Commercial Lease General Question

[Mustang]

Just a few generic questions, nothing from a legal standpoint. Starting to call some places this week and was unsure of a few things.

1. Will Divide. You will see some commercial buildings with this listed which I'm assuming is that if it is 4000 sq ft and you want to lease 2000, they will break the property into that size for you? Who exactly would pay for that or is that something that is written into the lease?

2. Properties that just sit. I would assume that for some properties, I would assume that there is some dollar value where it is more beneficial for them to not lease a property than it would be to lease it so, the property sits. Just trying to figure out some logic for why an owner wouldn't want to negotiate on the rate.

3. I've read that some renters might take a percent of sales to negotiate a lower lease, is that a fairly uncommon practice?

[flere-imsaho]

Originally Posted by Mustang

Just a few generic questions, nothing from a legal standpoint. Starting to call some places this week and was unsure of a few things.

It has been a while since I worked in commercial real estate, so take this with a grain of salt.

1. Will Divide. You will see some commercial buildings with this listed which I'm assuming is that if it is 4000 sq ft and you want to lease 2000, they will break the property into that size for you? Who exactly would pay for that or is that something that is written into the lease?

Yes to the first question. To the second: it depends how desperate they are, but if they agree to pay for it, make absolutely sure it's written into the lease, and don't be afraid to go even further into writing down the details into either the lease or a document referenced by the lease. But any good commercial real estate lawyer can take care of this for you. I've seen either party pay for this, and I've seen both parties pay for it together. It really depends on the situation. They're also more likely to divide if you have a longer lease.

2. Properties that just sit. I would assume that for some properties, I would assume that there is some dollar value where it is more beneficial for them to not lease a property than it would be to lease it so, the property sits. Just trying to figure out some logic for why an owner wouldn't want to negotiate on the rate.

In my experience the cases where it's better to let it sit as opposed to lease it at pretty much any rate tend to be very small in number. The math behind commercial real estate and leasing tends to more-or-less require buildings to be mostly leased at all times. But it can depend on the situation.

In general, an owner might not want to negotiate on the rate because:

1. He's playing "hardball negotiator"
2. He's OK with not leasing

In instance one be prepared to walk away. Sometimes watching you walk out the door changes their mind pretty quickly.

The most likely reasons why an owner might be OK with not leasing are a) if they own the building outright (i.e. not financed), b) if they're planning to sell it anyway or c) if they're trying to keep the overall leasing rate above some threshold (which matters with bigger bulk leasing negotiations).

If the building's financed, however, it was generally my experience that the owner really can't take more than a few months at less than 75% leased without mounting up his debt even more. Prestige properties aside, it tends to be a thin-margin game.

3. I've read that some renters might take a percent of sales to negotiate a lower lease, is that a fairly uncommon practice?

I didn't see it happen often, largely because you tend to lose the extra when paying off your accountants and lawyers. I could see it with tenants who had a well-established and well-understood revenue stream (example: Starbucks).

[Mustang]

Followup question for anyone.

I've been looking for a place, but I've stayed clear of NNN places for now, because it is my understanding you are responsibile for insurance, taxes and maintenance. Taxes and insurance are one thing because, generally, those things are pretty fixed, but the maintenance portion really causes me to scratch my head. Starting a new business is risky enough, but seems like adding on the extra risk of potential unknown maintenance costs to a place you are leasing could be pretty significant. All you need is for a furnace to go out or a foundation to crack and you have to drop thousands to get it someone else's property fixed.

Am I missing something?

[flere-imsaho]

Is it maintenance for the unit you're leasing or for common areas? Maintenance for your own unit is relatively typical, with standard special provisions for HVAC maintenance (usually the big ticket items in the HVAC system are considered to be the owner's responsibility - i.e. furnace going boom).

In my experience (which is not total and may not apply to your situation, of course) the details of maintenance responsibility tend to be spelled out in the lease relatively clearly to avoid these kinds of problems.

[Mustang]

I was operating under the false assumption that all NNN leases were Absolute NNN, completely glossing over that there is NNN and Absolute NNN.