Anyone who has had a commercial lease can attest to the complicated terms, wordy clauses, and fine print involved along the way. Phrases like “gross lease,” “net lease,” or “pro rata share” easily cloud readers’ understanding of what it is they are actually signing. Many commercial tenants have stories about their lease idiosyncrasies that created a windstorm of commercial woes.
Commercial leases shouldn’t be a painful part of owning a business or medical practice. Instead, they should support the goals of both the tenant and property owner, facilitating healthy business plans. Tenants who are interested in negotiating successful commercial leases should be careful to avoid these five common mistakes:
Procrastinating
If a tenant waits until the last minute to review and sign their commercial lease, they will have little to no time to negotiate. In markets where commercial space in a particular sector is in high demand, delayed negotiations can cause the tenant to risk losing that space. Tenants and their commercial real estate advisors should begin to review leases about 12 months before they need to move into a facility.
Signing a Lease Without Negotiating
One of the biggest mistakes a commercial tenant can make is to sign the dotted line without undergoing negotiations. Commercial leases should be tailored to individual businesses and can be a win-win for both the tenant and landlord. The terms of the lease are the foundation of the tenant-landlord relationship. If a lease leans too heavily on one side, it could frustrate the relationship, resulting in a vacancy for the landlord and a lack of space for the tenant. Negotiations even out the playing field and allow both parties to include details that best fit their business plans.
Focusing on the Present Without Considering the Future
The needs of a business or medical practice evolve over time. Staff and clientele growth or consolidation are natural facets of business. A commercial facility should provide flexibility so that the tenant can make adjustments as needed.
When preparing to negotiate a commercial lease, a tenant should have their 5, 10, or even 15-year business plan on hand. If the business plans to grow, consider the growth plan in the negotiations. For example, in the case of a medical practice, new facility trends suggest leaving room for future technological developments. This could require the medical tenant and the landlord to discuss tenant improvements (TI) during lease negotiations.
Not Managing Risk
Real estate is typically the second most expensive item on a medical practice’s budget sheet, next to payroll. Negotiations and lease elements should be realistic for both the landlord and the tenant. Both parties should have an understanding of fair market value, which is especially important for medical entities that need to comply with Stark Law.
Not Hiring a Professional CRE Advisor
Commercial leases are not something to try to handle alone. Without representation, many tenants and even landlords wind up in an unhealthy lease agreement that doesn’t reflect the current state of the market or needs of the business or medical group. Commercial real estate advisors provide professional guidance, helping clients to avoid common pitfalls of the lease negotiation process.
The Birmingham Business Journal recently released an article by Greg Winchester with Auburn University regarding his thoughts on the post-pandemic state of CRE. He suggests that there will be a significant need for asset management and real property expertise in the wake of high vacancy rates and delayed projects. He describes the balancing act taking place across the country as some areas experience accelerated construction projects and others encounter setbacks.
Now more than ever, both tenants and landlords should consider hiring a commercial real estate advisor. A commercial advisor’s expertise is invaluable for both the current and future real estate goals of a business or medical practice. With the help of a commercial real estate advisor, tenants can avoid many of the common issues associated with negotiating a commercial lease.
If you are interested in learning more about investing in commercial real estate, or if you have questions about buying, selling, or leasing a commercial property, please contact an HBRE advisor. Our team of experienced CRE professionals have the skills and insight to assist with all property transactions. To reach out to us directly, email [email protected] or call 615-564-4133.
