by Prince Licaylicay | Nov 24, 2021 | All Articles, Buying, Investing, Leasing, Selling
In a leasing project, it is likely you will come across a Letter of Intent (LOI). In this article, we have rounded up everything you need to know about a Letter of Intent.
A Letter of Intent (LOI) is a written non-binding document between two parties that serves as the basis for a contemplated future agreement. It is a preliminary agreement that is negotiated between a tenant and landlord or buyer and seller. The Letter of Intent stipulates the dominant economics and key points with proposed terms in a lease agreement. They are designed to describe or draft the essential items that both parties can assess to decide whether to proceed or continue to an official contract. Thus, a letter of intent is a nonbinding document that encapsulates the basic terms of the offer and the initial goal of the parties without the extensive legal norms included in a real estate contract. This gives the seller or the landlord a concise picture of the scope and terms of the real estate purchase or lease agreement. It is rather important to note that a letter of intent could be binding if the parties decide that it is binding.
When is LOI used in real estate?
A letter of intent is submitted by a serious soon-to-be tenant, buyer, or representing broker in a commercial real estate transaction as an initial offer. It is planned based on basic preparatory information furnished by the landlord as well as the introductory due diligence of the property. Negotiations and formal due diligence begin after the Letter of Intent has been conveyed and prior to a formal purchase or lease agreement is entered into. It is not infrequent for Letter of Intents to be submitted and agreed upon, only to have the terms and conditions subsequently changed or even withdrawn altogether. This is so because a Letter of Intent, at its core, is a nonbinding document that merely states the buyer’s intent subject to verification and due diligence, all of which can be amended or changed any time.
A letter of intent is used in commercial real estate to put the major points of a proposed lease into writing. The party submitting the letter of intent should research, inspect, or even tour available properties on the market before submitting a letter of intent to the landlord. Generally, a letter of intent will be drafted by a commercial estate broker representing the buyer or tenant after the inspection or tour of the property and conducting a spontaneous discourse or conference with the owner or landlord. The Letter of Intent will, therefore, serve as a vehicle to outline the key points of the deal, such as but not limited to: (a) the rent; (b) due diligence period; (c) financing; and (d) the close of the escrow date or date of possession.
And while a letter of intent is a non-binding document, the act of furnishing one certainly demonstrates that the buyer or tenant is committed to moving forward on a deal and intends to advance in good faith the deal. However, there are instances where a party may change the terms of the Letter of Intent or even withdraw from the deal altogether based wholly on desired terms not being agreed to, new information after performing due diligence and after verifying information provided by the parties.
All in all, a Letter of Intent is used to convey the key points of the parties from the lease price to the close of the escrow date or date of possession. To this end, the potential tenant must be diligent in researching or inspecting the properties since new information may serve as a basis for continuing or even withdrawing from the potential deal. In the same vein, the landlord must likewise be diligent in taking care and preserving its properties so that potential lessors will not be discouraged.
What is the importance of the Letter of Intent?
A letter of intent is one of the essential documents in commercial real estate leasing/buying. This is because buying, selling, or leasing commercial real estate is, most often than not, a tedious, convoluted, and costly process even to the most experienced investors and tenants. Hence, a Letter of Intent guides the parties to ensure that they have a meeting of the minds or that the contract conveys what they genuinely intend before going into the intricacies of contract making regarding leasing commercial real estate.
A letter of intent will serve as a stepping stone between introductory discussions with the property owner and the drafting of a legally binding lease contract. The Letter of Intent serves as a modality for the parties to put their key points and provides them with a quick and easy way to familiarize themselves with the basic terms of the proposed transaction. This is crucial before negotiating the contract terms and before paying a real estate attorney to draft or review a lease agreement.
Likewise, letters of intent are an excellent way for the landlord to determine who the prospective tenant is. Furthermore, making a letter of intent does not entail any costs; hence, a prospective lessee or buyer may submit as many Letters of Intent as possible, expecting that at least one is accepted. However, suppose the terms of the prospective lessee significantly deviate from that of the property owner’s. In that case, this could be a tell-tale sign that such prospective lessee submitting the Letter of Intent may not be a good fit for the owner to move forward with or be serious about completing the proposed transaction.
