Why should you choose Commercial Real Estate as your next investment?
Here are some of the benefits to investing in Commercial Real Estate. According to Nicholas Dunlap, CPM, VP on Dunlap Property Group, AMO, in Fullerton Ca.
1. Cash flow:
3. Tax deductions:
Contract negotiations, Tenant traps in commercial real estate
California Commercial Lease Agreements – Traps For the Unwary Tenant and Landlord
Prepared By: Melissa C. Marsh, Los Angeles Real Estate Attorney
We provide experienced legal guidance to both landlords and tenants in the drafting and negotiation of commercial lease agreements, renewals, notices, and addendums when making changes or amendments to an existing lease.
First let me start by stating that every commercial tenant would be wise to seek the advice of a real estate attorney BEFORE signing a commercial lease agreement. Commercial lease agreements are very different from residential lease agreements, and a thorough understanding of each paragraph is essential to avoiding future onerous expenses that often can lead to bankruptcy. Buried among the myriad of clauses setting forth legal rights and obligations are loopholes, traps for the unwary, and major ambiguities that often can and do lead to bankruptcy. Our office can assist you with understanding the lease terms presented by a prospective landlord and in negotiating better terms.
Most landlords and their real estate brokers opt to use a form commercial lease agreement prepared by the American Industrial Real Estate Association on behalf of commercial brokers and agents. Although this less costly form is often used, it does come with great risk for both landlords and tenants. Most experienced commercial landlords and tenants realize that the form lease does not address their major concerns in a clear and concise manner and consequently amend or completely revise these pre-printed documents. It is therefore important to understand that both landlords and tenants can and should negotiate, and revise as necessary, a “standard” commercial lease’s terms. To do so effectively, however, it is important to understand what each of the “standard” lease clauses mean.
This article seeks to provide a brief overview of the “standard” commercial lease and the terms that should be amended, or negotiated.
Every commercial lease should at the very least clearly set forth the following terms:
• Proper description of The Premises.
• The Permitted Use of the premises.
• The Term (length) of the initial lease.
• The amount of Base Rent.
• Whether the tenant is responsible for the Landlord’s maintenance costs, real property taxes, insurance and Operating Expenses, and if so the exclusions.
• How Rent Is To Be Increased during the term of the lease, or upon its renewal.
• The Security Deposit required, and any Personal Guarantees required.
• Detailed Listing of any Improvements, Alterations and/or Repairs: Whether, by whom, and the procedures that must be followed.
• Who will own and pay for any trade fixtures the tenant and/or landlord install and its removal at the end of the lease.
• Who will be responsible for Maintenance, Utilities, And Code Compliance (e.g. handicap accessible bathroom).
• Tenant’s Right Of Access to premises, hours of operation and HVAC Hours of operation.
• Landlord’s Right of Entry (reasonable notice and at reasonable times?).
• Tenant’s responsibility to carry Insurance and the amount of coverage.
• Business Sale Clause.
• Any Options To Renew, the new base rent (specifically) if the option is exercised and the length of each option.
• Right to Sublet and Assign.
• Going Dark Rights.
• Exit Clause – Tenant’s Right To Terminate The Lease.
• Pet Clause.
• Breach of the Lease.
It is important that the correct legal name of both the landlord and tenant are set forth. Unfortunately, it is all too common for the real estate agent to use a fictitious business name (DBA), or an individual’s name, when the tenant or landlord is a corporation or a limited liability company.
It is ultra important that the premises clause not only precisely define the space to be rented (location and usable square footage), but also any parking spaces, and common areas that can be used. If the tenant is leasing an entire building, the Premises Clause should simply provide the address of the building and any adjoining structures the tenant will have access to (e.g. parking garage). However, if the tenant is leasing less than an entire building the Premises Clause should specifically set forth the space to be rented, the usable square footage, as well as any access the tenant will have to parking spaces, storage facilities, conference rooms, and common areas.
Tenants should be aware that most landlords will try to use the actual square footage, as opposed to the usable square footage. Many tenants would be wise to engage a qualified consultant and confirm the measurements and verify its percentage, especially if utility and other charges are also based on the stated rentable area.
