Leasing commercial or industrial real estate is one of the most significant decisions a Chief Financial Officer (CFO) can make. The contractual commitments, risk exposure, and long-term impact on a company’s balance sheet deserve careful scrutiny. Even seasoned financial leaders sometimes underestimate the complexity behind these agreements. Here is what every CFO should weigh before putting pen to paper.
Understand the total cost of occupancy
The stated rent is only one piece of the lease cost puzzle. As a CFO, you should look beyond base rent to account for ancillary charges like common area maintenance (CAM), property taxes, utilities, insurance, and potential escalation clauses. These “hidden” or variable costs can make the actual lease rate significantly higher than advertised.
It’s essential to have a comprehensive financial analysis in which these expenses project over the lease term. Any unknown and unanticipated increase in CAM fees or tax adjustments could destroy budgeting and profitability. Being transparent with the landlord about responsibilities for repairs or upgrades is also key to avoiding financial surprises.
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Assess lease flexibility and scalability
One of the biggest risks when it comes to commercial and industrial leases lies in their inherent rigidity. It’s true that ten-year or even longer leases are common, however, your business requirements can shift more quickly. Before signing, make sure that the lease offers adequate flexibility: options to expand, contract, sublease, or assign the space; without penalties.
Scalability should also be top of mind. Can the premises accommodate anticipated growth, additional inventory, or upgraded equipment? Negotiating built-in expansion rights or first refusal options helps safeguard company agility and operational continuity.
Unpack legal and compliance obligations
Commercial leases are dense legal documents packed with obligations and potential liabilities. That’s why CFOs need to verify whom the lease holds responsible for environmental compliance, ADA regulations, and zoning changings. If you fail to do this, your company could be exposed to fines, remediation costs, or even eviction.
It’s worth considering partnering with legal counsel to scrutinize indemnity clauses, default terms, and remedies. The right legal advice ensures risk is proportionately shared and not unduly shifted to the tenant. A clear understanding of compliance requirements can save the company significant future expense and embarrassment.
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Evaluate the impact on financial statements
The introduction of new accounting standards, such as IFRS 16 and ASC 842, means leases now directly affect a company’s balance sheet and key financial ratios. If you’re a CFO, you should model how the lease will appear in right-of-use asset and liability accounts, and anticipate potential impacts on covenants, borrowing capacity, or investor perceptions.
A better understanding of the broader financial statement implications will allow a smarter negotiation and improved long-term planning. Always be proactive in discussing these effects with both your CEO and board before making any decision.
You can also read: What is a “Work Letter” and why is it the tenant’s best friend?
Negotiate for protections and incentives
Leverage your position to achieve terms favorable to the company. Negotiating for tenant improvement allowances, rent-free periods, or landlord-funded repairs can dramatically improve your total cost equation. Also, make sure you have reasonable exit strategies or break clauses in case the business direction changes.
Negotiation is about more than just the numbers—it’s about building long-term value and flexibility into the company’s real estate strategy. Don’t be afraid to walk away if critical protections cannot be secured.
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