Guide to decide whether to rent or buy premises for a business, tips for signing the rental agreement, and guidelines for renting premises in a shopping center.
Buying premises for a business (commercial premises) has the advantage of being able to count on a tangible asset that we could take as a long-term investment; but the disadvantage of having to make a high initial investment.
While renting a premises has the advantage of considerably reducing the initial investment, and minimizing the risk; but the disadvantage of having to permanently pay a high amount as rent for an asset that will never be ours.
Buying a premises would seem to be the best option, but, unless we have enough capital or financing capacity to buy one, renting is a good alternative.
In this article we help you decide whether to rent or buy a premises for your business, we offer you some tips that you should take before signing the rental contract for a premises, and we give you some guidelines for renting a premises in a shopping center.
In this article you will find:
If you are looking for a guide to find a place that you can rent for your business, you can visit our article: How to choose the location of a business place .
Rent or buy a premises?
The decision to rent or buy a place for a business depends on several factors, but mainly on the capital or the financing capacity.
Buying a premises allows us to possess a tangible asset that we could take as a long-term investment, being able to sell it at any time (for example, in case the business does not prosper), as well as having greater control over the premises (for example , to be able to do all the renovations we want); but it has the disadvantage of requiring a high initial investment.
While renting a premises allows us to considerably reduce the initial investment and, in case the business fails, also to reduce losses (it allows us to minimize investment and risk); But it has the disadvantage of having to constantly and permanently pay a high amount as rent, in addition to the possibility of having to answer for the entire period of the rental contract in case we decide to close the business earlier.
If, for example, the premises are rented for three years, and the business fails in the first, we will be obliged to pay the remaining months, get someone else to sublet the premises, or convince the owner to allow us to terminate the contract rental (although we could avoid this at the time of writing the contract, where we must ensure that the terms or clauses are favorable, not only for the owner of the premises, but also for us).
In the event that we do not have enough capital to buy a premises or we do not want to invest our capital in it, to decide whether to buy a premises through financing or rent it, we must calculate the total investment of the business, both in the scenario in where the premises are bought as well as the one where it is only rented, then make a projection of the future income and expenses of the business, and then, based on this, analyze whether we would be able to pay the debt incurred monthly as a consequence of the purchase of the premises, or if we would only be able to pay the rents.
If we choose to apply for a loan to buy a store, unless we have a good line of credit, the bank usually asks us to pay at least 25% of the total amount required; however, the monthly payment of a rental is usually one of the highest costs in a business, so the ideal would be to buy the premises.
However, if we do not have enough capital to buy a premises or we are not in the capacity to obtain the necessary financing for it, renting it appears as a good alternative, since in addition to the advantages I have mentioned, in this case we would only have to worry about obtaining the capital or the necessary financing to remodel and equip it.
The usual thing in the case of a single entrepreneur or a small business is that buying a premises is out of their reach.
Tips for signing a local rental contract
A rental or lease of premises is a contract that a person (lessee) signs together with the owner or owner of a premises (lessor) when renting or leasing the premises for the operation of their business.
A local rental contract establishes, among other things, the basic data of the parties that sign the contract (lessee and lessor), the term or duration of the contract (the rent), and the monthly amount (the rent) to be paid for the rent.
Here are some tips you should take before signing a local rental or lease:
The duration of a rental contract for a premises usually varies according to different factors such as the location of the premises, its size and the type of business expected to be set up there.
A short-term (short-term) rental contract allows you to minimize the risk since you would not be obliged to continue paying the rent in case the business does not prosper; but, on the other hand, it could be a disadvantage in case the business succeeds, and the owner of the premises decides to retake his premises or increase the rental price (for example, if he sees that you are having a good flow of clients) .
While signing a long-term (long-term) contract ensures that you do not have to vacate the premises so quickly in case the business prospers, and the owner does not want to renew the contract; But, on the other hand, it could be a disadvantage in case the business doesn’t prosper, and you have to keep paying the rent.
In general, it is recommended that, if you have a small or medium business, you sign a contract of at least two renewable years, and to avoid having to continue paying the rent in case your business does not prosper, include a clause in the contract that allows you to sublet the premises or sell the business to a third party.
