Realtor Roundtable – Leasing Do’s and Don’ts
What are the top must-haves for a prospective tenant in a typical lease situation?
Property Management Services. The lease should include reliable property management services: HVAC maintenance, cleaning services and snow removal, etc. and a five-year lease which will allow the landlord to provide a more competitive rate. A clean, well-maintained building and a fair and well-capitalized landlord are also key.
Reasonable Security Deposit. Because commercial real estate is largely unregulated, you might encounter outrageous demands when it comes to security deposits, sometimes asking for 3 – 6 months! So a reasonable security deposit of a month and a half should be looked for.
Kick-Out Clause. If you’re a start-up business, a ‘kick-out’ clause is desirable for both the tenant and the landlord. Essentially, it gives a
tenant an out during the first year of the lease if it becomes apparent that their start-up business is not going to make it. And it also saves the landlord from having to go to court for eviction and back rent. The ‘kick-out’ clause gives a two-month notice to the landlord within the first year, giving them the time find another tenant while the original tenant is continuing to pay rent.
Competitive Pricing. Like in all things real estate, location is the top priority. However, you want to get a fair market value for the space (comparable to other buildings in the marketplace), regardless if the space is Class A, B or C. And don’t just look at the rent – consider options to renew, flexibility of lease term, the ability to sublet, etc. Also, the quality and integrity of the landlord will have a major impact on the tenant’s work life. What you’re looking for is a landlord that is reliable, responsive and fair in making sure the property is well maintained and issues are addressed promptly.
Right Landlord. You always want to partner with the right landlord, both from a customer service standpoint and to account for potential expansion over the years. Say, for example, you’re an established company or brand that’s growing. You may want to go with a major landlord/developer – an institutional REIT (Real Estate Investment Trust) with a large portfolio of properties. That way, if you’re in the middle of your lease and you need to double your space needs, you may be able to work out a transition from one space to another in that landlord’s portfolio, rather than have to operate two locations.
That’s not to diminish the importance of the smaller, more entrepreneurial landlords that own a few buildings here and there; they comprise the generic makeup of most of the proximate cities as those class B/C buildings are not typically professionally owned and managed. Those landlords typically do not have the same resources and manpower as compared to their much larger counterparts, but the beauty of industrial real estate is that there is not a whole lot of managing to do in these smaller facilities. Ultimately, it’s the person, not the size of their company, that you want to do business with. And remember, your location should fit your business needs, not the other way around.
Knowledgeable Team. You should also have the right team assembled to protect your interests from the get-go. That means, a seasoned broker to help you locate and evaluate lease options; a real estate attorney who can ensure the lease agreement is fair and doesn’t include any hidden charges or restrictions; and an architect who will make sure the square footage is accurate.
What can a tenant do to strengthen his/her negotiating position?
Know Your Needs. Knowing exactly what specifications meet your needs will help the negotiation process go smoother.
Long Lease Period. The longer your lease period, the greater your negotiating leverage. If landlords know they have a stable tenant, they will be more likely to give concessions, go the extra mile in the work letter, etc. That being said, don’t negotiate for the last penny on a deal. It sends the wrong message to the landlord and the tenant will ultimate pay the cost for “beating up” the landlord.
Provide Financial Records. Show the landlord that you have the financial wherewithal to meet your obligations. Provide a recent financial statement for your business and a copy of your personal credit report with your letter of intent to lease as well as readying your company’s audited financials to be delivered to the landlord and having a complete and concise understanding of any potential fit-up needs are all important. Also, make sure your attorney is ready to review the lease documents.
Ask for Renewal Options. You can make your position even stronger by offering renewal options – say a five-year lease with five one-year options to renew. A landlord sees that as a potential 10-year lease! Keep in mind, renewal options are solely the tenant’s. If you want to use them, the landlord cannot refuse if you are in good standing. Likewise, if you don’t want to use them, the landlord can’t force you to.
