Commercial Lease Help

[MikeMang]

Does anyone here have any experience with commercial leases? I'm specifically looking for resources that will help me to determine if the lease presented to me is "fair". I'm having a tough time tracking down quality info online. Please PM if you can recommend a particular company/service that might be able to hold my hand through the process.

Specifically I am talking about a retail lease for a small business in the downtown core connected to the path (think Brookfield, Oxford, Cadillac Fairview).

 

[cdr108]

why don't you bring the lease to a commercial RE lawyer for review?

 

[Observer Walt]

I'm not sure what you mean by "fair" -- the rental rate, or other provisions of the lease. Of course you should be concerned with both. You need the assistance of a lawyer, as already mentioned, and also an experienced commercial real estate agent who can give guidance on what a fair lease rate would be.

I assume you are aware that you are talking about some of the more expensive locations in the city.

 

[MikeMang]

Thanks to the two of you for the responses. Do either of you have recommendations for a lawyer or agent?

I'm well aware that those are the most expensive locations in the city. We received prelim lease rates and I wasn't so much shocked by the absolute amount of rent (its a small space), but how fast they built in the escalation. The rent in the last year of the term is essentially double the first year. I'm sure you can rejigger the steps around so long as the PV of the lease payments is the same.

Anyone know what the industry standard is for lease termination. For example, if you decide to shut the doors two years into a ten year lease what typically happens?

Thanks,

 

[safeashouses]

As a commercial landlord I would try to mitigate my damages immediately by re-leasing the space (thus incurring lost rent, cleaning costs, improvement allowances and commissions) and then, depending on the dollars involves, likely pursue a claim against you for damages. You should be aware that signing a commercial lease enters you into a binding contract. That carries serious consequences that you should be aware of before proceeding.

You don't need to spend money on a lawyer until you've worked out the business terms. First call a commercial leasing broker- CBRE, Cushman LePage, DTZ or Colliers. All of them can help you understand the tranaaction.

Please note further that if you're dealing with one of the larger landlords you probably won't have much negotiating room but the local agents could best help you determine the market conditions.

Good luck Mike!

 

[cdr108]

doubling of the base rents from year 1 to year 10 sounds extreme ... that's ~7% cpa, unless they're giving you a teaser rate substantially below market just to get you started.

i'm mostly familiar with 5 year lease + option to renew another 5 years.

 

[Xenosblitz]

You can try to negotiate for "percentage rent" vs. "base rent", if you feel the rate they are quoting is very high. Percentage rent is when they take a portion of your revenue/sales. This gives you a bit of wiggle room in economic downturns, but if things are good, the opposite happens. Note that the landlord is less likely to allow percentage rent for small businesses since you do not have a proven track record of sales, thus, it is high risk for them.

From my understanding (I work at a major real estate company), small businesses have next to no negotiating power. The big landlords have the deep pockets to keep a space empty, until the "right" tenant comes along. They are usually looking for a tenant that will complement their existing mix of tenants - usually crucial that does not exist in the mall/tower yet, or something that is novel and will bring in customers/traffic. With percentage rent for various tenants, you can see how one store can drive revenues for the landlord across multiple leases.

In fact, if the potential tenant is a major traffic draw, landlords will pay the business to move in! I've seen payments of hundreds of thousands of dollars for retail tenants, literally. Office leases can run into the millions in incentives.

 

[Observer Walt]

I'm not so sure that owners would extend much to tenants in terms of incentives, in today's environment, unless you are a very solid and well known chain operation who would enhance the mall by your presence. Even so, you won't get free rent or anything near it.

I do remember, in the very weak leasing environment of the early 1990s, there were persistent (never confirmed) rumours that a few tenants got free rent, but still had to pay operating expenses. I have not heard of anything like that for many years now. Realistically, the best to expect is 30 days or so of free rent at the beginning of the term for initial "fixturing" (installation of the tenant's improvements), with rent to start on the earlier of 30 days or the date of actual opening for business.

It's certainly true as well, as already mentioned, that smaller businesses have little or no negotiating room. You will possibly find a "take it or leave it" attitude, or you may find that owners aren't interested in leasing to you at all if they feel that you won't enhance the mall significantly.

Remember that commercial leases are almost always on a "net" basis. You pay rent, and you pay operating expenses which are usually referred to in the lease as "additional rent". The operating expenses can be substantial, and you should get, from the owner, in advance, a realistic estimate of what they will be. They should be able to quote you a fairly accurate estimate, on a "per square foot" basis, based on last year's experience.