Navigating Commercial Real Estate In An Improving Market
The rent on a commercial lease is only the beginning of negotiations between the commercial tenant and landlord.
September 17, 2011 /24-7PressRelease/ -- While the U.S. residential real estate market still struggles to recover, commercial real estate is looking up. Global real estate giant CB Richard Ellis (CBRE) recently reported that office vacancies fell to 16.2 percent in the second quarter of 2011. The decline is the fourth consecutive quarter of improvement after the office vacancy rate peaked at 16.8 percent a year earlier.
States like Arizona, California, Florida and Nevada, which have been hit the hardest economically, have seen the biggest recent improvement due to lower lease rates.
Basic supply and demand principles are at play. A lower vacancy rate means less available commercial space, in turn driving up commercial rents. While this is certainly good news for commercial landlords, it is unclear how many tenants can afford increased rents when the general economy continues to struggle.
Typical Lease Inclusions and Topics for Negotiation
The rent of a commercial lease is only the beginning of negotiations between the commercial tenant and landlord. Rent can be a sticking point and determined predominately by market forces, but other aspects of a lease may be more negotiable. For example, a tenant may advocate for a broad permitted use of the space to maximize its potential. A smaller business may not be able to afford all upkeep, so putting maintenance responsibilities for the outside of the building onto the landlord may be practical. Agreeing to a cap on the share of some of the operating costs or the cost of insurance can help a tenant from becoming overburdened.
Ending A Lease and Bankruptcy Issues
Negotiating a lease should also include an exit strategy for both parties. The ability to transfer the lease or sublease the space can provide a nice security blanket for the tenant. On the other hand, landlords will want to have control over the occupants of the building, especially for multiple-tenant buildings.
In addition, despite the recent improvement a still-struggling economy may mean bankruptcy for either the landlord or tenant. If a landlord declares bankruptcy, the tenant will have the option to continue or discontinue the lease. If a tenant declares bankruptcy, the tenant cannot be evicted until the bankruptcy is through. However, the tenant is still obligated to pay rent while in the building. After bankruptcy, the tenant can either assume the lease, reject the lease, or assign the lease to another tenant, so long as the bankruptcy court approves the new assignee.
If a tenant is in financial trouble, action taken before bankruptcy can often be the most beneficial to the landlord. If rent is past due, properly evicting the tenant may allow the landlord to avoid bankruptcy court altogether.
An Experienced Attorney Can Help
Businesses looking to lease or rent commercial space should contact an experienced real estate lawyer to further discuss potential issues and pitfalls. With the commercial real estate market normalizing, but still uncertain, experienced attorneys are essential to the commercial leasing process.
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