Before signing a lease, you want to make sure you are happy with the terms for the entire lease duration. To do this, you must understand the internal pieces of a lease so you can negotiate favorable terms with the landlord.
- Right to Terminate: This section of the contract describes what will happen if the contract is ended early or defaulted on, and describes the conditions for termination. Either party has the right to terminate the lease for a variety of reasons. However, one source of power you can ask for is a break clause which permits the tenant to terminate the lease without being obligated to pay the remaining rent balance should there be a timely notification of the intent to leave. This can be a great source of leverage to restructure a lease regardless of how the market has changed since the inception of the lease.
- Surrender of Premises: A surrender of premises clause stipulates the conditions of how the premises should be returned to the landlord and what procedures to follow when the lease ends. The clause outlines the tenant’s obligations, the landlord’s rights and what happens to any property left behind. It is acceptable to negotiate for the space to be returned in broom clean condition, and nothing more. The landlord may ask for space to be returned to white box condition, but that is too much to ask.
- Gross Lease: A gross lease is a type of commercial lease where the landlord pays for the building’s property taxes, insurance and maintenance. The gross lease can be modified to meet the needs of a particular building’s tenants, and a gross lease may require a tenant to pay utility bills. It’s important to make sure capital improvements are not passed along to tenants through operating expenses. When negotiating a gross lease, the tenant should ask which janitorial services are provided, and how often they are offered. The benefit of a gross lease is the convenience for the tenant to forecast a static expense.
- Insurance requirement: The insurance requirement of a lease defines the lease provisions of specific insurance coverages, indemnity, restoration, self-insurance and subrogation. What makes this negotiation difficult is the ever-changing terminology and coverages of insurance. It is recommended that you have a qualified insurance broker review the coverage requirements.
- Damage or Destruction Clause: A damage or destruction clause in a lease agreement outlines the rights and obligations of the parties to the lease in the event that the leased premises are damaged or destroyed during the term of the lease. Seek to minimize the time in which the lease can be terminated, and maximize the remedies available for the tenant.
Understanding the different terms, clauses and definitions of a lease is half the battle of negotiating a favorable lease. Make it as easy as possible to weave your way to a tenant-friendly lease by knowing the different pieces of a lease to even the playing field.
The Chicago real estate development industry has been buzzing this summer with dozens of innovative new projects aiming to break ground in the next year in the booming South Loop neighborhood. Tenant Advisory Group predicted at the end of 2014 that the South Loop will continue to be a red-hot neighborhood, and it looks like this momentum will last through 2017 and into 2018.
The recovering economy has brought a resurgence of demand for the neighborhood’s urbanized lifestyle. Construction began last month on Prairie Court Townhomes, a luxury development at 18th and Prairie Ave. that consists of nine buildings offering 55 four-story townhomes for interested buyers. Those looking to rent in the South Loop should keep their eye on some of the high-profile towers coming to the area, including an all-glass, multi-tube designed rental apartment tower and retail center proposed for 1326 S. Michigan Ave.
Commercial and medical spaces are popping up as well. Rush University Medical Center announced it will bring an outpatient center to a new development replacing the former National Letter Carriers Association building at 1411 S. Michigan Ave. The building itself – a mixed-used residential development – will break ground this year, and the medical facility will open in 2018. Additionally, the Essex Inn expansion and the Riverline mega-development will bring more business to the South Loop.
There are plenty more proposals in the works that could drastically change the area, including a 62-acre site of former railroad land southwest of Clark Street and Roosevelt Road that could become its own neighborhood. Tenant Advisory Group continues to predict the South Loop is the future River North.
Episode 1: Investing in Multi-Family Real Estate
A popular investment option is real estate. Like the adage says, “they’re not making any more of it!” There are a variety of classes of real estate that one can invest in, including retail strip centers, office buildings, warehouses, and farm land. The most common for the individual investor, however, is residential and multi-family real estate.
Bill is leading this new series and will cover the basics of commercial real estate as well as leasing from the landlord and tenant side, with an emphasis on investing in commercial and multi-family real estate. The series kicks of Tuesday, May 12 at 3pm CST.