What are the contents of an LOI?
A Letter of Intent generally includes:
- The parties: (a) the name of the tenant; (b) the address of contact information; (c) the party authorized to execute a final sales or lease agreement.
- The property: (a) the address and the suite number of a lease of the negotiated lease; (b) the building description including lot size and square footage; (c) Type of rent, whether Full Gross Service (FSG) or a Triple Net Lease including any Common Area Maintenance (CAM).
- The offer: (a) The lease price as well as any down payment thereof; (b) Due diligence period and general description of documents that the landlord will provide; (c) Lease Terms, including rent and any annual increase; (d) rent abatements or tenant improvements; (e) length of lease; (f) target for signing the purchase contract or lease agreement; (g) Expiration date of the Letter of Intent.
- Any Disclaimers: (a) that the Letter of Intent is not binding, and any (b) preconditions in signing the lease.
How To Write an LOI
The typical structure of a Letter of Intent is as follows:
- Introductory paragraph. The preceding paragraph serves to describe the purpose of the LOI, such as your interest in leasing the property;
- The parties to the proposed transaction. This includes entities which are involved, the legal and home state to reduce the risk of the wrong information being used in the lease agreement;
- The key points in the deal. This includes the description of the property, the terms of the offer, and the disclosure of any commercial real estate brokers involved in the lease transaction, as well as any other key terms and conditions specific to the proposed transaction.
- The Closing Paragraph which includes whether or not certain parts of the LOI are binding, a non-disclosure agreement of confidentiality clause, remedies for breaching any binding provision in the LOI, as well as a request that the party receiving the LOI to sign and return a copy thereof proper to the expiration date of the LOI.
Conclusion
A letter of intent is a non-binding document that serves as a guiding light for the parties before entering into any formal lease or purchase agreement. It details the key points the parties want to convey to the other party to the end that they would have a meeting of the minds. Furthermore, considering the letter of intent is not binding, it is not infrequent that the offer may be withdrawn before the commencement of the formal agreement.
Even after outlining all the information above, writing a letter of intent (LOI) can still seem daunting. That’s why the Leveraged CRE Team at Commercial Properties, Inc. is here to help locate commercial space for lease and assist in using a letter of intent to land such space. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need 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!
Phill 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.
Bookmark 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. #LeveragedCRE
by Phill Tomlinson | Nov 23, 2021 | Blog
As a tenant or a business owner looking for a commercial real estate (CRE) property to lease, you are often on the advantage of being sought out by CRE property owners or landlords. These property owners typically employ strategies to entice potential tenants, like you, to sign with their property, or in the case of their existing tenants, to renew their contracts. These strategies include incentives that you can enjoy as perks.nnIn a competitive market, incentives are used by landlords to put their best foot forward. However, as encouraging as these incentives may be, they also require careful studying and examination to ensure that they do not cause major drawbacks. It is still wise to hire a real estate broker or lawyer to have the agreement examined before you ink your signature in.nnNow, before you explore the numerous incentives in the market, you need to understand the two types of rent: face rent and effective rent.nnFace rent refers to the baseline payable amount of rent, excluding incentives, whereas effective rent is the total amount of rent after all incentives are taken in. Effective rent pretty much sums up the amount of money you will be spending on the property, and is the amount subject to comparison with the properties in your option list. These two are also often used to compute the total savings a tenant can generate over the period of time indicated in the agreement.nnThere are numerous incentives in the market, but the three (3) most common ones are the rent-free period, rental rate reduction, and fit-out contribution.nn n
LEASE INCENTIVES