The amount to be paid for the rental of a premises is usually a fixed amount that must be paid monthly; however, in some cases (for example, in some shopping centers), the amount to be paid could depend on the sales that the business obtains: a fixed monthly minimum amount is established, and then the rental payment is increased or decreased according to the sales that the business generates.
In general, it is recommended that, if you have big growth plans for your business and you are going to sign a long-term contract, you should try to agree to pay a fixed amount of rent in order to avoid an increase that you did not have planned.
Exit or escape clauses are clauses that are normally included in rental contracts that allow the lessee to be exonerated from the obligations of the contract if certain unfavorable situations occur.
Before signing the rental agreement, you must ensure that it includes as many exit clauses in your favor as possible in order to minimize the loss that may occur if the business does not prosper as you expected.
The most common exit clauses, and that you should try to achieve are:
- possibility of selling the business : possibility of selling or transferring the business, but you will still be responsible for the rent payments, and for any fault that the new business owner commits.
- possibility of transferring the ownership of the contract if you decide to sell the business : possibility of selling the business and, at the same time, transferring the rental contract to the new owner of the business, assuming responsibility for the payment of the rents and the care of the premises .
- possibility of assigning the lease to a third party : possibility that, for some reason, you assign or transmit the rights and duties of the contract to a third party, without having to consult with the lessor.
- possibility of subletting the premises : possibility of leasing part or all of the premises to a third party.
- possibility of canceling the contract if for some reason the business cannot be opened : for example, in the event that you are not granted an operating license or some other permit.
- possibility of dissolving the contract in case the business does not prosper : clause that the owner of a premises is unlikely to accept, but which can be obtained through good negotiation.
Works and improvements
In addition to the exit clauses, another aspect that you should take into account before signing a rental or leasing contract is the carrying out of works or improvements on the premises.
Before signing the rental agreement, you must agree with the landlord, for example, what works or improvements you can do, what works or improvements you cannot do, and what works or improvements he should carry out if necessary; and then clearly specify these agreements in the contract.
Seek legal advice
Finally, before signing a rental or leasing contract, you should always seek the help of a good lawyer with experience in the matter.
Leasing contracts are usually somewhat complex, and making a mistake when signing them could be very harmful to your business, so in addition to being very careful when signing them, it is recommended that you have the advice of a good lawyer to help you avoid making mistakes, but also to get the best possible conditions.
Guidelines for renting a premises in a shopping center
Renting a premises located within a shopping center will always be a good alternative due to the high influx of public that shopping centers usually have and, therefore, the high volume of sales that can be had.
However, renting a premises in a shopping center has some disadvantages such as the high rental costs that they usually have, and the requirements that shopping centers usually ask for in order to lease one of their premises, which are usually not easy to meet.
If you are considering the possibility of renting a place in a shopping center, the following are some guidelines that will help you analyze your decision well:
- If you have a company running and you want to open a branch in a shopping center, it is common for the latter to evaluate the brand’s trajectory and the company’s financial situation. For this they could request, among other documents, the company’s financial statements, both historical and projected.
- Generally, large shopping malls seek to have well-known and prestigious brands, but they are likely to accept new businesses, as long as these prove to be attractive to the type of consumer that frequents the shopping center. For this they could request a business plan that demonstrates the attractiveness of the business idea, and supports the potential that the business could have if it had a space in the shopping center.
- The concession of the rental of the premises is usually subject to the business. If, for example, it is a shopping center where the majority of businesses belong to the same business, the shopping center will ensure that new businesses do not deviate much from the type of business. But, on the other hand, if it is a shopping center where a variety of products are offered, the shopping center will ensure that there are a variety of offers, and that there are not many businesses of the same type.
- The cost of renting a store in a shopping center is usually measured by the cost of each square meter. The cost varies depending on the shopping center, but to get an idea, it could be said that the rent costs between 3 to 4 times more than what a local of the same size located on an avenue would cost; although, in the case of large shopping centers, the proportion could be much higher.
- In some cases, to determine the rental cost, the shopping center establishes a fixed monthly minimum amount, and then increases or decreases the rent according to the sales that the business generates each month. This type of arrangement might be convenient when a business is just starting up, but as it thrives, the only benefit might be the mall.