What Every Business Needs to Know before Signing a Lease Pt. 3 | Brokers Round Table
In part 3, we cover key considerations for commercial real estate tenants when evaluating landlords, conducting due diligence, and negotiating favorable lease terms. The brokers discuss strategies for identifying reliable landlords, uncovering potential issues during the leasing process, and leveraging market conditions to secure the best deal. We also emphasize the importance of thorough research, maintaining flexibility during negotiations, and avoiding ego-driven deal killers that can derail an otherwise promising opportunity.
Key Takeaways:
Thoroughly evaluate the landlord and property management to avoid issues down the line, such as delayed repairs or non-payment of broker commissions.
Conduct thorough due diligence on the property, including permitting, construction, and utility access, to ensure the space meets your needs.
Negotiate lease terms strategically, focusing on more than just the rental rate and considering factors like renewal options and additional fees.
Avoid a "take it or leave it" mentality during negotiations and instead seek common ground to reach a mutually beneficial agreement.
Check out CRE Central: www.crecentral.com
About Your Host:
Tyler Cauble, Founder & President of The Cauble Group, is a commercial real estate developer and investor based in East Nashville. He’s the best selling author of Open for Business: The Insider’s Guide to Leasing Commercial Real Estate and has focused his career on serving commercial real estate investors.
Episode Transcript:
0:00
Are you looking to take the next step toward investing in commercial real estate but don't know where to go? Series central offers a comprehensive education and coaching platform designed to help you get started. Our online courses cover a wide range of topics from the fundamentals to advanced strategies, ensuring you have the knowledge and skills needed to thrive in this competitive industry. As a member, you'll gain access to our exclusive online community and monthly group coaching calls, providing you with valuable networking opportunities and personalized guidance from experienced professionals. Whether you're a beginner or looking to take your career to the next level, cre Central has the resources you need. Visit www dot cre central.com. To learn more. Welcome back to the commercial real estate investor podcast. We are here on part three of what tenants need to know when leasing commercial real estate. Now looks like Vic is already jumping in the live chat. Hey, Tyler. Hey Viken. Welcome to the stream. So guys, in today's episode, we've got a couple of items that we need to dive into that we haven't covered yet. And I'm glad that this is actually kind of turned into a three part series because there's so much that we could really talk about when it comes to this, it could probably be 12. Today, we're going to be talking about evaluating the landlord, how do you determine that a landlord is actually a good landlord, there are so many bad ones out there. We'll also discuss the importance of doing your due diligence before signing a lease. What can you and what can you not do because that is also just as important. And then we'll talk about strategies for negotiating favorable lease terms. What leverage do you have as a tenant to negotiate better leases? So guys, let's kick it off. First with evaluating landlords and evaluating property management. I mean, when you're when you're touring a property with a client, what are your first impressions? What are you thinking of when you first meet the other team? And Chad, we'll start with you.
2:00
Yeah, it's such an important conversation because it doesn't get talked about enough. And this is where new tenants and new agents run a serious risk of creating a problem that they didn't even know existed. And I've just seen it over 20 years now of a bad landlord or a bad property management company, it can cause all sorts of problems and downtime in the business and frustration. If a HVAC unit goes down, how long does it take the landlord to repair it? If there's a plumbing issue? How quickly are they going to move on it? If it's an out of town owner, who's perhaps has his daughter in law doing property management, it could take weeks, and I've seen it happen, I've seen that happen, where there's these massive delays, that are a big hindrance to business operations. Whereas if you're dealing with a institutional owner that owns a portfolio of properties, they probably have a local guy that's going around and fixing things as they come up. If the roof needs to be replaced, it's just getting replaced, they're not trying to stretch it Oh, for another three or four years, there's a huge degree of separation from a prudent well operated landlord and a small landlord that might not even live in the same city. So I think that that's what a broker can bring to the table. And that might sound self serving. But a good broker knows these things. Don't know who the owner is, they've probably talked to other tenants that are in that owners portfolio, they're going to have a really good understanding. So I think that's imperative, I think every, especially every new company where there's so much asymmetry and information between what the landlord has and what the landlord knows and what a new tenant has. I think that that's where a really good tenant rep broker who's experienced specializing in that area, just they're worth their weight in gold.