nRent-free periodnnAs the name suggests, rent-free periods, also called abated rent, are incentive schemes that allot a specific time period when tenants do not need to pay for rent. Rent-free periods are often employed in the first few months of the lease. This, indeed, is a cost-saving incentive, making it particularly popular in the market and relatively effective in enticing potential clients.nnRent-free periods are not only beneficial to tenants in terms of saving money within a specific time period, but also in allowing tenants, especially newly established businesses, to generate sustained cash flow in their initial operations in the property in a time when they are still establishing their presence at the spot.nnNote that tenants must still remain cautious when working on these incentives. Make sure that you study the lease agreement and hire professionals to examine its technical elements to ensure that the scheme bears no unnecessary drawbacks in the long run.nn nn Rental Rate ReductionnnRental Rate Reduction is part of the negotiation to pay a lower lease rate distributed within a period of time or all throughout the lease.nnEssentially, deciding whether to opt for a rent-free or rent reduction is a matter of calculating whichever can provide more savings in your end. In calculating these, also make sure to consider some factors that come in play, such as rent increase per annum, market stability, negotiations with the property owner, etc.nn nnFit-out contributionnnA fit-out contribution incentive, also called tenant improvement allowance, allows the tenants and the property owner to share identified charges, which may include maintenance costs, installation of fixtures and other decorative elements to the property, and other space improvement costs.nnThis incentive may transpire using reimbursement basis on a certain percentage of total costs identified. Before signing up for this, the tenant is typically required by the property owner to secure the following:n
n
- Duly signed commercial lease contract or agreement
n
- Required insurance taken out
n
- Submission of all the necessary receipts of identified expenditures for reimbursement
n
- A bank guarantee or security deposit
n
- Detailed plans for the works subject to the landlord’s approval, including quotes/price
n
nIn a fit-out contribution, the tenant and the property owner must negotiate clear and specific terms, such as:n
n
- Ownership by tenant or landlord of completed fit-out, either full or partial
n
- Whether the landlord is required to provide ‘incentive guarantee’ to cover the incentive
n
- Mode of payment, either reimbursement basis or other mechanisms
n
nAside from these three, here are other commercial lease incentives that may be offered by a property owner:n
n
- Cash payments
n
- Cash-convertible benefits, such as cars, equipment, etc.
n
- Fixed rent rates which do not arise during the lease period
n
- Reimbursement of relocation costs
n
- Reimbursement of a penalty
n
- Reimbursement of legal fees
n
- Free provision of furnishings and equipment
n
- Lease incentives for exceeding lease liabilities
n
- Lease incentive on a low value equipment
n
- Incentive for the inconvenience generated by refurbishment works
n
- Interest-free loans
n
- Holiday packages
n
- Pay-out of tenant’s pending lease commitment to another property
n
n nnOther important reminders on commercial lease incentivesnnIncentive taxationnnCase laws often consider cash incentives given to tenants as taxable income. However, if such incentives are provided at the initial stages of a business, the incentive may be declared as capital, and is therefore voided of tax. Incentives in the form of reduced rent and entertainment incentives, such as holiday packages, are also spared from being taxed.nn nnRepayment clausesnnOne of the most important reasons as to why tenants must study the lease agreement before signing is due to the repayment clauses that are indicated in the contract. In some cases, a sub-clause is included which requires tenants to repay an identified portion of the incentives in the occasion of assigned, surrendered, or terminated agreement before the lease expiration.nn nnFit-out ownershipnnTenants must clarify ownership mechanisms of the agreement when it comes to fit-out, especially when specifying the roles and duties of both parties in fit-out taxation and ownership, particularly in the event of lease expiration.nn nnIncentive disclosurennFinally, never hesitate to employ professional help to carefully examine the inclusions and exclusions of lease agreements and in negotiating for better terms.nnAs cliché as it may sound, it is indeed better to be safe than sorry. After all, a lease agreement is a legal document, and your signature binds you and the landlord to the law. These incentives are nevertheless enticing, but never let that spur of excitement lead you to sign an agreement without careful consideration, which might lead you to undesirable consequences and loss in the long run.nn
nnEven after outlining all the information above, knowing your commercial lease incentives when leasing CRE can still seem daunting. That’s why the Leveraged CRE Team at Commercial Properties, Inc. is here to help you achieve your business and 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!nn 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
by Prince Licaylicay | Nov 22, 2021 | All Articles, Leasing
As a tenant or a business owner looking for a commercial real estate (CRE) property to lease, you are often on the advantage of being sought out by CRE property owners or landlords. These property owners typically employ strategies to entice potential tenants, like you, to sign with their property, or in the case of their existing tenants, to renew their contracts. These strategies include incentives that you can enjoy as perks.
