Watch Out For These 11 Red Flags In A Commercial Lease Agreement

by Phill Tomlinson | Oct 29, 2021 | Blog

Whether you’re going for a long-term or a short-term lease agreement, you will still be bound to a landlord when signing a lease. Of course, you want to maximize this time to generate profit from your business while tending to minimal problems, or none at all.nnSo, before signing a lease agreement with a landlord, here are eleven (11) red flags you need to be wary of.nn n

Red Flags:

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1. Signs of Landlord Financial Constraint

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nOne of the major red flags you need to take note of is the landlord’s possible financial struggles, which can manifest in several ways:  poor maintenance of the property, landlord not willing to give TI’s but offers abated rent instead, a lot of vacancy at the project, or word of mouth from current tenants when asking about the project and landlord.  As a tenant, you may be wary of financially constrained landlords since unforeseen circumstances may lead you to problematic situations in case your landlord is unable to carry the financial responsibilities of these instances.nn n

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2. Missing Disturbance and/or Holdover Clause in the Lease

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nFor instance, a financially struggling landlord was forced by their lenders to take possession of his/her property, which a tenant is currently leasing. This will automatically nullify the leasing agreement. So, what will happen to the tenant?nnThe lack of disturbance clause in an agreement does not provide any security to the tenant to have ample time to find and relocate to another location if this happens. Therefore, a disturbance clause is a major requirement that should be included in the agreement before signing. As a matter of fact, this should be a mandatory requirement to all landlords in the first place.nnA holdover clause must also be included to allow tenants enough time to negotiate before renewing the contract or relocating.nn n

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3. Too good to be true projections

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nAnother red flag to look out for is when a property is presented to have future work to be done or an outstanding business survivability given the major economic disruptions of a particular time or area. If the property projections are too good to be true, chances are they were presented exceedingly beyond their actual numbers or the numbers are indeed true. Either way, tenants must always confirm this by asking legitimate documents to back up these significant claims.nn n

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4. Not Using Demographic or Analytical Study Results

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nAs a tenant, it is important to ask for data, such as demographic study results and analytics, from your commercial broker or landlord in order to maximize the assurance that the property is bound to generate adequate income. If you are unable to get this data, you may be walking into a commitment that could cost you down the road. Having access and understanding demographic and analytical data is part of your due diligence as a tenant. Most commercial brokers and landlords can provide this information. If not, consider this a red flag. In any case, it is better to consider bailing out before it is too late for you and your business.nn n

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5. Unclear mechanics on computations

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nThe terms included in the agreement between the landlord and the tenant must be as particular as they can be in order for both parties to clearly understand what each detail entails. This is especially important for fees and calculations as these involve money. If a landlord provides unclear calculations that lack or do not specifically point the mechanics of computations, then make sure that you, as the tenant, clarify this. Otherwise, it can potentially cause problems in the future and you will be left with no choice but to abide since you are bound to the signed agreement.nn n

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6. Unclear designations and obligations

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nAs a tenant, look out for vaguely described responsibilities of each party in the agreement. You need to avoid being put in a position where an unclear agreement is put against your favour and results to you taking on a role that was not explicitly stated in the agreement. A good commercial broker with work out the larger deal points through a Letter of Intent (LOI) prior to going to a lease.nn n

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7. No pass-through language on paper

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nAnother important data that a potential tenant should also get their hands on are the operating expenses history of the property for at least two or three years and the list of planned capital projects planned by the landlord within the next year or two. This is significant since this will impact the pass-through terms on the agreement, or the negotiations on whoever shoulders the maintenance costs.nnTypically, the landlord will attempt to generate back all these expenses as soon as possible, potentially influencing the rates set on you. So, if the landlord cannot provide the data or if a pass-through language is not set on paper, apply skepticism and inquire about this aspect. What you can do is to negotiate fair terms and put the agreed terms in writing to make everything official and contract-bound.nn n

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8. Unclear/unspecified CAM coverage

