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Commercial Real Estate Investment/Recoup investment on leasehold improvements?

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Expert: - 6/20/2007


Question
My commercial lease expires in a few months.  I made a lot of improvements to the space to get it approved by the FDA, state, and town for food processing.  In addition, I spent $ for plumbing and venting to make code for food equipment.  I need to move out and would like to recoup some of my expenditures.  I know I could find a suitable tenant in food processing because the facility is approved by 3 governing bodies.  Naturally, the landlord could also find someone as well.  Even if I found the new tenant through my food business contacts,  they would need to negotiate the new lease terms directly with the landlord.  I could also remove my sink, ovens and vents and  any food person would need to redo this.  I know I could save a food tenant a lot of money because the space is already set up for them.  Any advice?

Answer
Chris:

I wish I could give you a positive answer to your question.

Your landlord has likely already calculated the value you would be adding to his property by installing your valuable specialty improvements - if in fact you are correct in your   evaluation.   

At this point, you are limited in what you can do to recoup the value of your special improvements.

First, check your lease for what it says about "Fixtures" and how your lease text specifically dictates fixtures will be handled at the end or your lease.  Some landlords have language in their lease that says you - the current tenant - cannot remove your fixtures at the end of the lease because they are considered property of the landlord at the moment you "affix" (attach) the fixtures to the property.  

Check very carefully to see how your lease defines your "sink, ovens, and vents" and even "plumbing" to determine if they are considered fixtures.  Depending  how the lease is written, you would be in violation of the lease terms if you remove any of your fixtures from the property before or after your lease expires.  If this is the case, the landlord would likely go to court to recoup his loses.

If you are allowed to remove your fixtures, you can try to sell them to the next tenant that leases the premises.  However, most prospective tenants realize you would prefer to sell the fixtures to them rather than remove them and have to move them to another location.  You will likely get a greatly reduced price for them.

This may also be a matter to refer to an attorney. Note that if the fixture expenditures you have at risk were substantial, or, your lease does not specifically address this situation, you should contact an attorney that specializes in "Landlord/Tenant" law (i.e.,"L&T Law") to determine your best way to proceed.  Note also that your jurisdiction may have its own L&T law that supercedes your lease provisions in this regard, and again, an attorney will best advise you in that situation.

Whatever you do, do NOT ask for your landlord's advice!  You  likely will NOT get an objective response.

-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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