The Other Side of the Table: Understanding the Landlord’s Mindset
Yes, you read the headline correct, this post is about issues the building owner should consider when leasing commercial space to a prospective tenant. Isn’t this blog titled “The Tenant Advisor” you ask? Yes, this site is tenant oriented, but when approached about a guest post that looks at commercial leases from the other side — the landlord’s perspective, I was quick to agree it was a great idea.
Commercial leases are typically long-term arrangements between two parties and while lease negotiations can sometimes be contentious, ultimately a tenant and its landlord have to live together in what should be a mutually beneficial business relationship. Don’t get me wrong “Fair is Where We End Up” but, I believe it is important for both the tenant and their broker to look at the transaction from the landlord’s perspective and understand the building owner’s concerns in regards to protecting the value of their asset. There always has to be some give and take in any lease negotiation.
In this guest post, Michael Koss, the Founder and CEO of KossREsource.com outlines ten protection issues for the building owner.
The Top Ten Protections a Landlord Should Have in a Commercial Lease
Before leasing a property to a tenant, it’s important to safeguard your personal and financial interests, both of which can be covered within the document itself. Here are 10 things to think about as you draft a commercial property lease.
1) Check the tenant’s and guarantor’s credit. In the event that the tenant’s business is not successful, the lease will only be as strong as the tenant and the guarantor’s financial condition. Even if the tenant is allowed to operate the business in the name of an entity, their personal credit is a telling indication of their character. Get financial information from the guarantor as well and verify the cash on hand. It is always best to also have a personal guaranty and the signature of the spouse as well.
2) Ask to review the tenant’s business plan. A tenant is far more likely to be troublesome if the company is not succeeding in its line of business. Before leasing, make sure that you have confidence in the tenant’s business plan and that the location that you are providing is compatible with the tenant’s business requirements. Part of that review means determining that the tenant has adequate funds to develop his/her business as well as sufficient financial reserves.
3) Evaluate whether your tenant will have the value of synergy with other businesses nearby. In a multi-tenanted property, for instance, tenants impact each other’s businesses in many important ways. Be confident that the businesses you work with complement one another and are not direct competitors likely to drive down the new businesses prospects.
4) Verify that the tenant has his/her own insurance. Be certain that the tenant has adequate insurance from a highly rated carrier covering all potential castastrophes. This mitigates your risk as well as the tenant’s in the event of an emergency or disaster.
5) Incorporate a specific-use provision in the lease. You should lease to a tenant for a use that you believe is a good match with the available space. Incorporating a specific-use provision into the lease ensures that the tenant cannot change their business into something that is not desirable.
6) Control approval of the transfer right. This allows you to accept or reject the transfer of the business to another owner. It also ensures that any new tenant conforms to your specified-use provision, has sufficient financial circumstances to optimize their probability of success and meets all credit requirements.
7) Provide for escalations of rent. Because money is devalued over time as a result of inflation, a good rent today may be inadequate in the future. The best protection is a CPI (Consumer Price Index) annual adjustment to the tenant’s rent to ensure that the dollars specified remain constant in value over the term of the lease.
8) Retain property operation approval rights. To avoid a situation where a tenant could do something that is a detriment to your property (and/or other tenants in a multi-tenant property), retain all operation rights in the lease. This will allow you to avoid a situation where a tenant conducts unwanted construction or puts up undesirable signage.
9) Establish rules and guidelines for the use of the property. Setting appropriate rules and guidelines for the property at the outset and requiring that tenants conform to them should be a part of every lease. To be enforceable, these rules and guidelines should be clearly communicated in the lease document.
10) Be selective. When executing a lease you are entering into a long-term contractual relationship with a person, people or a business entity. Make sure this is a tenant you wish to do business with over an extended period of time. Once the lease is signed you are obligated to uphold it, just like the tenant, so be cautious about your tenant selection.
About Michael Koss
Michael Koss is the Founder and CEO of KossREsource.com, a comprehensive, free, online CRE information site that provides an extensive library of landlord-protective legal documents to owners and investors. KossREsource.com also lets CRE professionals and mortgage brokers find debt and equity financing for virtually any type of property, nationwide. The site lists thousands of loan programs from hundreds lenders. Other services include a directory of CRE service providers across the country and social networking tools CRE professionals can use to generate business.