Questions to Ask Landlords When Leasing Retail Space

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As you search for retail space you will find that landlords operate their retail shopping centers differently. Meaning they don’t all do the same thing. That is why it’s important to understand the nuances of how each landlord manages their retail center, what costs they are responsible for, what costs tenants responsible for, etc. To help get you started below are a few questions to ask landlords when leasing retail commercial real estate.

1. Who owns the retail shopping center? – Are you dealing with a local individual owner, and institutional owner? I ask because you would not negotiate the same way with an individual owner as you would with an institutional one. You have to adjust your negotiation strategy.
2. How long have they owned it? – The owner is either a holder or a flipper. If they are a holder they will want to keep it longer and increase the value. They may be more negotiable. If they are a flipper they may make some quick improvements, increase the value, increase the rents, and resell for a profit. New owners may not be as realistic with rents especially if they bought at a high price in a hot market. Long time owners maybe more realistic with market rates and be able to offer lower rates since their basis is lower.
3. What are the actual operating expenses for the center for the last 3-5 years? – This will give you an idea of how well they have managed to keep the common area maintenance charges to a minimum. If you see a pattern of the operating expenses going up and up and up then you might want to look at other options. They don’t have any control over taxes however they should be doing a good job of keeping their common area maintenance (CAM) charges low.
4. Who is the largest tenant (aka anchor tenant)? – The anchor tenant is typically the one who attracts the most traffic. If they leave how would that effect your business? You want to confirm that they are staying.
5. Who were the last two tenants to move out? – Were they not happy with the landlord? Did they go out of business, Why did they move out?
6. Which tenants just moved in? – Go talk to them and find out how their negotiating experience was with the landlord.
7. What is the signage criteria? – Signage is expensive so make sure you understand what will be required so you can get an estimate of costs for your budget.

These are just a few of the questions you should ask landlords when renting retail space. If you have any questions or would like help searching for retail space in Austin, Tx feel free to give us a call at 512-861-0525

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Why Your Commercial Real Estate Lease Needs Assignment and Sublease Clauses

What are Common Area Maintenance Charges (CAM) in Commercial Retail Leases?

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When renting commercial retail space IN ADDITION to paying pre-negotiated base rents Tenants are also responsible for paying their pro-rata share of triple net charges (NNN). Triple nets are the taxes, insurance, and common area maintenance charges that Landlord’s pass 100% of the costs to Tenants.

The common area maintenance (CAM) charge is one of the net fees charged to Tenants in a commercial retail triple net (NNN) lease mainly consists of the maintenance fees for work done on the retail property’s common area. Each tenant is only responsible for their prorata share which is the percentage of the tenants rented space vs the total square footage of the property.

Common Area Maintenance Charge Definition in Retail Lease Contracts

Below is an example of how you will typically see common area maintenance charges defined in a retail space commercial lease contract.

In addition to the rents and other charges prescribed in this Lease, Tenant shall pay Tenant’s proportionate share to Landlord all of the costs of operation and maintenance of the Common Area (“CAM”) which may be incurred by Landlord in its discretion. CAM shall include, without limitation, all sums expended in connection with: service and maintenance contracts, including, without limitation, windows and general cleaning, removing of snow, ice, debris and surface water, security police (if and to the extent Landlord provides security), electronic intrusion and fire control and telephone alert systems; machinery and equipment used in the operation of the Shopping Center; storm, sanitary and other drainage or detention systems, sprinklers and other fire protection systems, irrigation systems, and electrical, gas, water, telephone and other utility systems; off-site improvements (including off-site detention areas, drainage and detention ponds, landscaping and traffic signals), and the costs incurred by Landlord for maintenance and operation of and/or contributions to such costs maintained by others for any offsite improvements serving the Shopping Center; traffic regulation, directional signs and traffic consultants; permits, program services, and loudspeaker systems; paving, curbs, sidewalks, walkways, roadways, roofs, parking surfaces (including repaving, sealing, striping and patching); lighting facilities; signage; all costs and expenses allocable to any Declaration of Easements, Covenants, Conditions and Restrictions filed against the Shopping Center as amended from time to time (the “ECR”); margin taxes; the cost of compliance with any accessibility statute including, without limitation, the Americans With Disabilities Act and the (State) Accessibility Standards); all costs and expenses of water or other common utilities; uniforms, supplies and materials used in connection with the operation and maintenance of the Shopping Center; advertising, seasonal decorations, whatever management fee Landlord pays to the manager of the Shopping Center, CAM fees, an administrative fee equal to fifteen percent (15%) of CAM, and a reasonable allowance for Landlord’s overhead costs and the cost of any insurance for which Landlord is not reimbursed pursuant to Section 6.2, but specifically excluding all expenses paid or reimbursed pursuant to Article VI. In addition, although the roof(s) of the building(s) in the Shopping Center are not literally part of the Common Area, Landlord and Tenant agree that roof maintenance, repair and replacement shall be included as a common area maintenance item to the extent not specifically allocated to Tenant under this Lease nor to another tenant pursuant to its lease. With regard to capital expenditures (i) the original investment in capital improvements, i.e., upon the initial construction of the Shopping Center, shall not be included and (ii) improvements and replacements, to the extent capitalized on Landlord’s records, shall be included only to the extent of a commercially reasonable depreciation or amortization (including interest accruals commensurate with Landlord’s interest costs). The proportionate share to be paid by Tenant of CAM shall be computed on the ratio that the total floor area (all of which is deemed “leaseable”) of the Demised Premises bears to the total leaseable floor area of all constructed buildings within the Shopping Center (excluding, however, areas owned or maintained by a party or parties other than Landlord); provided that in no event shall Tenant’s monthly payment of CAM be less than the amount specified in Section 1.1(o) above. If this Lease should commence on a date other than the first day of a calendar year or terminate on a date other than the last day of a calendar year, Tenant’s reimbursement obligations under this Section 7.4 shall be prorated based upon Landlord’s expenses for the entire calendar year. Each month during the term of this Lease, at the same time and in the same manner as with the monthly installments of Minimum Guaranteed Rental, Tenant shall pay to Landlord one twelfth (1/12) of the estimated CAM for the current year which Landlord may have given Tenant for the current year or, if the CAM has not been estimated by Landlord, then Tenant shall pay one twelfth (1/12) of the actual CAM for the immediately preceding calendar year. Each CAM payment shall be due and payable at the same time and in the same manner as the payment of Minimum Guaranteed Rental. The amount of Tenant’s proportionate share of the initial CAM shall be as set forth in Article I above. Landlord may at its option make monthly or other periodic changes based upon the estimated annual CAM, payable in advance, but subject to adjustment after the end of the year on the basis of the actual cost for such year, as set forth in Article VI above as to payments of taxes, real estate charges, and insurance.