3:47
Yeah, I agree. There's, there's a lot of different types of landlords out there. And you've got to find the one that makes sense for you in the property. That also makes sense, Jesse, what about you, man? I mean, are there any questions that you make sure that you ask when you're talking to the leasing agent or the property owner, to make sure that your client is getting into a good situation?
4:09
Yeah, for sure. Try to cover a number there. So I'll just be specific on one of the big things for us is additional rent. We talked about triple net leases last time, when we actually look at the breakdown of additional rent, what's included in it? Are there fees on top of fees, are there management fees that are not in line with the market, and sometimes it is the private, private guys or gals versus the maybe more experienced, but oftentimes, even the more experienced landlords, you can find that they're doing certain practices, that's not in line with the market. And they're throwing their weight around and just kind of being on top of that type of stuff. And just making sure that those costs are in line. Now in terms of when you're first getting into a lease. Oftentimes, there's a question of build out. You know, today we talk a lot about turnkey suites. And that's definitely a trend that we I think is going to continue But if you're doing construction in your space, the question is, you know, who's actually doing the construction? Is the landlord paying for it and doing it? Or are you paying for it? Are you having your person, your contractor doing it? And if like, oftentimes in my market and Toronto, landlords want to use their preferred contractors, then that's another question of what's the experience been like with other tenants? What's the historical, you know, historical build outs that they've done speaking with other tenants? So I think those are all important things to ask at the outset, but definitely not not limited to those things.
5:34
Adam, what about you, man? Are there any policies or procedures that you've come across in your day where you're like, Hell, no, I'm not putting a tenant in this person's building.
5:42
Yeah, well, honestly. So a couple of things. So the other the other guy's already covered a lot of the hot buttons. And I don't know if I could add anything from like a technical perspective. But a couple of things to keep in mind, and it comes back to, you're getting the least done correctly, the first time, making sure you're not getting in bed with somebody that uses cam as an additional profit center. And, you know, sneaks in, like in my world sneaks in a ton of administration fees, marketing fees, things like that, without a cap, right, a big thing is, is non controllable annual caps on your cam increases. That's something that that younger people in the business don't really think about. The second thing is kind of a double, you know, kind of situation, right? Like your friends with, you become close with the guy that, you know, it's been in the business for 50 years, and his family owns the property, all of a sudden, they sell it to some kind of out of town developer that's just coming to town. And all the sudden, the the asset manager and the property manager that you got to know is gone, right? They live in Tahiti now, right? You ain't talking to him, they just made a big sale they're out. So that's another reason why you want to really make sure that you did everything correct in the in the original document, around tie cam, because all you have is that piece of paper, right? So if that thing's not tight, and it has any wiggle room, this new owner that you've never met before might might have an opportunity to, to slip some things in on you. Yeah,
7:17
I think that's great. And I'll volley this next one out to anybody that has a response. But have you all ever been in a situation where you've had to turn to your client and say, hell no, you should not be moving forward on this deal because of something that the tenant rep, or I'm sorry, the landlord rap, or the landlord, or the property manager said, when you guys were on tour, or through email communications, because we we've all kind of had those moments where we're like, Man, I really want to get this deal done for this client, but it's really not in their best interest kind of after uncovering this.
7:48
Yeah, I'll jump in and just say, it's not exactly that scenario, where it's something that was said on a tour, but there's definitely been situations with one or two landlords in Toronto, where the history we've had so many other brokers that have dealt with issues with this landlord, ranging from broker centric ones, where we, we, you know, we don't get paid on time. And, and there's times where you don't get paid at all, then to specific tenant ones where you have tenants you've put in his or her building, and there's just been horror stories, where like, you try to keep those locations off surveys, at least I do. And then sometimes a tenant will say, hey, what about this, and I'm gonna say like, Listen, this is my unbiased opinion, you could ask other brokers, but this is a landlord, you probably want to stay away from.
