By Steven Silverman Commercial Real Estate Tampa • Market • 0 Comments

Tips For Tenants Negotiating A Lease– Part 1

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Tips For Tenants Negotiating A Lease– Part 1
The Annual Cost of the Lease
In the broad  terms a tenant is concerned about
• annual lease cost  and
• lease term.
Leases usually favor the landlord, but  within the above  two key parameters there are negotiation points all along the way for a tenant to try and gain some advantage
In this section we will explore  the Annual Lease Cost
The total annual lease cost rent is the sum of the rent and the expenses. Lets examine each component
a) Lease Rate: The lease rate component is fairly straightforward . It is usually quoted as an annual rate of $ per square foot. In some shopping centers retail tenants have percentage leases where the Tenants pay a percentage of their gross sales plus an agreed base rent per square foot. Obviously, the retail tenant will want to consider how best to balance the base rate and percentage rent. If the tenant anticipates a high sales volume per square foot, it is better to negotiate a lower percentage rent and pay a little more on the base rent. Of course, the opposite  is true if the tenant expects a low sales volume per square foot. It is not always easy negotiating  this with mega landlords who may not be that flexible, but his depends on the market.
Since the  lease rate is quoted in terms of dollars per sf, both the dollars and the square foot part should be examined. All too often the tenant simply accepts what the landlord is quoting.  You would be surprised how often the landlord has the square footage of the space incorrect. How can something so simple be incorrect? The space could have been reconfigured by prior tenants. The space SF is often measured incorrectly. Two different people may both measure and come up with a different total SF.  I have seen this work to the tenants advantage where the lease rate/sf is agreed and the lease is signed. Then the tenant has the space measured by a professional using BOMA standards. If it turns out that the SF is less than quoted, the tenant goes back to the Landlord and with the actual SF and effectively reduces the annual dollar rent. See my article on BOMA standards
b) Expenses:
(i) General Property Expenses: Lease can vary from Triple Net Leases (NNN) where the tenant is responsible for the taxes, insurance and maintenance to Gross Lease . These expenses are often called common area maintenance (CAM). In a Gross Lease the landlord generally pays the taxes, insurance and maintenance. In a Modified Gross Lease the tenant and landlord each pay a portion of the CAM. The tenant must be sure that he understands the type of lease he has and that he is on the same page as the Landlord in defining these expenses. Some brokers define a Full Service Lease as a Gross Lease that includes utilities, others use the term Full Service Lease as a synonym for a Gross Lease.  Understand exactly what costs you as a Tenant will be responsible for. The Tenant should ask for an explanation of the components of the CAM cost. Sometimes the CAM component is based on estimated expenses. These should be adjusted at year end and the tenant should be entitled to see an accounting. Look for expense escalation clauses, even in a gross lease. The landlord may define the first year as a base year and not charge expenses, but in year 2 if some property expenses increase, the tenant is surprised to receive a bill for the increase over the base.
(ii) Tenant Space Expenses: A tenant may agree in the lease to be responsible for certain expenses of the individual space, such as Heating, Ventilation and Air Conditioning (HVAC). The equipment should be checked before occupancy. Some tenants just don’t bother. The air conditioning may seem fine but a 15 year old system that has not been well maintained represents a huge cost.  Similarly for plumbing, electrical etc. Do your homework and challenge the Landlord if you find problem. You may find the landlord a lot less cooperative in these matters six months into the lease.
Find out if the Landlord owns the property free and clear. In many cases mortgage loans required the landlord to keep the cash flow above a certain level. This may prevent the Landlord from giving you rent concessions. Owners that have a small mortgage or no mortgage at all have greater flexibility and are more likely to cut you some slack.
Love is blind so don’t fall in love with a space. Do your homework. The Landlord will have an asking price for the space. You need to know what the market rates are and be able to show the Landlord if he is above market.  Let him know that you are looking at alternative spaces.

In the broad  terms a tenant is concerned about

• Annual lease cost  and

• Lease term.

