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Tips for Tenants

Fifteen Negotiating Tips for Tenants

• Be prepared
• Know your goals
• Create a sense of urgency for the other party-set a dead line
• Know your options-have other alternatives available
• Do not let your enthusiasm to make a deal make you a bad negotiator
• Lawyers are paid to keep you out of trouble, not tell you what to do
• Negotiating is not about winning-it is about getting what you want
• Start early-allow enough time to negotiate elsewhere if necessary
• Identify the other party’s primary issue-stand in the Landlord’s shoes
• The person who gets the most emotionally involved has the least power
• Incorrect assumptions are a primary cause of most failures
• Negotiate on your turf or neutral turf
• Stay open-minded, creative, and flexible
• Be honest and direct
• Find out how others have fared in negotiations with the other party

Read the Lease Before Signing

Read the lease and look for standard provisions that would be a problem for your business.

Go Through the Rules & Regulations

A smart tenant would always read the entire Lease so you understand the potential ramifications that could be set in motion. The key is to catch the problem before it occurs.Read all the rules and regulations of the Lease as
carefully as you can.

Go Through The Details of Lease Insurance Clauses

One clause in the lease that always seems beyond reasonable comprehension is in the clause. Even some of the best real estate attorneys simply tell their clients to have their insurance agents read the clause before signing the lease.

The lease requires you to name both the landlord and their "agents" to be named as an "additional insured." That is standard. Then the tenant is typically requested to send a copy of the certificate to the property manager’s office. The big hit comes in that failure to do so can be a default on the part of the tenant. Check both your lease and your insurance policy.

Put Your Emotions Away When Looking For Space

Always pay more attention to utilitarian issues such as space layout, future growth, general location and economics, and less on image and other emotional issues. Landlords are less likely to pay for tenant improvements; you may need to either put in your cash or live with what you have.

In some Far East cultures, that is a sign of a more productive environment. They prefer to put more productive people on the inside rather than have a window. While the outside of a building may not be as appealing as you would like, we have seen wonderful things done to the inside to create a great working environment. An architectural firm converting an old boathouse to an ad agency converting an old Victorian.

The key is to define your usage, budget, and location. Be flexible on the rest, and all will fall in place.

Get All Of The Space You Are Paying For

It is surprising how quickly even small measuring mistakes can add up to big overcharges in rent. Apply BOMA standards to make sure you are getting all the space you are paying for. And have your space planner verify measurements.

Operating Cost-Pass-Through Methods

With an operating expense cost-pass-through, more rent will have to be paid as building operating expenses increase over a base year, and cost-pass-throughs take effect. You should compare past years' increases in your analysis of alternatives, make sure the starting point is appropriate, and place a cap on annual increases, if possible. Be aware of what calculation method is normal in your market.

You Don’t Have To Pay Rent During The Time You Cannot Use Your Space

What would you do if the elevator broke and your customers could not reach your office?
What if a fire on another floor prevented your employees from reaching your office, or if the ceiling collapsed because of a water leak? It would at least be difficult to operate your business, and you certainly would not want to pay rent during those times.

But many form leases require you to do just that. Make sure that your lease states that your obligation to pay rent stops (the legal term is "abates") during the time you are denied reasonable use of, or access to, your space.

You Don’t Have to Pay Rent If You Are Not Using the Property

If your business is not open because one of your employees damaged the property, you should not have to pay rent during that period. Most form leases require you to pay rent if you or your employees are at fault for damaging a leased property. Liability for negligence should rest with an insurance company. Properly drafted clauses should shift the risk for such events to the party’s insurers.

Protect Yourself From Your Landlord’s Insurance Company

In case of a fire accident and the like causes damage to your building, the landlord’s insurance company pays to repair the damage but then sues you to recover the $5 million that they paid. In such cases, the insurance company states two things: (1) The landlord waives her right to recover losses, and to any claims against you and (2) The landlord’s insurer also must waive its right to recover losses. The legal term for this clause is "waiver of subrogation."

Your Rent Payments Should Cover Building Operating Costs And Not Inappropriate Expenses

Attach a detailed list of items that you want, specifically excluded from operating costs. These may include capital improvements, higher-than-customary executive salaries, mark-ups on utility expenses, overhead for staff, and above-market payments to affiliates of the landlord. And insist on your right to audit the landlord’s records.

