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How a Broker Successfully Negotiates the Commercial Real Estate Lease

This is my third article in a series where I give insight into the world of a California commercial real estate broker. A commercial real estate broker leases/buys/sells commercial real estate (CRE) for the client (tenant/buyer/seller). Commercial real estate is defined for this article as office, retail and industrial spaces.

As reminder from last time, there are four main things a good CRE broker does. They: find suitable locations, negotiate the offer, negotiate the lease itself (the many clauses) and are there when the client needs help thereafter. The first article I wrote was about finding locations; the second about negotiating the major deal points and this third one will discuss negotiating the lease.

Most brokers and even many attorneys don’t negotiate the lease properly.  Why?  For brokers, many of them simply don’t know what most of the clauses mean and/or simply don’t have the experience to negotiate them properly.  For attorneys, it usually has to do with them not specializing in lease contracts and, again, not having enough experience and knowledge to do it properly.   Both brokers and attorneys many times specialize in only one area, like office or retail or industrial leases, but not all of them so it’s best to get one that specializes in the lease you are negotiating.

The main problem with using a broker or attorney that isn’t experienced and knowledgeable enough at negotiating a lease is that it will usually cost the tenant money and/or problems later on.  There are many clauses in leases that can bankrupt a tenant even when their rent is low like only $1,000 per month. These include insurance clauses, indemnification clauses, operating expense share clauses, maintenance provisions and more.  Therefore, it’s not the size of the deal that matters, it’s what was agreed to in the lease that matters.  A tenant should tread carefully here. I recommend using both an experienced broker and a specific commercial real estate attorney for a lease. In cases like this, two sets of experienced eyes are better than one.  I have saved my clients a lot of money by doing the lease review first and then sending it to their attorney to review thereafter.

After negotiating over 1,000 leases, and over 100 leases per year for many years, I have the experience to really help a tenant in this area.  It’s not something most brokers can do.  Pick a broker that can help you  properly in this area and you will sleep much better at night. When searching, you will find that the list of brokers with this type of expertise is very narrow.  Landlords  usually have a good real estate attorney create their lease and the bigger ones have their attorneys negotiate the lease clauses. Because of this, you really need to even the odds and have someone that specializes in lease negotiating on your side.

Picking the right broker is the key to getting your best deal. You can never do as well, or even come close, if you try and negotiate the deal without a good broker.

Next time, in the final article in this series, we will discuss how a broker can help their client after a lease is signed for items like construction, moving, landlord disputes, terminating a lease early, etc.  Most brokers, unfortunately, cannot do much here as they simply lack the experience and/or knowledge to do so.

If you have questions about any of the above topics or have any CRE needs, please contact David Massie at david@djmcre.com or 805-217-0791.

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Negotiating Your Lease: Why You Need a Good Broker

We read an article recently on what tenants should not be missing in their leases. This brought us back to one of our previous blogs, “Commercial Leasing: Hidden Tenant Costs That Tenants Shouldn’t Pay” that stresses the importance of having a good broker who understands these items and can negotiate them on the tenant’s behalf. This new article, from Retail Real Estate Law, talks about why landlords should be “elephants” in the lease drafting process.

The article is encouraging landlords to save money and headaches by creating versions of the lease provisions in a more favorable way by facing reality and starting with a complete lease form. It’s another example though of why tenants have to be careful of what they could be missing in their leases. It’s also another example of the importance of having a good broker to negotiate these lease terms for you.

From our previous blog on the topic:

“When leasing commercial real estate space of any type, there are many ways for landlords to hide extra costs from tenants that tenants are usually not aware of. […] If tenants aren’t careful to use a broker that understands the operating expense share, this cost to the tenant can be quite large during the lease term.  Many times this costs starts out low and then later on in the lease gets quite high.  It is best, in my opinion, to negotiate an overall annual cap and also have a list of expense exclusions that aren’t reasonable for a landlord to include as part of the tenant’s share. […]Measuring the building is another area where landlords can pad the numbers that will result in a higher rent to the tenant without a tenant even knowing it’s happening and this happens most commonly in office buildings.”

Retail Real Estate Law’s article adds to these thoughts:

“We suggest the following. These items are going to be added to any decent, important lease. Why not pay once to have them included in the lease instead of paying, each and every time a lease is negotiated? And, deny it as people may, the person whose lease form is used controls the outcome. When a provision is not in the form lease and everyone knows that it will wind up there before execution, why should the landlord (who invested) in a lease form in the first place, cede control over the “missing” provisions to the tenant. After all, if the lease is missing something that’s going to be in there at the end of the day, the tenant will supply the initial draft and thereby control the negotiation.”

