Beware of Hidden Costs in Commercial Real Estate Transactions

Whether you’re looking to lease or buy commercial real estate for your business or as an investment, it’s critical to be aware of all the costs you’ll be undertaking before signing that agreement. While expenses like monthly mortgage, insurance payments, or utilities may be obvious, take into account the following not-so-well-known costs:

Costs To Watch For When Leasing Commercial Real Estate

Type Of Lease

Not all lease agreements are created equally and they often vary according to sector: retail, industrial and commercial. For example, your landlord may propose a lease that includes a flat fee for all utilities, repairs, and other costs. Another option may include a base fee plus a percentage of your sales. Make sure you’re aware of what kind of lease you’re signing, what’s included, and what extras you’ll need to pay throughout the agreement.

Base Rent Increases

Often, the base rent you agree on is only negotiated for the first year of your lease. After that, an escalation clause will allow the landlord to raise the rent by a certain percentage each year (usually 3-4%) to allow for maintenance costs and changes in the market. Be sure you understand when and by how much you can expect rent increases.

Insurance

Landlords are required to carry insurance for liability of common areas and protection of the commercial building itself. However, they also have the right to require tenants to carry insurance that protects them against claims that might arise from business operations as well as contents and improvements coverage that protects the landlord’s investment in the property itself.

Costs To Watch For When Buying Commercial Real Estate

Closing Costs

Closing costs include legal fees, land transfer taxes, your commercial real estate agent’s commission, and sales tax. Make sure to include them in your budget along with your down payment and other upfront costs.

Renovations and Repairs

Just like when you purchase a home, you’ll likely want to make some improvements to the space. Make sure to consider all possible renovation costs before completing on your sale – including the roof, mechanical and HVAC, interior design and painting, landscaping, signage and windows, and even the parking lot. Depending on your industry and business operations, you may also need to make renovations and repairs that reflect relevant regulations.

Downtime

It’s easy to underestimate or overlook the amount of downtime your business will have during the renovation of your new property or the move itself. Make sure to plan accordingly, and account for the costs of any interruption to your business operations.