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nDepending on the type of lease agreement the landlord and the tenant get into, the Common Area Maintenance (CAM) entails important discussion between the two parties. If the CAM coverage appears vague or unspecified in terms of coverage, make sure to clarify this with the landlord. The danger of vaguely written CAM coverage is the possibility of paying the maintenance of items and facilities that may not necessarily be included in the supposed common area maintenance coverage.nnIn addition, tenants must inspect all maintenance facilities and equipment of the property and ensure that they are all in good condition. Furthermore, have the landlord grant a 6-month warranty to the maintenance facilities and equipment, such as the HVAC, so the tenant can avoid acquiring the financial burden of poor maintenance.nnIn case the maintenance expenses are shouldered by the landlord, tenants should have protection if the designated role of the landlord to maintain is not duly executed. Tenants must also secure into writing an annual audit of maintenance expenses to evaluate if the landlord is appropriating adequate amount of expenses for maintenance to sustain quality facilities and operations.nn n

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9. Alarming Turnover Rates

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nThe rate of tenants leaving the property can speak for itself, and a high turnover rate is very alarming. This implies that there is probably something wrong with the property or the landlord. If possible, talk to the previous tenants to determine the reason for their relocation. Either way, this should be enough to discontinue your negotiations and find a well-recommended property instead.nn n

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10. Sloppy Documents

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nHow the legal and official documents appear imply the legitimacy of the landlord. If documents are filled with casual and messy corrections, faded printing, and illegible writing, consider this a major red flag to be very wary of. This might appear to be a small consideration to take but in worst case scenarios, an unclear information can lead to consequences on the tenant’s end. It is always better to clarify these terms and ask for more legible copies to avoid future problems.nn n

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11. Putting assurance on verbal confirmations

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nVerbal confirmations and negotiations can be done as initial steps in taking the negotiations to writing. But if the landlord heavily relies on verbal confirmations and often disregards legal action, it may be best to find a better alternative or have a commercial broker get involved who can have better documents brought into the deal.nn nn

nnEven after outlining all the information above, leasing commercial space and/or renewing your lease can still seem daunting. That’s why the Leveraged CRE Team at Commercial Properties, Inc. is here to help you achieve your leasing goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.nn nnNeed help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!nnn nnPhill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns. nn nnBookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCREnn nn 

Know Your Lease Types: Triple Net (NNN), Full-Service, and Modified Gross

by Phill Tomlinson | Oct 26, 2021 | Blog

If you are leasing a commercial real estate space, chances are, you have encountered these terms: ‘triple net’ (NNN), ‘full-service’ (FS), and ‘modified gross’ (MG).nnAs a business owner, technical terms like these can often be confusing and overwhelming, when all you just want to do is offer your products or services. But with the right amount of experience and knowledge, you can grapple what these terms technically mean. To oversimplify, they are terms in commercial leasing that provide a variety of ways for the landlord to collect the rent from their tenants.nnNow, if you are a beginner in the industry and clueless on what these terms refer to, then this article will give you an overview on what these terms really mean, along with the pros and cons that come with each of these lease types and which one may be the best one for you and your business.nnThe words “Triple Net” is used commonly when dealing with commercial real estate because no matter which type is used to take a lease, the landlord has the Triple Net’s to deal with. They are getting paid regardless how you, the tenant, feel about it. Typically the Triple Net’s are a pass through cost that the landlord passes on. These costs are seldom marked up as a profit center for the landlord.nnOverall, when it comes to these lease types, the main differences are how the landlord collects the rent to be reimbursed for the expenses of the project. In the end, the tenant pays roughly the same amount but with small differences based on the building type and tenant use.nnCosts associated with most commercial real estate leases can be broken into three areas:n

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1. Base Rent

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2. Triple Nets

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3. Electric and Janitorial

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nLet us start with the Triple Net Lease or NNN.nn n

Triple Net Lease (NNN)

nThe Triple Net Lease, or often referred to as NNN, refers to the lease type where the tenant pays for the operating expenses outside of the base rate. The 3 Ns stand for the three “nets” in the lease which tenants are paying, namely:n

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• property taxes

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• building insurance

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• common area maintenance (CAM)n
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  • Common area refers to the entire area shared by all tenants and the corresponding facilities that come with it. CAM may include the maintenance of the property’s receiving space, water, parking lots, hallways, elevators, common bathrooms, roof and others. CAM expenses are typically distributed to all tenants occupying the property under the Triple Net Lease.