The Use Clause and Exclusive Use Clause.
You might think this is a no brainer…but the reality is many tenants execute a lease only to later find out that they cannot use the premises for their intended purpose. From the landlord’s perspective, it is best to keep this clause general and vague. From the tenant’s perspective, it is sometimes best to specifically set forth the tenant’s intended use(s) for the premises, and restrictions (if any); while other times it is best to use the broadest definition to facilitate subleasing.
Regardless of which method is used, the tenant should insist that the Landlord provide written assurances in the lease that the Premises are zoned appropriately for the tenant’s intended business purpose.
An Exclusive Use Clause, which typically must be requested by a tenant, is a clause in a lease under which the landlord promises that no other tenant will be permitted to either engage in a particular type of business or sell a particular line of goods. These types of clauses are most often negotiated in strip malls.
This clause describes the length of your lease and specifies the starting and ending dates. Exercise caution and pay attention as there are two traps here for the unwary. First, some leases start as of the date the lease is signed, while others will start when the landlord is prepared to turn over possession of the premises to the tenant. Avoid a lease term that starts on the date the lease is signed, but does not require the payment of rent until a later date. Why? Because even though the tenant may not be required to pay rent, the tenant will still be responsible for other liabilities such as insurance, the requirement that the tenant rebuild in the event of fire, earthquake, or other damage, etc…
The second trap is more an assumption made by many eager tenants that a longer lease term is better. While this may be true for an established savvy businessman, it is often not the case for a new business owner. A $2,000 per month lease for five years equates to a $120,000 commitment, which is usually accompanied by a personal guarantee executed by the owner of a business (tenant). For a new business owner who may strongly believe his or her business will succeed, we suggest a short one to two year lease term with multiple options to renew for three years each. The option period costs nothing, and in the event the business does not succeed or would do better in a different location, the shorter two year lease term will limit the potential liability (in the example above from $120,000 to $48,000).
While a tenant would like to fix the base rent for an extended period of time, most experienced landlords will insist on an escalation provision to account for inflation. In a down real estate market, however, the tenant should be able to negotiate for a fixed base rent for at two, if not three years. Rent escalations are often tied to one of the many indexes, the most common of which is the Consumer Price Index. Which index to use, whether to place a cap on any annual rental increase, and whether or not the rent will remain fixed for a certain number of years, are all negotiable items.
Although the amount of the base rent is an important consideration, it should not be the only consideration. Rent is usually comprised of multiple items: (1) Base Rent (stated monthly rent); (2) Operating Costs for Common Area Maintenance (a.k.a. Pass Through CAM expenses); and (3) Required Insurance. As stated above, the Base Rent is typically a fixed monthly fee, but many commercial leases also seek to require the commercial tenant to pay a proportional share of the landlord’s operating costs incurred in connection with the management, operation, repair and maintenance of the property. This too is negotiable and a common trap for the unwary tenant who may not realize that these pass through operating expenses can substantially increase.
Although the “triple net lease” was originally designed to protect the landlord against increases in utilities, property taxes and operating expenses (e.g. maintenance costs), it has become a major source of profit for the landlord at the expense of the unassuming tenant who is forced to bear the extra costs, which often times can be quite expensive.
We strongly advise prospective tenants to negotiate for a gross lease (which does not permit the landlord to pass through any expenses), and at the very least insist upon a “Cap” or limit on the pass through expenses that can be charged to the tenant in any given month and year. It is also important for the tenant to insist that the landlord provide the tenant with an “exclusive” list of the operating expenses the landlord will pass through to the tenant. Tenants should insist that certain costs be excluded such as: charitable donations made by the landlord, lease expenses incurred by the landlord with other tenants, entertainment and travel expenses, salaries paid to the landlord’s relatives, capital expenditures, Proposition 13 protection, etc…
A tenant should also insist that the tenant be given the right to audit the landlord’s books and records concerning operating expenses.
