Lease Negotiations: 4 Essential Landlord Terms

With commercial leases ranging in size from a few a pages to hundreds, it is difficult to know what are the most important terms for a landlord to focus on when signing a new tenant. Here is our list of lease terms to focus on in your next negotiation.

LEASE TERM.

From a landlord's perspective, security and the knowledge that rent is coming in each month to cover the costs associated with the property is worth the headache on the front end of negotiating a strong lease term. Tenants will want flexibility, including lease options to give them the ability to leave a poor performing property with an equal ability to stay in for an agreed upon price. As a landlord, look for a tenant who is willing to sign a long term lease as it demonstrates confidence in both their business and the property to perform at a high level for years to come. Remember, signing a new tenant is expense between attorney expenses, TI dollars, etc.

CREDIT & GAURANTEES.

In the same sense, be weary of signing an over optimistic tenant who has no supporting financials or is unwilling to sign a guaranty as a result. You want to feel confident that your tenant will have the ability to perform for the duration of the lease term. Take the the time to gather and analyze financials, history, and any relevant information you can be provided on the company/tenant you are signing on. Look to have a guaranty signed for an extra layer of security for smaller shops or a corporate business who is willing to back a failed franchisee as well. Remember, proper due diligence on the front end will result in a smoother relationship with tenants and longer lasting occupancy & cash flow for your properties.

ESCALATIONS & INCENTIVES.

Base rent is important, but perhaps an overlooked tool in setting such terms is the ability to create escalations and provide incentives for early years. Opening a new location is expensive for tenants, between improvements/property buildout, hiring & training new employees, and the time/costs that go into lease negotiations. Because of this, many tenants are motivated by lowering their upfront costs, and are willing to reflect their rent this way as a result. If you have the ability, provide higher incentives with increased TI dollars, abated or free rent, and a rent structure that escalates over the long term. This could be a win-win for all parties, and ultimately could get you more rent in the long term if structured properly.

EXCLUSIVES.

If your property contains more than one space to fill, sign tenant exclusives carefully. For example, if signing on a sandwich shop, do not agree to an exclusive that states that "no business that prepares & sells food shall occupy the premises" as this restricts all potential food users. A more proper exclusive would simply restrict the preparation & sale of sandwiches, allowing you as the landlord to sign on more types of users. Address this issue directly with a tenant, as often times tenants are willing to re-word an exclusive to achieve their goals while leaving you the ability to work with different tenants.

While this list highlights only some of the most important terms a commercial landlord should focus on during the lease negotiation process, there are many other terms that a landlord should become well acquainted with. A great resource to do so is this extensive Real Estate Terminology list. As always, investing in a strong legal partner is worth understanding the caveats of each lease prior to signing.

Thirty Eight Properties LLC Minnesota Commercial Real Estate Specialists

Contact Us: info@38properties.com or (612) 290-7195