Sometimes cheap rent doesnt 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.

NoteLeasehold 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, Section B.) 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 dont 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. Youll be sure that you can stay at the location long enough to build your business around it, and youll know what your rental costs will be. But what happens if your business fails or you discover the location is poor? Youll 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, youll have no 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 months rent and often a security deposit when you sign the lease. Dont include those deposits here. (See for treatment of pre-opening 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.

Example:Bob Smith signed a shopping center lease for his optometry office. His lease called for a base rent of $2,400 or 6% of monthly sales, whichever is more, plus a set charge of $400 for taxes, maintenance and insurance. If sales exceeded $40,000 per month ($2,400 divided by .06), he would be obligated to pay the landlord more rent. Bob was pleased to sign the lease because his sales projections ($32,000 per month) indicated he would be making a healthy profit if his sales volume reached $40,000 a month, so he would not mind paying a higher rent. Of course, this sort of lease is not a good idea if the amount of sales needed to trigger a substantially higher rent is too low. In Bobs situation, for example, if he was required to pay more rent if monthly sales reached $28,000, he probably would have looked elsewhere.

When you have figured out your total monthly rent from a lease quotation from your expected landlord or from a survey of market rents, fill in that amount.

4d.Marketing and Advertising. Heres a story about advertising. Back in the early 1930s, John Axelrod opened a hot dog stand on the main road into Pine Valley. Business was fair. When he put up a small sign, business got a little better. Then he added several more signs and things got a lot better. Finally, he put up a dozen big signs. Business became so good, he had to expand his seating area and hire more cooks. He was feeling pretty happy about life when his son, whom he thought was a positive wizard, came home from college. The son, an economics major, was appalled at all the new signs and seating.