what would it be for 5 years?
5: In many cases if the building sells - the lease is valid, unless you the tenant agree to a change.

I signed my lease for 7 years. No regrets yet.......

I like your "we not able to buy the building" statement - I have to wonder how many folks that were able to buy upscale commercial real estate would bother to open a frame shop.......I've had "artists & photographers" say that lease rates are too high in many areas of growth in Texas.
The simple fact is that no one is going to drive an hour or more to the middle of nowhere for custom framing-it is a matter of convenience, and the American framing customer is all about convenience.

 

I signed a one year lease when I moved into my shop 10 years ago. The lease expired and the landlord never renewed it. Nor has he raised the rent in 10 years.

My shop is somewhat undesirable. To others, not to me. I'm buried in bowels of an old manufacturing building and have no outside entrance. I don't receive mail or packages here; all at home. On the rare occasion that someone sends me something here, the friendly folk at the carpet store at the front of the building have to lead them back to me. When I get freight deliveries, I call the carrier to make sure the driver calls me from the loading dock. He'll never find me otherwise.

I don't want those pesky physical customers finding me. I show up in Google and Google Maps but luckily no one has figured out how to find me. 2500 square feet for a pittance. I love it.

 

There are exceptions to every rule.

 

Are you sure? A fully occupied building (with a good record of rent payments and 1 year+ leases) is a very attractive option for lenders. If you can afford your lease, and all units are filled, now is the time to make some dough! In 15-20 years, if you're ready to retire (I know, it would be Early Retirement), in addition to the possibility of selling the business, you have a sure asset in the property - either sell it so you can buy your retirement home in Hawai'i mortgage-free, or keep renting it out and rake in the cash monthly.

 

Positive.

 

What are the terms on the lease? Will landlord lock in some rates if you go over 3 years of lease? I agree that 7 sounds like a long time, but if you are planning to stay and the rates are good long term, I would seriously consider it.
We are glad we bought our building last year. We didn't have a lease in the previous place, tenants at will. Before that one, we signed 3 year leases but no longer as there wasn't a real advantage to go longer.

 

If the price is right and you like your landlord and you have a history I cannot see a problem. Remember, you can write anything into a lease contract and as long as you and the landlord agrees there should be no problem. I would cover things like breaking the lease due to illness or a complete downswing in business and a buyout amount if you break the lease. Cover the payment amount and how much it can increase monthly, annually, and for the term. In Minnesota the law states that if a property is sold that the purchaser has to honor the pre-existing lease - check out your laws there. So IMHO, if you protect yourself a longer lease is an advantage to you. just saying Joe B

 

I always get a lease with breakouts. My lease is 3 yrs with 1 yr breakouts, next year I will have to renew I will do the same, there was no incentive to go any longer. In the UK if you go for a longer lease there is stamp duty to pay I think on anything over 6 yrs in anycase.

With regards to getting out of your lease if you go belly up, well that al depends on how your company is structured, and what guarantee's you give and what your landlord is like. If the think you are an easy target they will go after you. But must leases are weighted in favour of the landlord unless you payed a load of money to have a solicitor to negotiate on your behalf.



Buying isn't always the best option either. when you see thousands of pounds/dollars going out of your account you may think that you are wasting money. But buying a building ties you to that building for the length of the mortgage, or if you do decided to sell and move the process is a lot slower and expensive than just moving when a lease is up. My family had a business for 50+ years in a buliding we owned. By the 1980's we were at the wrong end of town prices had dropped and when my dad finally closed and sold the building he was lucky to come out with his shirt still on his back, he certainly didn't have the value of the building to retire on. However if we had been able to move the business may have been able to expand and grow and perhaps make us of more commercial premises than high street, which in the long term would have been beneficial. But we were stuck with a building which was at the wrong end of town for retail and not an easy building to operate for our wholesale side of the business.

My advice would be to keep it short and give yourself the opportunity to expand whilst your business is growing.

 

My landlord has a bank loan on this plaza I am located in and the bank requires her to get a written renewal notice according to her leases. We are required as tenants to have a lease signed with years intended to stay. I always do three years at a time.

Lori

 

There is some good advice in the posts so far. In general, unless there is a major advantage in terms of rent amount, I would go for the shorter initial term, with renewal options attached. This gives you some flexibility, and if you did have to stop you wouldn't be on the hook for a long term commitment. As David W. suggested, if the area where you are located is stable/growing as opposed to transitional/decaying, and if the building were available for sale, you might be surprised that you could afford to buy in today's interest rate climate. My late uncle, who was my accountant, advised me to buy a building. I did so in 1996, and had it paid off in 10 years (at interest rates 2 to 3 times what they are today). Equity is your friend.
Rick

 

Interest rates are stupid-low right now. I just (well, actually, closing tomorrow) got a mortgage for 15 years at 3.00% fixed. Since that is below the average rate of inflation over the last 100 years or so (and the last 10 years have been below that average, which suggests it's likely to be higher in the near future).

IOW, rather than keep my money tied up, I can make total payments equal to or less than if I had just paid the price, over time. True, that means I pay more now, and less later, but that's fine with me. I can "afford" it now, and by the time I get to the last payment it will feel like peanuts. Overall it's like "free money" to me.

