By Jeffrey D. Jones, ASA, CBA, CBI
In the August 2014 issue of SBT Magazine, Part 1 of “Dealing with Landlords” listed the major considerations that are often found in property leases. This article, Part 2, will address in more detail some of those provisions that can be negotiated for your benefit. Lets face it; leases are all slanted to the benefit of the landlord. However, many of the lease provisions can be negotiated to be less onerous for the tenant. Typically, you will be dealing with a leasing agent who works for the landlord or a landlord’s management company when negotiating a new lease. Sometimes, these people have the authority to make changes to their standard lease and sometimes they will need to get permission from the landlord to make changes.
The lease provisions can vary greatly depending upon the type of property you are leasing such as a free-standing building, space in an office building, a business park, a warehouse, a shopping center, or a shopping mall. There are many common elements to property leases but there can be some unique elements depending upon the type of property and the use of the property. Some of these elements can be negotiated and some can not.
The following information will summarize some of the important lease provisions that can often be negotiated.
Term of the Lease
Most landlords prefer to enter into leases with a 3 to 5 year term. Owners of distressed properties will sometimes consider month to month leases or a one year lease; however, the best rental rates can be negotiated with lease terms of 3 to 5 years. It is not uncommon that there will be lease rate increases in each year of the lease. It may be possible to negotiate for a fixed rate depending upon the landlord’s need for a tenant. Landlords are often reluctant to give lease options to renew the lease for an additional period of time. When they are willing to give a lease option, it will most always have a provision that the original terms and conditions will extend into the lease option period except that the rent will be at the then market rate. At best, landlords will sometimes agree to a fixed rental rate for the option period; however, it will most always be at an increase over the original lease rate. The reason for this is because the rental income of the property is one of the basis for the value of the property. If a landlord were to give a 15 year lease, then the value of his property is the same today as it will be for 15 years. Rent increases enable the value of the property to increase.
Rental Rates
The rental rate will often vary depending on the amount of space you want to lease. Major tenants in a multitenant property will often get the most favorable lease rates. Smaller tenants typically pay higher rates to offset the lower rates of the major tenants. Landlords will often allow free rent for a new tenant for one to three months to give the tenant an opportunity to get their business started. Sometimes, landlords will want to put this so-called free rent on the back end of the lease wherein the tenant has to pay this rent at the end of the lease or prorate lease payments to include the cost of the free period. You want to avoid these provision when possible. If possible, check with other tenants in the property or nearby properties to see what they are paying and use that information to negotiate the best lease possible.
Negotiating the best lease possible can make the difference between your business thriving or dying. I often recommend to business owners that they hire a real estate broker who specializes in representing tenants for space. This specialist will be familiar with market rents and the terms and conditions that can be negotiated with the landlord. Typically, the landlord pays the broker fee, even when the broker is actually representing the tenant. Furthermore, I recommend that you have a real estate attorney review a proposed lease before you sign it to ensure there are no provisions that would jeopardize you and your business during the term of the lease. Spending some money upfront to ensure that you have a good lease can often save you thousands of dollars and many headaches during the term of the lease.
In next month’s article, “Dealing With Landlords”, Part 3 will address additional lease provisions to help you obtain the best lease possible.
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Jeff Jones is the President of Certified Appraisers, Inc. and Advanced Business Brokers, Inc. located at 10500 Northwest Freeway, Suite 200, Houston, TX 77092. He can be contacted by phone at 713-680-3290 or by email at jdj@certifiedappraiser.com.