If you have any questions about common area maintenance charges when leasing retail commercial real estate give us a call and we will help get you up to speed.

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Ways to Make a Commercial Lease More Flexible for Your Business

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When leasing commercial real estate having a more flexible lease will allow you to ensure the the building you lease space from will accommodate your current and future needs. Flexibility is key especially if you have a company with unpredictable growth. Below are a few ways to make a commercial lease more flexible for your business.

1. Do a Shorter Term Lease – longer leases commit you to one particular space for 3-5 years or longer. What if you are a new business that is just getting started? What if you plan on hiring 20 more employees by the 12th month? If you are in a longer lease and the building does not have anymore available space you will be forced to lease additional space in another building or have to sublease your space or end up eating it for the remainder of the term. If you are able to negotiate a shorter lease (1-3 years) then you will have the ability to ensure that your business is going the way you want it to before committing to a longer term. 
2. Negotiate a Lease Termination Option – Landlords don’t like giving these options however if you can get away with it then do so, especially if your only option is to sign a longer lease. You never know how quickly your company will grow or whether or not your business is going to make it. Let’s say you have to sign a 5 year lease to get the tenant improvement allowance needed to build out the space. If you can negotiate to have the option to terminate the lease after the 3rd year for example then you will have a little bit of flexibility. The caveat however is that you will more than likely have to pay some sort of early termination fee, which more than likely will be the landlords unamortized cost of tenant improvements & lease commissions as well as a predetermined number of rental payments.
3. Get a Renegotiation Clause – This one may be tough to get however if you can get the landlord to agree to give you the chance to renegotiate aspects of your lease (e.g. rental rate, tenant improvement allowance, etc) at some point in time this will help you to make the lease more flexible.  Just keep in mind you might have to trade more term.
4. Sublease & Assignment Options – Make sure you negotiate to have the ability to sublease all or a portion of your space to a 3rd party. What if you outgrow the space before the lease expires? What if you go out of business? What if you don’t need to use all of the space and wish to sublease a portion of it? What if you sell the company? These are reasons why you want to ensure you get sublease and assignment options.
5. Expansion Options – This will give you the ability to take more space if needed. This may come in the form of a right of first offer (ROFO) or a right of first refusal (ROFR). With a ROFO the landlord must offer any newly available space to you before marketing it to others. A ROFR means the landlord has to offer you the deal that was agreed to with a 3rd party. 
6. Contraction Options – Opposite of the above. At any point in time if you need to downsize with this option you would be able to give back a portion of your space. Keep in mind this is a deal point that only large companies have leverage enough to negotiate, especially if they are leasing more than one floor of a building.

The above are a few ways make a commercial real estate lease more flexible for your company. Just remember you will have to know how to negotiate these items. Having a commercial real estate tenant representative help you can increase your chances of success and their service does not cost you anything.

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Why Do Landlords Prefer Longer Commercial Leases?

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When leasing commercial real estate you will find that most landlords prefer longer commercial leases. If you are an existing, financially sound company that has been in business for over 5 years signing a longer commercial lease is not a big deal. However if you are a new business or startup company predicting the success of your company beyond 2-3 years can be quite challenging. Below are a few reasons why landlords prefer longer commercial leases.

