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If you are a business owner and are planning to lease retail space, make sure you do not make a costly mistake when choosing your location and negotiating your lease. Two of the most common mistakes retail tenants make when leasing space is not doing the necessary research prior to choosing a location and not utilizing the various professional services available to help during the leasing process.

Before you even start looking for locations, take the time to conduct the proper research and have a clear idea of what you are looking for and what you can afford. First, answer a few simple questions. What is your service or product? Who is your target consumer? What is your budget? What are your future plans? The answers to these questions can help guide your research. For example, you need not consider locations in an area zoned for bars and nightclubs if you are selling children’s toys. Likewise, you can rule out services for the elderly in an area populated by young singles. Your budget should be firmly mapped out and set in stone as well as a general idea of where you see the business in two, five and ten years. When determining your budget, make sure you have a budget set aside for the monthly lease payment as well as for utilities and maintenance. Include a budget for remodeling if necessary. Your future plans can be significant as most commercial leases are for a period of years, not months, with a lower monthly rate common when you agree to a longer lease period.

Finally, while paying for professional services can be an out of pocket expense in the short run, they often payoff ten fold in the long run. Use a market research company to determine where your target consumers are located. Depend on a commercial Realtor to find you the perfect space in the area you have chosen and pay an attorney to review your lease agreement to ensure that you do not make a costly mistake.

Leasing Retail

Property Maintenance

Property owners must make it clear in lease agreements, their responsibilities for maintaining and improving the commercial real estate. If you do not clarify this point in the lease, tenants could make unreasonable demands that you must comply with. Explain in the lease agreement that the tenant is responsible for returning the property to its original condition at the end of the lease terms or risk losing the security deposit.

Use and Exclusivity Clauses

Tenant problems could arise if you do not build in use and exclusivity clauses into your commercial lease contract. Use clauses dictate the type of activities permitted on the premises. Illegal activities must be prohibited to protect your business from liability. Also, if you have a personal aversion to a type of business and worry about the effect on your company’s image, you have the right to forbid the tenant from performing certain activities. If you rent multiple commercial properties, the exclusivity clause prevents you from renting spaces to competing businesses in the same complex or shopping center.

Eviction Process

To protect yourself in the case of tenant issues, build in eviction clauses into your leasing contract. For instance, commercial leases typically give the owner the right to evict a tenant if he violates the lease terms. The violation must be remedied within three to ten days or the eviction process can commence. Non-payment of rents could also launch the eviction process and require tenants to settle rents or be removed from the property.

Best regards

Rob Cassam

North Carolina last week became the 29th state to enact a law allowing commercial real estate brokers to obtain a lien as a legal remedy against a property if the buyer, seller, lessee or lessor fails to pay the agreed-upon commission or fee.

The Tar Heel State follows Colorado and Michigan, which adopted similar laws in August and October of 2010, respectively. Legislation has been introduced in a number of other states over the last year, including Oregon, North Dakota and Delaware.

The laws have a common purpose: to protect brokers by statute from clients who can’t or won’t pay commissions, often forcing a time-consuming and costly legal standoff where costs may far exceed the disputed commission or fee. Without the protection of a lien, proponents of the law say, the real estate broker may get stiffed on the commission, or forced to accept a reduced fee or “commission-ectomy,” as it’s known in the business.

The past real estate downturn was rife with examples of brokers losing out on commissions, often by financially distressed buyers, sellers, landlords and tenants.

North Carolina Gov. Bev Perdue on June 17 signed HB174, the Commercial Broker Lien Act. The legislation, co-sponsored by Reps Darrell McCormick (R-Iredell), Pryor Gibson (D-Anson), Leo Daughtry (R-Johnston) and Tom Murry (R-Wake), culminates an effort that started in 1997.

The legislators worked in cooperation with the North Carolina Association of Realtors to steer the bill through the Legislature. In most states, Realtor groups, with support from the National Association of Realtors (NAR) and its affiliates, the Society of Industrial and Office Realtors (SIOR), the CCIM Institute, the Institute of Real Estate Management (IREM), and the Realtors Land Institute (RLI), have led legislative initiatives to introduce and enact the state laws.

Opposition to the laws historically has come through State Bar associations, banks and other groups opposed to the addition of another lien to the property transaction process. Opponents claim the liens may complicate deals, cloud a property’s title, impede financing, interfere with basic property rights and even violate due process.

James A. Hochman, a commercial real estate attorney with Coman & Anderson P.C. based in Lisle, IL, said such arguments are an attempt to exploit “fear of the unknown” and are not grounded in facts, based on his experience asserting and litigating broker lien claims in several states over the last two decades. Hochman has consulted for and represented real estate groups and testified before several legislatures in pushing for broker lien acts, including the first significant law, enacted in Illinois in 1992. He worked as legal counsel for CB Richard Ellis when several of the early laws were adopted.

