Help walk us through signing a commercial lease.

September 27, 2010 10:10 AM

What are some important things you should know before signing a lease on a commercial space? New building, storefront, Brooklyn. Help us get as not-screwed as possible.

We're an educational organization that hosts a metric ton of different classes in Brooklyn. What do we need to keep an eye out for?

We have a preliminary meeting today with the building owners. It's a storefront space in a new building in an up-and-coming area, and the space is still being built out. We do have a broker.

There's just a ton of stuff going into this. Things like insurance, rent increases, buildout requests, utilities, building maintenance and a hundred other things. While we think we're decently prepared, talk to us like we're rather bright children.

And don't worry, we aren't going to go through this without a lawyer. The process happened more quickly than we thought, so we don't have one yet - feel free to make recommendations (we're in Brooklyn).

On a side note - anything useful but easily missed that we should include in the buildout? We'd be working with them on that.

posted by soma lkzx to work & money (8 answers total)

Say, any chance the location is the new building on Prospect in Windsor Terrace? I am not a real estate person, but just based on what I've seen with that particular new construction near my house, I would definitely be prepared to ask hard questions about building maintenance. For example, just a few weeks after the scaffolding was removed from the building, the sidewalk they had newly put in washed out in heavy rains, because they had failed to properly prepare the ground underneath. Also, the huge plate glass windows in the commercial space immediately started cracking and will no doubt be expensive and time-consuming to replace. With new construction, there seem to be a lot of things that look great at first but quickly show defects, and it should be clear in your lease how those things will be handled. It would be a real pain to be trying to start up a location and have it plagued by repairs right off the bat. Get clear answers about who is responsible about repair issues, even for repairs that are external to your rented space (i.e. sidewalks) and about a timeline for prospective repairs.
posted by otolith at 10:25 AM on September 27, 2010

I would actually hire a contractor (not one who's ever done work on this particular space) as a consultant, even if it's just $200 for walking around the place and taking note of what's up with it.
posted by Jon_Evil at 10:45 AM on September 27, 2010

also, commerical leases are usually done in long-term stretches. if your business is successful, the landlord will try and gouge you for everything they can when it's time to sign a new one. This is why most restaurants don't survive past the first lease. see if you can't get a clause put in the lease about limiting the percentage increase upon renewal.
posted by Jon_Evil at 10:50 AM on September 27, 2010 [2 favorites]

Get a clear understanding and commitment regarding common area expenses. A great trick of some landlords is to hire a company that they own to "manage" the property and pay that company a huge management fee. They then expense what is really profit as a "cost" of operating the space on your behalf. For example, they charge you rent, charge again for light bulbs in the hallways, charge for the outside company that changes the bulbs, and charge for the outside company that "manages" the changing of the bulbs, when a handyman could have done it as a part of his normal duties.
posted by Old Geezer at 11:16 AM on September 27, 2010

You are emailed.

For the lasting record here: no organization, particularly a nonprofit, should sign a lease or renew a lease without the advice of a real estate professional, preferably one who has nonprofit experience. Nonprofits sign bad leases almost as rule, unless they are well-advised.
posted by RJ Reynolds at 11:32 AM on September 27, 2010

I work in accounting for a corporate property ownership and management company in Chicago - one of my primary functions is calculating the expenses we pass through to our tenants. Hopefully the info below is helpful, and I could probably say much more, so feel free to MeMail or email me if you have any questions. Good luck!

Operating costs or common area costs (and real estate taxes) can be passed through to the tenants of a building. Operating expenses are different than common area maintenance expenses (CAM), in that the CAM costs are limited to only the common areas of the property. Operating expenses can include non-common are expenses like the landlords expenses for utilities in vacant spaces.

Limits to the types of expenses that can be passed through can vary and exclusions from these expenses are usually outlined in the lease language. It's important that you understand what can and cannot be passed through, and that you receive a breakdown of any expenses the landlord intends you to pay so you can confirm whether or not they are excluding what they should be.

In my experience, the amount the tenant pays is their proportionate share (the percentage of the property the tenant occupies, as set forth in the lease) of the expenses *or* their proportionate share of the difference between the tenant's base year (expenses the year they moved in) and the expenses for the calendar year in question. The first instance seems to be more common for a retail or storefront lease, while the base year calculation method seems to be more common for an office lease.

Some things you might want to look out for regarding these expenses, including some ways to limit their impact on your bottom line:
* They can be calculated based on the actual expenses or grossed up expenses (what it would have cost if the building was "full", usually 95% occupancy). There are advantages to both calculations. Based on actual occupancy could mean if the building is only half full, you're not paying that much, but if it's full the next year, you'll see a big increase in expenses. Grossed up calculations will make you pay more if the building is only half full, but it will keep the amount from fluctuating too much from year to year.
* You can request to be billed estimates throughout the year (based on the landlord's budgeted expenses) and have a reconciliation done once the actual expenses are known. If you were over billed, you'd get a credit back - if you were under billed, you'd owe them an additional payment. The lease might set time limits to which the landlord must adhere when doing the reconciliation.
* The whole or a portion of the expense amount could be capped so it does not increase over x% from one year to the next, or more than $x per square foot. Caps can be cumulative or non-cumulative. Under a cumulative cap, any amount over the actual expense and under the cap can be carried forward to future years.
* Management fees are often set to not exceed a percentage (4 or 5% seems pretty standard) of the gross income of the property.

On some leases, if the rent increases 4 or 5% per year, the increase is thought to be enough to cover any operating or real estate expenses. You won't get the benefit of a credit if the actual expenses were less than this increase, but you wouldn't have to pay the separate, variable charges.

Regarding the buildout, I'd make sure there is a punch-list provision, allowing you and the landlord to walk through the space once construction is substantially completed and compile a list of what still needs to be done. A time limit for these items to be corrected/finished should be set. If there is a termination clause in the lease, it may include a partial repayment the landlord's build-out costs as part of the termination fee.

If the property owner is a member of BOMA, they should adhere to their standards. If not, you may still find their reference material helpful.
posted by youngergirl44 at 12:38 PM on September 27, 2010

Thanks everyone! The meeting was actually the most preliminary-y thing on the planet, but this was definitely helpful.
posted by soma lkzx at 11:32 AM on September 28, 2010

Just got our hands on the lease, and some of it is hilariously not in our favor. I'll post an update after lawyer review, just so Future People can get a handle on some things to look out for.
posted by soma lkzx at 8:37 AM on November 5, 2010