Lease Renegotiation - Commercial Tenants
Member since 2020 · 6 posts · 2 votes
Hello! I just closed on my first commercial property a few weeks ago. There are a couple commercial units and some residential units in the building, and one commercial space was leased for 10 years earlier this year. That company was acquired by a competitor at the same time I was buying the building and soon after close they want to renegotiate the lease to a lower term, but want to lease the entire building. I see that as a major risk by eliminating the diversification of my tenants while sacrificing the security of a longer lease. They expect me to help them procure parking at an adjacent property to sign-on for a longer term, which I can't control. I feel like they should pay a penalty or an increased rent to offset that lost value of longer lease and "buy" my risk of a single tenant. Any advice for a fair resolution to the problem?
Hi @Zachary Toothman How did the company buy-out take place? Are they intending to fulfill the current lease? The Leasee cannot change without Landlords approval. The value of the lease would still be owed to the Lessor (property owner.) How much shorter term? Study the numbers and don't loose money, your loan depends on it. They should pay a lease closing fee which covers your staff to negotiate a lease. It might be based on the square footage. Talk to area commercial leasing agents, or come to an agreement on a flat fee due on the day of signing the new rental agreement.
As always, ask for the business plan from the new company. Why do they need more space and will it generate enough money to fund the expansion. What is the status of the leases of the other tenants, or are the other spaces vacant? How will the spaces be rehabbed? The LL would loose diversification but the tenant may be improving the condition of the property at their own expense. Is the property in a location where the upgrades would attract a future tenant?
If the 'new tenants' are in the building without a signed lease with the property, they are trespassing. You have the upper hand. Talk with your real estate attorney. Payment plan for all upgrades must be clear. That's the fair part.
And the parking? You could introduce the 'new tenants' with the owner of the neighboring property, support the tenant at the city council meeting if your input is required, but you cannot speak for the owner of the neighboring property. Do not promise a success, only support. Would the parking be a deal breaker? Explore this early.
Hi @Zachary Toothman How did the company buy-out take place? Are they intending to fulfill the current lease? The Leasee cannot change without Landlords approval. The value of the lease would still be owed to the Lessor (property owner.) How much shorter term? Study the numbers and don't loose money, your loan depends on it. They should pay a lease closing fee which covers your staff to negotiate a lease. It might be based on the square footage. Talk to area commercial leasing agents, or come to an agreement on a flat fee due on the day of signing the new rental agreement.
As always, ask for the business plan from the new company. Why do they need more space and will it generate enough money to fund the expansion. What is the status of the leases of the other tenants, or are the other spaces vacant? How will the spaces be rehabbed? The LL would loose diversification but the tenant may be improving the condition of the property at their own expense. Is the property in a location where the upgrades would attract a future tenant?
If the 'new tenants' are in the building without a signed lease with the property, they are trespassing. You have the upper hand. Talk with your real estate attorney. Payment plan for all upgrades must be clear. That's the fair part.
And the parking? You could introduce the 'new tenants' with the owner of the neighboring property, support the tenant at the city council meeting if your input is required, but you cannot speak for the owner of the neighboring property. Do not promise a success, only support. Would the parking be a deal breaker? Explore this early.
@Kathy Henley Thank you for your reply! So the lease was assigned to the new company and myself and at the moment I have no reason to believe they don’t intend to honor. Legally I don’t think they have a leg to stand on. Ok top of that, they are a medical cannabis company in a state newly legalizing the industry with a highly coveted permit tied to this address. It would likely be challenging and risky for them to try and move the location prior to even opening up their dispensary. Their main driver is having enough parking, per their business opinion. They want to lease the entire building to control the parking, but as you said that increases my risk by losing diversification of income. I think the property long term has potential to rent but commercial space is certainly a little more unknown in the COVID era. The draw for this property was this 10 year lease. New company wants to drop to 5 years and add the expansion. I feel like there should be a premium on rent and a penalty for reducing term, obviously they disagree. I guess it’s my opinion that I don’t have to budge but in the interest of forging a long term relationship with potential lease extensions I would like to be fair. I just am not sure what “fair” is as far as a penalty fee or increased rent. I have been clear with them that I’m willing to assist with the parking but can’t guarantee results, but they seem insistent in trying to hold lease extension or increased rent over my head to perform. I’m not willing to dedicate much time or effort to that endeavor, but if a few phone calls or on site meets will get it over the goal line for them then that’s a different story.