A typical commercial lease will require the commercial tenant to provide up to 6 month’s rent as a security deposit. However, commercial landlords should be aware that California Civil Code §1950.7 prohibits a landlord from applying the security deposit toward a defaulting tenant’s future rent obligations, absent a written agreement to the contrary. It is often in the landlord’s best interest to ensure the tenant waives the protection of Civil Code §1950.7 somewhere in the lease.
Improvements, Alterations and Repairs.
A tenant will often require the landlord, as a condition to leasing the premises, to make certain improvements or alterations to the premises before the lease start date. If a tenant is expecting the landlord to make such improvements or alterations, it is important for the lease to clearly state exactly what the landlord will be undertaking, who will perform the work, who will pay for the work, a date for commencement and completion, and either an exit clause or a formulaic rent reduction if the agreed upon alterations or improvements are not completed in a timely manner.
For the tenant, it is also important that a contractor evaluate the premises before the lease is signed to determine if the roof, HVAC, plumbing, electrical, etc.. are in good working order, or in need or maintenance or repair. As stated below, most commercial leases require the tenant to maintain the premises and to incur the cost of any needed repairs or maintenance. Yes…commercial tenants are often required to maintain at their sole expense the roof, the electrical, the air conditioning system, etc…
Maintenance, Utilities, and Code Compliance.
Most commercial lease agreements contain multiple nasty little surprises for unwary California commercial tenants, and the sections that deals with maintenance, utilities and code compliance are no exception. Without an express provision in the lease, the landlord does NOT have a duty to maintain or repair the premises. In fact, it is not uncommon for a commercial tenant to discover that s/he is responsible for upgrading a bathroom to be handicap compliant, replacing an old air conditioning system, or a 10-year old leaking roof. Before leasing commercial space it is extremely important to have a licensed contractor inspect the space; if the contractor discovers any deficiencies the tenant can insist that the landlord assume the cost of repair and/or replace such systems prior to commencement of the lease. A tenant may also request the lease be amended to specifically set forth the landlord’s maintenance and repair obligations.
The tenant can also demand that the landlord provide written warranties that the premises are code compliant (e.g. Americans with Disabilities Act).
Access, Hours and HVAC Hours.
All commercial tenants should require that the landlord state in the lease when the building, or unit, will be accessible to the tenant as well as clients and customers. In addition, the tenant should require the landlord to state in writing the normal hours of operation for such items as common area lighting, security, HVAC (air conditioning), etc…
Will your business require a Sign, Banner, or Window Dressing. If so, make sure your planned advertising method is mentioned in the lease as acceptable to the landlord.
Landlord’s Right of Entry.
A Right of Entry Clause gives the landlord the right to enter the Premises on an as-needed basis. While a landlord should insist on the Right of Entry at any time in the event of an emergency, the tenant should require the landlord to provide a reasonable notice period of at least 72 hours for normal repairs. It may also be possible to negotiate when non-emergency repairs are made (e.g. evenings, after 2:00pm, etc..).
Both landlords and tenants would be wise to pay particular attention to the insurance clauses in their lease. Due to the rising cost of insurance it is important that the landlord be selective in the types of insurance required and the amount of coverage. All commercial landlords should still require the tenant to obtain and maintain a comprehensive general liability (CGL) policy and casualty policy issued by a AAA rated insurance company with the landlord named as an additional insured. Insurance should also be kept to a level which does not trigger co-insurance (an amount that exceeds the value of the property). Is $2 Million Dollars really necessary? The only way to answer this question is to examine the property, the number of tenants, and the type of business operated by the tenant. In many cases, $1 Million Dollars (or less) should be sufficient. Landlords should also reconsider the requirement that their tenants maintain employer liability insurance. In its place, landlords would do well to examine their own premises and the business of the prospective tenant to determine if any additional endorsements should be added to the CGL policy based on risks associated either with the premises, or the tenant’s particular business.
Option to Renew.
Many leases grant the tenant the right (option) to extend (renew) the lease providing the rent is changed during the extended term(s) to fair market rental at that time. Unfortunately these clauses have been deemed invalid under California law and render the option to renew useless. It is therefore prudent for the tenant to insist on an option to renew with a fixed price for any rental increase, which can be tied to some metric such as the consumer price index.
