Considerations When Buying a Business That Rents Commercial Space

Some people prefer to buy an existing business rather than start a brand new company from scratch. In most cases the business you are buying has leased either office, retail, or warehouse space. Because of that you are not only negotiating to buy the business you also have to negotiate the remaining lease. One of the biggest mistakes people make when buying an existing business is not reviewing the current lease situation.

Commercial leases are going to be one of your biggest operating expense line items. If you make mistakes it could cost you dearly later on and ruin the success of your new endeavor. If you don’t know anything about leases then it would make sense for you to hire a local commercial real estate company.

To help guide you through the process below are a few things to review regarding the existing lease situation before signing a contract to buy the business.  

• Get a copy of the original lease and all of the amendments, renewals, assignments, etc.
• Make sure you understand the basic terms of the lease obligation and what you will be responsible for
• How much lease term is remaining?
• What is the lease expiration date?
• What are the base rents due each year for the remaining lease term
• What are the current estimated NNN?
• What other expense lease obligations are there (e.g. electric, hvac maintenance, general liability and property insurance, etc..)?
• How much has the electric been each month for the last 12 months?
• Who handles the repair and maintenance of the HVAC units?
• What is the sublease / assignment process?
• What financials does the landlord need to see before approving the assignment?
• How much is the security deposit?
• Will a personal guarantee be required to secure the lease?
• What Improvements and FFE that would convey with the lease?
• What terms of the lease will and will not transfer to assignee (eg assignment and sublease option, renewal option, etc).
• Is there a renewal option?

Those are just a few questions that you need answers to regarding the current tenant’s lease situation. If you are buying a business you need to know this stuff. If you don’t you risk the future success of the business.