@Zachary Toothman Interesting. We were just starting deep discussions at my last job in CA, about medical cannabis tenants. It will be a very special subject. The rules and regs will change as cities face the affects of such businesses. Why not ride the wave? Read their business plan and vet their funding sources.
Higher rent for a shorter term, yes perhaps. But think creatively. The building upgrades have a value too. If you are not experienced in negotiating a lease, hire someone. The property will absorb the cost but the tenant will be charged over time.
Omit the word 'penalty' for opportunity.
Lease assignment? Did you sign such a document? Show this to your real estate attorney.
What are the parking requirements from the city for the cannabis tenant? Call the planning and zoning dept.
1) Leasing the entire building to control parking doesn't sound advantageous, for you or them. Will controlling parking really help sales that much? If it does, then they can pay the premium to occupy it all.
2) Absolutely there should be a premium to drop the term length and add expansion. I like to look at things on a scale, so let's scale down for this scenario. If I rent my apartment for a year, then I have 12 months to plan and pursue other opportunities. If I rent the same apartment for a month, then I have 30 days to plan and pursue other options before I have to redirect my time and attention back to the asset. Thus, there should be a premium paid, for me to accommodate you. Also, IT IS KNOWN THAT IT IS MUCH MORE TIME CONSUMING AND COSTLY TO ACQUIRE NEW BUSINESS (or tenants), THAN IT IS TO RETAIN CURRENT BUSINESS. THAT'S WHY IN SALES, REFERRALS ARE KING!! So, Mr. Tenant your value was the lease length. If you would like to decrease the lease term, then there will be compensation to do so. I would be easier on the lease reduction if I saw potential for the tenant to grow long term, but they just need the shorter term for the, "what if" scenario. Have they explained why they want the shorter term?
3) In my opinion it all boils down to the numbers. You have to make the numbers make sense with any direction you take.
4) Who are your other tenants and how long are their leases?
5) If this tenant were to leave can you still make payments?
1) Leasing the entire building to control parking doesn't sound advantageous, for you or them. Will controlling parking really help sales that much? If it does, then they can pay the premium to occupy it all.
2) Absolutely there should be a premium to drop the term length and add expansion. I like to look at things on a scale, so let's scale down for this scenario. If I rent my apartment for a year, then I have 12 months to plan and pursue other opportunities. If I rent the same apartment for a month, then I have 30 days to plan and pursue other options before I have to redirect my time and attention back to the asset. Thus, there should be a premium paid, for me to accommodate you. Also, IT IS KNOWN THAT IT IS MUCH MORE TIME CONSUMING AND COSTLY TO ACQUIRE NEW BUSINESS (or tenants), THAN IT IS TO RETAIN CURRENT BUSINESS. THAT'S WHY IN SALES, REFERRALS ARE KING!! So, Mr. Tenant your value was the lease length. If you would like to decrease the lease term, then there will be compensation to do so. I would be easier on the lease reduction if I saw potential for the tenant to grow long term, but they just need the shorter term for the, "what if" scenario. Have they explained why they want the shorter term?
3) In my opinion it all boils down to the numbers. You have to make the numbers make sense with any direction you take.
4) Who are your other tenants and how long are their leases?
5) If this tenant were to leave can you still make payments?
@Joshua Spurlock - Thanks for the post. They have said they need the parking to meet their projected target for transactions per day, etc. There currently are no other tenants, the previous owner was not working the property very hard, so I can lease them the entire building. They want the shorter term in the event the location doesn't allow their business to net as much sales as they hope. I'm trying to decide what value a buydown should be for the term, looking at keeping the NPV10 constant if possible. If this tenant leases the entire building and then leaves the property would be in a very negative cashflow situation.
1) Have you asked for their business plan or sales projections?
2) What type of lease are they now, net or gross lease?
3) You could allow them to occupy the whole building for the current base rent plus a percentage of sales.
I'd give them the full building. Just work numbers and figure out the parking as a rent with vs. without the parking.
Do they want to front money getting the parking?
Thanks Everyone for the guidance and items to consider. I was able to negotiate and increased rate on the whole building in exchange for dropping to 5 year term. Works out to about 28% higher rate / sqft and added triple Net. Parking expansion will be handled as a pass through cost liable to the tenant without any guarantees. Ultimately I think this worked out really well. I appreciate everyone's responses! @Joshua Spurlock @Kathy Henley @Ryan Seib @Ronald Rohde