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Leasing

December 4, 2005

Q - I am going to open a new retail business and I have found a great location on one of the main streets. It is a heavily traveled street and the rent is only $18 per square foot, which is a very reasonable. The monthly rent is $3,000 for the 2,000 square feet I need. The landlord insists I sign a 5-year lease (which is renewable at the end of 5 years) on this property, which comes to $36,000 a year, plus escalators predicated on the consumer price index. Additionally, I would have to pay the common area maintenance (CAM) charges. I know my business will be successful at this location, I can just feel it. This is such a great price for the location. Do you see any reason why I should not sign this lease?

Getting a great location is very important and the price per square foot seems reasonable. However, the 5-year lease scares me a bunch! A new business is fraught with problems and many small businesses fail before they hit their second birthday, no matter how great the idea or business concept looked at the time of startup.

If you do not remain in business for the full five years, the landlord will look to you personally for the $36,000 per year for the rent, regardless of how your business is doing. Just about every landlord is going to demand that the tenant personally guarantee the rent payments, just in case the business folds. Even if you can sublease the property, it is going to be vacant for a while and you must continue to make these payments.

I strongly discourage you from signing a 5-year lease. The maximum I recommend for startups is a one or two year lease and the shorter, the better.

While this might be a great deal (in terms of value), the risk of this fixed payment is just too much for a startup business. Once you have been in business for two years, with a profitable product that the market demands, only then consider a longer lease.

Considering most of the decisions you will have to make about your startup business, it really just comes down to these two: "What is the return?" and "What are the risks?" In this case, the risks greatly outweigh the potential returns. However, I encourage you to go back to the landlord and see if you can negotiate a shorter term lease, even if you have to pay a slightly higher price. If this does not work, I strongly encourage you to find another location with a shorter lease. You can do this!