When renting commercial property, the rules of the game are very different than that of residential. Commercial property rentals have to contend with numerous obstacles that could significantly affect your ability to open your business. It's not enough to know if the area is zoned properly and if the building has enough parking for your use. Understanding the smaller less talked about intricacies could make the difference between successfully opening your business or finding yourself in an uncomfortable negotiation with the landlord.
There are many different scenarios that can affect a tenant's ability to open his doors. For instance, if you are renting in an office building, the issues to look out for are much different than renting in a commercial strip center. Essentially, the rules of the game are different. The same is true if renting in an industrial park. So, for the sake of relevancy, I'm going to concentrate on rentals as they pertain to retail strip centers. This is one of the most common scenarios for a small business owner and potentially one of the most complicated.
Let's start with the fact that every landlord is different and not all of them will give you the information you need. Aside from telling you if your use is exclusive or how many parking spaces there are, landlords typically aren't very forthcoming with information so you'll have to do your part in making sure all of your questions are answered. And the reason is simple. It's not the landlords job to know your business. That's your job. So you as the business owner need to know everything that is required of you by the local governing agencies before signing that lease. Considering that most if not all leases are as-is, it's extremely important to go over every possible detail.
The burden of due diligence is on the tenant and the tenant must take care in asking the right questions and investigating the property before signing that lease. Hence, the reason for a well written Letter of Intent. I will be covering this topic in later posts, but for now, let's start with the core questions that should be asked in every transaction.
In summary, this is not the end all on questions to ask when negotiating a lease. There are many more things to ask that are crucial to your business. These are the ones that stand out the most since they can end up costing you thousands if not addressed property from the beginning. In future posts I will address these other questions and their importance.
www.allrealtymanagement.com
There are many different scenarios that can affect a tenant's ability to open his doors. For instance, if you are renting in an office building, the issues to look out for are much different than renting in a commercial strip center. Essentially, the rules of the game are different. The same is true if renting in an industrial park. So, for the sake of relevancy, I'm going to concentrate on rentals as they pertain to retail strip centers. This is one of the most common scenarios for a small business owner and potentially one of the most complicated.
Let's start with the fact that every landlord is different and not all of them will give you the information you need. Aside from telling you if your use is exclusive or how many parking spaces there are, landlords typically aren't very forthcoming with information so you'll have to do your part in making sure all of your questions are answered. And the reason is simple. It's not the landlords job to know your business. That's your job. So you as the business owner need to know everything that is required of you by the local governing agencies before signing that lease. Considering that most if not all leases are as-is, it's extremely important to go over every possible detail.
The burden of due diligence is on the tenant and the tenant must take care in asking the right questions and investigating the property before signing that lease. Hence, the reason for a well written Letter of Intent. I will be covering this topic in later posts, but for now, let's start with the core questions that should be asked in every transaction.
- Is the Property on Septic or Sewer? I can not stress enough how important this question is and how strongly it can affect your ability to get a Certification of Use. Properties on Septic have to meet very strict water consumption and septic tank size criteria enforced by the local Health Department and DERM (Department of Environmental Resource Management). There are certain limitations on the allowed GPD or (gallons per day) for every specific use. If the property is fairly old, and odds are that it is if it's on septic, then chances are that the property is already over its allowed limit. This could then result in the city or county, depending on your location, to now allow a change of use. If the property is already over the allowed limit and the septic tank is undersized for the building, the building owners are penalized and not allowed to change uses. So, if the previous use was a nail salon, it has to stay as a nail salon. This is not something you hear about every day, but believe me, it's something I deal with on a daily basis. I will also be talking more about this in detail in future posts.
- What was the previous use of the property? Another unknown issue facing tenants is a term called "establishing use". So, let's say you have a barber shop and you just rented a space that looks perfect. You go to Zoning, submit your Certification of Use application, and the next thing you know you're denied. Why? Because this use was never established before. There was never a permit pulled for this use and the building department doesn't know if there is sufficient water allocated for the use, or sufficient parking, or if the space has been updated to meet current code requirements. There are only two uses typically allowed to reciprocate without the need of establishing use and those are retail and office. And even then, it's always a good idea to consult with your local Zoning and Building Department to make sure there are no issues with that particular space and your use.
- Aside from the base rent, are there any other pass-through costs? When you start calling around and asking for prices, you'll soon find out that not all building owners are the same or use the same terms when explaining their leases. Just because one landlord uses Modified Gross to describe their lease doesn't mean that the other owner will use Modified Gross in the same manner. The same holds true of Gross, Net, Double Net, Triple Net, and Modified Net. So, the best way to get around this is simple. Make sure you ask about any pass through expenses. Then they will have to disclose whether or not you are responsible for a pro-rata share of expenses including property taxes, insurance, or maintenance.
- Aside from A/C maintenance, am I also responsible for replacement? It is typical for the tenant to be responsible for the maintenance and general repairs of the A/C unit in commercial. However, depending on the building owner and type of lease you sign, the A/C replacement may be negotiable. And with all negotiations, the best time to negotiate is prior to signing that lease. If you are signing a typical gross lease that is far below the rates you would pay for Class A, triple Net retail space in the area, don't expect the landlord to include replacement in the lease. You will find a few that will do this but you have to negotiate ahead of time. At the very least, ask for a 30 day try out period to make sure it's operational. Leases should include language stating that A/C will be delivered in operating condition. But, if it needs a new compressor 6 months down the line and nothing was negotiated, the cost to replace or repair is all on you.
- Is there any free rent to account for the time I need to open the space? You would be surprised how many tenants I get calls from that don't even ask this question and it's perfectly reasonable to ask for 30 days to allow the tenant time to apply for the certificate of use and prepare the space for his business. And, if extensive remodeling is required as would be necessary for a restaurant, you should ask for more time. Unless you're building a space from dirt floors, I don't see a landlord giving more than 3 to 4 months of free rent. This is typically seen on completely new buildings. In this scenario, not only is free rent given but build-out allowances as well. However, for the typical mom and pop store, 30 days is a normal time to ask.
In summary, this is not the end all on questions to ask when negotiating a lease. There are many more things to ask that are crucial to your business. These are the ones that stand out the most since they can end up costing you thousands if not addressed property from the beginning. In future posts I will address these other questions and their importance.
www.allrealtymanagement.com
written by: Victor A. Abreu