Work with a Commercial Realtor. This is extremely important to do to protect your interests in the negotiation process. A good realtor will be very familiar with the comps in the area – size, location, and purpose similar to yours. That way, you’ll be walking in to the negotiations with the kind of data you need to get the best deal you can. Having a real estate broker who is knowledgeable in your particular market and industry segment as an advocate is a huge advantage. They’ll know what lease deals and landlord concessions are being made in the area. A good broker is also knowledgeable about the myriad of issues that can drive a real estate decision and will give you the objective information you need to make an informed decision.
Be Prepared and Prompt. The difference between getting the deal or losing out to someone else could be the speed in which you respond. It’s also important to have a “Plan B” and to make sure the landlord knows multiple options are being explored and considered.
Hidden dangers, red flags: what should tenants be watching out for?
Turnaround for Approvals. This isn’t related to the lease or landlord, but I think it’s critically important for tenants to consider the municipality they will be operating in. Is there a need for variances? What is the typical turnaround for approvals? Putting it bluntly, some cities just make the process that much easier than others, and those that do position themselves to be more attractive to prospective tenants.
Unkempt Property. It’s all about the viability of the landlord and the quality of the maintenance. Knock on the doors of current tenants
and ask if they are happy. Look for visual signs of poor maintenance in parking lots, elevators. Also, check to see that the property taxes are current and make sure the building is not in foreclosure or pre-foreclosure.
Certain Charges. Tenants should be careful about Triple Net Charges (NNN), also known as Common Area Maintenance Charges (CAM) as they can be extremely deceiving. You may think you’re getting a great deal on the rent but find that the triple net charges spike the total cost above market rates. Triple Net Charges include taxes, insurance, building and exterior maintenance, management fees, etc.
Work Letter Details. Play close attention to the details in the work letter. Both sides need to have a clear understanding of responsibilities in outfitting the space. And don’t forget to deal with expectations on returning space to pre-existing conditions, as considerable costs could be associated with this.
Unverified Square Footage. You should verify the square footage with the help of an architect. In larger transactions, even a small difference can turn into large savings. And while you’re at it, make sure the building systems (HVAC, networking, power, etc.) are sufficient to your needs.
Sublet Terms & Conditions. Another important item is your ability to sublet or assign some or all of your space during the course of the lease. You have to be prepared for ebbs and flows in your business. So you want to make sure that there is a clause that says you are allowed to do that with the landlord’s reasonable consent. Usually, the clause includes some definitions of the type of business and financial qualifications of the sublet tenant you can recruit.
When it comes to leasehold improvements, what can a tenant reasonably expect from the landlord?
Depends on Lease Terms and Negotiated Rate. In office leases, the tenant should expect at a minimum fresh paint and carpeting. In retail leases, the landlord should provide a clean ‘vanilla box’. Industrial spaces should be ‘broom clean’. You may be able to negotiate for more substantial renovations provided the term of the lease is long enough for the landlord to amortize the cost of the work.
Typically, for a three-year lease, you can expect fresh paint and carpet. Bump it up to a five-year lease and some modifications to the space should be included. If a landlord thinks a tenant has great financials, they may be more generous in the work letter. The landlord is looking for quality tenants. So they may agree to “invest” in this particular tenant by doing more work if the tenant leases for a ten-year 
term or over a five-year term. Also, if a landlord is not willing to contribute financially towards a tenant’s build out, tenants should ask for free rent while undertaking a build-out for their specific use. That way, they are not paying rent on the space before they can actually use it. Typical free rent periods can range from one to three months but can be more, depending on the extent of the build out.
A landlord can rationalize adding loading docks, upgrading lighting, functional things like that, whereas more tenant-specific improvements such as remodeling or expanding the offices might not be overly useful to the next tenant/user of the space, making it a tough sell to have a landlord contribute to in today’s market.
There are no absolutes, but rather rough guidelines as to what landlords will do. Factors such as the tenant’s financials and lease term have a significant impact on work letters. You can probably get a landlord to paint and carpet office space and maybe a month or two of free rent if build-outs are more extensive.
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