8:36
Yeah, I've had a couple of scenarios like that here in Nashville. And hopefully, we've got some landlords listening. Take note of that, make sure you always pay your brokers. I mean, that was one thing that I learned from my first boss, he was like, I will always pay a broker, I will always pay the broker their full commission, I will never negotiate with it. Because I want to maintain a good relationship with them, and make sure that they bring me more business in the future. And there are plenty of landlords that we've had to argue with over getting paid after having commission agreements signed. Plenty of landlords that are just absolute nightmares to deal with when it comes, you know, as soon as the tenant gets in there that you know, it's like the crazy girlfriend, they just flip a switch and it's just a nightmare to deal with. Adam, it looks like you were gonna say something. Did you have something else you wanted to add?
9:23
No, I'm just like recounting of horror stories of I'm thinking of specific aimless, that same thing and multiple right so if if a landlord is shady enough to sign an agreement with you, because frankly, I'm not showing anything. Yeah, I'm not getting very far down the road anymore without something in writing from a landlord. Unless I'm million deals with them. And, you know, his kid spends the night at my house. There's no there's some kind of relationship. Yeah, he's not gonna go out of his way to to mess with me. But if if you've got a landlord that cares about every last penny enough to not pay a broker that facilitated them making a ton of money, then they ain't gonna pay the TI, right? They're gonna they're gonna treat the tenant, just like they're gonna treat the treat the broker at the first, you know, first sign of turbulence, right. So that's really Yeah, obviously, we like to get paid, it's how to type of food on the table. But at the end of the day, you know, rattlesnakes, a rattlesnake, right? Like they're gonna, they're gonna do what they do. So if they're gonna, if they're gonna screw you at the first opportunity, the tenants gonna be right there behind them.
10:33
Yeah, I mean, I would leave those landlords intentionally off my site selection for tenants. And there was only one time where it was brought up by a tenant of, hey, you know, this, this property looks like it checked all of our boxes, why didn't we see this? And I straight up said to them, I said, here's the experience that I have with that landlord, you do not want to be a tenant with them. And they said, Yeah, you're right, we don't. Let's move on to the next one. So I mean, those those landlords do lose out on tenants and money because the brokers are kind of controlling that. Let's dive into into due diligence we had, we've had a couple of instances where we've actually signed true due diligence for tenants as they're coming into a space. Typically, it's because the space needs a lot of work, right? Like either there's a lot of renovations that need to take place, or something's going on. But it's not always super common to have a due diligence period for a commercial real estate lease. So, Adam, I'll kick it over to you because retail, you know, has some very interesting concepts that you got to get around. So, dude,
11:36
man, I could go in so many different directions with this. So it's weird because my wife owns a residential company. If you need a house in Charlotte, North Carolina and A to A to A five ZIP Code lookup Genevieve Williams shameless plug. Due diligence in the world is so different from due diligence in my world, we just closed on a little apartment complex last week, and it was it's so hard to get your head around, having to put not fundable money up day one, right. It's just, it's just not how, how the commercial world works. In my specific retail business, due diligence is is more tied to permitting, right like, like Will, you're not going to sign a lease in my world, unless you are pretty far down the road with understanding if if the space is going to work for you will ask for reps and warranties from a landlord. But then we'll usually build in some kind of contingency period to make sure that you know, there is not some fly in the ointment that we didn't see. But it gets very difficult. I do a lot of national brands, and they will build in a large call it 180 Day contingency for all permits, right. And in North Carolina specifically, that doesn't work because you can't get your alcohol permit until you get your co so due diligence in my world is way too challenging to talk about in like kind of when I want to be respectful for everybody else's time. But it is it's like ripping back layers of the onion for us. Because these uses are so specific, and they involve alcohol. They involve insanely complicated MEP systems. So I want to be respectful for everybody else's time and say it is a whole different ball of wax in my world. Yeah, you
13:26