In North Carolina, he represented NAR and its affiliate SIOR, working with Rep. McCormick and the state association to craft and fine tune the legislation, and address objections.

“[Broker liens] don’t hurt anybody other than somebody who agrees in writing to pay a commission and then doesn’t do it,” Hochman tells CoStar. “When brokers have lien rights, they typically get paid without the need for litigation. The mere threat of the broker lien leads to payment at closing in exchange for a lien waiver.”

The NAR supports enacting legislation in the remaining 21 states where no broker lien law exists, the association said in a statement.

Litigation to recover commissions is not always economically feasible and invariably results in delays, to the detriment of the real estate brokerages and commissioned agents involved in the transaction, CCIM Institute said in a public policy statement published on its Web site this week. However, because attorney’s fees can be recovered by the successful lien claimant, brokers in states protected by the law can threaten or pursue litigation to protect their interests that otherwise wouldn’t make financial sense, Hochman said.

Language varies from state to state, but most laws require that the lien language be placed in the written agreement signed by both the client or party the broker represents, and the real estate brokerage agency. Typically the agreement is valid only for the principal broker.

In its position statement, CCIM Institute “supports the enactment of commercial broker lien laws in all states to serve as a safety net for brokers who previously had no means of insuring payment of the agreed upon fee for their services, other than costly legal battles.” Further, lien laws should be forceful and efficient in protecting brokers in commercial lease transactions as well as property sales.

“As more and more states contemplate creation of such laws, commercial brokers will have a greater sense of security when completing a transaction, which is beneficial to not only the brokers themselves, but their clients and the commercial real estate market as a whole,” CCIM said.

Although brokers take haircuts on commissions in good times and bad, the weak economy and pressure on small brokerages played a role in finally pushing the law through in North Carolina after 14 years.

“Because of the economic situation we’re in, and what we’re seeing happening to our brokers, this definitely gave us a better leg to stand on to get this done,” said Cady Thomas, director of government affairs for the North Carolina Association of Realtors, who pushed for the recent legislation. “We’ve been trying to enact this law since 1997. We couldn’t even get a hearing back then.”

Realtors in North Carolina resurrected the issue two years ago during the recession but could not get the state legislature to bring the matter to a vote.

The North Carolina law gained impetus from the case of a Raleigh broker who had been working on a transaction for several years with an investor based in Texas, which has lien rights for brokers. “Whenever they sent a closing packet, it included a lien waiver. The broker promptly called the investor and said ‘we don’t need this, we don’t have lien rights,’” Thomas said.

The Texas investor then said they intended to renegotiate the broker’s commission, at a loss of $170,000.

“That gave us a real-life example of our brokers being taken advantage of,” Thomas said.

Some claim the broker lien laws afford more protection for smaller firms that may lack the legal resources of larger ones, Thomas said. Larger companies tend to have more clout, contacts and resources than boutique shops, ensuring their participation in a transaction from start to finish, and often representing both sides in deals.

“The broker is the easiest party to cut out of a transaction when they don’t have lien rights because in most cases it’s not economically feasible to sue for their commissions,” added Thomas.

Consider these important questions:

1.  Is the tenant accepting the premises AS IS and without any build-out obligation from landlord? Even so, the landlord should still represent and warrant that the condition of the premises, building and project comply with applicable laws as of the commencement date, including those relating to disability access and hazardous
materials (including asbestos), and that the building systems serving the premises are in good working order.
2. Is the landlord delivering a cold shell, warm shell or turn-key tenant improvements?
3. Can you describe the line between the work the landlord is to perform (and pay for) and the work the tenant is to perform (and pay for)? Misunderstandings about the parties’ build out responsibilities are a major source of conflict, so be sure to discuss these responsibilities in great detail.
4. What is the tenant improvement allowance and how is it calculated? Per rentable or usable square foot? Is the landlord open to providing an additional allowance which would be amortized and repaid over the term of the lease as additional rent?
5. If the entire allowance is not applied, who gets the remainder? Preferably it would be credited to rent. Alternatively, the funds remain available to the tenant for alterations later in the lease term.
6. Are there any unusual build-out requirements, such as internal staircases, high density file cabinets, showers, training or childcare facilities, satellite dishes or extra HVAC? Have those been approved by the landlord at least in concept?
7. Has the landlord approved the tenant’s finishes?
8. Does the lease provide a mechanism for delivering a punchlist and when is the punchlist due?

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Best regards

Rob Cassam

The process of locating usable space with a knowledgeable real estate agent is the real start. Have you determined the location that is best for you? Your search will help prepare you and temper expectations greatly. Even if you are contemplating renegotiating a lease at an existing location, or moving to a different space with the same landlord, it is a good idea to comparison shop just to familiarize yourself with what the market trends and prices are.

