Strategizing a New Business Location
With so much talk these days about loan modifications for homeowners that got into a bind with their mortgage, what about the businesses that are now stuck with an unfavorable lease? There are now a few options for business owners in this situation wishing to modify their commercial lease. This applies to large companies as well as the smaller individually owned businesses to modify their current leasing arrangements with their landlord.
These types of Commercial Lease Modifications have proven to be effective and beneficial for businesses by restructuring their terms and reducing their current rent by as much as 50%, and can be accomplished with as many as eighteen months remaining on a lease. Similar to loan modifications, a variety of steps have to take place and the process can take anywhere from 60-120 days or more depending on the complexity of the current lease and its terms as well as the situation with the ownership of the building.
Many times landlords need a variety of approvals to accomplish this feat. There are several instances where businesses have contemplated shutting down offices or closing due to high over market rents not realizing that there is a chance to save the office or make it profitable once again. During the height of the real estate market, companies expanded and new ones opened up to be in the game during a perceived economic expansion. Commercial developers went on a building binge to serve the business expansion throughout the Inland Empire. Consequently, there was an urgency to lease the space by commercial tenants regardless of the terms and cost of the lease.
Rental rates went into the stratosphere at highs not sustainable by businesses in a normal level economy, no different than the housing market. Since the commercial real estate industry follows housing in step, this was bound to happen when the prices of homes were skyrocketing and then began to fall precipitously. Like their residential property owner counterparts, commercial landlords began renegotiating their notes on their property or in some cases the buildings went to foreclosure or investors bought the notes on the property at a big discount. So either way the landlords mortgage payments went down.
Modifying commercial leases takes into consideration many factors, such as term remaining on the lease, current vacancies in the building or in the area, size of the premises in contrast to the size of the building, etc. Some roadblocks to a commercial lease modification can vary such as the landlord investing funds in the tenant improvements for the business, and how much was spent in addition to any up front concessions granted.
All the variables need to be weighted to figure out what kind of modification can be done, if any. Moreover, many landlords want to recapture the forgiven rent on a modification without waiving the discounted rent, but of course, that is all negotiable depending on the leasing variables. Most often a lease modification is temporary, however a permanent one can be negotiated as well, avoiding the eventual hit six months down the road.
(written for The Valley Business Journal)
[photo: a. magill]
Related posts
