Commercial Lease Agreement, you’ll be bound to a landlord. To maximize this time and generate profit from your business with minimal issues, it’s essential to recognize potential red flags before signing the lease.
1. Signs of Landlord Financial Constraint
One major red flag in a commercial lease agreement involves the landlord’s possible financial struggles. These struggles often manifest through poor property maintenance, reluctance to provide tenant improvements (TI), offering abated rent instead, high vacancy rates, or negative feedback from current tenants. When a landlord faces financial difficulties, they may struggle to fulfill their obligations, leading to potential issues for tenants.
2. Missing Disturbance or Holdover Clause
A commercial lease agreement should include a disturbance clause. If a financially struggling landlord loses their property to lenders, this clause protects the tenant by allowing time to relocate. Without this clause, tenants may find themselves suddenly without a lease. Additionally, a holdover clause is crucial as it provides tenants with time to negotiate before renewing the contract or moving out.
3. Unrealistic Projections
Be cautious if the property is presented with overly optimistic future projections or claims of outstanding business viability despite economic disruptions. When projections seem too good to be true, they usually are. Always ask for legitimate documents to back up these claims before signing a commercial lease agreement.
4. Lack of Demographic or Analytical Study Results
As a tenant, it’s important to request demographic and analytical data from your commercial broker or landlord. This information helps ensure that the property will generate adequate income. If this data is unavailable, it’s a significant red flag. Entering into a commercial lease agreement without this information could lead to costly mistakes.
5. Unclear Financial Calculations
A commercial lease agreement should include clear and detailed financial calculations. If the landlord provides unclear or vague numbers, clarify them before signing. Ambiguous financial terms often lead to disputes and unexpected costs later on.
6. Vague Responsibilities and Obligations
Ensure that the commercial lease agreement clearly outlines the responsibilities of both parties. Vague descriptions can result in the tenant being unfairly burdened with tasks that weren’t explicitly stated in the agreement. Typically, a good commercial broker will work out these details in a Letter of Intent (LOI) before finalizing the lease.
7. No Pass-Through Language on Paper
It’s essential to obtain the property’s operating expenses history for at least two to three years, along with a list of planned capital projects. This data impacts the pass-through terms in the commercial lease agreement—which determine who pays for maintenance costs. If the landlord can’t provide this information or if pass-through terms aren’t documented, it’s wise to consider it a red flag.
8. Unclear CAM Coverage
Common Area Maintenance (CAM) charges should be clearly defined in the commercial lease agreement. Vague CAM terms can lead to unexpected costs for the tenant. Therefore, ensure that the lease specifies what is included in CAM charges and inspect all maintenance facilities and equipment to confirm their condition. Consider requesting a 6-month warranty on maintenance facilities like HVAC systems to avoid future financial burdens.
9. High Tenant Turnover Rates
A high turnover rate among tenants often indicates problems with the property or the landlord. Before signing a commercial lease agreement, try to speak with previous tenants to understand why they left. High turnover typically serves as a warning sign that shouldn’t be ignored.
10. Sloppy Documentation
The quality of the legal and official documents reflects the legitimacy of the landlord. If the commercial lease agreement contains messy corrections, faded printing, or illegible writing, consider it a red flag. Clear, well-maintained documents are crucial to avoiding future misunderstandings or disputes.
11. Overreliance on Verbal Confirmations
While verbal negotiations serve as a starting point, they should always be followed by written agreements. If a landlord relies heavily on verbal confirmations and avoids putting terms in writing, it’s best to be cautious. Ensure all terms are documented in the commercial lease agreement to protect your interests.
Even after outlining all the information above, leasing commercial space and/or renewing your lease can still seem daunting. That’s why the Leveraged CRE Team at Commercial Properties, Inc. is here to help you achieve your leasing goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need assistance with your 1031 Exchange or DST? We’ve got you covered!
We’ve prepared a comprehensive, free e-book designed to guide you in achieving your long-term business goals or acquiring that dream property you’ve been eyeing.
Meet The LeveragedCRE Investment Team
Phill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets. The team leverages their extensive knowledge and expertise to help investors and property owners maximize their returns and navigate complex real estate transactions with confidence.
Stay informed with the latest in Commercial Real Estate strategies designed to enhance your income property investment results by bookmarking www.leveragedcre.com. Let us help you stay ahead in the market!