Know what you want and what you must have.  You must know the maximum and minimum amount of square footage that fits your needs, as well as the floor requirements. Does the nature of your business make the groundfloor a necessity? Is a panoramic view from the conference room important to you? Do you want a build-out of the office from the concrete, meaning totally new floor, carpet, walls, etc.? Is there a security system in existence at the office space? Do you require one? Is the heating and air conditioning individually maintained? If not, how will you be charged for it?

The more that you require, the less negotiating room you will have. On the other hand, make sure you, or the realtor, find out important information like the occupancy ratio over the last year. Is there square footage available where a lease has fallen through? There are instances in which large corporations rent entire floors, then do not need as much or decide to rent elsewhere. In these cases, the management company of the building will sublet the space – often for less than the going rate for office space in that building. All of these things could be negotiating points in getting the best rent.

Determining the length of the lease.  One year leases are few and far between, with the most typical being three (3) years. It is important that you take your growth potential into consideration. It will not be smart to sign a 1,200 square foot, five (5) year lease when you anticipate tremendous growth and will need 2,500 square feet in three years. It might not be a bad idea to put a clause in your lease that addresses this if much growth is anticipated. This can be done in a variety of ways, which your realtor can address for you.

Have a monetary range in mind.  During the negotiations, you will need to have the amount of rent that you can afford every month. Your search and your realtor should be able to provide you with the current market rental costs for the area in which you want to relocate, or even for renegotiating at your present location. The national average for rent has been noted to be between four (4) and five (5) percent of your total operating costs.

Determine all costs of the lease.  It is essential that you determine the other costs associated with the lease of the space. For instance, what portion of the heating and air conditioning are you responsible for; and what is the average monthly cost. Get types and figures on associated costs, from the landlord and the Realtor – it will not hurt to have them from two sources. As you plan your finances, you do not want any unexpected expense surprises.

One cost that is often overlooked is the common area factor. The common area is all parts in the building that are used by or for all tenants of the building. Usually included are: building lobby, all corridors, janitorial and electrical closets, elevator rooms and rest rooms. The owner determines what percentage of the building these areas represent and adds that percentage to the amount of space, you, the tenant occupies. So, while your rent per leaseable square foot may be $18.00, if there is a 15% common area factor, you actual cost per square foot is going to be $20.70.

Although the previous tasks may seem arduous, the real task is getting final lease approval – that is all parties agreeing on the finer points. You should write down all the things you would like to see in the lease and any specific time frames. You do yourself an immense favor by having a clear cut idea of what you want, which things are negotiable and which things are not.

Be ready to compromise, as it is highly unlikely that the lessor will tailor the lease to your exact specification. It is important that you have a clear idea of those items which you can easily give up, as flexibility is essential to successful lease negotiations. Equally important is not being desperate, or you can end up with a lease on a property which does not fit your needs at all and it will give the lessor all the bargaining power. It is an excellent idea to have your strongest negotiator handle this area, or brush up on your negotiation skills before going in.

At the very least, being knowledgeable about the current market trends for your area, the particulars of the real estate you are looking at and what you want is crucial to obtain a successful lease.

There are many options and terms available when leasing office space. You should always be ready to walk away if the terms are not acceptable to you. In order to make sure you have this option, you must start your search early enough and be thorough. You should have a couple of properties which might work for you, ranked in order of most desirable. successful negotiations are easiest when you have prepared yourself and really know what your needs are.

The 1099 statements will need to be submitted to the service provider, and will also be sent to the IRS.

This means that landlords will need to develop a system for collecting tax identification information, legal names and addresses for contractor they do business with.

The new provision is part of the Small Business Jobs Act that was passed two months ago, and signals a change over existing rules that used to apply only to landlords who rented as a business or trade. Now, anyone who receives rental income is required to disburse 1099 statements. The rules will also include vacation home rentals.

It is estimated that any one landlord will need to prepare a number of these 1099 statements, a dozen or so on average, at the end of each tax season or pay to have a tax preparer do the work. Industry experts fear the requirement will place a financial burden on small landlords, which is an irony given the intention of the jobs law was to help small businesses.

A second tax reporting provision is set to begin in 2012. In this case, landlords will be required to prepare 1099 statements on both services and goods purchased. This requirement, tucked into the health reform law, is the more controversial and attempts have already been made to repeal it. Prior IRS regulations appears to exempt credit card purchases, which are already tracked by banks and card servicers.

The IRS is currently developing regulations to aid taxpayers in compliance with both provisions, but the agency is still in the preliminary stages of rule-making, where it is evaluating public comments to the proposed changes.

Now if the perfect time to start making those plans as the market is still soft. Property owners are thinking creatively like never before. Consider the possibilities for the future!

This months issue is has some great tips and ideas to consider  as you start to make those plans. 

Click Here for the entire issue!

Best regards

Rob Cassam