Earlier this month, I wrote about the value of hiring a property management company (PMC) to handle the thousands of details involved in managing a commercial investment property. (Click here to read it.) In this follow-up article, I’d like to explore the importance of a well-structured lease agreement and explain why having your PMC review the lease prior to execution is usually the smartest option.
Most inexperienced commercial investors underestimate the importance of the initial tenant lease agreement and the substantial effect it can have on the value and profitability of a property. It is not an exaggeration to say, that in many cases, it is the quality of the lease that determines whether a commercial investor sinks or swims. If the lease is not comprehensive, and not structured correctly, the business is exposed to any number of potential risks, liabilities and expensive problems.
Practically every detail that a PMC must deal with in terms of managing the property must be anticipated and addressed ahead of time when drawing up the details of the lease. From maintenance and repair responsibilities to legal liability issues, the spectrum of the items written into a good lease is extremely wide.
The following are just a few examples of some key elements that should be covered in the lease:
Utilities – Some commercial properties are designed so that utilities, such as power and water, are tracked separately for each individual space; others share common, centralized utilities. Since different types of businesses have varying utility needs, it’s important to consider how you’re going to divide and assign the responsibilities for paying the utility bills among your tenants. A restaurant or cleaning business may use a high volume of water, while an electronics company may need an above average amount of electricity. This is one of several reasons why it’s usually a good idea to write individual leases for each tenant rather than using a standardized, cookie-cutter lease for all tenants.
Structural Build-Out – Every tenant will have different needs in terms of the physical structure of the space they are leasing. The lease should clearly define responsibilities for altering the space and for returning it to its original state if applicable. If the tenant plans on making major modifications, the lease should describe the changes in detail and identify which vendors are approved to make the modifications.
Maintenance and Repairs – This is an area where many leases fall short because there are so many details to consider. Structural damage, HVAC system maintenance, cleaning, plumbing, lawn maintenance, fresh paint, signage and the list goes on. Only an experienced PMC that has dealt with all kinds of properties and tenants possesses the wherewithal to address every detail thoroughly.
Insurance – If one of your tenants runs a restaurant, who’s responsible for damages caused by an accidental fire? If a customer is severely injured slipping on an ice patch in your tenant’s patio area, are you liable? Defining the required liability insurance for each tenant is a crucial step for minimizing your risk, repairing damages, and mitigating a catastrophic lawsuit.
Having an experienced PMC review your leases is a good idea because the company probably has been through many situations and is aware of many different solutions to each situation. A properly structured lease will not only minimize your risk and protect your investment, it will also result in happier tenants and maximize the value of your property. Ultimately, a good lease will save you time and money.
Grayson Powell is a Managing Partner at Coldwell Banker Commercial SunCoast Partners (CBCSCP). CBCSCP leverages the vast experience of highly-skilled real estate professionals and developers and specialize in selling, leasing and managing retail, commercial, and investment property. To learn more about CBCSCP, visit www.cbcwilmington.com or call 910-350-1200.
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