Why is it important to understand the types of rentals?

The buyer Matt D. (his real name has been changed to preserve the confidentiality of the client) decided to open a restaurant. First, he rented an appropriate venue room for this.

Opening this kind of establishment is not a quick process. It was necessary to make repairs, select and buy equipment, obtain a work permit, and hire staff. All of this took about six months, during which Matt regularly paid $22,000 a month for the rent of the premises.

He was surprised and indignant when he received a bill from the landlord for $60,000. This happened due to a process called assessment wherein the building`s owner carries out the work at his discretion, chooses what to do outside his building (for example, changes the asphalt in the parking lot), and then informs the tenants that they must each pay a share of the total cost.

Matt could not help but feel perplexed and wonder how he could have signed an open-ended lease agreement, where the price can be changed upwards by any amount and at any time. Read about it in our article "Buy a restaurant and move to the USA".

The problem with buyers like Matt is that they have no idea what types of rentals are available.

What aspects should be studied in order not to get into a similar situation?

  1. First, you need to understand the rental basics. There is Gross rent, where the tenant pays the rent and nothing else. NNN-net is the opposite of the previous type. In the case of such a lease, the tenant pays the base rent and all costs associated with the building (property tax, insurance, maintenance of the adjacent territory, and so on). In every third case, this is a surprise for people, and in order not to be among these cases, it is better to get a clear picture in advance about all payments related to rent.

For example, common area maintenance is the cost your company pays for areas in a commercial building that are common to all tenants. There is also such a thing as assessment, and their appraisal rates are calculated based on the estimated annual rental value of your property.

  1. Personal guarantee. It is necessary to understand the principles of contract execution. The person who finds out that the rent is more profitable tries to get rid of the deal. However, in 98% of cases, contracts are drawn up for several years and require personal guarantees from the tenant. Even if you move out before the expiration date, you still have to pay the rent. Moreover, you cannot take your business-use property out of the premises.
  2. Terms of termination. This is rarely the case, but sometimes contracts contain unilateral termination clauses. The landlord can terminate the contract and kick you out at any time, but you cannot terminate the contract and leave.
  3. Duration of the contract. If a business such as a restaurant, for example, is dependent on the location (the revenue is high precisely because of it), you need to understand how sustainable this business is. Will you be kicked out the door? You do not want to get into a situation where the buyer, being absent for a certain time from the country, skips the stage of transferring the rights to the lease. Later, having come to the tenant, he may simply refuse to renew the contract.

In order not to lose money, remember:

Договор аренды на что обращать внимание 3

  • You need to understand the basics of the lease to protect yourself in the future.
  • Most often, contracts are drawn up in such a way that the landlord can kick you out at any time, but you, on the other hand, cannot terminate the deal. You should carefully read the terms of the contract. Read more here.
  • You need to have a written confirmation from the landlord that he will renew the lease after the deal is concluded to buy you a business.

Takeaway: transfer of rental rights is a key limitation of your offer. You must say that you will not close the deal until you get a written agreement from the landlord that he will renew the lease. 

Also, don't forget that good brokers like INVMAG walk you through the whole process of buying a business and can give you advice in various areas, in particular on renting a space. Read more about the role of a business broker in buying a business here.

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