Tenant Leasing Tips
Common Lease Clauses - You may receive assurances that the owner has no intention of selling during your lease term; that is not enough. The property may be transferred for estate planning reasons or by reason of death. If the owner says they have no intention of selling, then giving you a cap on tax increases should not be a problem.
Common Lease Clauses - You are likely to encounter the term "Substantially Complete" with respect to the owner's delivery of the premises. This is intended to mean ready to occupy, with only a punch-list of items to be completed or corrected. Make sure you negotiate for at least 30 days to submit your punch-list to the owner, as you will certainly be too busy with other matters to do it in less time.
Common Lease Clauses - There are many erosive forces at work that can silently reduce a commercial property value. Property taxes increase annually, insurance costs constantly creep up, utilities and other operating expenses must be monitored and re-negotiated. The lease contract rent is a promise to pay, and is paid in future dollars. Inflation causes the future value of money to have less purchasing power - this is why commercial leases contain protective clauses against income erosion. These are known as escalation clauses.
Common Lease Clauses - The use clause will appear with the basic business points and is important because if too tightly written it can affect what you are permitted to do in the premises later if your business model changes and your rights to sublease or assign the lease at a later time. Think about the ramifications of this clause with respect to your business, particularly if you are a retail or industrial tenant.
Common Lease Clauses - The term includes the commencement date, expiration date, and contemplates a possible delay in possession. If the space is vacant and in move-in condition, then barring strikes, riots, natural disasters or other acts of God, you will likely not have any delay in possession of the premises. If the space is subject to construction work, you may need to anticipate delays, or even establish a "drop-dead-date."
Common Lease Clauses - The operating expense increase clause, or additional rent clause, allows the property owner to pass through increases of operating expenses to the commercial tenant. Normally the pass through begins in the 2nd year of the lease term. The 1st year is referred to the base, or comparison, year and increased expenses are compared to the base year - the difference is apportioned to all the tenants and passed through as an operating expense increase.
Common Lease Clauses - The lease will set out the obligations of the parties for maintenance and repairs of the premises and you must be sure this accurately reflects your understanding. As a general rule, in a full service gross lease used for office space, or in any kind of lease covering multi-tenant property, the tenant will be responsible for the interior and the owner for the exterior and common areas.
Common Lease Clauses - The late charge is used to offset the cost incurred by the owner in collecting late rent and as a preventative measure against late rent. Most leases do provide a grace period: 3-5 days is typical. You can often negotiate more days, but I think it might be better to negotiate one or two forgiveness' of late charges per year as this will probably save you more money if you forget to pay on time. The interest rate is for longer, uncured monetary defaults and is applied to those overdue amounts in addition to any late charges.
Common Lease Clauses - The balance of the lease must be reviewed by your legal counsel and discussed thoroughly to make sure you understand what you are signing. Do not get lulled into thinking the bulk of the lease is boilerplate; you never know what may be buried in the miscellaneous provisions.
Common Lease Clauses - The "drop-dead-date" is the date by which, if the premises are not delivered, a tenant has the right to cancel the lease and reclaim any money on deposit. How long a tenant may have to wait to cancel a lease is a negotiable item, but 60-100 days is typical. Frequently a delay in possession does not extend the term of the lease, leaving the tenant with a shorter term than anticipated. Be sure any delay in possession automatically extends the expiration of the lease term to get the full benefit of your bargain.
Common Lease Clauses - Sometimes tenants are concerned with outgrowing the space before the lease expires. Usually the solution is to sublet or assign the lease. However, if the sublease and/or assignment provisions are too restrictive, you may want to negotiate an early termination of the lease. There are costs associated with the right to terminate early. Normally you will be expected to pay several months of rent while the owner finds a substitute tenant. If the owner provided you substantial amounts of improvements, you should expect to repay the unamortized portion of that fee. While early termination penalties are expensive, for some tenants this is preferable to being a sublessor and the potential liabilities of those duties.
Common Lease Clauses - Some smaller properties, owned by individuals, will not want to go through all the calculations and ensuing discussions with tenants about increases in rent. Instead they might simply ask for a flat percentage increase annually. While this is easier for both parties, typically this kind of increase is based upon the entire rental payment. Expense increases are only applied to that portion of the rent that goes toward a particular expense - you could pay more for the convenience of flat percentage increase.