In a competitive market, incentives are used by landlords to put their best foot forward. However, as encouraging as these incentives may be, they also require careful studying and examination to ensure that they do not cause major drawbacks. It is still wise to hire a real estate broker or lawyer to have the agreement examined before you ink your signature in.
Now, before you explore the numerous incentives in the market, you need to understand the two types of rent: face rent and effective rent.
Face rent refers to the baseline payable amount of rent, excluding incentives, whereas effective rent is the total amount of rent after all incentives are taken in. Effective rent pretty much sums up the amount of money you will be spending on the property, and is the amount subject to comparison with the properties in your option list. These two are also often used to compute the total savings a tenant can generate over the period of time indicated in the agreement.
There are numerous incentives in the market, but the three (3) most common ones are the rent-free period, rental rate reduction, and fit-out contribution.
LEASE INCENTIVES
Rent-free period
As the name suggests, rent-free periods, also called abated rent, are incentive schemes that allot a specific time period when tenants do not need to pay for rent. Rent-free periods are often employed in the first few months of the lease. This, indeed, is a cost-saving incentive, making it particularly popular in the market and relatively effective in enticing potential clients.
Rent-free periods are not only beneficial to tenants in terms of saving money within a specific time period, but also in allowing tenants, especially newly established businesses, to generate sustained cash flow in their initial operations in the property in a time when they are still establishing their presence at the spot.
Note that tenants must still remain cautious when working on these incentives. Make sure that you study the lease agreement and hire professionals to examine its technical elements to ensure that the scheme bears no unnecessary drawbacks in the long run.
Rental Rate Reduction
Rental Rate Reduction is part of the negotiation to pay a lower lease rate distributed within a period of time or all throughout the lease.
Essentially, deciding whether to opt for a rent-free or rent reduction is a matter of calculating whichever can provide more savings in your end. In calculating these, also make sure to consider some factors that come in play, such as rent increase per annum, market stability, negotiations with the property owner, etc.
Fit-out contribution
A fit-out contribution incentive, also called tenant improvement allowance, allows the tenants and the property owner to share identified charges, which may include maintenance costs, installation of fixtures and other decorative elements to the property, and other space improvement costs.
This incentive may transpire using reimbursement basis on a certain percentage of total costs identified. Before signing up for this, the tenant is typically required by the property owner to secure the following:
- Duly signed commercial lease contract or agreement
- Required insurance taken out
- Submission of all the necessary receipts of identified expenditures for reimbursement
- A bank guarantee or security deposit
- Detailed plans for the works subject to the landlord’s approval, including quotes/price
In a fit-out contribution, the tenant and the property owner must negotiate clear and specific terms, such as:
- Ownership by tenant or landlord of completed fit-out, either full or partial
- Whether the landlord is required to provide ‘incentive guarantee’ to cover the incentive
- Mode of payment, either reimbursement basis or other mechanisms
Aside from these three, here are other commercial lease incentives that may be offered by a property owner:
- Cash payments
- Cash-convertible benefits, such as cars, equipment, etc.
