Prepare yourself for the second half of a seldom seen look inside a lease deal as it is occurring. In my need to uphold the privacy of my clients and my fiduciary duty as their broker the specific terms have been changed.
We are close to wrapping-up negotiations in a few days. It has been a long process because of the many issues, minutia and needs of the tenant.
The 10,000 square foot office space will be leased for a medical use at $2.00 per sf triple-net for ten years. Because of the cost of tenant improvements of $2.5M to convert to a medical office the tenant is asking for the landlord to contribute $500,000.
You can review the other terms in part one of the article.
A residential lease is a few pages in length, but a commercial lease averages twenty or more. The reasons are for the need to foresee all possible scenarios in the past, present and future. Many of these issues are not readily apparent until a sequence of events occurs that brings the situation to fruition.
Three examples in this lease are allowed use, property taxes and insurance.
In my previous article regarding zoning, you will learn that each property has a specific use or set of uses based on the zoning ordinance. This site is zoned for office use, but the tenant’s use is medical office with a clinic, therefore it must apply for a use permit.
The process can take several months and several thousands of dollars; therefore the tenant does not want to pursue a use permit without a secure lease in place. So, the lease is executed contingent upon receiving a use permit from the city.
If the city does not provide a use permit with reasonable conditions, the tenant will have the right to cancel the lease within a set period of time.
Next, property taxes must be considered as this tenant will be upgrading their space at a cost of $2.5M. When they obtain a permit with the city building department this will alert the tax assessor of the added value. This could add an additional $25,000 per year to the total property taxes of the property. The owner will want to be sure this amount is applied only to this tenant for reimbursement.
Lastly, because of the nature of this tenant’s use insurance companies consider it a higher risk than just an office use. Therefore, the building owner’s insurance cost will increase. We need to make note what the current insurance cost is and apply any increase because of this tenant’s use only to this tenant.
As you can see there are many pieces to consider in a commercial lease. There are many more terms to be considered in this transaction, but these are the highlights. It is my hope that we can get a signed lease executed in the next few days and move forward.
Burt M. Polson, CCIM, is a real estate broker with ACRES Real Estate Services Inc. helping clients sell, buy and lease real estate. Reach him at 707-254-8000, [email protected] or BurtPolson.com.
Burt M. Polson, CCIM is a Commercial Real Estate Advisor with ACRES Real Estate Services, Inc. He has been assisting clients in the sale, leasing, management and consulting of commercial real estate in the Napa Valley since 1992.