Church Leasing | 5 Steps for Commercial Leasing
Church Leasing is an important topic for churches.
One of the things you may find yourself doing as a pastor or church leader is leasing building space. Whether you are a brand new church looking for its first home or you are an established church outgrowing your existing space, dealing with a leasing company or landlord for rental space for your church is an inevitable part of ministry.
I realized recently that pastors may not be familiar with commercial leases. There is a big difference between residential and commercial leases. Understanding those differences can empower you, the pastor or church leader, to effectively maneuver these lease agreements. By understanding the differences in these leases, you are able to provide the most benefit and security for your church.
1) Let’s talk about terms in commercial leasing.
In commercial leasing, terms are typically fixed for a short number of years. Terms that last longer than five years are generally not heard of the commercial world. With that being said, there is also an option to renew a lease many times after you’ve completed the first term. Whether that is 12, 24, or 460 months you will have the option to renew your lease for another period of years.
2) Now let’s talk about the rate of commercial leasing.
One of the things that catch people off guard in commercial leasing is the price per square foot. This square-foot pricing is typically an annual square-foot pricing. By that I mean you would negotiate what your price per square foot is ($10, $15, or $20) and that would be your annual price to lease the space. Therefore, you would take your annual price and simply divide that number by 12 to get the monthly installment price. These monthly installments often escalate every year, meaning what you might have paid $10 a square foot for a year ago might be $10.50 a square foot now and $11 a square foot by year three.
Rent escalation is definitely something you want to make sure you understand because the price you pay the first year may not be the price that’s paid in year five.
2) Let’s talk about the kinds of leases associated with commercial leases.
Some leases are what’s called “triple net leases.” This means that you pay all of your expenses and they are not included in to the lease amount. Understanding if you have a triple net lease or if your lease agreement includes things like taxes or any kind of maintenance on the building are important things that you need to understand upfront. If you have a triple net lease, you need to calculate the added cost you’ll pay annually in order to arrive at the true cost for your lease.
Another form of a commercial lease is a personal guarantee. Personal guarantees are a form of security for the landlord and one that your church may not be used to dealing with. It’s also good to know that personal guarantees are not required.
I recently helped a pastor work through a commercial lease. The lessor of the property wanted the pastor and several of the elders to come in and sign personal paperwork that we ascertained was a personal guarantee. The personal guarantee is simply you signing or cosigning for the church, meaning if the church cannot meet its rental obligations or if the church expands and cannot fit in the current space, the church is not the only one liable for the full rent amount. In this particular situation, it would also be the pastor and the elders.
Please note it is not required for someone to get a personal guarantee on a commercial lease. This is a choice that the lessor has made and a point to be negotiated. For a myriad of reasons, I would discourage any pastor or elder from signing the personal guarantee for rental space for the church. The biggest reason is that the Bible talks about not being surety for our brothers, and I think this applies here (Proverbs 22:26).
4) Now let’s talk about signage as a church.
You are going to want some kind of signage to help members and guests find your location. Information about permitted signage needs to be included within a commercial lease. Don’t forget that when dealing with signage, you often have to deal with local city ordinances. These local ordinances will supersede anything put into the lease, so it’s incumbent on you to check and make sure that what the landlord has in the lease is allowed by local ordinances.
5) Finally, it is important to talk about who needs to sign the lease.
Who signs the lease generally depends on the structure of your church. If your church is in a corporation, then simply by resolution or by agreement your church can have the pastor or other authorized board member such as the church secretary sign the lease. That’s the only signature needed if your church is a corporation. If your church is an unincorporated association, you may need your trustee, board of directors, or pastor and elders called to sign the lease. This is not the same as signing a personal guarantee. It is signing for the church so that the church can be bound. Read here for more information about liability issues in an unincorporated association.
I hope this short review of commercial leasing has helped your church understand what it must do in order to lease commercial space including a few of the pitfalls that await in this changing world. Leasing commercial space is not like renting a house or an apartment; it is much more complex and cumbersome. Therefore, if you don’t understand something regarding a commercial lease, ask. Either call us here at the Church Counsel or seek local counsel to help you understand your commercial lease prior to signing.
For more information about church start-up, here are 8 Steps to Protect Your Church with By-law Modification.