Right to Sublet and Assign.
An assignment transfers all of the tenant’s interest in the lease. A sublease transfers only a part of the tenant’s interest in the lease (e.g. a section of the premises, or just part of the remaining term of the lease). Although most commercial leases contain terms that restrict the tenant’s ability to enter into an assignment and/or sublease (prohibited absent the landlord’s consent), this is a very important provision for both the landlord and tenant to negotiate and revise. Landlords who are predisposed as a matter of principle to retain as much control as possible should strongly consider revising this language because a subtenant is much preferable to a vacant property and a bankrupt tenant. As a safety precaution, tenants should insist that the landlord accept a sublease and an assignment if the tenant finds a qualified tenant (appropriate references, fico score and deposit) with such qualifications actually set forth in the lease.
Although most landlord’s will accept a clause that permits a sublet subject to the approval of the landlord, with such approval not to be unreasonably withheld or delayed this is not necessarily sufficient from a tenant’s perspective. From a tenant’s perspective, the lease should automatically permit a transfer to an affiliate, a corporation, or a limited liability company without the landlord’s consent. In addition, some tenants would be well served to negotiate broader terms such as a prequalified tenant with a sufficient FICO score and security deposit. A steadfast commercial landlord in a booming real estate market, however, may desire to eliminate the tenant’s right to sublet and may even want to add an addendum to provide for recapture rights that give the landlord the right to terminate the lease if the tenant seeks to assign or sublet (especially if the tenant stands to profit from the transfer).
Going Dark Rights.
“Going dark” rights allow the tenant in a strip mall, or other retail space, to close their store or get a large rent reduction if a major business in the shopping center (e.g. Ralphs or Target) goes out of business or leaves the shopping center.
Every commercial tenant should try to negotiate a cancellation right with a fair payment to the Landlord if one or more specified events occur (e.g. death of the tenant, collapse of the business, etc.). For the small business owner it is almost essential to negotiate such an exit clause and a reasonable commercial landlord should be willing to accept such a clause so long as it provides for a reasonable payment.
Some tenants may also want to consider having the landlord add a “pet clause.” It is becoming all the more popular for not only owners, but also employees, to bring their pets to work.
Breach of the Lease.
By The Tenant. If a commercial tenant fails to pay rent or breaches a material term of the lease (e.g. fails to maintain the requisite insurance), the landlord can bring an civil suit for eviction, the balance of the rent owed for the entire term of the lease, and consequential damages. Although the landlord has a duty to mitigate damages (search for another tenant), quite often the damage award is enough to force many tenants into bankruptcy.
Long term lease commitments made in the last several years are now undergoing reevaluation as tenants are finding themselves unable to make their monthly rental payments. Such tenants are being forced to weigh whether to shut the doors, face the eviction process, and possibly declare bankruptcy and landlords are facing an ever increasing number of vacancies and uncollectible debts. Both landlords and tenants should therefore consider the possibility of a lease modification (rent reduction, term reduction, space reduction, subletting agreement, etc…).
Landlords should be aware that some tenants may be able to turn the tables on the landlord if they formed a single member limited liability company, or a corporation, whose sole purpose was to lease the premises. If such a tenant did not execute a personal guarantee and the LLC or corporation maintained itself properly (followed the corporate formalities including the preparation and execution of annual and special minutes) the tenant will effectively be able to use the threat of bankruptcy to secure a reasonable rent reduction. If the corporation/LLC was properly maintained and if no personal guarantee was executed the tenant’s personal credit will go unscathed.
By the Landlord. Tenants faced with the possibility of eviction can seek to mitigate their losses by bringing a defense such as: (1) Landlord failed to perform a specific obligation; or (2) Landlord breached the “covenant of quiet enjoyment” by interfering with the tenant’s use of the premises (e.g. failure to provide critical services such as electrical, plumbing, air conditioning, elevator services, etc.). While such defenses may mitigate the damage award, they often will not suffice as a defense to the eviction itself.