really want to be careful with that, especially in new construction, retail, if you're representing tenants there I got brought in to help do damage control. For a fitness group here in Nashville, they signed a lease they were represented by a broker who works with the listing broker. So talk about collusion going on behind the scenes. And they had her sign this lease waiving basically all of these rights. Well, I mean, she's a business owner, she doesn't know any better. She didn't know she had any rights to be reviewing everything gets into the space and finds out the power is like 150 feet away, and some other tenants part of the building, and she had to run the electrical lines to her space, then the plumbing wasn't even actually in this space, which to be completely, like honest. Typically landlords stub all of that into a space for you. So I don't know why that happened. It was it was new construction. But that's a nightmare to deal with as a tenant if you don't know what you're doing. So she ended up having to back out of that lease and that didn't happen. Jesse, what about you, man? Due Diligence? Yeah, so
14:31
I think it depends a little on the market you're in I'd be curious to hear what the guys you know, whether they're doing non binding loi versus offers to lease so most times I'd say 80% or more we're doing binding offers to lease it's starting to become more loi just because like before we started Chad was saying it's getting harder and harder to do deals. So rather than going way down the road with specifics we oftentimes now we're just doing non binding loi is to say is this deal It makes sense. But the reason I bring it up is because a lot of this stuff actually does get ironed out during the offer to lease stage. And then when we do have a conditional period, we're kind of tightening up those loose ends. But that being said, for instance, one of the big ones for us is say, if there's landlord's work, or like we just described here, there's a line that needed to be run all that you know, up to code, making sure that it's delivered in X condition, that is something that will say in this offer to lease will make sure that's exhaustive, but also saying that, during the lease, we have the ability to negotiate whether that's 15 days, 20 days, 30 days that this, these non financial terms will be negotiated and agreed to. And that's really where kind of the rubber meets the road where, for us, it's so important that our tenant actually uses a commercial leasing lawyer that knows the specific geography and knows the market. And that's where those things get kind of like buttoned down, at least in in our in our market here.
15:57
Yeah, that's right. So brokers, you negotiate the financial terms, the attorney negotiates the business terms, right, that's the easiest kind of way to just leave it Don't. Don't let your attorney negotiate the rent rates, you don't negotiate the liability insurance. Chad, what about you, man?
16:17
Yeah, piggyback on what Jesse said, it's, it's common to have conditions on an industrial lease. And it can be as simple as just getting permitting. Sometimes there's scenarios where you might not need anything, if it was previously used the warehouse, I call it like a 10,000 square foot warehouse space and the next tenant going into its students similar type of use, that's probably a very low risk of of any challenges arising. But I still think it's prudent to have general conditions in there could be board of director approval on the tenant side, if it's a big company, chances are their senior management or somebody at the board level that has to approve it. So you spend that time negotiating the financial terms, you come to an agreement on that, that's usually when senior management or board is going to start taking a hard look at it. So that's one area and then industrial, there's scenarios where it can just become very complex. If it's a company going in that perhaps they need a crane put in there in a crane way. That's that's a lengthy process to actually get that quoted, figure out if the structures can support it. Or if you need to make structural upgrades and and what the cost is and what the time is, before people go down that road, they probably want to know that they at least have a framework of a deal in place. So I'd say full spectrum, it can be a very easy move in companies taking the space relatively as is maybe a little bit of cosmetic work, you could probably do that with minimal condition or due diligence period. But as it gets more and more complex, it's it's common to see a couple months worth of conditions in a really complex deal.
17:50
Yeah, that's that's typically how we've done it is it's it's a non binding letter of intent. But we'll also throw in, you know, 30 days, or 60 days for tenant to go do whatever they need to do. It's it's tough, we've only ever done a couple of binding letters of intent. Because most most landlords and I being one of them, don't want to bind myself for 30 or 60 Days to a tenant and say, Yeah, fine, I won't talk to anybody else. Because what happens if that deal falls through, then you're basically starting back at ground zero? Well, so. So once you've done your due diligence on the landlord, and then you've done your due diligence on the property, it's time to start negotiating favorable lease terms. And very similarly to the residential housing market. There are buyers markets and seller's markets. And in commercial real estate, we have landlord markets and tenant markets. And I mean, Chad, what kind of market do you feel like we're in today? And how can tenants leverage that or take advantage of that?
