Lease Renegotiation - Commercial Tenants

[Zachary Toothman]

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?

[Kathy Henley]

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.