TEN LANDLORD QUESTIONS ANY TENANT SHOULD BE PREPARED TO ANSWER WHEN LEASING COMMERCIAL REAL ESTATE
For a business to lease commercial office space, or any commercial space, successfully, it helps immensely if the tenant realizes the landlord will base much of its decision on the credit worthiness of the tenant. I usually tell my tenant clients to view the process much like applying for a bank loan. Towards that end, below are ten landlord questions/concerns a tenant should be prepared to address along with some tips on handling them.
1. Will the tenant be able to pay rent as specified in the lease?
The gold standard in answering this question is to provide the landlord with two to three years of audited financial statements if available. This may be easy for established businesses with a long-standing track record. If audited statements are not available, the tenant needs to provide whatever financial information it does have which can include unaudited statements, “Quickbooks” profit and loss statements and balance sheet, and tax returns. However, addressing this issue for young companies or start-ups is more problematic but not insurmountable. Providing information on the source of funding and bank statements should enable the start up to overcome this obstacle. Work with your broker for guidance as he/she often has past experience with the particular landlords involved.
2. What are the tenant’s strengths, what are its primary sources of revenue, and are these services likely to continue to benefit the company?
Marketing/promotional materials should usually be submitted to the landlord to help with this. The tenant’s website can also be instrumental here. For non-profits, it is important to explain how the non-profit generates its revenue: dues, grants, contracts, or a combination along with some history of its revenue from these sources.
3. Are there any key individuals in the tenant’s company that it could not afford to lose without losing revenue?
If the company or organization is in the news or generating press releases on staff changes, the tenant can explain the plan to replace such key people. Curriculum vitaes of those currently in charge or soon to replace such people is also helpful.
4. What type and amount of security is the tenant willing to provide; what type and amount of security should be required?
The landlord’s decision on this issue will depend on the financial capability and stability of the tenant and the concessions the landlord makes to get the tenant to sign the lease: free rent, build out allowances, the current market for commercial space, and rent to be paid by the tenant.
5. Does the tenant have a reputation for dealing honestly and fairly with the business community?
Constant attention to the firm’s social media profile is very important here. The tenant should expect the landlord to Google the tenant. If there is negative material on the internet, the firm should make sure it is addressed and explained.
6. What are the tenant’s economic requirements of the transaction (e.g., minimal rental and improvement allowances versus higher rent and larger concessions)?
In searching for space, it is very helpful if the tenant can find space that meets its needs as close as possible to the “as built” condition of the premises. For example, if the space needs only new paint and carpet as opposed to a complete build out from “shell” condition, there will be more landlord dollars available to the tenant for things like free rent, lower rental rates, or lower rent escalations.
7. Are there any unusual requirements that need to be addressed?
This can be anything. We once had a tenant that insisted on the right to smoke cigars on the balcony adjacent to its space. Unusual is ok; unreasonable is not.
8. What type of tenant improvement work will be required?
The landlord is concerned not only with the cost of the tenant improvements it pays for, but also that the dollars it spends have some benefit to the residual value of the landlord’s building. If the build out required is one that would be attractive to follow on tenants after expiration of the existing tenant’s term, the landlord may be able to refill the space with a new tenant with minimal improvement costs rather than demolishing the existing build out and starting over from shell condition. Also, trends in design and décor change over time, but outlandish or bizarre design will not help to keep the landlord flexible and open to the deal.
9. Does the tenant grow its business from within or by acquiring other companies; has it incurred significant debts as it has expanded its operations?
Debt will be a key line item in the landlord’s financial review of the tenant.
10. What are the long and short-term projections for the tenant’s business operations?
About fifteen years ago, we were involved in a lease where the tenant was an association representing phone booth manufacturers. Even then, the association’s members were dying due to the growth of cell phones. Whether the landlord is a single individual, a partnership, a large equity firm, a life insurance company, pension fund or real estate investment firm, they are business people. Landlords will look at the tenant’s business with an experienced critical eye, often with a battery of paid experts to assist in the analysis. The tenant must be prepared to answer some tough questions.
