How to Negotiate a Lease – Part 2

Explanations and Clarifications

The first few components of the Letter of Intent (LOI) are self explanatory. Some landlords do not provide a floor plan. Even though the real estate listing will indicate the total SF, you should verify the measurements are correct. If a landlord does not have a copy of the floor plan, you can check with the City Hall’s Record Department. Once you have confirmed a floor plan exists, you can inform the landlord to retrieve it. There is a fee charged for retrieval.

• Occupancy

As you will notice in this sample, occupancy states “Shall occur on the later of May 15, 2008 or completion of the Lessor’s work as defined in Base Building Conditions.” I have highlighted the words “later” and “or” as of importance as it effects the meaning. In simple terms, it states, occupancy of the space will begin anytime after May 15, 2008 or until the landlord has met all Base Building Conditions. We will not occupy the space prior to May 15, 2008 nor will we occupy it on May 15, 2008. This allows you to have sufficient time to prepare any necessary funding or modifications to the plan, drawings and suppliers. We will also only occupy the space after the landlord has met all Base Building Conditions.

In this particular offer, I have included three additional conditions that must be met prior to occupying the space. Once you have verified there is a copy of a floor plan held at City Hall, the Landlord should be given a specific number days to deliver the drawing to the tenant. In this sample, I have given four days. The second condition requests an official approval by City Zoning.

Although the real estate listing may classify the space as a commercial space, you should check whether a food business with extraction is allowed meaning full range of cooking is permitted. There is nothing worst to have signed a lease and finding out afterwards that cooking isn’t allowed. In this condition, you should allow three to four weeks for City Zoning to review the site. The third condition pertains to building taxes. You should request an official copy of the tax year quoted on the real estate listing. You just never know what kind of landlord you are dealing with.

• Rent Commencement

In this sample I have requested three months after occupancy. This provides a rent free period to the tenant for build out. Most landlords are willing to give two months while others may be more generous and offer up to four months. The wording is important as you will see it states rent will not commence after occupancy. You want to avoid paying unnecessary rent on an empty space.

• Usage

Keep this section simple and straight to the point. Fancy words in the description won’t score you any points. Here I have stated, “Modern Fast Casual Dining Restaurant.”

• Base Rent

This is the rent that you are willing to offer on a per month basis.

• Term

This is the number of years you would want to lock in. Most landlords will expect either a five (5) year lease or ten (10) years. Most landlords prefer long-term leases. As a tenant, there are pros and cons of offering a longer term than a shorter one. For example, a ten (10) year lease offers you security that you will be paying the same rent for a ten year period. On the other hand, if you fail to succeed, you could deeply put yourself into bankruptcy. You must weigh the options and see which you believe is best for you.

• Options

Once you have decided the first lease term, you want to have options to extend your lease. Commonly, you will see many offers stating a one (1) 5-year option to extend. Here I have asked for three (3) 5-year options. Although it is possible for a landlord to agree to accept the same base rent during a tenant’s option period, few will accept what I have requested. In this particular scenario, the landlord is unwilling to contribute towards any of the much needed upgrades. Therefore, I have lowered the base rent compared to the asking price but have offered a longer term lease with an incentive.

I have stated, “new options are subject to a base rent increase, but no more than ten (10) percent of prior five year period.” This provides an incentive for the landlord. Depending on what base rent you are willing to offer and how much money you are willing contribute for upgrades, this will definitely effect a landlord’s final decision. Overall, you want to try and lock in at the same base rent for the longest period of time.

• Base Building Conditions

Anything that needs to be upgraded or improved that you want the landlord to cover should be included in this section. You will note that I use the term “Vanilla Box” which refers to a space with four walls. Before occupying the space, a landlord should agree to provide the tenant a clean fully stripped down space. Second, if the space is not up to building code, a landlord should be fully responsible for this upgrade including delivering the space with all necessary fire protection.

These two conditions are absolutely the minimum that should be provided by any landlord. Other conditions will vary depending on the space.

• Tenant Improvements

The important point to note in this section is the statement, “Such landlord approval shall not be unreasonably withheld or delayed.” The section refers to the tenant’s right to change the façade (the exterior store front). Basically the statement refers to the landlord’s willingness to give permission and the time it will take to get an answer. A landlord should be reasonable in giving you permission within a reasonable period of time.

• Real Estate Taxes

This section is crucial and should not be taken lightly. Crooked landlords can falsely state the real estate taxes. To protect yourself, you should ensure you are only paying for your fair share of the taxes. If the space you are leasing is part of a much larger building, you obviously do not want to pay more than what you are leasing. You should also request for the real estate taxes for the prior two years of the building and/or if available the specific space being rented.

• Utilities

You should be allowed to pay directly to the utility company for all separated utility meters associated with the space. Never pay directly to the landlord unless you receive a copy of the bill.

• Security / Building Access

You should have no difficulties in accessing the space 24 hours a day, seven days a week.

• Signage

Similar to the statements used in “Tenant Improvement,” the tenant shall be given the right to install signage at its own expense once it has met building code and approval of the city. The landlord should be reasonable in giving you permission to do so and should approve it within a reasonable time.

• Brokerage

In this section, you should state the commission agreement between you and your broker and if applicable any co-brokers who were involved.

Once you have received confirmation of a mutual agreement of the terms listed in the LOI, then you may proceed. Any necessary legal documents should be prepared prior to proceeding.

Summary of Negotiating

Negotiating a lease involves some skill and practice. How to negotiate a lease is not taught in school, it’s something you have to learn. Hopefully, this has provided a quick insight of the various components of what is involved. Understanding each component is the very first step in protecting yourself. You should never rely on a broker to do all the work for you. No matter how experience they are, you need to know how to negotiate the terms and conditions you want.

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