I don't know what the interest rate was (doing some reverse calculation, probably around 8%), but my parents built a house in 1969 - and got your typical 30-year mortgage - when I was 5 years old. By the time I was in my mid-late teens and was considered "able to understand family finances" I found that their monthly payment was $8x.xx/mo. Even at just 10 +/- years later, that amount seemed laughable. I felt like I could pay it working a no-skills teenage job.

Our first house, that we bought in 1987, had a 30-year mortgage at 8.xx% and the payment was right around $250. It would have been paid off next year if we'd kept it and paid the scheduled payments. Today, $250 would be a cheap car payment. You probably couldn't rent a room anywhere other than Bupkis, AK for that.

 

Rick and david that is an interesting perspective on it, perhaps I just had a bad experience with our situation and the UK commercial property market.

 

Two things that can help reduce the anxiety of a long lease:

1. A "Good Guy Clause" that lets the tenant off the hook if your business fails.
2. Option years -- this is my preferred method. Gives you control and security.

 

Once I hit age 70 all of my leases have had a 60 day retirement clause.

 

Well, there are no guarantees in RE. And no doubt there have been many that ended up in your situation. But as a risk, RE is generally pretty low unless you do something outright stupid.

 

I was in the same location for 27 years on a hand shake....remember the old days when peoples word meant something. I decided it was time to move on for many reasons. I had my eye on a strip mall 5 minutes to where I live for a number of years. I bit the bullet and inquired. They were not signing any new tenants for terms less than 10 years. Needless to say this scared the .... out of me. Then I thought about it, I've been in business for 27 years already and I hope to be in business at least 15 more, so why not. 10 year lease with a 5 year option. My hope is to one day sell it to an employee, once I have employees that is.

 

Just a cautionary tale... This shop has been in the same location for 20years, long ago went month to month. Without notice the building was sold. New owner asked for a 500% rent increase. We will be closing our doors forever on January 10th. At the very least, ask that your owner inform you of any intentions to sell.

 

Sorry to hear Tracey. My building was sold (along with the rest of the companies portfolio) The new company can't put up rents until the we negotiate a new lease which is due next year. Word is they are looking for 20% which is way above inflation. The oonly good news is that my building is now exempt from business rates as of next april so what i gain in that I am likely to lose in rent rise.

Having a gentlemans agreement does have its benifits for both parties but can come and bite you in the bum, when you least expect it. A lease is there to protect you. And with good negotiating you should be able o limit your liabilities should you have to break out early.

 

That's sad news, Tracey.

A few thoughts -

• I can't see any good reason for a business to be on month-to-month. While I can understand hesitation to lock in for 5 or more years, as a business owner it would be unusual to have the foresight and commitment for the next 12 months.
• If the rent is going up 5 times either they aren't going to be able to actually rent it, or if that's the going rate the current tenant is (and has been likely for some time) getting a steal.
• If a lease is in place, any new owner is required to continue the lease to term. Of course, that's what happened in this case, it's just that it was a one month term.

There are probably a lot of businesses in similar situations who have not yet had the hammer drop. This can be a good lesson for them

 

David

The reason we evolved into month to month was that the previous owner was... lazy. The building was part of a trust and when he took over he did nothing. He was asked for and repeatedly promised a new lease but never followed through. As for the rent, he found the one company that is willing to pay this amount, they are relocating their existing operation to this area to be close to an ailing family member. We were paying below market but that is because there are issues (oversized building in low traffic, residential neighborhood) that would make it impossible for any retail shop to survive this location at market. We have spoken with the incoming people and even they acknowledge the rent is higher than it should be but this is the only location in the area that will accommodate them in terms of size. Otherwise, others that looked at the building when it was put up for lease balked at the price.

 

Shayla...you've been around this business long enough to have a feel for what you're doing. If business is good and feel confident in your customer base, then what's the worry. My experience is time flies so fast. I am 7 years into my current 10 year lease and it seems just like yesterday that I signed. It really depends on your situation. Some folks here lease on a handshake, but I have always needed the security of a longer lease. It locks in our rent and location for a longer period of time.

 

Thanks for your helpful note, hangups. I've been in framing for almost 25 years, so do know quite a bit. But we've only owned our shop for close to three of those years, and my dear husband is the more business-minded of us. We do have other resources, and he knows a lot from his years in the corporate world and on a planning commission, but we truly appreciate the help of folks on the Grumble. There's a wealth of experience here, including yours, and we listen with learning ears. lol....that sounded like something a kindergarten class would be asked to do, but I often feel like I'm in kindergarten as a shop owner, so maybe it's not far off.

This thread came back up at a meaningful time for me. An artist friend, who has rented a small house for many years, just learned the her house was sold to a real estate agent who plans to sell it as a VRBO. Our town has quite a few, already, and it's a shame when people who've lived here for years are shoved out to make way for tourists. Just before Christmas, she got a one month eviction notice, and this morning, the agent plans to bring prospective clients through. Just goes to highlight the value of having a proper lease.