Introduction to Commercial Leases
Although most entrepreneurs have gone through the residential leasing process, commercial spaces have a host of surprises for new business owners. Learn what to look for from an entrepreneur who had no idea.
Bob & Weave
A Business Owner Bobbed When He Should Have Weaved
In our last post, we shared a story of successful transition. Our friend John went from being laid off from his corporate job to forging his own financial future by acquiring four locations of upscale barbershop franchises. In that story, John was an example of someone who recognized the freedom working for himself could offer, who incurred a lot of risks striving for that possibility, and then came out successful and happy with the future he continues to build for himself. While John has been able to create an increasingly more stable business for himself, that doesn’t mean his story was without roadblocks...
At one point in our lives, we’ve all signed leases. When you’re a resident, a lease works in one way. For commercial spaces, it’s completely different. As John underwent the process of purchasing his first franchise, he had to build an understanding of the commercial real estate market. This was not something he had planned on. He found that commercial leases, unlike residential leases, are all in favor of the landlord. As a tenant, that meant John needed to understand absolutely everything. While a traditional residential lease could be 5-10 pages, he found that a commercial lease could be as long as 150 pages—probably longer for certain spaces. John, like most people, didn’t have the expertise to review that level of complexity, which meant he had to hire a lawyer. What had seemed like a relatively simple task of signing a lease had turned into an unexpected expense.
The unexpected expenses didn’t stop there. John’s first shop was in a small town outside of Boston. Having cashed in his 401k and used a lot of his saving to buy and build out a franchise, he was excited to be moving towards a completed location. Well down the road to getting his store constructed, John’s architect discovered that the town had a “controlled construction affidavit.” Do you have any idea what that means? John didn’t. Basically, it meant that the city required him to hire an independent engineer to determine that the shop was built to the specific blueprint approved by the city. This is in contrast to a city engineer inspecting the building to ensure it is up to code. The difference is slight, but significant, where it required the independent engineer to sign a very specific form after a simple inspection. The cost of that one signature ended up being $2,500.
Still, John's startup woes didn't stop there. His second location was in Boston. Because it was right in the city, a franchisee had to get every permit imaginable - radio, TV, water, you name it. The final inspection was a fire inspection. The Fire Marshall walked around inspecting every corner of the new location. It all looked good until... at the last moment, he looked at a sticker on the barber chairs and said, “These chairs cannot be used in the city of Boston because they do not meet the city of Boston’s flame retardant standards.” The store ended up being completely built and sitting empty for 6 weeks while they were going back and forth with the Fire Marshall... because of the flame retardant level of the chairs.
There are so many different levels of review when you’re building out a commercial space. Knowing the local ordinances, codes, etc. to build out can be incredibly complicated as a small business owner. It’s part of a business owner’s job to fully understand his or her local, regional, state, and even federal regulations to understand where and what the restrictions are. While John’s expenses may have been the same regardless of his knowledge of commercial real estate or a local law, a six-week loss of potential income could have been avoided had he understood all the nuanced regulations that dealt with fire safety.
Starting a business will show you exactly what you don’t know and could end up costing you. Make sure you know about startup costs, locating, and regulations in your city.