- Fixed rent rates which do not arise during the lease period
- Reimbursement of relocation costs
- Reimbursement of a penalty
- Reimbursement of legal fees
- Free provision of furnishings and equipment
- Lease incentives for exceeding lease liabilities
- Lease incentive on a low value equipment
- Incentive for the inconvenience generated by refurbishment works
- Interest-free loans
- Holiday packages
- Pay-out of tenant’s pending lease commitment to another property
Other important reminders on commercial lease incentives
Incentive taxation
Case laws often consider cash incentives given to tenants as taxable income. However, if such incentives are provided at the initial stages of a business, the incentive may be declared as capital, and is therefore voided of tax. Incentives in the form of reduced rent and entertainment incentives, such as holiday packages, are also spared from being taxed.
Repayment clauses
One of the most important reasons as to why tenants must study the lease agreement before signing is due to the repayment clauses that are indicated in the contract. In some cases, a sub-clause is included which requires tenants to repay an identified portion of the incentives in the occasion of assigned, surrendered, or terminated agreement before the lease expiration.
Fit-out ownership
Tenants must clarify ownership mechanisms of the agreement when it comes to fit-out, especially when specifying the roles and duties of both parties in fit-out taxation and ownership, particularly in the event of lease expiration.
Incentive disclosure
Finally, never hesitate to employ professional help to carefully examine the inclusions and exclusions of lease agreements and in negotiating for better terms.
As cliché as it may sound, it is indeed better to be safe than sorry. After all, a lease agreement is a legal document, and your signature binds you and the landlord to the law. These incentives are nevertheless enticing, but never let that spur of excitement lead you to sign an agreement without careful consideration, which might lead you to undesirable consequences and loss in the long run.
Even after outlining all the information above, knowing your commercial lease incentives when leasing CRE can still seem daunting. That’s why the Leveraged CRE Team at Commercial Properties, Inc. is here to help you achieve your business and leasing goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need 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!
Phill 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.
Bookmark 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. #LeveragedCRE
by Phill Tomlinson | Nov 19, 2021 | Blog
A crucial part in leasing commercial real estate (CRE) is the lease agreement, These agreements sum up all the terms and conditions that will govern the lease within the period of occupancy.nnBusiness owners and tenants can negotiate a number of provisions. This allows the landlord and the tenant to customize the provisions according to their needs. Since a lease agreement is a legal document that determines the finances and the duties of both tenant and landlord, a tenant is recommended to always employ the help of a commercial real estate broker or lawyers in reading through the document to ensure that provisions are fair and justified.nnFrom your end, as a tenant, here are the provisions that must be present in your lease agreement.nn n
Commercial Lease Provisions
nRENTnnA rental rate is the obligation of the tenant to fill at the agreed number of days or months. Regardless of the lease type (full-service (FS), modified gross (MG). or Triple Net (NNN)), the rental or lease rate can be negotiated, depending on the length of the term, strength of the tenant, the amount of tenant improvements needed and demand for the space. Most lease agreements include annual increases, causing the rental rate to go up each year, depending on the lease agreement.nnFor instance, as a tenant, you should be wary of how your rental obligations may affect your overall rental amounts over time. This primarily happens due to what’s called a base-year in both full-service and modified gross leases. This unexpected increase in the rental amount is the difference from what the operating expenses were when you first signed the lease to where they end up each year after the accounts have been reconciled. Typically, this increase is no more than 1% or 2%, but it’s worth noting so there are no surprises. nnLease incentives can also affect the lease rate, and if this is offered by your landlord, you must ensure it is stated in the lease agreement.nn nnREPAIRS, MAINTENANCE, AND IMPROVEMENT CLAUSEnnThis part of the agreement explains the improvements made in the property before you take possession of the space, along with the terms identifying who is required to pay for the improvements made. For this reason, this clause is a crucial entry-level consideration as this involves money. Always check for this clause in your agreement to make sure that you are in a fair position within the agreement.nnAdditionally, this clause in the agreement covers the improvements you are allowed to make in the CRE property. This is significant if you wish to do some renovations in the space to cater to the type of business that you have.nnIf there is no improvement clause and you wish to