Column: Commercial real estate leases explained, part two

BY MICHAEL GOLDMAN

Outside of the actual product or service sold, a business”™s most important decision is its lease. This decision affects a business”™s revenues, costs and employees and is frequently a make-or-break decision. Last week”™s column assessed specifics of how to make the best choices or to maximize negotiating leverage. This is part two.

Most landlords require that a lease be guaranteed by the business owner, thereby putting personal assets (home and savings) of the guarantor at risk if the tenant does not generate enough cash flow to pay the rent. If the business fails, it is bad enough that the owner will lose the initial investment. It is even worse to have additional losses stem from the guaranty. Yet, almost all landlords require a guaranty. Therefore, the key for the business owner is to negotiate a reasonable limitation to the guaranty (a “cap”).

There are several ways to convince a landlord to limit the guaranty. One way is by posting a larger security deposit. Alternatively, some landlords will agree to a “good guy” guaranty, which caps the amount of the guaranty so long as the tenant (i) gives a certain amount of advance notice that he needs to end the lease early, (ii) pays rent until he vacates, and (iii) leaves the property in good condition. Depending on the size of the lease and the amount of the landlord”™s build-out, landlords will frequently accept a “good guy” guaranty with a cap of three to twelve months”™ rental exposure. Stronger tenants can sometimes negotiate that the guaranty gets reduced over the lease term ”” in other words, a successful track record reduces the total exposure over time.

Almost every lease states that the tenant accepts the property “as is” at the time the lease commences. This requires that the owner uses good building inspectors when negotiating the lease, ensuring that such issues as zoning, permits, liquor licenses, etc., are in order before the lease starts or are the subject of contingencies in the lease. Without this, an owner can be stuck paying rent on unusable property, suffer a delayed opening, or have to pay significant unbudgeted costs to get unexpected permits before being able to open.

These important leasing issues should be on every business owner”™s checklist:

Ӣ Exclusivity: If appropriate, the landlord should agree not to lease the shopping center to competitive businesses. For a restaurant in a large shopping center that can accommodate multiple eateries, there should still be exclusivity about the type of food served, entertainment, price point, etc.

”¢ Insurance: Among the most overlooked aspects of a commercial lease are the insurance provisions, since they are typically long, boring and “seem standard.” Nonetheless, an experienced commercial insurance broker should review them to determine whether the lease requires appropriate insurances and that the tenant is not paying for duplicative coverage. Also, the tenant will be in default if his or her insurance does not completely comport with what the lease provides.

Ӣ Parking: Parking can greatly affect the locationӪs attractiveness for customers and employees. Is there enough parking for both customers and employees? Will other tenants overburden the existing parking? (Fitness and medical centers use more parking than other businesses.) Is there sufficient lighting? Is exclusive parking available? If the building has significant unleased space, consider restrictions on future tenantsӪ use of parking.

Ӣ Traffic patterns: Traffic patterns affect location choice. If a strong competitorӪs location is more convenient, your new business may be doomed for no other reason. Customers consider things like long traffic lights, distance from main arteries and even which side of the street a business is on.

Some business owners mistakenly believe they can save money if they do not use a leasing broker ”” the landlord will pass along the commission savings. The opposite is generally true.

Because of commercial brokers”™ knowledge of the marketplace, the landlords”™ modus operandi and construction costs, they can save clients more money than what the landlord might save (and pass along) by not paying a commission. Experienced commercial brokers generally have personal knowledge of each major building and landlord in their market so they know the best deal they can win from each. Brokers know the additional rent structure, parking issues, IT-related capabilities and what limitations on guarantees and option terms the landlords have accepted in the past. Some brokers represent tenants exclusively. Some handle more class A office space. Others focus more on class B and lower-grade space.

The list of leasing concerns for business owners is lengthy. Anyone expecting to sign a lease should have an experienced leasing attorney, accountant, insurance broker, contractor and real estate broker on the team in order to make sure the leasing decision is a good one and the lease is fair.

Michael Goldman is an attorney with the Connecticut-based law firm Goldman, Gruder & Woods L.L.C. He can be reached at 203-899-8900.