So you’re starting a business and need a place to operate your business. Here’s your dilemma: should you buy or lease?

There are pros and cons to both buying and leasing. Regardless of which you choose, do your homework to be sure you understand the risks involved.

Before You Sign a Lease

The majority of startups start out leasing space. Many choose to use leased space throughout the life of the business.

By leasing rather than buying, you avoid tying up valuable working capital — a plus for cash-strapped small business owners. Leasing also makes it easier to move if you outgrow your existing space.

If you decide to lease, you should carefully investigate the terms of the lease agreement to make sure it meets your needs. Consider these major clauses of a lease:

Premises. Find out exactly what you would be leasing. Determine how the landlord has measured the square feet. Make sure that you (or the landlord) will be able to make the necessary modifications that your business requires — for example adding offices or rewiring for better communications.

Rent. Avoid any surprises by learning how the rent is calculated and whether the landlord will pay utilities, repairs, taxes, and insurance. A “gross lease” includes these costs; with a “net lease,” you pay for them separately. A net lease often ends up being more costly. You will also want to find out what common area maintenance (CAM) costs you have to pay for.

Term. Find out when the lease begins and how long it will run. A short-term lease with renewal options is usually safer than locking yourself into a 5- or 10-year lease, especially if your business ends up growing faster than expected.

Deposit. This is a payment that is required by a landlord to ensure you pay rent on time and to cover repairs if you damage the property.

Use. This clause spells out the restrictions and requirements on how you use your rented space. For instance, you may want to ensure your lease gives you the right to put up a sign that’s visible from the street or that it prevents the landlord from leasing space to a competitor.

Assignment/Sublease. This clause determines if you can transfer your interest to the buyer of a business and who can take over the lease.

Options/Right of First Refusal. You may negotiate a right to rent additional space, to renew for additional terms, or even to purchase the property.

Financing. This is an important consideration for both landlord and tenant. The landlord may require you to sign an estoppel certificate to enable the landlord to obtain the needed financing. The certificate acknowledges that you and the landlord are complying with the lease terms. As tenant, your lender may require an assignment of your lease as collateral. The lease should be drawn to allow this to happen.

Environmental. As tenant you will want assurances that there are no environmental problems on the property. The landlord will want you to agree that you will not create an environmental problem.

Who’s Responsible for Insurance?

Insurance rarely gets the attention it deserves when parties are trying to firm up a lease.

As a result, many buildings, especially those with multiple tenants, are covered by a mishmash of overlapping and inadequate coverage.

Work out in advance of signing a lease who is going to pay for what insurance. A professional insurance agent or lawyer with expertise in insurance can help you make sure the policies of the landlord dovetail with those of the tenant.

Expect the unexpected when you write the terms and provisions of a lease. Any lease should make clear who is responsible for what and when.

Risks of Owning Commercial Real Estate

Buying commercial real estate certainly has its advantages. Developing equity in a building can be a sensible way to grow your business or personal wealth portfolio. You also get complete control over the property.

Owning real estate comes with risks as well. The most obvious risk of owning commercial real estate is that the return on investment is never guaranteed. You are responsible for the mortgage, the building, and all related expenses — all while handling the duties that come with being the landlord.

Property owners face any number of possibilities: tenants who can’t pay; increases in property taxes; an HVAC system that needs replacement; injuries or damages on property.