Agreement to Allow Some Discretion

Be sure your agreement allows you some discretion should you ever want to sublease or transfer your lease to another company.There are a host of legitimate business reasons why companies transfer lease rights. In essence, companies are sold, they outgrow space, and they downsize or form strategic alliances and sublet space to a new partner. Most standard leases give landlords absolute discretion over transfer decisions. Make sure that your lease requires the landlord to be reasonable-at a minimum-in consenting to a transfer.

Detailed Description of the Condition of Space Leased

Your lease should describe in detail the condition of the space you are leasing and all services for which the landlord is responsible.The law in most states recognizes that when someone signs a lease, they accept the property in its existing condition unless the lease specifies otherwise. It is important to carefully describe the expected condition of the premises and list such services like hot and cold water, heating, ventilation, electrical power, restrooms, elevator service, building maintenance, janitorial services and any others you expect the landlord to provide.

Seek Advice of An Insurance Professional

Always seek the advice of an experienced insurance professional to make sure your interests are adequately covered.An experienced insurance agent will advise you on coverage to protect your property and interests. Be sure that your company carries all coverage specifically required in the lease.

Offset Costs Against Future Rent

Ask for the right to fix a problem when your landlord does not, and to offset your costs against future rent. If you state in your lease that you can fix a problem if the landlord does not, and then reduce your rent payments by the amount it costs you, you provide an incentive for the landlord to do the work herself.

Protect Yourself From The Landlord's Lender To Terminate Your Lease

Anyone investing significant sums to improve a leased space or believes the location of a property is critical to a business should be particularly concerned about this point. A landlord's lender can terminate your lease by foreclosing its mortgage on the property.

The two steps to be followed are to insist that the landlord obtain an agreement from her current mortgage lender not to terminate the lease,i.e., a "non disturbance agreement" and make sure the lease says any future lender that acquires the property through foreclosure cannot terminate the lease for an undue cause.

Negotiate the Common Area Maintenance Section

Some leases permit the landlord to pass through both an outside property management fee as well as a hefty "landlord administrative charge." Those costs add up, but you can often convince the landlord to drop the administration charge if you catch it before signing the Lease.

Trust

Never rely on "trust" or a handshake on matters very significant to your new space. Get agreement on the size, location, color, lighting, etc. of the sign and have the details included in the Lease.

Review Operating Issues

Watch out for issues like

• After-hours HVAC service - is it available and how much will it cost
• Do you make higher than normal levels of noise at particular times
• Your employees love to cook popcorn in the microwave in the afternoon, and that is strictly forbidden by the Lease

Options To Extend The Term

If you want an enforceable option to extend, make sure that either the rent for the option term is stated in the Lease or that there is a detailed arbitration provision, which will establish the rent if the Landlord and Tenant are not in agreement on it. Otherwise, it will be unenforceable.

Notice & Opportunity To Cure

Make sure that you are entitled to written notice of a default and a period of time to cure the default before the landlord is entitled to take any action against you.

Consents
Try to get the landlord to agree that in cases where you are required to obtain their consent, it will not be unreasonably withheld.

Notarization

Make sure the landlord's signature on the Lease is notarized if it is longer than a year. Otherwise, according to some State's laws, the landlord may be able to terminate the lease if it becomes advantageous for him to do so.

Condition Upon Return
Occasionally leases require the tenant to return the premises at the end of the lease term in the same condition as when they were at the beginning. Be sure to qualify that "with normal wear and tear and any damage by casualty excepted."

Security Deposits

As markets around the country tightened and then weakened over the past few years, security deposit requirements flowed from the typical "last month’s rental" to anywhere from three to 18 months of rent and then back to "last month’s rental" for all except startups. Many landlords have been "burned" by startups and .coms and are very cautious in securing their leasing expenses when negotiating with them.Your financial statement and creativity is the key.

Level The Playing Field
Level the playing field by taking advantage of the availability of a good tenant representative. You will find that there is usually no cost to you. In the long run, you will end up way ahead in not only the rent you pay but also in avoiding mistakes.

Relocation Lease Clauses

If you are a small tenant occupying less than 5000 feet on a multi-tenant floor of a nice office building, you may be exposed to the "we can move you any time we want" clause. This simply gives the landlord the right to relocate you to another part of the building should they need your space for a larger tenant. Generally, this clause is covered up under "Building Planning."

While it may not be unreasonable to allow the landlord to relocate you, demand concessions. Most landlords will pay for certain moving expenses. Demand “everything.” The new suite should meet your needs, and you should never pay more in total rent despite any increase in size while your rent should decrease if the new space is smaller. If there is no suitable space, demand a termination clause and compensation for the move.