renovate your space, you can negotiate to include one or write a letter to your landlord or the property manager asking for permission.nnIn leasing commercial real estate properties, you must always understand the nature of your lease agreement. More importantly, and we cannot stress this enough, you must always read the terms in the agreement before signing. If you deem some terms in the agreement unfavorable, never hesitate to negotiate. As a tenant, it is your prerogative to do so in the appropriate means, and as an entrepreneur, it is a crucial step that can determine the success of your business venture.nn nnSUBLEASE CLAUSEnnEntering the world of business means you are ready to take risks. As a business owner, you should be ready to encounter failures and losses just as you are ready for success. In case of troubling times, one should be ready for a back-up plan. A sublease clause can protect you from bankruptcy and debt.nnThe sublease clause in your lease agreement must be reviewed. It is stated in that clause, whether or not, you – the existing tenant, can sublease the space to another tenant. This clause will be able to protect you from having to continue to pay rent for unused areas of your property or from having to terminate your lease in case you want to relocate your business or entirely stop operations.nnHowever, not all lease agreement has a sublease clause. That is why it is important for you to consider your long term need and future plans. Landlords, typically, have certain pessimism on this clause in leasing agreements. However, you can always negotiate for a sublease clause to be included to also secure your business and finances.nn nnPERMITTED USEnnAs a tenant, you should be aware of the allowable or permitted uses of the commercial real estate you are eyeing. Permitted use means the enumerated activities allowed in the property. These activities are usually described in the terms of the lease agreement, the CC&R’s, or on a larger scale the zoning requirements. Be sure to call your city and verify if your business use is allowed at the CRE project you want to lease at. A permitted use may still require permission. Take for example – a dog grooming use may not be allowed in the CC&R’s, while a welding company is required to be in a project with specific zoning. nnThis is something you need to check on prior to signing a lease agreement as there may be a chance that the property you are considering to lease will not allow your business use. This can be a deal-breaker, especially if the nature of your business requires a lot of activities that are limited by the landlord.nnBut the good thing is, as a tenant, you can always negotiate the permitted use provision of your lease agreement to be as broad as possible.nn nnRENEWAL CLAUSEnnIt is always a possibility for a tenant to forget to renew the contract and might lead to consequences, such as eviction. In this case, a renewal clause can save you all the worries. A renewal clause in the lease agreement gives the tenant the right to renew and/or the right to extend the agreement, but in totality, the particulars of this clause may vary from contract to contract.nnA renewal clause should be able to include the steps needed for a tenant to renew their lease agreement when their term ends. There are also instances requiring tenants to write to the landlord of the former’s intent to renew the agreement.nnNevertheless, when it comes to renewing contracts, negotiate for convenient methods for both tenants and landlords to make sure that both parties are spared from inconveniences.nn nnThis article serves to introduce you to the basic clauses that need to be included in your lease agreement. This said, you are still recommended to employ professional help as you negotiate your way to business success.nn
nnEven after outlining all the information above, dealing with commercial lease provisions 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!nn 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
by Prince Licaylicay | Nov 19, 2021 | All Articles, Leasing
A crucial part in leasing commercial real estate (CRE) is the lease agreement, These agreements sum up all the terms and conditions that will govern the lease within the period of occupancy.
Business owners and tenants can negotiate a number of provisions. This allows the landlord and the tenant to customize the provisions according to their needs. Since a lease agreement is a legal document that determines the finances and the duties of both tenant and landlord, a tenant is recommended to always employ the help of a commercial real estate broker or lawyers in reading through the document to ensure that provisions are fair and justified.
From your end, as a tenant, here are the provisions that must be present in your lease agreement.
Commercial Lease Provisions
RENT
A rental rate is the obligation of the tenant to fill at the agreed number of days or months. Regardless of the lease type (full-service (FS), modified gross (MG). or Triple Net (NNN)), the rental or lease rate can be negotiated, depending on the length of the term, strength of the tenant, the amount of tenant improvements needed and demand for the space. Most lease agreements include annual increases, causing the rental rate to go up each year, depending on the lease agreement.