Common Lease Clauses - Some of the aspects of assignment and subletting are becoming more and more restrictive. Be sure you know your rights and obligations as well as the rights retained by the owner. The owner will always require that they consent to any assignment or subletting.
Common Lease Clauses - Some forms describe the premises by defining both the rentable and usable square footage, while others just give the suite number and refer to an exhibit: an architectural drawing of the space. Always ask how recently the space was measured and by whom. When an architect is involved it should be easy to obtain accurate area calculations.
Common Lease Clauses - Regardless of whether or not you are reimbursing the owner for their insurance policies, you will be required to provide your own insurance. Start by sending this part of the lease contract to your insurer along with any clauses that deal with attornment, indemnification and/or subrogation.
Common Lease Clauses - Normally you will have access to your premises 24 hours a day, 7 days a week, 365 days a year. And you can expect the electrical plugs and lights and elevators to operate. Many of the other services the owner is obliged to provide will only be available during the building operating hours - these include HVAC, guard services, building engineers, etc. If you need any of these types of services to be extended beyond the buildings operating hours, the cost of these, if even available, will be passed on to you. This is a big issue for some properties, and a footnote for others.
Common Lease Clauses - Most leases contain a provision stating that this is the entire agreement and that you have not relied upon any other representation and that there are no other outside agreements. To make sure this is accurate, review all your proposals and notes on the transaction and check to see everything you have been promised is in the lease.
Common Lease Clauses - Many options to expand or renew are personal to the original tenant and are not transferable, Options are only viable if there is no default of the lease. It is better if the lease specifies that there are no "uncured monetary defaults," as this is more specific and avoids the risk of losing an option for minor or inconsequential defaults easily cured upon notice. Be sure all notices of default are required to be in writing and delivered to you by certified delivery. Multiple options require preceding options be duly exercised for subsequent options to be viable.
Common Lease Clauses - Many leases seek to distance the owner from any liability about the suitability of your intended use of the premises. It is your responsibility to have checked with zoning and permitting before you sign a lease and begin to operate your business. Before signing any lease you must go to the governing authority and ensure that you can get the necessary license and/or permits needed to operate in the location.
Common Lease Clauses - It often comes as a surprise to the tenant to find out the rent they have negotiated is subject to various kinds of increases. The most common is the requirement to pay for increases in the owner's share of the cost of operating the building, and sometimes tenants object to this, though it can rarely be negotiated away. When expenses are included in the rent they are subject to increases if the cost of providing those services increase over the term of the lease.
Common Lease Clauses - It is sometimes possible to negotiate a cap on operating expense increases including taxes. The cap is usually expressed as a percentage, such as 5% annually. In some states property taxes can rise dramatically when a property is sold or transferred, and a limit on the amount of taxes that can be passed through to you is very important, especially if the property has been held for a long time.
Common Lease Clauses - In order for a renewal option to be viable, any agreements to agree must be scrupulously avoided. Therefore mechanisms to establish the future rental rate, which do not rely upon a future agreement, are vital to the option contract. Typically, one of three methods of establishing the new rental rate is used. The market rental value adjustments are the most flexible and meet the needs of both owner and tenant. Although a market rental value adjustment may sound like an agreement to agree, as long as there is mechanism capable of binding the parties to a rental rate, it is likely that the option to renew will remain valid. Careful consultation with a qualified attorney can prevent misunderstandings at renewal time.
Common Lease Clauses - In order for a renewal option to be viable, any agreements to agree must be scrupulously avoided. Therefore mechanisms to establish the future rental rate, which do not rely upon a future agreement, are vital to the option contract. Typically, one of three methods of establishing the new rental rate is used. The fixed rate option method is the clearest and easiest to understand. Unfortunately, since each side of the transaction has a different forecast of future values, it is also frequently the most difficult one upon which to reach agreement.
Common Lease Clauses - In order for a renewal option to be viable, any agreements to agree must be scrupulously avoided. Therefore mechanisms to establish the future rental rate, which do not rely upon a future agreement, are vital to the option contract. Typically, one of three methods of establishing the new rental rate is used. The Cost of Living Adjustment is based upon one of two Consumer Price Indexes. Either an index showing the increase in cost of living for all urban consumers in a particular area, or the index of all urban wage earners and clerical worker in the nation are used. The problem with this method is that the indexes do not bear much relation to the rental value of a particular property
Common Lease Clauses - If you need extended hours of operations, broach the subject with the owner and make sure the services you want can be delivered affordably before you get too far along in the transaction.
