Commercial leasing advice for the Leasee

Posted: December 22, 2011 in Uncategorized

Commercial leasing is heating up in Denver as business look for more efficiency and lower costs in these tough economic times. The good news is business are opening, expanding and adjusting for the good times that are sure to come. The past 4+ years has “thinned out the herd” and only the strong and resilient businesses have survived. A large number of Denver business owners are retaining there reserves and capital and opting for a commercial lease rather than purchasing a building. 

Leasing allows a new business to lower the “first monies” or “cash infusion” needed to start a business or open a second location. Banks policies are very tough on all businesses especially new start up businesses. Loans offered have higher down payments, lower LTVs, shorter terms (making the monthly payments a struggle), and under valuating appraisals. The bank has only there best interests in mind when loaning money to you and in this market, sinking your money into commercial real estate can hurt your start up business. You need to secure your success by keeping your working capital available for turns in your business!

Businesses acquiring a lease on a new location need to proceed with caution! There is more to leasing than just negotiating the terms of a lease. Zoning, occupancy, and other factors need to be verified before you sign a lease. Many lessees  are under the impression they can void a lease they signed if there use is not allowed, but this is not true. If you sign a lease and afterward you realize your unit is not zoned for your use, you are bound to the terms of the lease! 

It is your responsibility or your commercial agents job to verify the unit you are wanting to lease allows your businesses use. Even if you are leasing a unit that has the same business you are going to operate, you need to verify the zoning! One of my clients was opening a massage salon and we found a unit zoned industrial professional. We noticed another massage/chiropractor business in the same strip mall who offered a different type of massage and we would have posed no threat or issue. My personal work ethic has taught me to follow through even though it seemed obvious my clients use appeared to be conforming.  This property was zoned industrial professional and in general Industrial zoning permits almost any type of use. Also there was another similar business in the strip mall. The listing or leasing agent was positive the zoning was correct for my client. 

HOWEVER, when I called the city, they told me this zoning only allowed a certain type of massage and it needed to be approved by the city. In fact erotic massages were allowed in this type of zoning and all other massages needed to be approved. The current business in the mall was doing massages and it was not an approved use! There was a different approval process for a medical massage or for a sport or massage for entertainment. When you move forward with a lease and it is not an accepted use, you will delay process in approving your business license and possibly be denied for your intended use!

The next step in your due dilligence is making sure your occupancy is allowed within your zoning type. There are 3 types of occupancy “A”, “B”, and “C” with the “A” occupancy being the highest or most comprehensive designation on the IFC or International Fire Code. The city or fire dept (or both) will determine what your occupancy rating is. This is determined by what your businesses basic daily uses are, but your occupancy rating can receive a higher or more comprehensive rating if it is determined your use has ANY characteristics of the higher occupancy code. For example, you are leasing an office and you have 100 salespersons with offices, your use would be considered a “B” occupancy use. HOWEVER, if the fire dept come in to do an inspection and you are holding your weekly sales meeting with 100 salesmen in the conference room, your occupancy classification could be upgraded to a class “A” occupancy. 

The IFC states that if an occupant uses there location that denotes more than one type of occupancy, that an inspector or official should classify or re classify a business or occupant to the highest or more comprehensive occupancy rating. If this does happen, the occupant or business would be required to install the additional doors,panic door hardware, fire suppression system, etc. that is required for the higher occupancy rating. Even if you have only one meeting a year, the city or fire dept can reclassify your occupancy use to a higher rating! 

The planning and zoning dept of the city also needs to give there approval of your use in some municipalities. For example, if your leasing (or purchasing) a location in one city, you may not have been required to get written approval for your business location or for your business tax license. However, when the fire dept comes by to do their inspection, if your location is not compliant with the zoning or occupancy requirements necessary, there is a good chance you will be given a notice to complete the work necessary to comply with these regulations or risk having to close. Whether you are required to get written approvals prior to move in, these steps are enforced!  If you cannot use your unit for your business, you are still legally responsible for the payments of the lease!

If you fall into this situation you do have options to cut your losses. First, ask your landlord if he will allow you out of the lease. Its a long shot but some landlords/owners will allow you out of the lease if you pay them a settlement/penalty. Others might consider having you pay until they find another tenant.

Another option is to sublease your unit. Sub lease your unit to someone who can operate their business for the remaining term of your lease. You might need to accept less than the full amount of the lease to get someone into the unit, but this could offset a large amount of your lease obligation. 

There are many other issues that need to be evaluated and addressed with acquiring a lease and this article has mentioned just a few of them. Having a lawyer assist you with the leasing,, or purchasing process is always a good idea. They can review the paperwork and legalities etc. but for the most part, lease contracts are pretty standard and there are very few changes allowed on the standard disclosures. Lawyers can make certain any additional agreements, promises, etc that are added to the lease are worded properly and perform to your expectations of the agreement. 

Negotiating a lease is another phase of acquiring a lease. Having a commercial real estate agent negotiate a lease for you is a good idea if your agent is not the listing agent. When you utilize an agent that is not attached to any property, this agent will look for conforming properties to fit your use and in most cases provide you a wide selection to chose from. If your experienced at leasing and decided to do it yourself, make sure that you allocate ample time to do it right! Employing a commercial agent for many experienced lessees is necessary because the have  limited time to do the due dilligence, researching units, etc. 

Don’t assume, don’t take the listing agent’s word, don’t rely on common sense, don’t rely on luck or a best friend,, delegate the work to be done right, PAY someone so they become responsible for your due dilligence, ask questions, and use your faith to over see all the work you need to be done!!!

 

KENNY D

 

 

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