Commercial Real Estate Investment/Tenant Improvement

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Expert: - 8/20/2010


Question
I would like to accommodate an existing tenant that has grown out of his space.  The tenant's lease has converted to a month to month.  I would like to work out an amicable decrease of space to the neighboring tenant that is having difficulty making the full lease payment.

Can you suggest the best way to cover the tenant improvement costs needed to make these changes.  the current space is about 1,800sf (gross), comprised of a 900sf office and a 400sf office.  The monthly tenant is flexible and mainly concerned about increasing space, whereas the other tenant with the larger space is not as motivated.  The area has grown over the years and is mainly comprised of two level retail and office space.  The vacancy rate is a bit high in the area; yet businesses are doing well.  The vacancies are mostly new stock that has been added due to demand, versus the flight/default of tenants.

Thank You

Answer
Alexis:

I am sorry for taking so long to answer your question, I was out of town for all of last week.

There is no magic to making the improvement adjustments you would like to make.  I would do everything possible to amortize the cost of any tenant improvements needed now over the longest period possible and absorb those costs in with your base rental.   

This is not a time to take a chance on losing ANY existing rent paying tenants with the vacancy rate high in your area - even if a tenant is having difficulty making their full lease payment.   Don't risk losing a regular monthly rental payment of  X  to save $.25 cents psf on improvements expense.

Regardless of what anyone else tells you, the current recession is not about to end, and do your best to be flexible and maintain all of your current tenants for at least the next 24 months, aiming preferably for 48 months.  

If necessary, you should consider lease modifications for any previously solid rent paying tenants that are treading water now.  Verify that the tenant's business still collects enough revenue to cover your new lease modification terms, and try to back the funds you will be putting at risk with personal guarantees by the tenant until our economy recovers.  

If a tenant's seeks a lease modification and it's revised business plan is clearly unrealistic, you obviously cannot support a business that cannot generate any rental income.   Additionally, make every effort to keep all of your discussions and final lease arrangements with your tenants confidential.

You may discover that your tenants will return your good will one day.

Good luck.

- Jim

Commercial Real Estate Investment

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Jim Avancena, CPM

Expertise

Best qualified to answer questions that involve commercial leases, that is, basic issues as well as the often unexpected effects of the complexities and inter-relationships of the provisions a lease may contain, explain how seemingly innocuous text in your lease can have a major impact on a Tenant or Landlord and their business operations, and the common practices utilized in the industry. I can untangle most matters that may come up from the time a tenant begins searching for a office or store space and the lease acquisition process, concerns related to remodeling/improving the leased premises, moving-in, subletting or assigning the leased space, and a long list of problems that may come up during the lease term and even after a tenant moves out. I have practical experience with most property management issues and resolving landlord and tenant disputes - especially those involving what may appear to be overcharges assessed for additional lease charges like CAM costs, operating expense reimbursement, real estate taxes, utilities, construction improvements etc. Note that I am not an attorney and cannot provide legal advice.

Experience

Thirty years active experience in the commercial real estate industry as a licensed real estate broker in the Washington DC Metro area (DC, Northern Virginia & Maryland). I have been admitted (approved) by the Maryland and DC courts to testify as an expert witness on the subjects of Commercial Leasing and Property Management in the area of standard industry practices. I have had a business for the last 14 years advising virtually every form of business entity from large national corporations to the smallest ma & pa new businesses regarding a wide range of commercial real estate matters in addition to property management and commercial leasing.

Organizations
Currently my three children keep me so busy that it is difficult to participate in organizations with continuing and specific time requirements.

Publications
I publish a local commercial real estate newsletter titled: "Tenants First". My firm was the subject of a high profile Washington Post business section cover page (2.25 full pages) feature story on January 13, 1993; titled "Overcharging Overhead".

Education/Credentials
BA in Political Science from Memphis University, and five years of study in the real estate development summer program at MIT. I was certified as a commercial property manager (CPM-IREM), and currently hold a brokers license in Maryland and the District of Columbia.

Awards and Honors
The same plaques and honors that most others in my industry have earned. I have none that I consider especially meaningful.

Past/Present Clients
Past clients include: The World Bank, George Washington University, National Association of Criminal Defense Attorneys, US Department of Commerce, The American Benefits Council, K-Mart Development, many law firms, a national union, other major organizations, and many, many small business firms and retail operators that I am most honored to serve. I estimate more than 1,500 firms/organizations.

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