Leases usually favor the landlord, but  within the above  two key parameters there are negotiation points all along the way for a tenant to try and gain some advantage

PART I – THE ANNUAL COST OF THE LEASE

The total annual lease cost rent is the sum of the rent and the expenses. Lets examine each component

a) LEASE RATE: The lease rate component is fairly straightforward . It is usually quoted as an annual rate of $ per square foot. In some shopping centers retail tenants have percentage leases where the Tenants pay a percentage of their gross sales plus an agreed base rent per square foot. Obviously, the retail tenant will want to consider how best to balance the base rate and percentage rent. If the tenant anticipates a high sales volume per square foot, it is better to negotiate a lower percentage rent and pay a little more on the base rent. Of course, the opposite  is true if the tenant expects a low sales volume per square foot. It is not always easy negotiating  this with mega landlords who may not be that flexible, but his depends on the market. Every Tenant should at the very minimum understand what the market lease rates are for comparable space,

Since the  lease rate is quoted in terms of dollars per sf, both the dollars and the square foot part should be examined. All too often the tenant simply accepts what the sf landlord is quoting.  You would be surprised how often the landlord has the square footage of the space incorrect. How can something so simple be incorrect? The space could have been reconfigured by prior tenants. The space SF is often measured incorrectly. Two different people may both measure and come up with a different total SF.  I have seen this work to the tenants advantage where the lease rate/sf is agreed and the lease is signed. Then the tenant has the space measured by a professional using BOMA standards. If it turns out that the SF is less than quoted, the tenant goes back to the Landlord and with the actual SF and effectively reduces the annual dollar rent. See my article on BOMA standards

b) EXPENSES:

(i) General Property Expenses: Lease can vary from Triple Net Leases (NNN) where the tenant is responsible for the taxes, insurance and maintenance to Gross Lease . These expenses are often called common area maintenance (CAM). In a Gross Lease the landlord generally pays the taxes, insurance and maintenance. In a Modified Gross Lease the tenant and landlord each pay a portion of the CAM. The tenant must be sure that he understands the type of lease he has and that he is on the same page as the Landlord in defining these expenses. Some brokers define a Full Service Lease as a Gross Lease that includes utilities, others use the term Full Service Lease as a synonym for a Gross Lease.  Understand exactly what costs you as a Tenant will be responsible for. The Tenant should ask for an explanation of the components of the CAM cost. Sometimes the CAM component is based on estimated expenses. These should be adjusted at year end and the tenant should be entitled to see an accounting. Look for expense escalation clauses, even in a gross lease. The landlord may define the first year as a base year and not charge expenses, but in year 2 if some property expenses increase, the tenant is surprised to receive a bill for the increase over the base. Be careful about real estate taxes. If it is a new building the current tax rate may still be based on the raw land or building shell.  The property tax will increase at the next assessment period when the finished building is assessed.

(ii) Tenant Space Expenses: A tenant may agree in the lease to be responsible for certain expenses of the individual space, such as Heating, Ventilation and Air Conditioning (HVAC). The equipment should be checked before occupancy. Some tenants just don’t bother. The air conditioning may seem fine but a 15 year old system that has not been well maintained represents a huge cost.  Similarly for plumbing, electrical etc. Do your homework and challenge the Landlord if you find problem. You may find the landlord a lot less cooperative in these matters six months into the lease.

(iii) Build-Out Expenses. A Landlord will often agree to allowances for certain build-out expenses and the Tenants should negotiate the best deal he can.  Many landlords, in a soft market, will also offer periods of free rent. The Tenant is responsible for other start up costs (example a burglar alarm). The Tenant may be able to negotiate for the landlord to pay some of these additional upfront expenses in exchange for a slight increase in rent.   It can help with cash flow for the tenant

Find out if the Landlord owns the property free and clear. In many cases mortgage loans required the landlord to keep the cash flow above a certain level. This may prevent the Landlord from giving you rent concessions. Owners that have a small mortgage or no mortgage at all have greater flexibility and are more able to cut you some slack.

Don’t fall in love with a space. Do your homework, be diligent and got the whole way. Inspect all the equipment, especially the electrical, heating and plumbing, companies like Blake & Sons Heating and Air can be hired independently, their second opinion is your life line in many cases. . The Landlord will have an asking price for the space. You need to know what the market is offering and break out lease rate and expenses so that you can compare apples to apples. You need to be able to show the Landlord if he is above market.  Let him know that you are looking at alternative spaces.

The purpose of this blog is to share information on questions that I have answered or information I have given to my commercial real estate clients in the Tampa Bay, FL area. I hope that others may find the information useful.

Steven Silverman, CCIM is the broker at Tampa Commercial Real Estate, a commercial real estate brokerage firm based in Tampa, FL. Please contact us if you are looking to purchase, sell or lease commercial property in the Tampa Bay area.

email: Steven@TampaCommercialRealEstate.com.

WebSite: www.TampaCommercialRealestate.com

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