Needless to say this article only provides a brief overview of some of the issues involved in a commercial lease. At bottom, a tenant should only commit to the least timeframe possible (get a two year lease with a three year option vs. a five year lease). Remember options don’t cost you but give you the right to continue in the space. Second, document the promises or assumptions made by the landlord, agent, or management company (i.e. the big anchor store will stay, or will move in, no competing store will be allowed to lease space in the building or center, amount of foot traffic, average utility costs, average operating expenses, etc.). Third, negotiate a cap on all aspects of the rent (base rent, annual increases, common area charges, property tax increases, etc). Forth, try to negotiate the inclusion of an exit clause. Finally, always remember that there are many options out there and you should always be ready to walk away if the terms are not acceptable.
If you would like the assistance of counsel, we are available to draft, review, negotiate and/or revise a commercial lease, prepare letters or notices, and to provide general advice. Please feel free to call us at 818.849.5206 818.849.5206 or Send Us An Email. We are based in Sherman Oaks and Los Angeles.
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One authorized to represent and to act on behalf of another person (called the principal).
The acceptance by the tenant or buyer of the existing condition of the premises at the time the lease or sale is consummated. This would include any physical defects.
Under the terms of an assignment, a tenant transfers all interest in the leased property to another party. Generally all lease terms remain the same.
The bringing together of parties interested in making a real estate transaction. The business of a brokers acting as a third party agent to a transaction.
A set amount used as a minimum rent in a lease with provisions for increasing the rent over the term of the lease.
The assets of an existing business enterprise including its goodwill. As used in the Real Estate Law, the term includes the sale or lease of the business and goodwill of an existing business enterprise or opportunity.
Common Area Maintenance (CAM) is the amount of rent charged to the tenant in addition to the Base Rent, to maintain the common areas of the property shared by the tenants and from which all tenants benefit. Examples include: outdoor lighting, parking lot sweeping, insurance, property taxes, etc.
Cap Rate (Capitalization Rate): Method of estimating a property’s value by considering net annual income as a percentage of a reasonable rate of return on an investment (Net Income / Cap Rate = Property Value).
The consummation of a real estate transaction, when the seller delivers title to the buyer in exchange for payment of the purchase price by the buyer. Closing in some areas may not occur until the documents are recorded; however, under general rules of Real Estate Law, transfer of title takes place upon delivery of the deed to the grantee.
There are two components of the term “common area”. If referred to in association with the Rentable/Usable or Load Factor calculation, the common areas are those portions of the building used by all office tenants or which serve all office areas (i.e. lobbies, corridors, restrooms, etc.). On the other hand, the cost of maintaining parking facilities, malls, sidewalks, landscaped areas, public toilets, truck and service facilities, and the like are included in the term “common area” when calculating the tenant’s pro-rata share of building operating expenses.
A provision in a contract that requires a certain act to be done or a certain event to occur before the contract becomes binding.
Consumer Price Index (“CPI”):
Measures inflation in relation to the change in the price of a fixed market basket of goods and services purchased by a specified population during a “base” period of time. It is not a true “cost of living” factor and bears little direct relation to actual costs of building operation or the value of real estate. The CPI is commonly used to increase the Base Rent periodically as a means of protecting the landlord’s rental stream against inflation.
An agency relationship in which the agent acts concurrently for both principals in a real estate transaction.
The process by which money and/or documents are held by a disinterested third person (a stakeholder) until satisfaction of the terms and conditions of the escrow instructions (as prepared by the parties to the escrow) has been achieved. Once these terms have been satisfied, delivery and transfer of the escrowed funds and documents takes place. Although in some states a real estate broker is authorized to handle escrow functions, the common practice is to employ the services of a licensed escrow company, title company or lending institution.
The trust account established by a broker under the provisions of the license law for the purpose of holding funds on behalf of the broker’s principal or some other person until the consummation or termination of a transaction.
In a sales transaction, a document signed by buyer and seller that details the procedures necessary to close a transaction and directs the escrow agent on how to proceed. Sometimes the buyer and seller execute separate instructions and sometimes the contract of sale itself serves as the escrow instructions.