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nA triple net lease is one in which the tenant pays all the ongoing operating expenses. The landlord/owner charges an annual base rate plus a pass-through cost of the three major nets. Other costs such as utilities, janitorial, internet, phone, etc. are not included in the lease rent. In its purest form, a Triple Net Lease is where the tenant manages the property/space, doing everything from paying all the operating expenses, property taxes, utilities, insurance premiums, maintenance, and interior repairs. With a triple net lease, the landlord will also pass on utility costs that are not separately metered, as well as all costs related to common area maintenance (CAM). These so-called CAM charges include all expenses involved in maintaining common areas such as water/sewer, trash, restrooms, landscaping, parking lots, fire sprinklers, the roof or anything that all tenants share.nn n

Modified Gross Lease (MG)

nUnlike a triple net lease, this agreement includes one, two or all three of the Nets as part of the base rent. It’s important not to assume what’s included and to ask your commercial broker what part of the nets have been included or modified. Typically, a modified gross lease will include all the nets in the base rent, but not include electric or janitorial.nn n

Full-Service Lease (FS)

nThis agreement is where the base rent covers all costs of taxes, insurance, maintenance along with the utilities and janitorial. The tenant pays a pre-determined lease rate each month and there are no pass-through expenses for operating expenses. A pure full-service lease is the best of all worlds for a tenant, particularly for a medical office tenant. The tenant only has to write one check per month, and the amount only goes up incrementally over time with the normal progression of rent. Monthly rent typically rises about 3% to 4% per year (although that’s negotiable). The tenant doesn’t have to worry about getting hit later for extra costs such as utilities, and the landlord handles all of the maintenance so the tenant can focus on growing their business. One thing to note is if the yearly costs for CAM’s go down, the savings go directly into the landlord’s pocket. If the costs go up, the tenant is responsible for paying the difference at the beginning of each year over the base year that was established in their lease.nn nn n

Benefits of a Triple Net NNN Lease

nThe nice thing about a triple net lease is the potential savings you could have in the event the costs for the insurance, taxes, or CAM charges were to come down. In this case those savings are passed on to the tenant. Likewise, the downside of a triple net lease is that if expenses go up, those expenses as well are passed on to the tenant as a higher net cost.nn nn n

Other things to Consider Before Signing Lease Agreement

nBy now, you may have already understood the three basic lease structures in the market and what each entail on you, based on your business type or preference. You may have also decided by now on the lease type to employ for your business.nnBut before signing your lease agreements, here is one more crucial thing for you to consider: never solely rely on verbal agreements on what your landlord identifies the lease type to be. At the end of the day, these are just terms that may be used to verbally characterize a lease type, but what is more important is what’s on paper.nnAs a sensible tenant, you still need to thoroughly go through your lease agreement before signing, understanding all the provisions included, and making sure that indeed, you are signing into a lease type of your choice without any suspicious terms and conditions that may put you on a disadvantage in the future.nn

nnEven after outlining all the information above, knowing these lease types in commercial real estate (CRE) can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your leasing goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.nn nnNeed help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!nnn nnPhill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns. nn nnBookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCREnn nn nn 

Do’s And Don’ts When Renewing Your Commercial Lease

by Phill Tomlinson | Oct 22, 2021 | Blog

Renewing your commercial lease agreement seems like a pretty simple task. But as a wise tenant and business owner, you must know that there is more to the task than merely signing your lease agreement for another set of years. There are actually things you can do and must not do in order to ensure that your requests and needs are met by the landlord.nnHere are three (3) of the most crucial do’s and don’ts when it comes to renewing your commercial lease agreement.nn n