1. They want stable predictable cash flow – In order to maximize their assets and satisfy investors and banks landlords want to have predictable cash flow. Having a bunch of tenants with 1-2 year leases does not guarantee a return on investment in the long run. Having tenants sign a minimum of 3-5 years will provide more security and predictable income for their asset.
2. The need to recoup a lot of up front costs – In most commercial lease deals to persuade tenants to lease space at their building landlords have to spend a lot of money up front. The capital they typically invest upfront may be architectural costs, attorney fees, tenant improvements, and commercial leasing commissions. Depending on the scope of work completed they may not make any profit the first 1-2 years or longer which is why they would want a 5 year lease or longer to recoup their initial costs and make a profit so get an acceptable ROI.
3. The market is hot – If the market you live in is strong, rents are at an all time high, and vacancy rates are low then landlords would want to lock in tenant at the higher rates. Markets are cyclical meaning rates won’t always continue to go up. At least every 8-10 years the market goes up or down. If they can lock you in at the higher rates for 5-7 years or more then it protects their investment during the downturn. 
4. Retail space – If you are renting retail space then most landlords will want at least a 3-5 year lease. One is for the reasons above. The other reason is because of perception. If customers see tenants moving in and out every 1-2 years it makes the shopping center look like it’s not successful. Having tenants at a shopping center not only gives the center a better image but also gives the other tenants more confidence in the success and encourages them to stay there longer. All the tenants attract customers and that helps the shopping center as a whole.

Now that you know why landlords prefer tenants to sign longer commercial real estate leases you have to decided what is best for your business. Don’t force yourself to sign a longer lease than necessary especially if it does not make business sense. I know you may really like one particular building that requires a 5 year lease, however if you are unsure about the future of your business then you will be setting yourself up for failure by signing a long lease. If the landlord will not budge on the required lease term then find a building that will be more flexible.

 

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Questions to Ask Landlords Before Signing a Commercial Lease

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When determining which commercial space is right for your business there are a lot more things to consider than just the rental rate. Landlords know that most tenants are not familiar with the intricacies of commercial leasing and if you don’t take the time to ask the right questions you could be taken advantage of. Keep in mind the landlords goal is to negotiate the most money out of the deal as they can. The more money they make the better their return on investment. As a tenant you want to negotiate the lowest out of pocket expense and lease terms that give you as much control as possible. To help get you started below are a few questions you need to ask in order to negotiate the best deal possible.

1. What Type of Commercial Lease is Being Used? – It’s important that you understand the type of lease being used and what obligations you will have after signing it. There are several different types of commercial real estate leases that landlords use and it depends on the market you are in, the type of space being rented, or just the building owners preference. Commercial lease types used could be gross leases, modified gross, triple net (NNN) leases, full service leases, etc. For example when renting office space you will see some landlords use gross leases however many are converting to NNN leases because it’s easier to pass through all the expenses to tenants. Again, before signing a commercial lease find out what type of lease is being used and what your obligations are.
2. Are the Commercial Lease Terms Negotiable? – Pretty much all commercial leases are landlord friendly. Find out how negotiable the landlord will be when negotiating the lease. If you find out they are not give on anything it may be a sign on how not favorable they will be in the future. It’s really important that you know your current and future needs of your business and what lease terms are or will be important to you. Stick to your guns. If the landlord is not willing to give on anything then find a landlord that will work with you
3. Is the Landlord Willing to Do Any Tenant Improvements? – 99% of the spaces you see will need some sort of improvements to accommodate you needs. I have not seen too many spaces that are move in ready. Ask the landlord if they are willing to make any improvements and/or if they will let you make improvements on your own.
4. What Internet Vendors Service the Building? – The last thing you want to do is sign a lease then find out the internet service providers cannot accommodate you needs. Do you need fiber or gigabit? Which internet vendors service the building? What if you use AT&T in one location and it’s important that your next location also offers AT&T, however they only have Grande? What if your a gaming company that has to have fiber and you find out the building your in does not have it? Bottom line you need to ask the landlord which vendors service the building. What you will find is that most agents don’t know so you will have to do your own due diligence.
5. How is the Phone Reception in the Building? – Another thing tenants find out after it’s too late is that the mobile phone reception in the building is not great. For example their company may use AT&T wireless and then find out that the reception is so low they have to walk outside to make phone calls. Sometimes having a cell booster installed on the rooftop will enhance the connection. Make sure to ask the landlord if they will allow you to have one installed. Or better yet ask if they will install it on their dime.
6. What Amenities are Available? – Does the building have a building conference room, fitness center, deli, covered parking or other amenities that are free for Tenants to use? If they are not free how much do they cost?
7. Are You Allowed to Assign or Sublease the Lease? – Fact is not every business is successful. What if your business fails or you grow so rapidly that your space won’t accommodate your needs anymore and your building does not have anymore vacant space? What if you sell the business? Will the landlord allow you to assign or sublease the space? If you sell the business and assign the space will the landlord let you off the hook or will you always be held accountable for the lease even if you sold the business?

 

 

 

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