2020 Boise Idaho Real Estate Blog
Commercial Leases - Avoiding Some Pitfalls Main Boise Valley Commercial Real Estate
Along with my normal commercial leasing activities, I also do some pro-bono work to assist small business owners. In the past two months I've assisted two small business owners work through some very tricky lease issues. When you are working on commercial leases, make sure you get the assistance of a commercial real estate agent. You need assistance with typical commercial lease terms and conditions. Without experieinced assistance you may be making sub-optimal decisions.
SUB-LEASING WITHOUT GETTING THE OWNER / LANDLORD'S APPROVAL
 
The first interesting lease I helped with was a client of mine who had leased one facility.  After going through the engineering / permitting process with the City of Boise, we found the tenant improvement (TI) costs were very high.  We looked at alternative facilities where the infrastructre existed, thus materially reducing the upfront cash-flow, & during that search he was contacted by another specialty company in the same industry.  Fundamentally, it is an ideal situation.

The problem is that the person leasing the property didn't want to notify the building owner.  Uh-uh, no way.  The lease rate is so attractive, we continued negotiations.  Again, the existing tenant expressed a desire to keep the landlord out of the loop.  He expressed several "legal" objections which were, well, just incorrect.

Did I mention the existing tenant is in a lawsuit with the building owner?  Ha!  How'd you like to be subleasing  from someone who doesn't want to clear it with the building owner and who happens to be in a lawsuit with the building owner?
 
Sound too strange to be true?  Nope.  Right here in River City.  We worked it out & struck a deal with the owner and the new tenant now pays the owner directly as well.
 
GETTING IN OVER YOUR HEAD IN A LEASE
 
Don't think a lease can bankrupt your company?  Of course it can.  I worked for a national company whose biggest liability was -> You got it…their lease!  After a hostile take-over, the conquering CEO decided to lease very prominent facilities in a premier downtown facility and consolidate all corporate functions to that property.  Ultimately, the stockowners changed the company's management & after years and years of lawsuits, the issue was finally resolved.  Okay, so leases are important, right?  And understanding lease terms are important, right?
 
So, the second non-routine lease issue I am involved with is literally bankrupting the tenant.  The tenant leased a brand-new facility, invested personal savings into a very, very nice facility.  With all the growth in the valley, in a new facility right (almost) in the middle of the growth, how could this not be a great deal?
 
Well, the facility is right in the middle of a high growth area.  Trouble is that it is so busy and the access is limited (you either have to be going the right way or cross heavy traffic) to get to this very small business.  Even though the property is only two years old, several tenants have already folded.  What looks like a seemingly nice location, the difficulty getting to the facility is hurting the small tenants.  They're not what we would call "destination" tenants & rely upon heavy traffic for survival.
 
Here are some key factors that are particularly working against this tenant: 

-          Lease rate too high for a non-proven facility. Sure, it’s a nice looking place, it seems to be in the middle of a booming area, but it wasn’t a proven facility and, as we know now, there are issues.

-          Poor Lease terms – the initial term for this first time business owner is 5 years. On top of that, there is only 1 option to extend and only for a 5 year period. A better scenario would have been a 3 year lease with two (2) three (3) year options.

-          Poor Access. There aren’t enough curb cuts for ease of access. Customers often have to cross traffic in a high traffic area; too far away from a light & too close to a light. What?? What I mean is that there is a light nearby, but this property can’t be accessed via that light. So the problem is that the access point (curb cut) is so close to the light that traffic often blocks the entrance for cars trying to turn in or for cars trying to get out.

-          Poor Signage. It’s bad enough that this business is on the back-side of the strip mall, but there is no good signage for the complex.

-          Poor Management Decisions? This is a NNN lease and the tenant feels like the owner has expensed items that appear to be more akin to capital expenses.
 
In summary, the tenant spent too much money to improve the facility, the property did not have a good track record for the lease rate, access is poor, signage is poor, the term of the initial lease term is too long, and the NNNs are too high.
 
Not a good combination. We’re meeting with the bankruptcy attorney this coming week.
 
However, I am also recommending to the Tenant that we immediately engage the owner in a meaningful dialog. The old saying is: “There is strength in weakness.” Sometimes there is no better time to renegotiate a lease than before you walk out on the lease. If the owner has acknowledged the troubles of other tenants (several have already gone under & / or left in the short amount of time the property has been available), then we might be able to work out a compromise that is a win-win for all concerned. In the end, that’s what we all want and what virtually every building owner wants as well. Let’s keep our collective fingers crossed for this business owner.
 
In the meantime, don’t you bet the farm on your lease without expert assistant. You need to fully understand your lease and you need an experienced commercial real estate agent to help you. Leasing a commercial property is not the same as buying or leasing residential real estate.
 
Posted by Scott Nicholson at 11/12/2007 3:09:00 AM
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Michelle Penick, Build Idaho Client Real Estate Services

Michelle Penick

Client Care Team
208.629.0217
[email protected]

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