I am hopeful that you are enjoying the summer months given that we only see a few months of nice weather each year here in New Jersey! My last correspondence resulted in a discussion about The Art of Negotiating a Lease and I would like to further that “conversation” since I feel it is rather important for all parties that are tied to that lease. This month’s focus is on what most people perceive to be a simple item to negotiate, TERM. I think this four letter word seems quite simple on the cusp, but when you really analyze it, it may be more complex than you would imagine. I am going to give you a couple things to think about from both a Tenant’s and Landlord’s perspective and why this four letter word is so important when negotiating a lease.

TENANT’S PERSPECTIVE:

A Tenant leases space because it is cheaper than purchasing a building and it provides more flexibility. The reason it’s cheaper to lease is because a Tenant will not have to come up with equity (cash) up front and, in some cases (typically with office buildings), it is a way for a Tenant to have the Landlord pay for some of their fit-up cost to become operational. To purchase a building that cost $1 million, a Buyer would have to layout approximately $250,000 if they choose to finance 75% of the building if they have good enough credit to qualify in the first place. There are additional costs to getting a building ready for the Buyer to occupy the building and run their business operations. In an office building environment, it is not unusual for a Landlord to pride up to $20 per sq. ft. as an allowance towards their fit-up. If the total space were 5,000 sq. ft. using this example, this is an additional $100,000 the Tenant keeps in their pocket. The question I will leave you with is does having $350,000 of working capital in the bank warrant enough reason NOT to proceed with the purchase of a building and continue to lease? (I am not going to get into the reasons for purchasing rather than leasing in this issue, but you can can always contact me to further this discussion.)

Another reason Tenants choose to lease space, and for good reason, is because it allows flexibility for expanding or contracting without having to wait for the sale of a building to go through and/or the purchase of another building. This makes the most sense for a newer company that is going to sustain growth over time. Of course, from a Tenant’s perspective, they have to be careful of negotiating too much time on a lease because if they have too much time on the lease and they grow out of the space, this could create additional problems going forward such as having to identify and secure new space with the possibility of becoming a “Landlord” themselves (known legally as a Sub-Lessor).

LANDLORD’S PERSPECTIVE:

A Landlord’s perspective is much different than Tenants because they are in business to rent space they own and there is nothing worse than owning an empty building. An empty building can generate a substantial amount of overhead that the Landlord must continue to pay whether the building is empty or full. The government, the bank utility companies, etc. do not care that a Landlord is suffering from loss in revenue; they still want to get paid! Therefore Term of a lease is something Landlords consider very carefully. Because they do not want to end up with vacancies, Landlords typically want Tenants to sign longer term leases, if possible. The longer the term, the better so that they do not have to worry about paying all the bills generated by the building coupled with legal, Brokerage, etc.

Another reason Landlords are concerned with term has to do with their financing capabilities. Landlords can achieve better financing terms when their buildings are leased to good credit tenants for long-term and, therefore, they carefully consider how long of a term a tenant signs. To tie this together, I mentioned above that Landlords will pay Tenant Improvement money to secure good credit tenants because not only do they want to shell out this capital to secure their tenants, but they generally can obtain longer term leases at much higher rents by laying out this capital expenditure up front. Again, this helps with their financing because the leases will reflect much higher numbers when evaluating the building’s income.

As with all my topics, this only scratches the surface, however, I do not want to take up more of your valuable time. If you want to further discuss, please contact me at your convenience at dlizzack@naihanson.com or call me directly at 201-478-7372. Enjoy the rest of the summer; it’s going quickly as usual!!!

Favorite Contact of the Month: Dr. Lawrence S. Lizzack, D.M.D., P.A. & Dr. Jason H. Lizzack, D.M.D. If you are looking for the BEST dentist around, I know how you can find two of them for the price of one!! Visit them at the following website: http://www.lizzackdmd.com or call 201-797-7774. You may also email them at keepsmiling@lizzackdmd.com.