18:54
I'd say it's pretty balanced. Across the board. There's there's very tight markets. Still, if you're trying to lease industrial space, and in the Inland Empire, and you're trying to lease a 20,000 square foot spot, it's probably going to be difficult. If you're trying to lease a 300,000 square foot spot, you're probably more in favor of being the tenant. The one thing that I always say to tenants and landlords is that a lease has a lot of levers, and you pull one lever, something changes on the other end. So it's not always just negotiating the best price or negotiating the best term because every time you tried to negotiate one point, it's changing something on the other end. And the easiest example I can give that is an option to renew. If a tenant was looking at two spaces, and let's just assume that they're completely identical and the tenant is going to go in and put $200,000 worth of their own money improving the space in one deal. You can get an option to renew the landlord will concede on that. On the other one, you can't get an option to renew what what is that option to renew really worth? Because in my in mind, you can actually put a monetary value on that lease on that option to renew. Because if you have to leave at the end of the five years, maybe the landlord wants to take the space for themselves. There's any number of reasons why a landlord might not give an option to renew. If you had to move versus having that option to renew, I wouldn't be willing to pay more as a tenant in rent to get that option to renew. And I would want a discount if I didn't have that option to renew. So I think that it really is just important, it's it's levers, it's not just one thing, it's not about finding the cheapest space, because as we already alluded to, quality of the landlord makes a big difference. The space itself makes a big difference with a company be willing to pay a premium for a much better location. I mean, Adam would would know that better than any of us been in the retail space, tenants always going to pay more for a better location than one in a worst location. So there's so many factors to account for and to consider that the most reckless thing a tenant can do is focus just on the rent just on on that singular number, when without taking into account the full story of that deal.
21:06
Jesse, what about you? How do you anchor these conversations? And what foothold do you try and grab when you're when you're negotiating on behalf of tenants?
21:15
Yeah, sure. So I 100% agree with Chad, I always tell my clients like we try to get more terms on the table. Because then you have more things like Levers as we always say, we have more levers to pull. And sometimes those things are somewhat easy to put $1 value on it. Sometimes there's more challenging. So like rights of first refusal, we're doing a deal right now, trying to explain to a tenant that's not particularly significant, excuse me, experience to talk about the significance of having a right of first refusal. For our market, for instance, we are definitely an attendance market. We have been in a landlord's market in Toronto for such a long time on the office side. Now we're in a tenants market. And the idea of getting a right of first refusal on a contiguous space, and an office building 10 years ago would have cost you a lot. And you'd have to be very large tenant to get it. So try and explain to a tenant that yeah, there's no, you're not getting paid anything, but you'll now have flexibility down the road if you needed to expand, and trying to put a number to that and kind of explain that to them. So for us, I mean, a lot of the a lot of this decision making process really involves putting everything on the table. And one thing I don't know if it was Chris Voss, you know, never split the difference in negotiating book where I think it was him where he's like, a lot of people, they try to negotiate the hardest things first, and then at the end you're left with are the easiest things first, and then at the end, you're just left with the most difficult pieces of the lease. And what I tried to do is negotiate things collectively. So you don't commit to everything, you know, 20 out of 21 terms, and then you when you have one left, you negotiate kind of scenarios, what if we get a tenant allowance with this, right? And we have so that you basically have more options to to work with with the landlord, it's usually easier on the landlord as well, because you don't you don't commit to certain things or take certain things off the table. And the last thing I'll say is, I try my best just to not be a take it or leave it guy. And I always frustrates frustrates me when you get landlords that are like this is the final position. It's like, we're negotiating. Why even say that, let's let's have a conversation and figure out what the best route for it is. Man,
23:27
the amount of times that ego gets involved and kills a commercial real estate deal blows me away, because it's like, Guys, we were this close, you want to go all the way back to step one, when we were one inch away from getting this across the finish line, because your ego just decided you didn't want to, you know, negotiate one final point is is always wild to me. And kind of to your point. Yes. You mean one thing that I like to do is, you know, what are the four points that we have to have? Let's go back to the landlord with seven. Knowing that you know what, we'll give and take on a couple of these, but we'll walk away closer to what we needed. Adam, I'm gonna let you bring us home, man. What about you?
