The Manual thanks for following me on Twitter! https://t.co/vTui7mOzwz

The Manual thanks for following me on Twitter! https://t.co/vTui7mOzwz

— Nathan K Smith (@AustinTenantAdv) January 12, 2019

from Twitter https://twitter.com/AustinTenantAdv

What is Rent Abatement in Commercial Leases & How To Get It?

Rent abatement in a commercial lease means that the tenant does NOT have to pay rent for a certain time period during one of the following scenarios:

1. During the initial tenant improvements,
2. As a concession in lieu of a reduced rental rate,
3. Or when the tenant is not able to occupy the space because major property repairs are needed.

Rent abatement is a negotiable item in a commercial lease that must not be overlooked. To ensure that you negotiate rent abatement effectively it’s important that you consult with a real estate attorney and your commercial real estate agent because once the terms are finalized the clauses will be outlined in the lease contract and set in stone. Whatever happens after that will all be handled according to how the language is set forth in the contract.

Rent Abatement During Initial Tenant Improvements

Sometimes when you lease commercial real estate (e.g. retail space) the space is either in shell condition (brand new) or is 2nd generation space that needs a lot reconfiguration and improvements. Depending on the size of space, existing condition, and if a construction permit is required it could take anywhere from a few weeks to 6-9 months for any improvements to be completed.

It would not make sense to pay rent during the construction period so it’s important that you negotiate to have rental payments not start until substantial completion of all the tenant improvements.

Rent Abatement as a Concession

When negotiating commercial leases you ask for all kinds of concessions such as tenant improvement allowance, lower rate, expansion options, etc. Rent abatement (aka Free Rent) is also something that you can negotiate for. Investors that own buildings can have different investment objectives. Some prefer to cash flow a property and more likely to offer a lower rate. Others maybe trying to sell or refinance the building and more likely to offer free rent instead of a lower rate. You see the rents the landlords collects on a commercial property dictate the market value. The lower the rates the lower the potential value. It’s important to understand the investment objective of each building owner. 

Anytime you can negotiate to get rent abatement in addition to a tenant improvement allowance and other concessions you will be better off in the long run.

What happens if you get abated rent and default on the lease?

Getting rent abatement can help you lower your overall monthly rent costs or help you pay for tenant improvements that are above and beyond what the landlord is willing to give an allowance for. However keep in mind in most cases if you default or don’t fulfill the entire lease term you will be required to pay back all or a portion of any free rent given. This is also known as a clawback provision. During negotiations if a landlord is going to demand a clawback in the event you default or break the lease try to negotiate to where you only pay for unamortized free rent. For example if you were given $12,000 in rent abatement and the lease term was 3 years it would be amortized over 36 months ($4,000 per year or $333 per month). If you broke the lease after the 12th month you would have to pay back the rent abatement for the remaining 24 months or $8,000……..which is the unamortized portion.

Rent abatement on the base rent and nnn or just the base rent?

Rent abatement is negotiable. If the landlord agrees to it they would rather just give you free base rent and you pay the operating expenses (taxes, insurance, maintenance). That way they are at least covering their operating costs.

As a tenant you would rather receive free gross rent (not pay base rent or the operating expenses). Do your best to negotiate this. In the end free base rent is better than nothing.

Rent Abatement Due to Commercial Space Being Untenantable

In most commercial leases there is a Casualty clause (like in the example below) that talks about rent abatement in the event the tenant is not able to occupy or access a space because of fire or other casualty. It could be a partial rent abatement or full abatement depending on the scope of damage and what portion of the space the tenant has access to.  Potential scenarios could be fire or flooding, natural disasters such as earthquakes, tornadoes, and hurricanes, or condemnation by the city or government.

Rationale Behind Rent Abatement

Commercial property owners typically have business liability insurance on their building. The insurance would cover any damages to the property in addition to the abatement of rent. Personal property of a tenant that is damaged would be covered by the tenant’s own insurance. It’s a good idea for the tenant to have business interruption insurance as well to cover any potential financial losses. Since both parties have insurance – the tenant on personal property and the landlord on the property – the abatement puts the lease contract between landlord and tenant on hold until the property can be occupied again.

How Long Does the Abatement of Rent Continue?

The abatement last from the date of the casualty until the date the landlord has substantially completed the repairs and restoration. Rather than just let tenants out of a commercial lease when a casualty occurs Landlords want the ability to try to cure the defects first within a certain time period (which is negotiated). The restoration could take weeks or months however at some point if the insurance company or contractors determine that the repairs will take longer than the negotiated time frame then the tenant or landlord could terminate the lease.

Tenants Must Negotiate to Not Let Rent Abatement Be Nullified

Tenants need to negotiate to require that no matter who caused the casualty the abatement provision will still exist. For example some landlords have language in the lease that says if the tenant or tenants employee causes the casualty then the abatement clause is nullified and the tenant must continue paying rent while repairs and restoration is being conducted.

Commercial rent is income for a landlord which is paid for by tenants. Part of the rent a tenant pays includes the building insurance coverage. If the abatement clause is nullified then the landlord is able to double dip by getting rent from the tenant and file the claim with their insurance company.