Common Lease Clauses - Holding over can cause your rent to double. At the end of the term the owner may need you to vacate on time to avoid delaying another tenant. To ensure you do vacate on time a provision is made in the lease that increases the rent if you stay beyond the lease term without the owner's consent. This can be an increase of 115-200% of the base rent. Obtaining the owner's consent to stay will eliminate this problem, and lease will become a month-to-month tenancy where the owner can adjust the rent upon 30 days written notice.
Common Lease Clauses - Delays caused by the tenant in approving the plans. making payments for work performed on the tenant's account, or resulting from change orders by the tenant, are not the responsibility of the owner. This type of delay in possession may start the rent and other tenant obligations prior to occupancy.
Common Lease Clauses - Delays caused by circumstances outside the owner's control such as strikes, weather, governmental procedures, fires or other accidents extend the commencement date and the drop-dead date without liability to the owner. In all the preceding examples no rent would be payable until the premises are actually delivered.
Common Lease Clauses - Cash poor commercial property operations offer little benefit to the tenant. Escalation clauses can help ensure the property remains well run, clean and functional for the tenant(s). Expect most leases to allow for the recapture of the increases in the owner's expenses based upon what is included or excluded in the rent structure.
Common Lease Clauses - Capital improvements to the property should either be excluded from the operating expense increases or amortized over their useful life and only that portion passed through annually. Always ask if there are capital improvements planned and how they will be treated in the lease.
Common Lease Clauses - Be sure you understand your rights and obligations to ensure your lease will commence on time. If possession of a leased property is delayed, be sure a Notice of Lease Term Commencement is acknowledged in writing between the parties to avoid misunderstandings later.
Common Lease Clauses - Be sure to calendar the critical dates in the post-lease signing working drawings stage - delays caused by tenants can cause rent to start even though the premises has not been competed and delivered to you. Once the work starts be sure to schedule your cabling, equipment and furniture installers with the contractor or project manager to ensure smooth transition into the building and an undisputed commencement date. Once you have moved in be sure to execute a notice of lease term commencement with the owner.
Common Lease Clauses - Be aware that if your use of the premises increases the cost of coverage to the building, any adjacent premises, or common areas, that cost would most likely be passed on to you. After you have received assurances from your insurer that you can obtain the coverage required, discuss the ramifications of the indemnification, attornment and subrogation with your legal counsel.
Commercial Tenant Leasing Tips,
Courtesy of Michael Coretz,
www.Tucson-Tenant-Representation.com
the Arizona Department of Real Estate
Commercial Real Estate Tips
About Commercial Property Brokers - A full service broker receives as well as initiates transactions. They develop strong problem solving and negotiating skill. Full service brokers often work on more transaction than their tenant rep counterparts.
About Commercial Property Brokers - A qualified commercial property broker will put you in control of your lease transaction. Since you are the one who will live with the lease, control is exactly what you need.
About Commercial Property Brokers - Agency is an action; if a real estate licensee acts as your agent, they become your agent. A broker owes you a fiduciary duty. In other words: an absolutely faithful duty to perform in your best interest, and to do no harm.
See more tipsAbout Commercial Property Brokers - Any broker, even a tenant rep, can inadvertently become a dual agent in a transaction by performing an agency action for the other party.
About Commercial Property Brokers - Brokers are paid upon the completion of the transaction, and not paid if the transaction fails for any reason. Commissions are calculated in two ways: a percentage of the rent for all the years of the lease; or a certain number of dollars per square foot based upon the lease term.
About Commercial Property Brokers - Commercial leasing brokers fall into two categories: full service brokers, who serve as agents for both landlord and tenant; and tenant-only representatives. You will benefit from attaining the skills of a tenant rep.
About Retail Lease Proposals - Operating your business next to a business that may be morally objectionable such as an adult arcade can be a business killer. Have your attorney draft language to protect you from the owner leasing to such uses.
See more tipsAbout Retail Lease Proposals - Take a close look at how your potential neighbors are using utilities in the center and research whether or not you are sharing utility meters with high-demand users. Adjustments may need to be negotiated if separate meters are not possible.
About Retail Lease Proposals - When proposing your lease term, think about the best month for your lease to terminate. If your business thrives during the year-end holiday season and you open your business before the holidays, you may want the lease to end in January or February, rather than an annual anniversary of the commencement date.
