By Jeffrey D. Jones, ASA, CBA, CBI
In Dealing with Landlords – Part 1 and Part 2, I listed the major considerations that are often found in property leases and some of the lease provisions that can be negotiated such as the term of the lease and rental rates. This article will address construction costs, parking fees, and landlord liens.
Typically, you will be dealing with a leasing agent who works for the landlord or a landlord’s management company when negotiating a new lease. Sometimes, these people have the authority to make changes to their standard lease and sometimes they will need to get permission from the landlord to make changes.
Construction Costs
In the event you are taking on a new lease space, the landlord will often provide funds to particularly build out the space to your specifications. Typically, you are leasing a vacant space without built-in fixtures and plumbing. The landlord gives you a lease space allowance to offset some of the costs to complete the space. This allowance will range from $8 to $15 per square foot of space being leased. In most cases, this is never enough to complete the space to meet your specifications. So, be prepared to spend $10,000 or more in additional costs over and above what the landlord is willing to pay to furnish out the required leasehold improvements. The more you can get the landlord to pay, the less you will have to come out of pocket to complete the space.
Parking
When leasing space in an office building that has paid parking, there will be an additional fee for parking for you, your staff, and visitors. The landlord will sometimes include one or more spaces as part of the property rent. The number of spaces and the fee for parking can often be negotiated.
Landlord Liens on Business Assets
Most leases give the landlord a lien on your business assets as security for the lease payments. This can become a problem if you need to obtain a business loan which requires a first lien on the business assets. When possible, negotiate with the landlord to either waive this provision of the lease or at least be willing to subordinate the landlord’s lien to a financial lender when the business obtains a bank loan wherein the business assets will be the collateral. This is often a problem when a business owner applies for an SBA loan. The lender will require the landlord to subordinate the landlord lien so that the bank will have first lien. Unless this is negotiated up front with the landlord, it may become a problem at a later date wherein the landlord has no obligation to do so.
When searching for lease space, I recommend to business owners that they hire a real estate broker who specializes in representing tenants for space. This specialist will be familiar with market rents and the terms and conditions that can be negotiated with the landlord. Typically, the landlord pays the broker fee even when the broker is actually representing the tenant. Furthermore, I recommend that you have a real estate attorney review a proposed lease before you sign it to ensure there are no provisions that would jeopardize you and your business during the term of the lease.
Spending some money up front to ensure that you have a good lease can often save you thousands of dollars and many headaches during the term of the lease. Subsequent articles will address lease assignments and subletting provisions typically found in leases.
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Jeff Jones is the President of Certified Appraisers, Inc. and Advanced Business Brokers, Inc. located at 10500 Northwest Freeway, Suite 200, Houston, TX 77092. He can be contacted by phone at 713-680-3290 or by email at jdj@certifiedappraiser.com.