To purchase the course and for more information, visit: https://westlegaledcenter.com/
The commercial real estate market, as with all industries, is constantly evolving and shaping itself to stay current with the advancement of new technology available for business owners to gather information. This newfound wealth of public knowledge can be helpful, however attempting to charter these waters alone can prove costly. For a variety of reasons, commercial real estate brokers still hold the keys to finding the right space at the right price for companies in the market for a new home.
Here are three essential areas where a broker will bring serious value to your company’s next real estate search.
Finding a Fair Deal
The most important aspect of real estate that both buyers and sellers can agree on, is finding a fair deal. Because “fair” is subjective based on whether you are buying or selling, the lessee or the lessor, a broker is used to find intermediate pricing to help both parties.
Brokers commonly use average rental market rates as a tool that shows average pricing per square foot based on neighborhoods, accessibility, building conditions and a variety of other factors. However, people are unaware that brokers go much more in-depth with their research. They also include tenant improvement allowances, securitization and rights to terminate, and free rent. In many cases, these factors make brokers more specialized than attorneys who may know the legal aspect of real estate terms, yet are unfamiliar with the fair business terms.
Off Market Opportunities
In both commercial and residential real estate, tools like Zillow, Craigslist and Loop.net have helped buyers see current activity. While this has been able to help with more transparency, on many occasions, not all opportunities are listed on these sites.
If you have an informed broker who is up-to-date on the market, they will be able to offer you off market opportunities. Active brokers should be in constant communication with leasing agents and owners to see any upcoming spaces that have yet to hit the market. Because so many cities are incredibly competitive in real estate, off market opportunities are able to increase your odds of finding a place by lowering the number of potential bidders.
Brokers bring a necessary closing speed to transactions. Due to the increasingly rapid pace with which today’ market is operating, quality spaces do not sit on the real estate market very long. There are certain relationships that must be formed in order for the finalized deal to be made between landlord and tenant.
Listing agents are that first point of contact in the cycle and experienced brokers will have an ingrained trust with these men and women. This serves to help you get the first rights to a space. The other major player in the process is the landlord. Having a broker by your side will ensure that he/she does not play games or try to sneak anything through a contract that can cause delays or headaches down the line. Because brokers know how to navigate smoothly through the entire transaction process, they will be far more efficient at doing so than a tenant who chooses to go it alone.
So you finally found the space you were dreaming of. Now it is time to work out the details beyond the first year’s rent. Each particular aspect of the lease has its own importance and to ensure the security of the great new spot you are locking down, do not just skim over all the nuances.
Tenant Advisory Group is your advocate when a landlord may be out of bounds with your lease agreement. Bill Himmelstein, founder and CEO of Tenant Advisory Group offers these five topics as ways to protect yourself before you sign on the dotted line.
1) Free Rent
The amount of months that the space is occupied and no rent is paid. Rent is the most obvious factor of the lease and a broker who understands the market is able to maneuver several months of free rent for you. The market standard for long term leases is to receive one month free per each year of the lease. So, if you sign a 6 year lease, then you should be expecting to get 6 free months.
2) Tenant Improvement Allowance
For the tenant who is looking to build out the available space, ensuring that the lease allows you to make those improvements and have them paid for by the landlord is critical. There can be a cash allowance which will go toward hiring a contractor. The amount that is allocated will depend on your financial stability as well as the terms and duration of the lease.
As landlords are in a constant effort to get the most bang for their buck, you need to be sure that there are clauses protecting you from unreasonable rent increases. Having a yearly increase over the course of the lease or a specific percentage by which rent can rise keeps you from losing control of your budget.
4) Securitization (security deposit)
All landlords will seek some sort of securitization on their leases. When a landlord knows the tenant well or believes that the tenant does not carry much risk, the security deposit becomes reduced. However, if you hold greater risk to your leased space, then it will be important to the landlord to securitize a portion of their out of pocket expenses to ensure that the landlord is protected and comfortable if there are any major issues. This deposit will allow for money to be refunded back or credited towards your rent as long as the tenant is not in default.
5) Termination Option:
The termination option is an extremely valuable piece of the negotiation. Your landlord will not offer this unsolicited. For leases that are longer than five years, it is critical to have termination rights. By negotiating this into the lease, if the rates dip below market value, then you will be able to exercise the right to terminate and move or use it as leverage to reduce your rate. Likewise, if rates have risen above your current levels, a right to terminate can be used to ensure you maintain below market rates.