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A Commercial Lease Negotiation Strategy That Puts YOU in Control

For Super Savvy Landlords and Tenants Only!

By Wally Conway

Back in the commercial real estate buying boom, it was common for investors from across the country to purchase property in Jacksonville. It was also common for many investors to purchase buildings sight unseen. Due diligence concerning the building and grounds came in the form of a Property Condition Assessment (PCA). Property Condition Assessments are essentially more detailed versions of home inspections, and have similar value propositions.

It was during that boom time that I first met David Lee. David was a third generation commercial real estate investor from Studio City, California. He retained my company to perform a PCA on a 15,000 square foot building that was being used as a retail store. He used the PCA as a negotiating tool during the purchase of the building, and as an initial punch list for repairs and completion of deferred maintenance after closing.

David used the PCA much like scores of other commercial building buyers that I’ve worked with over the past 20 years. But then, David did something different!

When negotiating the lease with his prospective tenant, David used the PCA to benchmark the condition of the property. In a triple net lease, the tenant is responsible for all maintenance and repair expenses. It was important to David to have an objective documentation of the property condition at the start of the five-year lease. He felt this was a very simple way to protect not only his interest, but also be fair to the tenant. The tenant agreed and the lease was signed.

Using a PCA in negotiations between landlord and tenant is a risk and liability management tool that protects both parties. Why a tenant would ever enter into a triple net lease without a PCA escapes logic.  An unexpected expense for a new tenant, who oftentimes is also a new business, can crimp cash flow and cripple a business.

David showed his brilliance again, five years later. He retained my company once again to perform a second PCA on the same property in preparation for renewal of the lease. He intended to use the PCA to determine if the tenant had honored the terms of the lease regarding maintenance, repair, and condition. If the building was in as good or better working order then when originally occupied, David would reward the tenant with a favorable rent rate. If the PCA revealed that the tenant had damaged or failed to care properly for the property, David could demand repairs, increase the rent, or refuse renewal of the lease. The PCA put David in control.

Yes, there was an expense for the PCA, but it paled in comparison to the expense of litigating a disagreement or repairing disputed damages. David is certainly a savvy investor and landlord.

Could a tenant also be so savvy as to use a PCA for lease negotiations? Certainly.

Would documentation of the condition of the property before the lease was signed make for a superior negotiating position? For sure.

Could the PCA be used to reduce surprises and cost over-runs during tenant build out? Absolutely.

When it’s time to negotiate your next lease, as either landlord or tenant, consider a Property Condition Assessment. And remember this, the person who brings the information to the negotiation is the person who controls the negotiation.

 

By Wally Conway

Wally Conway is a graduate of the U.S. Naval Academy, retired Navy Pilot, licensed contractor, home inspector, energy auditor, media expert and entrepreneur who is the founder of HomePro Inspections. He can be reached at Wally@gohomepro.com


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