Jim came in to see me the other day. He was really excited. He was about to open his own comedy driving traffic school. He was going to name it “Fun While Drinking and Driving.”
He even selected a location for the classes. He met with the landlord and agreed on a 5-year term at a rental price he thought was a great rate.
He told me all this after he sat down. Then he asked, “I don’t really need to talk to you, do I? After all, I figured out where I’m going, how much I’m paying and for how long. What else is there to renting something?”
I asked him for a few details – things like the square footage and how much he was paying per square foot. I also asked if there were going to be any CAM charges.
He gave me a blank stare. “What are those?” he asked.
CAM. It stands for common area maintenance. Are you going to be responsible for the cost of taking care of areas beyond just your shop? If so, how much? And how is that calculated?
Jim had no idea. “How much are paying a month in rent?” I asked. “Four thousand a month for five years,” he replied.
“So, by signing this lease, you’re obligating yourself to pay almost $250,000. And you’re balking at spending $5,000 to make sure you understand it?” I asked.
“Let me ask you questions in just eight areas. If you can answer them to your satisfaction and you like the answers, then don’t hire me to look at the lease.”
“OK,” he said, confident he knew this lease backward and forward.
1) Do you have any renewal periods? If so, how many and for how long? What’s the renewal rate? Is it negotiable or predetermined? Do you understand how to exercise any rights to renew?
2) Can the landlord move you to someplace else if he decides to do so? Do you have any rights to prevent this?
3) Did you get any tenant improvement (TI) allowance? That is, the landlord agrees to reimburse you for some of the costs of getting the premises ready so that you can move in.
4) How long do you have to finish the TI work? Have you checked with a general contractor to see if the length of time is feasible? Have you had the place inspected? Do you know if it even meets code for what you want to do?
5) When do you have to start paying rent? Is it before your TI work is done? What happens if you can’t get approval from the city to do the work you want? Do you still owe rent?
6) Do you have an exclusivity clause in the lease? In other words, can other traffic schools open in the same center? If you do have an exclusivity clause, how expansive is it? Does it prohibit all traffic schools, or only ones like yours?
7) Did you sign a personal guarantee for the lease? If so, can you limit it at all?
8) The CAM questions I asked before. Are there any? How much are you responsible for? How is that calculated?
In my next few columns I’ll go over why each of these is so crucial. ©