About Retail Lease Proposals - Within the operating expense budgets for shopping centers you are likely to pay for promotion and media fees. Be sure these are reasonable and will benefit your business. You may want to have limits placed on how much these can increase annually, or you may find a weak center spending more than you can afford in order to save the center if business falls off.
See more tipsAmericans with Disabilities Act - Do not attempt to tackle the Americans with Disabilities Act compliance without the help of a professional. If employing a space-planning architect, it will be their responsibility to keep you informed about ADA. At minimum you must go to the planning department and ask that the building file be reviewed and that a building inspector visits the site before you sign the lease.
Common Lease Clauses - Most leases contain a provision stating that this is the entire agreement and that you have not relied upon any other representation and that there are no other outside agreements. To make sure this is accurate, review all your proposals and notes on the transaction and check to see everything you have been promised is in the lease.
Common Lease Clauses - Normally you will have access to your premises 24 hours a day, 7 days a week, 365 days a year. And you can expect the electrical plugs and lights and elevators to operate. Many of the other services the owner is obliged to provide will only be available during the building operating hours - these include HVAC, guard services, building engineers, etc. If you need any of these types of services to be extended beyond the buildings operating hours, the cost of these, if even available, will be passed on to you. This is a big issue for some properties, and a footnote for others.
See more tipsCommon Lease Clauses - Regardless of whether or not you are reimbursing the owner for their insurance policies, you will be required to provide your own insurance. Start by sending this part of the lease contract to your insurer along with any clauses that deal with attornment, indemnification and/or subrogation.
Common Lease Clauses - Some forms describe the premises by defining both the rentable and usable square footage, while others just give the suite number and refer to an exhibit: an architectural drawing of the space. Always ask how recently the space was measured and by whom. When an architect is involved it should be easy to obtain accurate area calculations.
Common Lease Clauses - Some of the aspects of assignment and subletting are becoming more and more restrictive. Be sure you know your rights and obligations as well as the rights retained by the owner. The owner will always require that they consent to any assignment or subletting.
See more tipsCommon Lease Clauses - Some smaller properties, owned by individuals, will not want to go through all the calculations and ensuing discussions with tenants about increases in rent. Instead they might simply ask for a flat percentage increase annually. While this is easier for both parties, typically this kind of increase is based upon the entire rental payment. Expense increases are only applied to that portion of the rent that goes toward a particular expense - you could pay more for the convenience of flat percentage increase.
Common Lease Clauses - Sometimes tenants are concerned with outgrowing the space before the lease expires. Usually the solution is to sublet or assign the lease. However, if the sublease and/or assignment provisions are too restrictive, you may want to negotiate an early termination of the lease. There are costs associated with the right to terminate early. Normally you will be expected to pay several months of rent while the owner finds a substitute tenant. If the owner provided you substantial amounts of improvements, you should expect to repay the unamortized portion of that fee. While early termination penalties are expensive, for some tenants this is preferable to being a sublessor and the potential liabilities of those duties.
See more tipsCommon Lease Clauses - The "drop-dead-date" is the date by which, if the premises are not delivered, a tenant has the right to cancel the lease and reclaim any money on deposit. How long a tenant may have to wait to cancel a lease is a negotiable item, but 60-100 days is typical. Frequently a delay in possession does not extend the term of the lease, leaving the tenant with a shorter term than anticipated. Be sure any delay in possession automatically extends the expiration of the lease term to get the full benefit of your bargain.
Common Lease Clauses - The balance of the lease must be reviewed by your legal counsel and discussed thoroughly to make sure you understand what you are signing. Do not get lulled into thinking the bulk of the lease is boilerplate; you never know what may be buried in the miscellaneous provisions.
Common Lease Clauses - The late charge is used to offset the cost incurred by the owner in collecting late rent and as a preventative measure against late rent. Most leases do provide a grace period: 3-5 days is typical. You can often negotiate more days, but I think it might be better to negotiate one or two forgiveness' of late charges per year as this will probably save you more money if you forget to pay on time. The interest rate is for longer, uncured monetary defaults and is applied to those overdue amounts in addition to any late charges.
Common Lease Clauses - The lease will set out the obligations of the parties for maintenance and repairs of the premises and you must be sure this accurately reflects your understanding. As a general rule, in a full service gross lease used for office space, or in any kind of lease covering multi-tenant property, the tenant will be responsible for the interior and the owner for the exterior and common areas.