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   Market Research

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nWhether you find yourself contented with your current location or not, market research is a significant step in exploring your rights and demands as a tenant. Doing market research entails studying the current status of commercial real estate properties in your area, including rental rates, agreement terms, incentives, and perks.nn nnCompare your current status vs. the marketnnCommunicate with other tenants in your location or in neighboring properties and asking how much they pay for rent, what their lease agreement inclusions are, and the incentives and perks they enjoy, if there are. Of course, you need to remain professional in your approach for them to disclose these pieces of information.nn nnConsider sales on current locationnnMarket research may also include finding options if you are deciding to transfer. Never dwell on false optimism, which means that if you feel that the location is not working for your business given the time of your stay, it is often better to transfer to a more advantageous location than stay and wait for progress to happen. Moving out and transferring may initially cost you money but once you secure a better location, it will prove to be a correct move in the long run.nn nnWork with expertsnnFor some business owners, it may benefit to recognize that doing market research is not your cup of tea. There’s an apparent reason why commercial real estate brokers exist. Therefore, you can acquire market research by working with a commercial real estate broker who knows the market very well to find leasing details, better locations, amenities or help guide you in the right direction on making a quality decision to attain positive results in the long run.nn nnProvide time to plannnRemember that market research will benefit you as a tenant and as a business owner. Therefore, you need to invest ample time to plan out your actions. It is recommended to have things in mind at least six to nine (6 – 9) months before your lease expires. This should give you enough time to explore and prepare your necessary paper works for whatever you decide to do.nnAnother side note: always keep critical dates in mind, such as your lease expiration date.nnSo, what’s in it for you and your business?nnBy doing market research you can:n

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• compare your current rent, agreement inclusions, incentives, and amenities with that of other tenants

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• evaluate if you are on a fair trade with your current landlord or you are on a disadvantaged position with higher rental rate than the other tenants

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• use these bits of information to negotiate better terms or request incentives, perks, or additional amenities

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• find a better location for your business

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   Negotiate

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nNegotiate from first offernnDuring your lease renewal, never settle with the first offer. Your landlord may retain the same rental rate or discuss with you any changes in your rent or expenses. The first offer is often a rate the landlord has set for all tenants at the project. Therefore, you need to start negotiating for a better trade from your standpoint.nnSome tenants are scared of negotiating terms with their landlords, while some simply settle with their current rate. As they say, “Don’t fix something that’s not broken.”nnBut as a business owner, your goal is to maximize your resources and generate higher income, and if that means saving a certain amount from your rental expenses, then that is already significant. This is where your gathered information from market research enters the picture.nn nnHave operating costs auditednnWhen negotiating, make sure to have your operating costs audited to assess whether all your operating expenses are properly managed and is spent on the appropriate items.nnWhat’s in it for you?n

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• can negotiate for reduced rental fee, especially when other locations offer lesser rate or other tenants in your location are offered less

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• can request for perks or incentives offered to new or other tenants in the same location

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• can negotiate better terms on lease agreement, particularly on operating costs, based on your business or space’s needs in the present

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• discuss flexible arrangements with your landlord, considering the potential changes or expansion your business or space may undergo in the future. These arrangements may include terms on space expansion and additional amenities or share-spacing options should your business require financial or spatial compression in the future

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   Don’t disclose profit increase with your landlord

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nLandlords are businessmen like you, and they are also looking for ways to be profitable. With this being said, never share details of your sales to your landlord, especially your increased sales. Some landlords may take this to their advantage to increase your rental fee knowing that you can afford this increase and how inconvenient and impractical it is to transfer to a new location when sales are booming in your current one.nnUnderstandably, some tenants can and do develop a great relationship with their landlords, but there is something to be said keeping such details about your business close to the vest.nnWe hope this guide enlightened you on what you must and must not do when renewing your lease renewal agreement. Indeed, there are a lot of things to consider before signing a lease renewal agreement. It’s a given that as a business owner, you want nothing but the best for your business in all its aspects. With this being said, it is part of your responsibility as a business owner to study the ins and outs of managing your enterprise, particularly on the space where your business stands.nn

nnConsidering buying your own building versus leasing? If you would like information on the next steps to get started, consider reaching out to us. We’re here to help you achieve your commercial real estate goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.nn nnNeed help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!nnn nnPhill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns. nn nnBookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCREnn nn