Sample Rent Abatement Clause in Commercial Lease

To see an example of a rent abatement clause in a commercial real estate lease or if you are looking for commercial space for rent in Austin Tx feel free to give us a call at 512-861-0525

 

 

 

Josh Daspit thanks for following me on Twitter! https://t.co/Qoncn6tern

Josh Daspit thanks for following me on Twitter! https://t.co/Qoncn6tern

— Nathan K Smith (@AustinTenantAdv) January 5, 2019

from Twitter https://twitter.com/AustinTenantAdv

Before Leasing Retail Space Try These Alternatives First

Leasing retail space is expensive so before rushing out to sign a commercial lease it’s important that you prove that your products will sell. This applies to anyone wanting to open a retail business including health spas, restaurants, hair salons or any store that sells merchandise. 

Do people want to buy your products at a price that you can profit from? If you don’t know you need to determine if their is an active market before doing anything.

Ways to Sell Products Without Leasing Retail Space

1. Flea Markets

Consider renting a booth at a local flea market. There are a great way to test the market with your products. You can rent on a daily or weekly basis. You can find flea markets that are outdoors, indoors, upscale, or downscale. Just ask a lot of questions about each one and what type of customers typically visit each. Then pick the one that more closely relates to your target audience

2. Sell Retail Products Online

Amazon is huge right now. Looking into selling on Amazon whether you ship or if you use FBA. You can also test the marketability of your products on Ebay and Craigslist.

3. Wholesale Products to Local Retailers

Talk to existing retail shops who sell products that could potentially compliment yours. Do your homework to determine which ones sell to your target customer. Try to make distribution deals with these existing retailers. This might require that you discount your products and potentially not make much or any profit however it will help you figure out which of your products will sell………..and…………..at what price.

4. Home & Office Product Parties

Talk to a bunch of women and find out what types of products similar to yours that that interest them. Then organize small parties or meetups for groups of women who are interested in buying your type of products. You could also invite a few other retailers. This would be a low pressure atmosphere.

5. Restaurant Retailing

Visit a few restaurants and ask them if they would let you model your accessories. You could go from table to table showing off your products. Offer to give the restaurants commissions on any sales generated.

Benefits of Selling Products Before Leasing Retail Space

If you are able to try selling your products at different venues you will gain a lot of valuable information about your target audience and how to position your product to sell the best. Below are a few benefits:

1. You find out which products will sell
2. You discover the best selling environment for each product
3. You determine the best price at which your products will sell
4. You learn how to sell your products. Which sales approach works best for the type of customer that you want to attract
5. You will generate cash to run your business
6. You will know what products to stock in your store and how to price and package them
7. You will know where products sell the best
8. Gives you the opportunity to fine tune your products.

By not leasing retail space and first testing your ideas and sales via person to person, home based parties, etc if gives you the opportunity to fine tune your products and marketing. Once you determine that your products will sell at a price that you can profit from then you are ready to find and lease retail space. If you need help finding Austin retail space for lease give us a call at (512) 861-0525

515 Congress Ave Austin Tx 78701 – Bank of America Center

The Bank of America Center is a class A office building located in the heart of downtown Austin at 515 Congress Ave Austin Tx 78701. If you want to be at the center of it all, and within walking distance of the Warehouse & 6th street entertainment districts, the Texas State Capital, Austin Convention Center, and Lady Bird Lake this is the perfect class A office building for you.

If you are interested in leasing downtown Austin office space and would like help finding the options that best suit your needs call (512) 861-0525.

Building Size – 263,058 SF

Building Height – 26 Floors

Typical Floor Plate – 14,000 SF

Parking – Building has a parking garage with 340 spaces. Parking ratio of 1 per 770 sf at $195 per space per month. 

Access – 7:00 a.m. – 7:00 p.m Monday thru Friday. 8:00 a.m. – 1:00 p.m. Saturday

Security – Landlord provides on-site 24 hour access control (both manned and card key), 7 days per week. Card key access is required after hours for entrance and exit doors, & the elevators.

Amenities – Bike storage room, Jimmy John’s Deli, Coffee bar, Cava Grill. Also a 4,300 sf for profit fitness center with showers and locker rooms in lower level of project.

Asking Base Rental Rate – $39 (as of 1/1/2019)

Estimated Operating Expenses – $23.31 (as of 1/1/2019)

For information about available space at 515 Congress Avenue or other class A office buildings in downtown Austin give us a call. We will help you find great space and negotiate the best deal possible.

Powderkeg thanks for following me on Twitter! https://t.co/J3ObduqPmx

Powderkeg thanks for following me on Twitter! https://t.co/J3ObduqPmx

— Nathan K Smith (@AustinTenantAdv) January 4, 2019

from Twitter https://twitter.com/AustinTenantAdv

Fashion Flooring thanks for following me on Twitter! https://t.co/eXuPNKahI6

Fashion Flooring thanks for following me on Twitter! https://t.co/eXuPNKahI6

— Nathan K Smith (@AustinTenantAdv) January 1, 2019

from Twitter https://twitter.com/AustinTenantAdv