See more tipsCommon Lease Clauses - The operating expense increase clause, or additional rent clause, allows the property owner to pass through increases of operating expenses to the commercial tenant. Normally the pass through begins in the 2nd year of the lease term. The 1st year is referred to the base, or comparison, year and increased expenses are compared to the base year - the difference is apportioned to all the tenants and passed through as an operating expense increase.
Common Lease Clauses - The term includes the commencement date, expiration date, and contemplates a possible delay in possession. If the space is vacant and in move-in condition, then barring strikes, riots, natural disasters or other acts of God, you will likely not have any delay in possession of the premises. If the space is subject to construction work, you may need to anticipate delays, or even establish a "drop-dead-date."
Common Lease Clauses - The use clause will appear with the basic business points and is important because if too tightly written it can affect what you are permitted to do in the premises later if your business model changes and your rights to sublease or assign the lease at a later time. Think about the ramifications of this clause with respect to your business, particularly if you are a retail or industrial tenant.
See more tipsCommon Lease Clauses - There are many erosive forces at work that can silently reduce a commercial property value. Property taxes increase annually, insurance costs constantly creep up, utilities and other operating expenses must be monitored and re-negotiated. The lease contract rent is a promise to pay, and is paid in future dollars. Inflation causes the future value of money to have less purchasing power - this is why commercial leases contain protective clauses against income erosion. These are known as escalation clauses.
Common Lease Clauses - You are likely to encounter the term "Substantially Complete" with respect to the owner's delivery of the premises. This is intended to mean ready to occupy, with only a punch-list of items to be completed or corrected. Make sure you negotiate for at least 30 days to submit your punch-list to the owner, as you will certainly be too busy with other matters to do it in less time.
Common Lease Clauses - You may receive assurances that the owner has no intention of selling during your lease term; that is not enough. The property may be transferred for estate planning reasons or by reason of death. If the owner says they have no intention of selling, then giving you a cap on tax increases should not be a problem.
Common Lease Clauses - You will be required to sign up to four copies of the lease in original signature. I suggest you initial every page of the lease when you are signing to prevent any accidental substitution of pages. You will next need to provide good funds to cover the first month's rent and any security deposits, or contribution to tenant improvements. You also need to deliver an insurance binder from the insurer.
See more tipsCommon Lease Clauses - Your lease will start with the basic business points, either in an outline form or using fill-in-the-blanks as with form leases. The lease will describe the legal entities involved in the transaction - be very sure this is done correctly, as mistakes here can be costly. If your business is a corporation or limited liability company, you certainly want to maintain the protection that theses business structures afford.
Creating a Proposal to Lease - A well-written proposal to lease will get you well into lease negotiations. Once the proposal stage is complete, you will be provided a draft lease for you and your legal counsel to review and fine-tune into a contract that accurately defines your agreement. An experienced broker can help you write a successful proposal to lease.
Creating a Proposal to Lease - Be aware that if you are offered a reimbursement for tenant improvements provided by you, it could cause a taxable event. Consult a tax advisor before agreeing to any cash allowance that comes as a reimbursement.
Creating a Proposal to Lease - If the property is a multi-tenant property you will need to define the owner's obligations related to the common areas.
Creating a Proposal to Lease - If you are negotiating for more than one space, I advise you not to go much beyond the 1st round of proposal responses or into multiple space-planning sessions without informing the property owners. Creating competition in a softer market can work well I your favor, so letting the other side(s) know you have other options can garner some nice concessions.
Creating a Proposal to Lease - If you have been provided with a floor plan of existing conditions, mark it up and include it with your proposal.
See more tipsCreating a Proposal to Lease - If you use hazardous materials, it is important to discuss that up front to avoid wasting everyone's time. In industrial space you will want assurances the space is clean before occupancy: Be sure to ask the owner for a complete written disclosure about prior uses of the premises.
Creating a Proposal to Lease - In preparing letters of intent, I prefer the approach which makes the proposal simple. This means to gain agreement on the big issues first and set aside smaller issues to work out later in the lease negotiations. This negotiation strategy relieves much of the inherent tension in negotiating, and makes agreement on the side issues easier to obtain.
Creating a Proposal to Lease - Most tenants are concerned about expansion rights so they can avoid moving if they outgrown the space. Owners are reluctant to grant any options since options never serve the owner's interests. Options to expand or renew are definitely considered concessions by property owners. Ask for what you want, but expect the owner's attempt to water down your rights as much as possible. In tight markets, option concessions tend to dissipate.
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