Essentials of a Valid Lease:
A lease is a form of contract. To be valid, a lease must meet essentially the same requirements as any other contract:
Offer and acceptance -The parties must reach a mutual agreement on all the terms of the contract.
Consideration -The lease must be supported by valid consideration. Rent is the normal consideration given for the right to occupy the leased premises. However, the payment of rent is not essential as long as consideration was granted in creating the lease itself. Sometimes, for instance, this consideration is labor performed on the property. Because a lease is a contract, it is not subject to subsequent changes in the rent or other terms unless these changes are in writing and executed in the same manner as the original lease.
Capacity to contract -The parties must have the legal capacity to contract.
Legal objectives-The objectives of the lease must be legal.
Exclusive Agency Listing:
A written listing agreement giving a sole agent the right to sell or lease a property for a specified period of time. The exclusive agent is entitled to a commission. It is exclusive in the sense that the property is listed with only one broker.
This is a completely exclusive agency agreement. The buyer/tenant is legally bound to compensate the agent whenever the buyer purchases a property of the type described in the contract. The broker is entitled to payment regardless of whether he or she locates the property.
Full Service Gross (FSG) Lease:
A lease wherein all services to a property are included in the rent such as utilities, janitorial service, building maintenance and others. Exception items would be noted as “net of” item(s). For example: FSG, Net of Janitorial and Utilities.
Gross lease or Industrial Gross:
A lease of property where a landlord pays for property charges such as exterior repairs to the structure, real property taxes and real property insurance. (See also Triple-net Lease, Full Service Gross Lease, and Modified Lease).
The acronym for “Heating, Ventilating and Air-Conditioning”.
The Lessor or the owner of leased premises. The landlord retains a reversionary interest in the property, so that when the lease ends the property will revert to the landlord.
An agreement transferring the right to exclusive possession and use of real estate for a definite period of time. To create a valid lease, the lessor must retain a reversionary right; that is, the lessor (landlord) must grant the right of possession to the lessee (tenant) but retain the right to retake possession after the lease term has expired. (See Landlord, Tenant ).
Lease Purchase Option:
A lease under which the tenant has the right to purchase the property either during the lease term or at its end.
Lease Renewal Option:
A clause giving a tenant the right to extend the term of a lease, usually for a stated period of time and at a rent amount as provided for in the option language.
The person to whom property is rented or leased; also referred to as tenant.
The person who rents or leases property to another. Often referred to as a Landlord.
A contract between a property owner (as principle) and a licensed real estate broker (as agent) authorizing the broker to find a buyer or a tenant for certain real property, for which service the property owner agrees to pay a commission.
That percentage of a building which is common area allocated to the tenants to increase their usable area to rentable area. If the load factor for a suite is 10%, multiplying the usable square footage of the suite by 1.10 would yield the rentable square footage of the suite. A load factor of 10% means that 900 usable square feet would be 990 rentable square feet. (See Rentable Square Footage vs. Usable Square Footage.)
Modified Gross Lease:
This lease is typically an Industrial Gross or Full Service Gross Lease with certain deviations from the standard definition of such lease forms. For example, items such as utilities, property taxes, property insurance, and building maintenance may be the responsibility of either the landlord or the tenant through negotiations.
A branch of the real estate business involving the marketing, operation, maintenance and day-to-day administration of rental properties.
The ratio between the tenant’s percentage of occupancy of the rentable square footage of the building and the entire building rentable area.
Rentable Square Footage vs. Usable Square Footage:
The rentable square footage includes the usable square footage plus a pro-rata share of common areas, excluding vertical shafts, such as elevators, stairs, mechanical risers, etc. Usable square footage is the area actually occupied by a tenant for its sole and exclusive use. The usable area on a single floor of a building may vary depending upon corridor configurations, whether the floor is a single tenant or multiple tenant occupancy, etc.
A deposit of money by a tenant to a landlord to secure performance of a lease. This deposit can also take the form of a Letter of Credit or other financial instrument.
Leasing of premises by one party to another for the remaining balance of an existing lease term.
