ChApter 6 | YOUR PROFIT AND LOSS FORECAST | 111
cheap rent doesn’t turn out to be such
a bargain if you have to build walls or
install a bathroom and a loading area,
or if a poor location means you get few
customers.TiP
Leasehold improvements note:
Any time you build something like a wall or a
bathroom, it is considered a capital outlay, not
a fixed expense. (Capital expenses are covered
in Chapter 7.) Do not show the expenditure
as a current operating expense. Only the
depreciation is a fixed expense. You can write
off or depreciate leasehold improvements
over the term of the lease in most cases. (If
you don’t know what depreciation is, look
at line 4h, below. For more help, check with
your CPA.)Normally you will want to sign a
lease for a business space rather than
to accept a month-to-month tenancy.
Business leases generally protect the
tenant more than the landlord, although
it may not seem so if you read all those
fine print clauses. You’ll be sure that you
can stay at the location long enough to
build your business around it, and you’ll
know what your rental costs will be. But
what happens if your business fails or
you discover the location is poor? You’ll
be responsible for paying the rent until
the space is rented to someone else,
which could take a long time in some
areas. Assuming someone else will pay
at least as much as you do, you’ll haveno further obligation once the new
tenant begins paying rent.
Be sure you know exactly what your
rent will include. Commercial leases
often require the tenant to pay for
a number of things that a landlord
commonly pays for in residential
rentals. For example, some shopping
center leases require you to pay a pro
rata share of property taxes, building
maintenance, and fire insurance on the
building, as well as a pro rata share of
the parking and common area charges.
A friend of mine who rented a small
building for a retail nursery business
put it this way: “That blankety-blank
landlord sold me the building; he just
kept the title.” So, as part of making
your financial projection, be sure you
know exactly what charges, if any, the
realtor or landlord expects you to pay
in addition to the rent. By the way, no
matter what you determine the rent to
be, expect to put up the first and last
month’s rent and often a security deposit
when you sign the lease. Don’t include
those deposits here. (See Chapter 7 for
treatment of preopening expenses.)
Many leases that last longer than a year
contain a method to protect the landlord
from inflation. Some are tied to a cost-
of-living index, which means your rent
goes up each year at the same amount
as the inflation rate. Others contain a
percentage of sales clause, where you
pay a set rent or a percentage of your
gross sales, whichever is higher.