If you want to learn more about your specific situation and why a good broker will be the difference for you, contact David Massie at DJM Commercial at 805-217-0791 or david@djmcre.com – we can help! For more details from Retail Real Estate law, read the full article here.

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Options to Renew Your Lease: The Good, The Bad, The Ugly

You are a tenant leasing some kind of commercial space like retail, office, industrial or otherwise.  You were smart and negotiated at least one option to renew your lease.  But, should you exercise that option to renew?  Do you really understand what conditions in which it would be favorable or not to exercise this option?

In my market in Southern California, most landlords will grant a tenant who is leasing commercial space an option to renew their lease for one additional lease term that is less or equal to their original term.  For example, if you leased for a 5 year term then you could usually negotiate a 5 year or less option to renew.  If you leased for 10 years, you might get one 10 year option to renew or perhaps two 5 year options to renew.

But here is where it gets tricky.  It’s generally not in your best interest to exercise your option to renew. Instead, you should think of it as a last resort.  Option to renew language usually contains a certain minimum rent to the landlord. For instance, it may be no less than what you were paying at the end of you current term or maybe it has a 3% bump above what you are paying at that time.  I have found that market rents are usually lower than what your option to renew requires you to pay.  And what about current market tenant concessions like free rent, improvements, etc.?  You will most likely miss out on these.

Another provision that option to renew language usually contains is that the lease (except for the rent) will be on the same terms and conditions.  So, if there is a clause in your lease that needs to be negotiated you may want to reconsider the option to renew.  These clauses could include receiving a new base year for operating expense increases for an office tenant or excluding unreasonable lease clauses from applying. For instance, certain Triple Net clauses could be excluded for a retail tenant if you negotiated your renewal instead, but these exclusions won’t apply if you simply exercise your option to renew.

What is a tenant to do?  Hire a good commercial broker to help.  This broker will know the current market rents and be able to review the lease with you and recommend all necessary changes.  If the broker is active in your area, then the landlord will be concerned that this broker might relocate you to another building if the landlord isn’t fair.  You simply don’t have the same clout without a good broker and you won’t get as good of a deal.  But do it at least 6-12 months in advance of when your current lease terminates or at least 3 months before you have to exercise your option to renew so your broker and you have time to review your needs and options. One other really good thing that happens when you don’t exercise your option to renew, but rather negotiate your renewal, is that your option to renew many times gets left in place and is still valid the next time your lease terminates.

I have successfully represented many commercials tenants for renewals for their leases and not just new leases.  I can’t remember the last time I didn’t do much better than the tenant could do on their own.  Many times the landlords end up paying my fee for the tenant’s renewal just like they always do when I represent a tenant for a new lease.

For more information about commercial leasing, buying, and selling please contact David Massie at DJM Commercial Real Estate at 505-217-0791 or david@djmcre.com.

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How to Terminate a Commercial Lease Early

Many of my clients have stated, “I don’t want to sign a long term lease like 5 years or more because I’m not sure I will be in business that long or might need more or less space.”   My answer to them?  It’s usually in their best interest to sign a long term lease and there are ways to terminate a lease early.

Signing a longer term lease between 5-10 years makes good sense for many reasons.  You normally get the best economic deal that way with lower rent, more free rent and more tenant improvements paid by the landlord.  You normally get more options like renewal options with more time.   You don’t have to worry about moving sooner either or having to pay a much higher rent in 1-3 years if the market rates increase.  Keep in mind that many landlords won’t agree to less than a 5 year term, especially for space in demand where another party will lease it for 5-10 years, so it will really limit your options for properties if you want to do less than a 5 year term.

If you need to terminate a lease early, you have many options available to you.  You can request an early termination option of the landlord in your lease, but most landlords don’t like to grant them.   If they do, they want enough time to release your space so a 6-12 month notice from you might be required.  You might then have to pay back unamortized tenant concessions like free rent and tenant improvements.  But this is still a good option to have if you can get it.

What if you can’t get the landlord to agree to an early termination option?  There are still other good options like having the right to relocate in the project to a larger or smaller location.  You also generally have rights to sublease or assign your lease to another qualified tenant.

If none of the above options work out, then you can still legally terminate a lease in most states like California.  Courts usually require a landlord to mitigate a tenant’s damages.  This usually means the landlord has to take reasonable steps to re-lease the space, but this mitigation usually only starts after you vacate the space –not while you are in it.  However, I have seen most legal awards and arbitrations settle between 6-12 months of rent.  This is generally the most a landlord can squeeze out of a tenant in Southern California.  This can be a tricky matter, so you have to make sure you do it right and use someone familiar with the process like me or a good real estate attorney. You might need both.  But I have been very successful negotiating an early lease termination for my clients.

Contact David Massie for more help:   805-217-0791 or david@djmcre.com