Top Ten Lease Issues for Retail Tenants in This Economy

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If you are leasing retail space — you know the importance of your location and the lease. While there are always many factors to consider, leasing has become even more complicated in today’s economy. For instance, during the go-go days, many tenants did not consider the possibility their landlords might be foreclosed on — and now some retailers are learning the hard way what the impacts of that can be. Here are my top ten issues retail tenants should consider about leasing space related to today’s marketplace:

1) Understand the strength of your potential landlord and the status of loans on the property. In most cases this information is available to professionals in the industry, so ask your broker.

2) In some cases landlords will agree to put funds in an escrow account at lease signing for tenant improvement costs if paid by the landlord and other transaction costs to insure they are funded.

3) When negotiating letters of intent and leases, ask for a contingency that an SNDA to be signed by the lenders, which stands for subordination, non-disturbance and attornment agreement. Properly drafted, this would require the existing lenders that sign it to honor your lease in the event of foreclosure.

4) If subleasing space, your lease as a sub-tenant is subject to the rights of the original tenant. So if the original tenant defaults, you could be at the mercy of the landlord. You may have to accept whatever the original tenant’s rate and terms were or worse, if you don’t want to spend the time and money to move. When you are negotiating a sublease, in some cases the landlord may agree to ‘recognize’ your sublease. Then if the original tenant does default, the landlord will honor your lease rates and terms.

5) Other lease clauses important to ask for are “go dark” and “co-tenancy” clauses. If you want to move or shut down and the lease allows you to go dark, you can reduce your business operating costs by shutting down and just pay rent. Co-tenancy clauses are very important in retail allowing a tenant to reduce rent or possibly cancel the lease at some point if an anchor tenant closes its doors. This is important because anchor tenants typically draw traffic to shopping centers.

6) Be aware of the possible effects of the upcoming FASB lease accounting changes, which are expected to cause tenants to have to include leases on their balance sheets as liabilities. Consider existing loan covenant issues and investor confidence, especially if your firm is a public company with many leases.

7) In most areas it is still a tenants’ market, so it may make sense to upgrade locations, expand and extend leases now. When you consider the combination of inflation and the lack of new construction, the window for good deals could close more quickly than you might expect.

8) Consider buying space if the model works for your business. Location choices are good now, prices in some cases are below replacement costs and interest rates are low. Lenders are still picky, but lenders prefer borrowers that plan to occupy the space they are buying. The FASB lease accounting changes may make buying a better choice for retailers who typically sign long leases.

9) Hire professionals. Engage a commercial real estate broker who specializes in representing retail tenants. Engage a real estate attorney who specializes in representing retail tenants. Landlords negotiate leases almost every day. Experienced representation on your side of the table is extremely beneficial.

10) Be aware of how changing demographics and consumer trends may affect your business now and in the future. Ask for liberal “use” clauses and flexible “sublease” rights. If your business is not profitable you may want to be able to operate other businesses in the space.

Your ability to negotiate lease terms to protect your interest in this market will vary depending on the vacancy in the submarket and the particular property, as well as the strength of your company and size and term of your lease. It’s important to understand the most important issues for your business and what’s reasonable in your situation. The knowledge and talent of your tenant rep and real estate lawyer can also affect the outcome.

In the event property you lease space in is foreclosed, your lease document and the existence or not of an SNDA is critical. How the SNDA and the lease are worded will control the lender and tenants rights. Review your lease with a real estate lawyer and with a full understanding of the market and your goals, contact the lenders representative.

Michael Bull is the host of the Commercial Real Estate Show, a national talk radio show about commercial real estate and the founder of Bull Realty, a regional commercial real estate brokerage firm with three offices, headquartered in Atlanta.