Most professionals in Austin are all to aware of the challenges in the local commercial real estate market. This does, however, present problems for a business owner who wants to renegotiate a lease, add to or upgrade space or even consider buying a property.

Landlords and owners tend to be less flexible on the terms of contracts in markets like this, including price, length of lease, property maintenance and improvement allowances.

But before taking the plunge to move, change a lease or even buy, there are questions that need answers.

• What are some common mistakes when signing lease contracts?

A common mistake is the tendency to focus mainly on negotiating lease rates, rather than business contract issues that can affect the long-term profitability and day-to-day running of a business. For example, some business owners make a personal or business guarantee of the entire lease amount, which may affect their ability to borrow from vendors or lenders, as it is a long-term liability.

Knowing when to ask for professional representation helps the business owner navigate the technical business issues connected to lease contracts.

• How do I determine the right size and location for my business?

There is no set formula for choosing the right size facility for your business – it will depend on the way you use your space. If it’s solely to house employees, understand how much space they need to effectively do their jobs, and how it needs to be organized. If you will be interacting with clients or customers, know their profiles and anticipate their expectations. Real estate and design professionals can help with additional decisions regarding location and size, using tools such as demographic data.

• How can I structure a flexible lease for a growing business?

Leasing commercial real estate will most likely be one of your most expensive overhead items, and it is important that you build it into your short-term and long-term business plans. In other words, if you plan to double your employees or inventory every year, you must choose space and negotiate a deal that will allow you to do so.

Two specific items should be carefully negotiated in a lease contract for maximum flexibility. First, a cancellation clause allows a tenant to cancel a lease after a specific time period if the landlord cannot provide additional space. Second, its advantageous to gain a first right of option to lease other space in the building, especially adjacent space.

• How do I determine the appropriate length of lease for my business?

Most owners will require a three to five year lease. Shorter leases will reduce the leverage the tenant has to negotiate other terms. Although five years may seem like a long commitment to a small business, certain businesses will actually need 10 years or longer to amortize their investment in improvements.

Again, business owners need to think of how this ongoing expense fits in their business plans. It’s also a good idea for a tenant to gain options to renew in an initial lease, at a fixed option price, giving protection from large price increases at the time of renewal. Without fixed renewal rates the tenant is essentially captive because of the need to amortize improvements.

• How do I make sure my landlord is responsible – and responsive – for repair, maintenance, and upgrade issues?

This is an important part of the initial negotiation, as tenants should seek to limit both their liability and obligation in the lease contract. The tenant needs a mechanism that not only clearly spells out their responsibilities, but also penalizes the landlord if the landlord does not meet obligations within the allotted time.

It’s also crucial that the contract state the landlord is responsible for meeting all federal, state, and local codes, ordinances, and regulations – current and future. Many tenants have been left covering the cost of additional sprinkler systems to meet changing fire codes, for example, because a lease contract did not protect them.

• What terms of commercial leases are most landlords likely to negotiate?

The economic terms of a lease are always up for negotiation, and a tenant should not shy from looking for “deals” especially in the current market environment.

Negotiable items include free rent, improvement allowance, moving expenses, relief from building operation expense escalation and free operating equipment – things such as furniture, phone systems, or computer cabling. There are also literally dozens of non-economic clauses that can be negotiated, based on a company’s needs and priorities.

• What happens if my landlord sells my building or goes bankrupt?

According to Texas law, leases convey if a building is sold to a new owner. If an owner goes bankrupt and the lender forecloses, however, all leases are void and tenants must renegotiate with the new owner – leaving you open to a rate increase.