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Why you should let your general contractor review your lease before you sign it….

Disclaimer: No, I’m not a real estate professional, not an attorney, not a professional lease “negotiator”.  Not suggesting I comment on lease rates, terms, triple net, etc. or replace any of those important professionals.   What I am I a building professional who has seen hundreds of leases. The parts of the leases I care about are pointed and all construction related, and many times can be the costliest for a new business. I appreciate this I a “landlords” market, but this advice holds true for ALL markets.  The most successful “C” in construction is “communication”-and it starts with including professionals to help facilitate your building project as earlyas possible.

What I look for in leases:

  • Commencement Date: aka-when does the clock start for you to start paying rent.  This can be triggered by many things, from signing the lease, to receipt of final plans, to receipt of building permit. in any business transaction always try and mitigate risk and maintain control.  If possible, tie the commencement date to some future date AFTER the receipt of building permits.  No one, no matter how diligent, can control the plan review process.  Tying the rent commencement to permit receipt allows you to maximize “free rent’ periods.
  • Work Letter: This is the section of the lease that identifies both how the landlord with deliver the space and what are you responsible for constructing as the tenant.
    • Will your space have:
      • Roof Top Unit?
      • Power panel provided or just stubbed to space with panel by tenant?
      • Utility roughs? (water, gas, electric, sewer hookups)
      • Are utilities separately metered?
      • Are utilities adequate for your use?
      • Concrete trench left out at rear for easy hook up to building sanitary system?
      • Demising walls?
      • Are utilities separately metered?
      • Elevator access during construction? (I’ve had to pull windows and booms cabinets up through the window because the landlord would not allow elevator access, the struggle is real)
      • Fire sprinkler roughed to space
      • TI Allowance-how much do you receive and when will this be released? This should be tied to you receiving your certificate of occupancy and be within 10 days of delivering close out items to your landlord.
      • Any special work hours?
      • Make sure language regarding Landlord work is clear and concise and tied to a specific turnover date that their work is “complete”
  • Pitfalls-These are items I see in leases that can cost the tenant the most-avoid or mitigate these at all cost.
    • Landlord construction management fees-I have been seeing this crop up more and more lately. This is a fee, generally tied to the construction cost up to 5% of the total construction amount.  Example $300K in construction cost, landlord charges a $15K fee to “Manage” construction. Much of what they say they do is done (and already included) by hiring a good Architect and General Contractor. Sadly, even when this fee is charged, I rarely if EVER see the landlord onsite or actively participating in the build out.  Get this eliminated or as low as possible.
    • Proprietary Fire Alarm/Fire Sprinkler subs- There are always “proprietary subs” associated with a building. A proprietary sub is one you are forced to use to build out your space.  This is with good reason, many buildings have existing warranties, like roofing, that may be warrantied if someone else works on them.  There also may be complicated fire alarm, or sprinkler systems that should be handled by one company to ensure warranty and smooth ongoing operations. What you want is the ability to get a competitive bid for these items.  That way they are not taking advantage of the fact they are the only ones able to work on these building systems and inflate costs accordingly.
    • Environmental/asbestos testing and mitigation: Always, always exclude this from your scope of work. The building owner should be responsible for testing and mitigation solely at his cost.  I have had clients who had to pay for this on a leased building because of lease language-maddening.

So that is my high-level list of things to look for in your commercial lease and reasons why you should always include your construction professional to help your real estate agent, lawyer and yourself review and negotiate your lease.  Hope this is helpful-if you have further questions or need our services-please reach out! chill@hillcommercial.com