Negotiating a New Commercial Lease? You Need Someone on your Side!



Negotiating a New Commercial Lease? You Need Someone on your Side!
By Sheryl Mazirow
Edited by Gary Wartik
March 8, 2014

Vision Economics has worked for years with companies occupying leased space.  One of the major changes to commercial leasing during the last twenty years has been the requirement that management of the business, whether it is an LLC or some form of corporation, be required to also sign personal guarantees of the lease.  This can be an expensive option, one that this office has often counseled against, where practical, except in unusual circumstances.  A second significant change has been the near explosion in the charges for maintenance, salaries and taxes that are passed through to tenants.  In view of these two dynamics, it makes it especially relevant to be fully aware of the terms and conditions of any new lease so that one’s obligations are fully understood.

This office has known Sheryl Mazirow of Mazirow Commercial, Inc. in Westlake Village, CA for nearly twenty years.  Ms. Mazirow is considered by those in the field to be one of the most effective lease negotiators on behalf of tenants in Southern California.   She only represents tenants.  She shares with us some of the keys to negotiating a commercial lease that fully discloses the obligations of the tenant prior to lease signing, thereby eliminating nasty and expenses surprises later on.

Introduction – Knowing all of the costs before signing

Before one signs a lease for any space in a building, you should know all of the costs that make up the CAM costs and operating expenses  (OPEX) for that building —and how much of those you costs for which you will be responsible under the lease terms.

You can avoid getting an unpleasant surprise when you receive the CAM and OPEX rent bill by addressing these items during negotiations to nail down these costs. But be prepared to ask for a disclosure of CAM costs and operating expenses!   If you expect the owner to voluntarily disclose to you all of those costs, you will be disappointed.

There are several key documents relating to office building CAM costs and other operating expenses    that can show you whether additional rent will end up wreaking havoc on your cash flow after you’ve signed a lease. If you ask the owner why it didn’t disclose those costs to you when you negotiated the lease, the owner may simply respond: “Because you didn’t ask about them.”  To avoid such unpleasant surprises, here are the documents that Mazirow Commercial, Inc. will obtain and review for and with you before a new lease is signed:

Document #1: Expense schedule. Expense schedules typically break down the expenses by category—such as cleaning costs, energy, and insurance. An owner generally prepares an expense schedule annually and then sends it to tenants after the end of each fiscal year. You should request expense schedules covering the past several years. They will help you determine what—and how much—was charged. Since there are well-established norms for each category of expenses, an expense schedule is a good indicator of whether the building is being managed properly. If you are dealing with a new building, review a budget of its projected CAM costs and operating expenses, including real estate taxes.

Document #2: Historicaloperating expense/CAM cost data. Review the historical amounts for CAM costs and operating expenses, including real estate taxes. Review the historical data for the past three to five years to estimate what your annual increases might be. Be aware that many owners will resist giving you their historical data unless you have lots of negotiating power.

If you expect to pay a share of capital improvements, find out when the improvements will need to be replaced. If the improvements will need replacement soon, you won’t see their cost in the historical data that you review. But you’ll need to keep in mind that they could cause big increases in your share of costs.

Document #3: Accountingof base year expenses. If you are negotiating a base year lease with an owner, ask to see and review an accounting of the base year’s CAM costs and operating expenses. For a new building, review a budget for the base year. Be aware that with a base year lease, you are responsible for any increases above the base year’s CAM costs and operating expenses. So if the base year’s CAM costs and operating expenses are set too low, you’ll have to pay a share of very large increases.

Document #4: Utilityand tax bills. A five-year history of utility costs and real estate taxes will assist in determining expected costs going forward. Request information on any tax abatements or reductions that have occurred or are planned.

Document #5: Insurance coverage. Review the declarations page of the owner’s insurance policies on the building. You want to make sure that you are not required to pay for any insurance coverage the owner already has. And if you will be required to pay a share of the owner’s insurance deductible, you will want an understanding of the amount of the deductible.

Key Questions to Ask During Lease Negotiations

Question #1:  Howbig is the space? Find out the square footage of the space that you are considering renting and the method of measurement.  Defined square footage figure is extremely important because your rent and pro-rata share of CAM costs and operating expenses, including any real estate taxes, are calculated on it. Find out which measurement standard the owner used to determine the square footage of your space. The owner should have used a measurement standard that is recognized in the industry— such as the standard set by the Building Owners and Managers Association (BOMA) International.

Question #2: Capital improvement projects. Which capital improvement projects are underway or planned? If there are capital improvement projects in progress or planned, you may be responsible for paying a share of their cost. These projects can be expensive – determine those costs before committing to a lease.

Question #3: Energyand electricity. Have any energy conservation measures been implemented at the building/center? Energy conservation measures typically result in cost savings for you and the owner.

Question #4: Tax assessments. Is the owner involved in any ongoing tax appeals for the building, or has it recently won a tax appeal? An owner might not otherwise disclose this information to you, but a successful tax appeal could lower your tax bill.

Question #5: Gross-upclause. Will the lease have a gross-up clause? As a building’s occupancy rate rises or falls, certain operating expenses will also rise and fall. These “occupancy-dependent” operating expenses will include such costs as electricity, garbage removal, and heating and air conditioning. The fluctuations can lead to big swings in the total operating expenses, which are the sum of the occupancy-dependent operating expenses and non- occupancy-dependent operating. “Grossing up” prevents these big variations

Question #6: Propertymanagement. You should find out how much the management fee is. Evaluate the management fee, together with the payroll costs, to determine whether they are within market-level norms

Question #7: Employees and contractors. How large is the owner’s staff and what do they do? Because CAM costs and operating expenses typically include staff salaries and wages, find out the number of administrative staff on the building’s payroll and what each staff member does.

Question #8: Above-standard services. What does the owner charge for above-standard services? If the owner provides above-standard services—such  as freight elevator usage, excess janitorial services, additional utilities, and overtime heating and air conditions— find out its markup for these services and how often they will increase.

We hope that those who are seeking to lease space, or expand their current leaseholds benefit from this review.  For further information, please contact Gary Wartik at Vision Economics at 805-987-7322 or Sheryl Mazirow at 805-449-1943 (www.tenantadvisory.com).

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