Capital Expenditures In Tenant Pass-Throughs

Why capital expenditures in tenant pass-throughs should not be included in operating expenses and why tenants should do their best to keep such expenditures out of their leases.

Capital Expenditures - Includable or Not?

This tip will help you explore why these expenditures should not be included in operating expenses and why tenants should do their best to keep such expenditures out of their leases.

What Are Capital Expenditures?

According to GAAP, capital expenditures are the acquisition costs for items that last beyond the current accounting period and increase the value or the life of an asset. The best way to understand capital expenditures is to think of them as "investments" in its building that are intended to yield long-term benefits.

Where Capital Expenditures Appear In Leases?

Most leases have operating expense/common area maintenance provisions that require the tenant to share in the "pot" of building operating expenses. Operating expenses typically include maintenance costs, operation costs, and other normal costs of the building. When it comes to capital expenditures, most leases have language that specifically addresses how they are to be treated.

The Rent Already Covers Capital Expenditures?

In most cases, the costs of capital expenditures should be borne entirely by the landlord. In order to understand why one must first understand how the lease is structured financially.Base rent is intended to compensate a landlord for the use of its building, which consists of the entire structure, including all of its physical improvements, systems, equipment, and other attributes.

Capital Replacements

Many parts of a building will wear out through the years, and therefore, every component will, eventually, need to be replaced. So when a landlord spends money replacing a component of the building, it is merely replacing part of what the rent is already covering. There is no justification for including these replacement costs in the building operating expenses.

Extraordinary Repairs

Small, routine repairs neither increase the value nor extend the life of the asset. However, if a repair is non-routine and rises to a level where the expenditure increases the value or life of the asset, then this constitutes what accountants call a "betterment" and the costs should be capitalized.

Capital Improvements

Capital improvements are expenditures for new items in a building, such as a new sidewalk (where one didn't exist before), a new security system, etc. Should any of these be included in operating expenses? Let's examine the various circumstances for these kinds of expenditures.

Straight Improvements

If a landlord puts in a new sidewalk, one can argue that the tenants are all benefiting from it and that they, therefore, should pay for it. Even though the tenant may receive a benefit from the new item, the tenant should, at a minimum, have the option of deciding whether it wants to spend its money on it. The landlord should first obtain the tenants' written agreement that if such an improvement is made, they are willing to pay for their share of it by allowing inclusion in the operating expenses. Without such approval, inclusion in the operating costs is inappropriate.

Improvements Intended to Save Operating Expenses

Tenants should have no problem in including these costs in operating expenses provided the expenditure is spread out over the improvement's useful life, and to the extent that the annual amortization charge is no higher than the money saved. It is acceptable for capital expenditures to be allowed for items that save other operating expenses to the extent of such savings.

Beware of clauses that say that capital expenditures are allowable if they are intended to save money because almost anything can fit into that category. The expenditure must save money, and the landlord must be able to document such savings.

Improvements Required by New Laws

From time to time, laws are passed that require building owners to make improvements to their buildings. These are unexpected expenditures on the part of the landlord, and a good argument can be made that the tenant should pay for them because they are not factored into the existing rent structure. However, an equally good argument can be made that having to fund such improvements is one of the risks of building ownership and that the tenant should be insulated from such risk. The tenant may enjoy the use of the new improvement for a short time (during the balance of its lease term), but it is the landlord that now owns the further improvement forever.

Spreading the Cost Out Over The Useful Life

In any case, any time that capital expenditures are allowed to be included in operating expenses, the cost must be spread out over the useful life of the expenditure. Remember that these expenditures are essentially investments in the building, and are expected to yield benefits for many years. Sound accounting principles require that to accurately measure and report the financial performance of an investment in real estate, the cost of such items must be allocated to the time periods they benefit. Doing so also avoids the inequitable result of having a tenant pay for the entire cost of such an expenditure in one year even though it may not be in occupancy to enjoy the benefits thereof in future years.

Conclusion

Capital expenditures can take the form of extraordinary repairs (such as refurbishments and overhauls), replacements, and improvements. Except where the expenditure saves other operating expenses (and therefore has no net impact on the tenant), tenants should not allow the inclusion of such expenditures in operating expenses. These are investments in the building. They are already anticipated and covered by the existing rent and are yield long-term benefits to the landlord almost exclusively. If, through negotiation, any of such expenditures are allowed, at a minimum they must be spread out over their useful lives so as to minimize the single-year impact they may impose.