What is Leasing in Entrepreneurship?
If you’re an entrepreneur looking to start or grow your business in Australia, one important decision you’ll need to make is whether to buy or lease your commercial space. Leasing provides an attractive option for many small business owners, offering flexibility and potential cost savings versus purchasing property. In this blog, we’ll explore the ins and outs of commercial leasing to help you determine if it’s the right choice for your company.
The Basics of Commercial Leases
A commercial lease is a legally binding contract between a landlord and tenant for the rental of business property. The landlord agrees to provide space, while the tenant agrees to pay rent and follow the terms and conditions set out in the lease. Key clauses in a standard commercial lease include:
• Rent amount and terms of payment
• Length of the lease
• Permitted business activities on the premises
• Maintenance responsibilities of landlord and tenant
• Options for lease renewal and termination
• Commercial leases typically run from 3-5 years on average, though terms can range from 1-10+ years. Longer leases often come with more favourable terms for tenants but less flexibility. Month-to-month leases are also an option, offering maximum flexibility but minimal security.
When negotiating your lease, it’s important to understand each clause thoroughly and try to negotiate terms that meet your unique business needs. An experienced commercial real estate agent or solicitor can help ensure you get a fair lease tailored to your situation.
Types of Commercial Leases
There are a few main types of commercial leases to be aware of:
• Gross lease – Tenant pays a flat rental amount and landlord pays property expenses
Net lease – Tenant pays base rent plus proportional share of expenses
• Percentage lease – Rent is based on a percentage of tenant’s monthly or annual revenue
Triple net lease – Tenant pays all property expenses including taxes, maintenance, insurance
Gross leases tend to have higher base rents but lower overall costs for tenants. Net and triple net leases have lower base rents since some costs are passed through to tenants, but tenants take on more financial risk. Percentage leases link rent directly to sales revenue, which benefits landlords when business is good but can be risky for tenants if sales decline.
Why Lease Commercial Space?
Leasing offers many benefits that make it an attractive option for small and growing businesses:
Lower Upfront Costs
The most obvious advantage of leasing is that it requires little to no upfront capital investment in real estate. Tenants pay a monthly rent rather than a large down payment, keeping more working capital free for other business needs. This gives new ventures flexibility to test concepts before committing to a long-term property purchase.
Adaptability to Changing Needs
Leases allow for more flexibility to move locations or resize space as your business evolves. Purchasing commercial real estate can lock you into one location for the long haul. With a lease, it’s easier to relocate to a larger space as you grow or downsize during tough times. Shorter lease terms also allow testing new markets.
Offloading Maintenance Responsibilities
Depending on the lease terms, many of the responsibilities and expenses for taxes, insurance, maintenance, and repairs fall to the landlord. This allows tenants to focus their capital on core business operations rather than property management. Of course, these costs may be passed back to tenants in higher rents for net or triple net leases.
Access to More Locations and Markets
Leasing opens up many more options on where you can locate your business, without the need for large capital reserves. You can take advantage of cheaper rental markets or set up locations in multiple regions to access broader customer bases. If one market underperforms, it may be easier to exit a leased space versus selling owned property.
Risk Mitigation
Leasing reduces the financial risk exposure if your business struggles or fails. With purchased property, you take on mortgage liabilities and your equity is tied up in real estate. If the business fails, you still owe the balance. Leasing limits this risk, and remaining lease obligations can be negotiated.
Drawbacks to Consider
While leasing has many benefits, there are also some potential drawbacks to factor into your decision:
Less Equity and Appreciation
Leasing forgoes the equity buildup and property appreciation you would gain by owning your commercial space. Your lease payments help build equity for the landlord rather than your business over time.
Less Control
Leasing means you must adhere to the landlord’s rules and terms for alterations, signage, insurance requirements, and other property matters. You have less control versus owning the property outright.
Risk of Rising Rents
Once your initial lease term expires, the landlord may raise rents substantially on a lease renewal. This reduces cost predictability and you may need to incur moving expenses if you choose not to renew.
Costs Add Up Over Time
If you lease long term or renew leases consistently, your cumulative rents can eventually exceed the cost of purchasing property. At some point, ownership often becomes more cost effective.
How to Choose the Right Lease
If leasing makes sense for your current business situation, here are some tips for finding the ideal property and negotiating a favorable lease:
• Clearly define your space requirements – square footage, layout, amenities, parking, etc.
• Thoroughly research market rents and terms so you negotiate fair pricing
• Work with a knowledgeable agent/broker to access the best spaces
• Inspect potential properties carefully and factor in costs of any needed renovations
• Try to secure favorable terms like rent abatements, build-out allowances, options to renew
• Negotiate who pays for taxes, insurance, CAM fees, and maintenance
• Avoid over-committing on space you don’t yet need
• Have an experienced solicitor review the lease before signing
• Understand termination clauses if you need to exit early
The right commercial lease can provide the ideal foundation for your business to thrive. Weigh the pros and cons, work with professionals, and negotiate win-win terms for both you and your landlord. If you need assistance finding the perfect leased space for your growing venture, the team at Create Real Estate would be happy to help – just get in touch!