I recently attended the 10th Annual Colliers International Real Estate Conference in Boise and I left excited about the experts’ predictions for 2014. In short, the outlook for the Treasure Valley is positive, which is a welcome change from the past five years!
The conference caused me to think about startup businesses and the anticipated growth for those businesses savvy enough to have weathered the economic downturn. What challenges are facing Treasure Valley businesses? Well, at some point most of them will either negotiate or renegotiate a lease. This can be a stressful endeavor for business owners, and below are some of my top issues to consider before signing any lease.
I cannot say enough about having a good broker. Brokers are on the front end of negotiations, and a good one will be able to spot issues before you sign a letter of intent. An experienced broker’s advice can amount to significant cost savings over the term of the lease and limit the amount of legal work necessary to close the deal. Ask your business colleagues who they have used in the past and get a recommendation.
Common area maintenance charges are always an issue. If the location is part of an office complex or shopping center, you should understand what is included in the CAM charges. Make sure any CAM charges do not include capital expenditures. Capital expenditures are those that extend the life of the building and last beyond the current accounting period for purposes of depreciation. These should be allocated in the lease as the landlord’s responsibility. A good broker can help in this part of the negotiation and advise you of any expenses the landlord is passing through to you as a tenant.
You want to make certain that the use provisions in the lease allow you to operate your business with the flexibility you need to be successful. If your business is an insurance firm, then I would request the use be categorized as “general office” and not as an “insurance office.” The reason for this is that your business model may change, or you may expand the services that you offer. A narrowly drafted use provision can limit your ability to conduct other types of business in the premises or assign the lease to another party.
Assignment of the lease
This is an important provision and one that is worth bargaining for with the landlord. At a minimum, you want the ability to be able to assign the lease with the landlord’s consent and language that such consent may not be unreasonably withheld. From a landlord’s perspective, he wants to know that rent will continue to be paid and that he is not at risk if he agrees to the assignment.
Options to renew
Tenants should try to negotiate a renewal option and lock in the renewal rental rate during the initial negotiations. There is nothing but upside for a tenant who negotiates a renewal option and locks in a rate as part of the initial lease. If the cost for office space increases over the term of the lease, then the tenant is protected from swings in the market. Conversely, if the market becomes overbuilt and the cost of office space declines over the term, then the tenant can either renegotiate or move.
Negotiate for some type of tenant allowance for the build-out of the premises. This can take the form of a cash allowance or rent abatement. One key issue to consider is whether or not you can use your own contractors or whether the landlord will be responsible for the build-out. If the landlord will be responsible, the tenant should request a work letter from the landlord stating the improvements the landlord will undertake and the expected date of completion.
Of course, there are always additional considerations in any lease negotiation, but the above points are good starting point. One final thing to remember, there are no “standard” leases. Each lease is different, and you should spend time reading it and asking questions of your broker before signing it.
Chad W. Lamer is an attorney and urban planner with the law firm of Spink Butler LLP in Boise. He works primarily in the areas of land use and zoning, real estate development, and construction law. He is a frequent contributor to the Idaho Land Law blog, where he touches on all topics related to the development process. Follow on Twitter @ChadLamer