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Negotiating Commercial Leases with Due Diligence
Commercial property managers share some common roles and responsibilities with residential property managers, but when it comes to due diligence, most experts would agree that commercial lease negotiations pose unique challenges.
Both tenants and property management professionals have a responsibility to exercise due diligence. Hiring an experienced real estate attorney who specializes in commercial rental property lease preparation to assist you during the negotiation phase is advisable.
If you’re new to commercial rental management, or considering venturing into this field, this article will discuss negotiations from a landlord perspective.
Key Areas of Focus: Lease Design
Crafting a customized lease for each tenant is standard operating procedure. A commercial lease provides a roadmap for the tenant/management company relationship. During the negotiation phase, property managers and legal advocates focus on these key areas.
- Financial standing of potential tenants – and guarantors, if applicable – directly impacts credit worthiness scores, potential concessions and lease pricing and incentives. Financial standing could also influence decisions about flexible lease arrangements and delinquent fee schedules.
- Exclusive use, provisions and exclusions, and inspection access agreements clearly define expectations, allowable activities on the property and the management team’s legal rights and responsibilities during the tenancy.
- Warranties and remedy clauses provide legal protection for items overlooked or omitted during the due diligence process.
- Termination options strengthen risk management strategies.
How to Leverage Technology to Streamline the Process
Every state has unique statues that affect what type and the extent of information property manager can gather and share digitally prior to entering a commercial lease arrangement.
Here are three examples.
- Posting vacancy listings on your website that display rent per square feet in compliance with state requirements is recommended if you’re advertising multiple units and seeking commercial occupants.
- If you’re leasing to an individual operating under a registered DBA or a sole proprietor, using advanced tenant screening tools to explore credit performance, work histories and criminal records is generally allowed, provided your screening providers and technology platforms have adequate security measures in place to protect data and privacy. When verifying financial standing for corporations or established businesses, you’ll want to expand your search to include the Better Business Bureau and Dunn & Bradstreet profiles.
- Rent comparison tools are instrumental in setting current lease rates and mid-term renegotiating schedules.
After you secure a signed lease, your commercial property management team can also use cloud-based solutions to communicate with tenants, deliver accounting statements, and track and bill common area expenses.
Understanding Tenant Perspectives
Naturally, property managers and tenants have differing perspectives about lease negotiations. Understanding the process from the other side of the table will make you a better negotiator.
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