How to negotiate the world of commercial real estate

Simon Caplan, SIOR, Partner, CRESCO Real Estate

You’ve found the perfect office or commercial space and you’re ready to commit to a lease. But before you do so, you need to be aware of potential issues so that you don’t make costly mistakes, says Simon Caplan, SIOR, a partner with CRESCO Real Estate. “By the time the tenant and landlord start negotiating a lease, they’ve already agreed to the major lease points, such as what the rent is, the space buildout plan, the amount of tenant improvement dollars, etc.,” says Caplan. “Once you’ve got those together, you’re ready to negotiate the lease, but you need the help of an expert in order to avoid potential red flags.” Smart Business spoke with Caplan about some common red flags for tenants to look out for and issues you need to raise for your own protection. What are the major issues to be aware of in a lease? The normal process for a potential tenant is that you hire a broker to show you the best spaces for your requirements, then you look at spaces and you choose the best space for your needs. From a tenant perspective, you want to know how big the space is and how much you are going to pay and for how long of a term. What is the buildout going to look like? What are the tenant improvement dollars? Is there a period of free rent? Once you have negotiated those major points, the next step is to start negotiating the lease. What are some common red flag issues to look out for? One of the biggest areas tenants should be aware of are pass-throughs, that is what costs the landlord is allowed to pass through to the tenant. Based on that, when the landlord is doing a buildout for the tenant, if it is extensive, the tenant should have the ability to monitor the landlord’s contractors to make sure the work is of good quality. It should be specified in the contract that the tenant is allowed to observe/inspect the landlord’s work When you rent space, the landlord is usually willing to give a tenant a one-year warranty on the space. Then, after a year, the tenant is responsible for all in-suite maintenance. So if the buildout is not done right – or if the existing space is not in good condition – you don’t want to be stuck with a problem down the road. You really need to know what you’re getting into and who is financially responsible for what. Also regarding maintenance, the tenant should agree to maintain the space and do minor repairs and attempt to get the landlord to do major repairs and replacements. This issue needs to be explicitly addressed as to who is responsible for what in areas including roof repairs, the parking lot and common areas. In most leases, the tenant pays for repairs and the landlord pays for replacements, but you need to spell that out. In addition, the tenant should ask for the right to audit common area maintenance reimbursements once a year. At the beginning of every new year, the landlord should have figured out all of the costs for the previous year and submits them to the tenant to justify what the tenant has to reimburse. If the tenant thinks the numbers are high, that right to audit would then allow the tenant to inspect the landlord’s records to make sure that what the landlord is billing them is correct. Are there any issues that tenants should raise for their own protection? If the tenant has a problem such as a leaking roof, there is nothing worse than an unresponsive landlord. To protect yourself, you should try to include a self-help clause. That way, if you repeatedly have to call the landlord to fix things and the landlord doesn’t take care of it, you have the right to take care of the problem yourself, pay for it yourself and then bill the landlord or subtract it from the rent. You will have to give the landlord proper notice, but if the landlord is not responding, you can notify him that if he doesn’t take care of it by a certain date, you’ll do it yourself. In addition, every lease has a ‘Damage and Destruction’ clause. If there is a fire, or major storm damage, what are you going to do? How long will you give the landlord to put the space back together for you? And what will you do in the meantime? What you want to pay attention to is how long will you give the landlord to put the space back together for you. The goal is to get the landlord to fix the building as quickly as possible. But it takes time and, as a tenant, you have zero control over that. The Damage and Destruction clause gives the landlord a certain amount of time to do the work, and if it’s done within that time, you have an obligation to come back to the space when it’s ready. Make sure you have Business Interruption Insurance. Also, for your own protection, include an option to extend the lease. Normally there will be some type of increase in rent, sometimes tied to the Consumer Price Index. This gives you the guaranteed right to stay in the space for an extended term at this agreed-to price. You still have the option to try to negotiate a better rate at the extension time. Finally, ensure that you have the ability to install high-speed Internet, satellite dishes and other high-tech communication systems through common areas such as roofs, halls, etc., to get into your space. Tenants often make the mistake of assuming they’ll have access, but the landlord doesn’t have to grant you access. How important is it to have an outside adviser review a contract or lease before signing? You absolutely need a professional to work with you through the process. With a lease, the tenant, the broker and the lawyer should all go over the lease individually and make comments on different clauses, then compare notes before responding back to the landlord. Landlords expect tenants to make reasonable changes to the lease terms, and when you’re leasing office or industrial space, just about every clause is negotiable. There are many other issues that your professional can advise you on to help save you future grief. Simon Caplan, SIOR, is a partner with CRESCO Real Estate. Reach him at (216) 525-1472 or [email protected] Insights Real Estate is brought to you by CRESCO Real Estate.