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Whether starting a new business, or expanding operational facilities, finding the perfect location is probably one of the most arduous tasks for business owners. While the mantra "location, location, location" is a principal foundation in branding and marketing a business, remember that the lease terms for some prime locations may cost a business more than just a higher rental payment. This article is intended to convey some key considerations in finding and negotiating lease terms for commercial space.

On the West Side, rates currently average anywhere between $1.67 and $4.00 per square foot. While rates vary from area to area, there are some fundamental extra charges that business owners must be wary of in order to calculate the impact of the location on its profit margins. For example, retail spaces sometimes require tenants to pay a percentage of retail sales. Office leases, however, usually require tenants to pay common area maintenance charges ("CAM") (maintenance, utilities and taxes) and HVAC charges (heating, ventilation and air conditioning). All these charges are in addition to the monthly rent.

Additionally, if the business operates as a legal entity, landlords will tend to require a personal guarantee from the principals, or even secure a letter of credit to guarantee the tenant’s lease obligations. Furthermore, a business may also have to incur significant start up costs for phone systems, internet access, and tenant improvements ("TI"). Finally, parking facilities for employees and customers are normally extra charges and are probably one of the most overlooked expenses in calculating monthly expenditures.

Fortunately, the current market landscape in Los Angeles gives tenants more leverage than in the past, due to higher supply. With the dot.com crash in 2001, a great percentage of office and commercial space remain vacant. Although the most prime locations are likely filled to capacity, smaller businesses may tend to find better deals in less popular areas or the abandoned warehouse areas formally occupied by the dotcoms. Business owners may negotiate for TI allowances to defray start-up costs, rent abatement for permanent tenant improvements, free parking, and waivers of certain standard practices such as CAM and HVAC charges. Additionally, tenants should be wary of “AS IS” clauses in commercial leases, and can negotiate with landlords that they will need to repair and maintain any latent defects in the premises that the initial visual inspection fails to reveal. Tenants can incur significant expenses and down time in their operations repairing hidden plumbing problems or making repairs to comply with health, safety and fire codes.

As depicting every potential issue would be impossible to accomplish in one article and each circumstance may be vastly different, it is strongly recommended that businesses consult a competent legal professional prior to signing a commercial lease. Otherwise, the unwary or inexperienced business owner may put personal attachment of securing the particular location without weighing the practical economic implications of the decision.

David Michail is a business, corporate, entertainment and commercial transactions attorney for the Law Offices of David F. Michail, a Professional Corporation. This article is intended for general informational purposes only, and shall not be construed as rendering legal advice to any particular party. For further information on this issue, or to schedule Mr. Michail for public speaking engagements related to this or other business or entertainment law topics, please call 310-559-4333 or email Mr. Michail at david.michail@michaillaw.com.