24:09
Yeah, I think that the things that we always run into, are going to be the same kind of brick and mortar points that we always talk about. It's like how do we how do we get to like, I'll give you example from today. Like we're doing a restaurant deal. It's an uptown deal. Central business deals. Central Business District deals are just hard. I don't care where you are in the country right now. They're all kind of office based and they can they can be a challenge. So that has shifted to the form of more ti Maybe there's even a percentage rent kicker on the in the in the beginning as the central business district continues. He's to kind of come back and re flourish. So that market has has changed and landlords are having to be more aggressive, more creative. And but then you're always so that market has been a challenge. But then you go to a strip retail center on a that is, you know, just a normal $30 A foot deal hyper competitive, still landlord market. So I can literally multiple deals that I work work on in the course of an hour, same vertical of, of real estate, completely different markets, right. So that said, today, hot buttons are always they always come down to credit, Ti and rent. And we had we had a group today that has just taken an extreme, take it or leave it hard line on on no securitisation for the lease, in essence, to come pre COVID In a good market, or even pre kind of just like a, like a total readjustment of capital costs to go in and say, My credit is the amount of money I'm going to put into this restaurant. I'm signing it in an SPE, if you don't like it, take it or leave it. Right. And that's been, I would have laughed somebody out of the room a little while back for saying that. And now I'm looking at a multinational, massive conglomerate on the other end saying, maybe we should do it. I mean, so it's crazy how those markets can shift so drastically, in the same, the same, you know, real estate vertical in the same city a mile away. But it's no two deals are the same. And in my world, no two, no two markets are the same. So I feel like the an attorney kind of not answering your question in a five minute response. But but that's what I'm seeing right now.
27:04
Well, that's the great thing about commercial real estate, right? It's so market specific. You can't listen to the headlines, you've got to get to know your area super well become the expert on that, and know exactly how to pitch your tenants and your deals. Gentlemen, thank you so much for Yeah, go ahead.
27:20
Can I just add one thing to what Jesse said, because it's reminds me of one thing that I that I always try to tell clients, especially if they're getting very stubborn, and maybe this is helpful for somebody listening, but I couldn't agree more of that, take it or leave it is the worst thing you can say to a deal? Because you're essentially done. So you're saying this is this is it like you're drawing a very hard line in the sand. When commercial leasing. By its very nature, we're talking about levers, there's so many levers that you can pull that there really should be no Take it or leave a deal. If a tenant wants to negotiate? Let's say they're, they want $20 A square foot and the landlord's fixed at 24? Well, let's go back to them and say, we'll give you 20 We're going to escalate this so that it ends at 28 at the end of the term. So now we're getting we're getting our 24. But maybe you needed some cheaper time upfront to get your business setup. There's always a lever you can pull. So the one thing that I always say to landlords when they get or tenants, when they get really fixated and say this is your ticket or or take it or leave it always just say let's let them tell us No, instead of us telling them no. So give them something go back to them and say listen, you're 120 We're 24 We'll give you 20. But we want an Escalade and a 28 make them say no, make the other side say no instead of you say no. And that that alone has gotten me deals that I probably wouldn't have closed otherwise. But don't draw hard lines in the sand. And I think most landlords or tenants when you phrase it that way, it's you're trying to put together a deal last longer than some marriages last. You don't want to have that hostility and that tension right on day one, like figure out some common ground here and seeing that you're drawing a line in the sand that's pretty aggressive. So make them say no, that'd be what that'd be my tip.
29:05
I'm usually that's yeah, I was gonna say that is great. What alive.
29:12
I 15th is in two days.
29:15
So Congrats. Congrats.
29:17
I'm past most leases at this point.
29:19
How many options to renew
29:27
Yeah, that's awesome. All right, guys. That was great. Thank you so much for the for the awesome ending there. We'll see y'all in the next one. So you guys yes. Are you looking to take the next step toward investing in commercial real estate but don't know where to go? Series central offers a comprehensive education and coaching platform designed to help you get started. Our online courses cover a wide range of topics, from the fundamentals to advanced strategies, ensuring you have the knowledge and skills needed to thrive in this competitive industry. As a member, you'll gain access to Our exclusive online community and monthly group coaching calls, providing you with valuable networking opportunities and personalized guidance from experienced professionals. Whether you're a beginner or looking to take your career to the next level, cre Central has the resources you need. Visit www dot cre central.com To learn more
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