Expert: Jim Avancena, CPM - 5/1/2008

Question
We have a new "start-up" church and have located a building and the owner has offered Lease with Option.  I don't know if the price is a fair price.  He is repairing and including what we are asking to be remodeled.  He wants to lease for 3 years and at which time we have to secure an outside mortgage.  We don't know how hard this will be since we have not established any credit.  Plus owner wants us to pay the Real Estate Taxes and Insurance on the building while leasing.  If we should outgrown the space within 1-3 years of the lease the owner has stated that the mortgage must be paid off in full.  We are concern as this is a new process and/or transaction.  We have not consulted with an attorney at this point.  Also the building is not zoned for a church and we are in the process of presenting application to the City for Zoning, however, the owner is requesting that we do an Agreement first before Zoning and if we are not zoned then the Agreement is null and void.  He will not begin the repairs until we are Zoned due to him having difficulty later to sale if it is zoned for a church and we not come to an Agreement.  In other words, come to an Agreement and wait to see if we get Zoned and then begin work.  If not Zoned then Agreement is void.

Answer
Paster Witherspoon-

Although the lease,sale,and rezoning process you describe may sound relatively uncomplicated to you, it is not.   It is a process that incorporates a multitude of potential land mines that can trigger complex and expensive problems; any one of which can destroy your plans.   It would be best if you had an attorney to assist you in arranging this transaction BEFORE you get too far in the process.

Allow me to make some comments regarding several of the comments and questions contained in your statement.

Both the Lease and the Option demand an understanding of a very specialized body of law and will contain various bits of text that WILL address considerations and responsibilities that you will understand, but many more important concerns that you will not be aware that are well hidden "between the lines".  Do not try to navigate the Lease and Option without an attorney with a good knowledge of lease law.   

Your use of the building is so specialized that it may be difficult to determine if the rental rate being offered is fair.  Your should ask tenants occupying similar property to share with you what they are paying in lease rates and ask their opinion about the terms you are being offered.  

It appears that the option is an option to purchase the property. Do you want to purchase the property after three years?  You might prefer to lease the property for three (3)years with an option to renew the lease for five (5) consecutive one(1) year terms providing you give the landlord written notice that you wish to extend the lease for another one year term at least 180 days prior to the end of the then current lease term.  This way the landlord will have a minimum of six (6) months to find a new tenant for his property before you vacate and stop paying rent.

You might also ask if your landlord would accept a lease with an initial lease term of three (3) years, with an option to terminate the lease at any time on six (6) months advance written notice - however you agree to reimburse the landlord for the unamortized costs (based on a three year basis) of the special repairs he has to do for you to prepare the property for your church operations.  This would give you the most flexibility.   Note, however, that the landlord will (quite reasonably) likely require that you provide him a security deposit for the three (3) year lease that matches the cost of his anticipated repair work, and decrease the amount of the security deposit the landlord holds by one-third (1/3)at the end of each year of the initial lease term.

I do not understand the linking of outgrowing the space available in the property and paying off the mortgage.  You should avoid any agreement that requires you to purchase the property in the future because of the unusual elements of uncertainty attached to that requirement at this time.  

Finally, you may find that the local zoning authority will not hear your request for rezoning unless you actually have a binding agreement with the landlord.  Many jurisdictions will give you a NON-binding opinion of what they expect will be the result of the rezoning process, but they will not go through the effort and expense to go through the formal steps of the process unless they know there is actually someone with a contractual commitment regarding the property to justify all their work.  Clearly NONE of the specialty repairs should be started by the landlord until you know the property is legally approved for the zoning variance you will be requesting.

I could write you a book of advice as you approach this process, but that will have to be a future project.

I wish you luck with your undertaking.  Please try to find a real estate attorney with reasonable fees, or willing to donate his time and efforts, to protect and guide you through your activities.

-Jim Avancena