In commercial real estate, the lease agreement/agreement of sale reigns supreme. Today I sat down to coffee with a connection working in leasing, and it really hit home that it’s always an interesting conversation merging construction and a brokerage-world perspective. One area worth highlighting is a situation that can be seen in the show “Bar Rescue.”
For those who haven’t seen it, a bar that’s underperforming is completely re-done by a “restaurant aficionado.” I’ve seen episodes where multi-million-dollar improvements are executed to transform these places. What’s unexpected but a real problem within a tenant/LL relationship, is when these improvements have been completed and the landlord can use a lease agreement to their benefit—all legally. This is why it’s important to read between the lines of your lease. If there aren’t renewal options on a lease (or if you’re on a month-to-month type arrangement), a landlord has some rights that can put a business owner in a bad place following a construction investment.
When a space becomes appealing (and more in demand), if there is no inclusion for renewals in agreements, a landlord can decide to raise their rent rate. From this, many tenants are being “priced out of their lease.” Basically, the business who performed the improvements may not be able to afford the new space cost and are forced to vacate their space for a new tenant who agrees to the higher rates. Without protection in a lease agreement for this situation through renewal options, tenants can be in hot water.
Within the world of a property sale, there are plenty other examples of agreement terms that favor one party over the other—and should be clearly understood before you sign on the dotted line.
In the purchase of an income-producing asset, the purchase price is ultimately dictated by the rental income. It is important to note that just because there is a lease in place at a certain rental rate, that doesn’t mean that the tenants are necessarily paying in full and on time. Just like in bidding a construction job, the saavy investor should make sure that the rental rate that is being represented by the seller is comparable to properties nearby. They should also “look under the hood” to make sure that the rent is coming in and that they are not buying somebody else’s defective headache.
Since so many areas of construction dictate demand within the realm of leasing/purchasing commercial property, there are some interesting ties worth discussing with these two different lenses involved. Although these are only two examples, the main bit of guidance to take away is to make sure your construction investment is being used fairly and you’re well-versed in all areas of your property agreements.