Rental rate is just one thing that you should consider.
In many parts of the country, the commercial real estate market is softer than it has been in years. For businesses looking for new space, the soft market may offer some of the lowest rents in quite some time. As seasoned business owners know, however, the cost per square foot is only one factor to consider when evaluating a commercial lease offer.
Look Beyond Base Rate
Let’s talk about rates. Given the current state of the economy and current interest rates, it is reasonable to expect that rates will have come down in many markets. At the same time, rental rates must be economically viable for the landlord as well as the tenant. If the rate seems too good to be true, you may want to investigate the financial health of your potential landlord. Low rent from a financially distressed property owner will provide only a short-term benefit if the property owner becomes bankrupt.
Low rents should make you cautious about other lease terms, too. In some cases, artificially low rents are driving property owners to become somewhat creative in finding other revenue sources, such as inflated operating costs or the shifting of certain maintenance obligations to the tenant.
Take a Negotiating Approach
Whether you intend to negotiate your lease or have a lawyer or broker negotiate on your behalf, you must begin with a clear plan of needs and objectives. We recommend that our clients identify their specific needs in three general areas: their business operations, their economic needs, and their need for an exit strategy.
With respect to business operations, you will have a number of matters to consider. If the property will be used to store your equipment and your fleet, you need to be sure that the building can provide adequate security. Additionally, if you are storing equipment and vehicles, you’ll likely also want to perform maintenance on equipment and vehicles at the property. Is this within the permitted uses under the zoning rules and under the lease?
If you plan on using your space to meet with customers, you will want assurance of adequate parking, signage, etc. In summary, you will want to make the landlord aware of your intentions for the property, and you’ll want the landlord’s assurance that your intended use presents no problems.
Economic considerations start with the rental rate. However, you also need to be concerned about expenses that will be passed through to you as one of the tenants. What expenses are included in the pass-through? What are your rights to receive a detailed list of pass-through expenses? When do you have the right to audit the landlord’s books and records to ensure that only proper expenses are passed through to the tenants? Is there a cap on annual increases?
If there are apparent deficiencies with the property, such as an old roof or a parking lot that needs paving, you will want assurance that the deficiencies will be repaired at the landlord’s expense.
If circumstances arise that cause you to cease business operations, what are your obligations under the lease? In the absence of special provisions, a tenant is generally liable for all lease payments through the end of the lease term. However, landlords will sometimes modify their stance with regard to early termination. For example, a landlord may agree to allow you to terminate with limited exposure for unpaid rent if you terminate after a certain number of years or after giving several months advance written notice. Landlords will sometimes agree to termination without penalty and certain enumerated circumstances, such as the death or total disability of the business owner.
Regardless of the size of the property being rented, there should always be some room for lease negotiations. If a landlord is inflexible at the outset, consider whether the landlord will be reasonable during the lease term if problems arise.
Finally, given the length and complexity of commercial leases, and the significance of the financial commitment, you should always have a lease professionally reviewed before signing. A well-written and fair lease may provide more economic benefit in the long term than a low base-rental rate!
Michael P. Coyne is a founding partner of the law firm, Waldheger Coyne, located in Cleveland, Ohio. For more information on the firm, visit: www.healthlaw.com or call 440-835-0600.