Commercial Real Estate Investment/Commercial Lease Modification

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Expert: - 5/12/2011


Question
We own an office warehouse complex that is 5 years old. One of our tenants took occupancy the latter part of '07 on a 5 year lease term and have been low maintenance, easy tenants that we would love to see renew.  They operate a subsidiary of a company that owns, plus or minus 150 stores up and down the eastern seaboard.  Recently, they have requested a 20% modification to their lease for a period of one year at which time their lease will be up for renewal.  The amount equal to 20% would be a real detriment in our ability to manage our financial responsibilities, nor can we afford to lose them next year which would be even worse. They occupy 3 units and have invested largely toward tenant improvements and communicate  their desire to remain at our location as opposed to the many costs associated with a move.
We've decided to roll back their annual increases, however, this isn't equivalent to 20%, more akin to 9%.  Most likely they are expecting a counter and perhaps starting high with plans of reaching what they need in the end. The decrease they are requesting is several hundred less than what they originally moved in at 4 years ago.  I would like to see evidence of their financial distress creating this need, is this our right? I do not believe we covered for this type of situation in our Agreement. I expect another revision is necessary.
We are attempting to meet in the middle to assist them but do not want to be hoodwinked either. Everybody is struggling even landlords.
Thank you, this is a wonderful service you offer.

Answer
Linda:

Tell your tenant that you suggest terminating their current lease responsibility if they sign a new five year lease that would take effect immediately with an immediate ten percent (10%) reduction in rent (or whatever reduction you can afford).    If they won't go for a full five (5) year term, reluctantly give them a four (4) or three (3) year lease.  This should flush out if the tenant is simply looking to pay less rent during the last lease year before they relocate somewhere else.  If you can get the new lease escalations to get back up to a level that you can afford, you will have bought 3 to 5 more years before you have to risk losing them again.

This way you also avoid asking to review their financial records.   NO ONE likes to show evidence of their financial distress to anyone.

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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