For instance, as a tenant, you should be wary of how your rental obligations may affect your overall rental amounts over time. This primarily happens due to what’s called a base-year in both full-service and modified gross leases. This unexpected increase in the rental amount is the difference from what the operating expenses were when you first signed the lease to where they end up each year after the accounts have been reconciled. Typically, this increase is no more than 1% or 2%, but it’s worth noting so there are no surprises.
Lease incentives can also affect the lease rate, and if this is offered by your landlord, you must ensure it is stated in the lease agreement.
REPAIRS, MAINTENANCE, AND IMPROVEMENT CLAUSE
This part of the agreement explains the improvements made in the property before you take possession of the space, along with the terms identifying who is required to pay for the improvements made. For this reason, this clause is a crucial entry-level consideration as this involves money. Always check for this clause in your agreement to make sure that you are in a fair position within the agreement.
Additionally, this clause in the agreement covers the improvements you are allowed to make in the CRE property. This is significant if you wish to do some renovations in the space to cater to the type of business that you have.
If there is no improvement clause and you wish to renovate your space, you can negotiate to include one or write a letter to your landlord or the property manager asking for permission.
In leasing commercial real estate properties, you must always understand the nature of your lease agreement. More importantly, and we cannot stress this enough, you must always read the terms in the agreement before signing. If you deem some terms in the agreement unfavorable, never hesitate to negotiate. As a tenant, it is your prerogative to do so in the appropriate means, and as an entrepreneur, it is a crucial step that can determine the success of your business venture.
SUBLEASE CLAUSE
Entering the world of business means you are ready to take risks. As a business owner, you should be ready to encounter failures and losses just as you are ready for success. In case of troubling times, one should be ready for a back-up plan. A sublease clause can protect you from bankruptcy and debt.
The sublease clause in your lease agreement must be reviewed. It is stated in that clause, whether or not, you – the existing tenant, can sublease the space to another tenant. This clause will be able to protect you from having to continue to pay rent for unused areas of your property or from having to terminate your lease in case you want to relocate your business or entirely stop operations.
However, not all lease agreement has a sublease clause. That is why it is important for you to consider your long term need and future plans. Landlords, typically, have certain pessimism on this clause in leasing agreements. However, you can always negotiate for a sublease clause to be included to also secure your business and finances.
PERMITTED USE
As a tenant, you should be aware of the allowable or permitted uses of the commercial real estate you are eyeing. Permitted use means the enumerated activities allowed in the property. These activities are usually described in the terms of the lease agreement, the CC&R’s, or on a larger scale the zoning requirements. Be sure to call your city and verify if your business use is allowed at the CRE project you want to lease at. A permitted use may still require permission. Take for example – a dog grooming use may not be allowed in the CC&R’s, while a welding company is required to be in a project with specific zoning.
This is something you need to check on prior to signing a lease agreement as there may be a chance that the property you are considering to lease will not allow your business use. This can be a deal-breaker, especially if the nature of your business requires a lot of activities that are limited by the landlord.
But the good thing is, as a tenant, you can always negotiate the permitted use provision of your lease agreement to be as broad as possible.
RENEWAL CLAUSE
It is always a possibility for a tenant to forget to renew the contract and might lead to consequences, such as eviction. In this case, a renewal clause can save you all the worries. A renewal clause in the lease agreement gives the tenant the right to renew and/or the right to extend the agreement, but in totality, the particulars of this clause may vary from contract to contract.
A renewal clause should be able to include the steps needed for a tenant to renew their lease agreement when their term ends. There are also instances requiring tenants to write to the landlord of the former’s intent to renew the agreement.
Nevertheless, when it comes to renewing contracts, negotiate for convenient methods for both tenants and landlords to make sure that both parties are spared from inconveniences.
This article serves to introduce you to the basic clauses that need to be included in your lease agreement. This said, you are still recommended to employ professional help as you negotiate your way to business success.
Even after outlining all the information above, dealing with commercial lease provisions 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.
Need 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!
Phill 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.
Bookmark 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. #LeveragedCRE
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