Triple-net Lease (NNN or Net-Net-Net):
A lease where, in addition to the stipulated rent, the lessee assumes payment of all expenses associated with the operation of the property. This includes both fixed expenses, such as real property taxes and real property insurance, and all operating expenses, including costs of services, maintenance and repairs.
Alterations to the interior of the building to meet a tenant’s particular space needs. Such construction alterations range from simply repainting or recarpeting to completely gutting the interior and redesigning the space by erecting new walls, partitions and electrical systems.
The regulation of structures and uses of property within designated districts or zones. Zoning regulates and affects such things as use of the land, lot sizes, types of structure permitted, building heights, setbacks and density (the ratio of land area to improvement area).
John Manning @ Home Realty Asset Properties
Phone: 801 979-9229
Fax: 801 270-9114
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TIPS AND TRAPS
The following list of Top 10 Mistakes is a result of a survey taken by George Post & Company . The results draw from our experience in representing and advising commercial tenants in lease transactions. Mistake #1: WAITING TOO LONG TO START THE EVALUATION PROCESS
Negotiations with the landlord and legal preparation of the documents can be very time consuming. Architectural plans need to be prepared, building permits secured and actual build-out completed. Six to twelve months is a good time frame to use when looking for new facilities. The longer the time period taken,the more leverage is retained in the negotiating process.
Mistake #2: BEGINNING A SPACE SEARCH WITHOUT DETERMINING BOTH CURRENT AND LONG TERM NEEDS
Evaluation of space needs include not only square footage but also the nature of the floor plan, communication needs, parking requirements, access and security. These considerations should precede the market and facility research phases. Long term planning includes obtaining facilities and lease terms which allow companies to expand, downsize or relocate as circumstances dictate.
Mistake #3: USING NO BROKER AT ALL
Unless someone in the company is already an expert in commercial real estate, most business owners cannot and should not take the time to learn this new industry. Since commissions are paid by landlords on most transactions whether or not the tenant is represented, the additional cost for tenant epresentation is usually zero.
Mistake #4: LEASE COMMENCEMENT DATE IS NOT TIED TO COMPLETION OF CONSTRUCTION
Leases should always include a clause which provides for an extension of the lease commencement date if construction delays are encountered which are not caused by the tenant.
Mistake #5: CONDITION OF THE PREMISES
Tenants who take possession of the premises “as-is” put themselves at great risk. It is best to have the landlord guarantee the space is up to current building, fire, safety, zoning and ADA codes. It is also important to have the landlord guarantee the electrical, plumbing, and HVAC systems are in good operating condition, particularly if the tenant has responsibility for maintenance and repair under the lease.
Mistake #6: USING THE LANDLORD’S PROFESSIONALS
In many situations the tenant should use architects, space planners and general contractors under their control to ensure the most efficient design and the least cost.
Mistake #7: LACK OF UNDERSTANDING THE TRUE SPACE COSTS
Tenants do not always understand the difference between usable and rentable space they are leasing and the impact on occupancy costs, or different types of leases such as full service, modified gross, net, etc. This confusion may cause business owners to make less than optimum decisions.
Mistake #8: PAYING TOO MUCH RENT
Tenants who do not obtain accurate, current market research may pay too high a rental rate. Reliable information is especially important with lease renewal negotiations. It is more costly for a landlord to secure a new tenant then to offer generous concessions to retain an existing tenant. Market knowledge can extract these concessions.
Mistake #9: PAYING FOR TOO MUCH SPACE
Tenant did not use a space planner and leased offices which were too large or had an inefficient floor plan. Tenant did not verify the landlord’s dimensions and figures and is paying rent on “phantom” space.
Mistake #10: LIMIT ON FUTURE FLEXIBILITY AND COMPANY GROWTH
How fast is the company going to grow? Will it be necessary to downsize? How likely is a merger? These situations, and more, indicate the tenant’s need for as much flexibility as possible. Proper language should be inserted into the lease document which will allow a cancellation or modification of the lease under certain circumstances.
Google: “Tenant traps in commercial real estate