Leases

A business lease can be a significant financial commitment, affecting your company’s cash flow, flexibility, and growth potential.

Whether you’re leasing commercial space, equipment, or vehicles, hence it’s essential to understand how to maximize the benefits and minimize the risks associated with leasing.

This article will guide you through the key steps to get the best out of your business leases.

Understand your business needs

Before entering into the lease agreement, it’s crucial to assess your business needs thoroughly. Determine the size, location, and type of space or equipment you require, along with any additional features or services you may need. Consider your growth plans, and evaluate whether the lease terms allow for expansion, contraction, or early termination without excessive penalties.

What Are ASC 842 Leases

The world of lease accounting was recently disrupted when the FASB released its updated accounting guidance, ASC 842. If you’re a public or private business that conforms to US GAAP, hence you’ll have to use this guidance going forward when you account for leases.

So, ASC 842 leases are simply leases that have been accounted for using the newest guidance, ASC 842. If you do your own lease accounting, make sure they’re up to scratch and that you’re posting them to the balance sheet in line with the new guidance. If you use accounting software or an accountant. Make sure it’s up to date or that they know what you’re doing.

Research the market

Research the market

Research the market to get an accurate understanding of leasing rates, terms, and conditions for similar properties or equipment in your area. This information will serve as a negotiation benchmark, ensuring you don’t overpay or accept unfavorable lease terms.

Investigate local market trends and economic factors affecting rental rates and demand, such as new developments, infrastructure projects, or changing zoning regulations.

Negotiate lease terms

Negotiation is a critical step in securing the best possible lease terms for your business. Therefore you can use your market research to negotiate rental rates, security deposits, lease duration, and rent escalation clauses.

Additionally, negotiate other terms that may impact your business. Hence it can work as tenant improvement allowances, maintenance responsibilities, signage rights, and parking availability. Be prepared to compromise and prioritize the most important terms for your specific needs.

Here’s a table with an example of lease terms that you’d potentially negotiate:

Lease TermDescriptionNegotiation Points
Base RentThe tenant’s rights to place signage on the property or building can impact visibility and brand recognition.Negotiate a competitive rate based on market research, and consider proposing a graduated rent structure, where rent increases gradually over time.
Lease DurationA sum of money is provided by the landlord to help cover the cost of customizing or renovating the leased space to meet the tenant’s needs.Aim for a lease term that provides flexibility for your business needs. Consider shorter terms with renewal options or longer terms with favorable early termination clauses.
Rent EscalationA clause that outlines how and when the rent will increase over the lease term, either as a fixed percentage, a specific dollar amount, or based on a financial index.Negotiate a reasonable rate of rent escalation, consider a cap on the percentage increase, and try to delay the first escalation to a later point in the lease.
Security DepositAccess to parking spaces for employees, customers, or equipment, can be an important factor for businesses reliant on vehicle traffic or needing space for equipment storage.Negotiate a lower security deposit amount or consider alternatives, such as a letter of credit or personal guarantee.
Tenant Improvement Allowance (TIA)A refundable deposit is paid by the tenant to the landlord to cover potential damages or unpaid rent.Negotiate a higher TIA to reduce out-of-pocket expenses for improvements. Hence by asking the landlord to complete specific improvements before occupancy.
Maintenance ResponsibilitiesThe division of responsibility for maintaining and repairing the leased space, equipment, or common areas between the tenant and the landlord.Clearly define each party’s maintenance responsibilities and try to limit the tenant’s obligations, especially for costly repairs or replacements.
Signage RightsThe tenant’s rights to place signage on the property or building can impact visibility and brand recognition.Negotiate for prominent and exclusive signage rights, ensuring your business has maximum exposure.
Parking AvailabilityThe tenant’s rights to place signage on the property or building, can impact visibility and brand recognition.Negotiate for a sufficient number of parking spaces, or consider asking for reserved or discounted parking rates if additional

Consult with professionals

Navigating lease agreements can be complex, and enlisting the help of professionals can save you time, money, and potential legal issues. Consider consulting with a commercial real estate broker or attorney who specializes in lease negotiations to guide you through the process and review the lease agreement. Therefore the experts can help identify potential risks, provide advice on favorable terms, and ensure your interests are protected.

Monitor ongoing lease expenses

lease expenses

Once the lease is signed, it’s essential to regularly monitor ongoing lease expenses to ensure you’re getting the best value. Therefore, keep track of rent payments, maintenance costs, utilities, insurance premiums, and any other lease-related expenses. Regularly review these expenses and compare them to market rates, adjusting your budget accordingly.

Maintain a positive relationship with the landlord

Maintaining a positive relationship with your landlord can be advantageous, particularly when it comes to negotiating lease renewals or addressing concerns. Hence start to communicate openly and professionally, promptly address any issues that arise, and fulfill your lease obligations.

A good rapport with your landlord can lead to more favorable lease terms and a more enjoyable leasing experience.

Plan for lease renewals or termination

As your lease term nears its end, evaluate whether renewing or terminating it is in your best interest. Hence it considers the factors such as current market conditions, your business growth plans, and the overall leasing experience. If you decide to renew, start negotiations well in advance, using market research to secure favorable terms. Hence when you choose to terminate, ensure you adhere to the lease termination provisions. And plan for a smooth transition to a new location or alternative arrangements.

Getting the best out of business leases requires careful planning, negotiation, and ongoing management. By understanding your business needs, researching the market, and consulting with professionals. And maintaining a positive relationship with your landlord. Therefore you can maximize the benefits of leasing while minimizing potential risks. Stay proactive and adaptable to secure favorable lease terms that support your business’s growth and success.

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