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Orange County Legal Blog

Planning to renew your commercial lease? Start early

After being in a rental space for some time, an Orange County tenant may be comfortable and not want to move. If this is the case, a review of the original lease would be in order some months prior to its end. Starting to think about renewing a commercial lease sooner rather than later could save a tenant from accepting unfavorable provisions.

If the current tenant pays on time and does not cause any problems for the landlord, he or she probably does not want to lose such a good tenant. Even conditions that a commercial tenant agreed to in the original lease could be up for negotiation at renewal time. The sooner a business begins talking to the property owner about renegotiating and renewing the lease, the better the chances are that a landlord will compromise on terms.

Common mistakes new companies make with commercial leases

If you've found the perfect location for a new business, it can be tempting to move fast to secure the spot and get things going.

But many business owners commit several mistakes before they even open their doors, and they’re all tied to their commercial lease. Here are a few major mistakes to avoid when signing a commercial lease:

Percentage leases are popular in the retail industry

One of the primary decisions that a new California company needs to make is where it will do business. In the retail industry, this often involves setting up shop in a shopping center or mall. When it comes to leases in this world, property owners often want percentage leases from their tenants.

As the name indicates, the property owner wants a percentage of a business's gross sales on top of the base rental payment. Small retail business owners should not assume that they will not be subject to such a lease because they do not bring in the volume of sales of larger stores, such as those referred to as "anchor" stores in the shopping center or mall. A landlord may still want a percentage from its smaller retailers as well.

Keeping track of trends helps developers choose projects

What projects could still provide a healthy profit margin here in California? In 2018, a study was done to make that determination. Keeping track of trends by reviewing these types of studies could help developers choose projects that could provide the investment and profits they seek.

For instance, brick and mortar retail establishments may not be the best option right now. Re-purposing them might allow for their continued success, but starting from scratch may not provide the best opportunities. The same could be said for commercial office buildings. Rental rates do not appear to be increasing anytime soon, but construction costs probably will. This limits the amount of return a developer could receive on this type of project.

Insurance is an important part of being a landlord

Orange County property owners choose certain locations in order to maximize their investments. After making sure that a particular property is attractive to potential tenants, a future landlord needs to protect it. This means obtaining the proper insurance coverage.

There are two primary facets to insuring a rental property. The first is to make sure that any injuries or losses that occur on the property are covered through liability insurance. The second is to make sure that the property is covered for any losses associated with the physical property. 

Developers consider the costs of 'going green' in construction

Every California resident can do his or her part in protecting the environment. For developers, this could include "going green" when it comes to construction. However, they would more than likely consider the financial benefits of doing so first since some environmentally friendly construction options can be costly.

However, it is possible to save money and protect the environment when embarking on a new development. Many construction materials are recycled these days such as steel, drywall and glass. These materials often present a substantial expense during construction, but using recycled materials could actually save money.

Attracting a commercial tenant may require some concessions

Property owners and developers here in Orange County could find themselves hunting for renters at times. During these times, landlords could need to "sweeten the pot" in order to keep their properties full. This often means making concessions to a prospective commercial tenant.

Property owners can offer some common incentives to draw in a tenant. Providing a higher allowance for improvements could be enough to convince someone to sign a lease. Increasing this allowance anywhere from $20 to $50 per square foot could provide an attractive incentive.

Key differences between a residential and a commercial tenant

Like many other states, California views matters differently when it comes to renting property to an individual as opposed to a business. Individuals are given certain protections that a commercial tenant would not receive. Before renting a commercial property, it would be a good idea to understand some of the differences, especially if a new venture is just entering into this rental market.

Rent control does not exist in the commercial rental market. Having rent capped at a certain amount could give a business an unfair advantage over other, similar businesses. Even so, a property owner may agree to keep the rent at or below a certain amount when the tenant is a public agency. California also specifically prohibits property owners from extorting under-the-table payments or bribes in exchange for a rental property.

Including leasehold improvements in a commercial lease

When Orange County business owners look for a space in which to do business, they may not find the perfect setup. For this reason, many prospective tenants like to include leasehold improvements as part of a commercial lease. These improvements can quickly get out of control financially, and careful consideration should be given to them.

Many people become confused regarding the terminology for improvements to rental spaces. Orange County entrepreneurs who are new to the commercial rental market could hear about leasehold improvements, build-outs and tenant improvements. While it may seem as though they are different, they generally are not. It simply depends on who you are and what terminology is used.

Understanding debt vs. equity financing as a business owner

As a small business owner, you understand the financial challenges that come with owning a business. Opening a business is a risky venture, but with careful financial management it can also be very lucrative. One of the most important aspects of fiscal planning for business owners is debt versus equity financing. Many people conflate the two, but they are types of financing with their own advantages and drawbacks.