As a business owner, finding the perfect commercial space is crucial to the success of your business. However, navigating the lifecycle of a commercial lease can be cumbersome and confusing, especially if you're managing multiple leases. From acquisition to operations, there are many departments and processes to consider when managing commercial lease agreements. That's why we've put together a comprehensive guide to help you navigate every step of the commercial lease lifecycle. In this guide, we'll cover everything from occupancy cost auditing to tenant improvement allowances. Whether you're a new business owner or a seasoned entrepreneur, this guide will help you make informed decisions and ensure that your commercial lease is a valuable asset to your business. So, let's dive in and explore the ins and outs of navigating the lifecycle of a commercial lease.
Managing commercial leases can involve various departments, including real estate, accounting, and legal teams. Each department plays an important role in the lifecycle of a commercial lease. The real estate department is responsible for recording and monitoring critical dates. The accounting team is responsible for processing AP, auditing occupancy costs, and adhering to GAAP standards. The legal team is responsible for drafting and reviewing lease agreements and assigning the lease during an acquisition or disposition.
Understanding the roles of these departments is critical for businesses to ensure that their lease agreement is handled appropriately. It is essential to communicate with each department to ensure that all aspects of the lease agreement are being followed and that each department has the tools they need. This will help ensure that the business is running smoothly and that managing lease agreements doesn't get in the way of running your business.
The acquisition or development process is the first step in leasing a commercial space. This process involves legal, development, facilities, real estate, and accounting departments.
Before moving forward with an acquisition, it is critical to know the terms of the leases being acquired. Understanding all the lease constraints or allowances is important for both sellers and buyers to have a complete picture of what the portfolio is worth. Few things are as disappointing as finding out too late that your plans for a new location are disallowed by the lease constraints you inherited in your purchase. Nasty surprises like these are more likely to occur when a deal goes through before anyone on the buyer's team has made a full assessment of all the leases' various terms.
During a development project, the development team needs to work closely with other departments, this way management knows when certain milestones will be reached and ultimately when operations can begin. Typically the lease will include a timeline for the construction process. If development projects aren't managed correctly, the landlord can begin charging rent before the construction process is complete.
After acquiring and existing lease or signing a new lease agreement, the business must transition into operations. This process must happen as fast as possible so the new location starts generating revenue. Post-closing integration can involve various departments, including facilities, compliance, accounting, and real estate teams.
Facilities is responsible for setting up utilities, or in the case of an acquisition, changing ownership on the previous utility contracts. The compliance team, or the development team, will assist with applying for new licenses or changing the ownership of the previous licenses. The accounting team will need to integrate the new lease's expense terms into the existing AP process.
Executing a detailed plan for transition into operations allows the newly leased locations to begin generating revenue as quickly as possible.
A lease abstract is a summary of the lease agreement, including critical terms and conditions. It is essential to have a reliable lease abstract to ensure that all terms are being followed throughout the lease agreement. A lease abstract should include the rental amount, lease term, renewal options, and any additional terms or conditions. This responsibility typically falls to the legal or real estate teams.
Having a reliable lease abstract can help businesses manage their lease agreement more efficiently, ensuring that all terms are being followed and any potential issues or concerns are addressed promptly. It is essential to update the lease abstract regularly to ensure that all new terms from amendments and other documents are properly accounted for.
Occupancy cost auditing involves reviewing and verifying the costs associated with leasing a commercial space. This process includes reviewing rent escalations, reconciling any discrepancies, and ensuring that all costs are compliant with the lease agreement.
Rent escalations are typically included in the lease agreement and will increase the rental amount over time. It is essential to review these escalations regularly to ensure that they are compliant with the lease agreement and the landlord is not prematurely escalating the base rent.
Reconciling any discrepancies involves reviewing any potential errors or discrepancies in occupancy costs, including rent, utilities, and maintenance fees. It is essential to address any discrepancies promptly to avoid potential legal issues. Real estate and accounting teams need to work closely together to efficiently conduct OC audits.
Maintenance and repairs are crucial for ensuring that the commercial space is safe and comfortable. facilities teams are responsible for maintaining the property and coordinating any necessary repairs/upgrades. Facilities teams need access to lease data so they are aware of what maintenance items the landlord is responsible for.
It is essential to have a plan in place for addressing maintenance and repairs promptly, including identifying potential issues and addressing them immediately. This will help ensure that the commercial space is safe and comfortable for customers and that any potential legal issues are avoided.
Tenant improvements and alterations involve making changes to the commercial space to meet the needs of the tenant. This process can include adding walls, upgrading electrical systems, and installing new fixtures or appliances.
Construction and real estate teams need to work closely together so that all available TI allowances are provided by the landlord. this becomes even more critical if the franchisor requires regular remodels.
As energy efficiency requirements make their way into law It is essential to have a plan in place for tenant improvements and alterations, including identifying potential issues and addressing them promptly. This will help ensure that the commercial space is safe and compliant with local and federal laws.
Engaging with the landlord is crucial for ensuring that the lease agreement is being followed and any issues or concerns are addressed promptly. This process involves communicating with the landlord regularly, addressing any potential issues or concerns, and ensuring that all lease terms are being followed. Provisions to monitor include signage, parking, use, snow removal, etc...
A consistent channel of communication with landlords will enable accounting teams to easily acquire expense backups, facilities teams to quickly coordinate repairs, and real estate teams to negotiate renewals. It is essential to have a constructive and consistent channel of communication open with landlords. This will help ensure that the lease agreement is a valuable asset to the business.
Real estate tax compliance and verification involves knowing when tax bills are issued and due, comparing the current valuation with comps, and ensuring that all occupancy costs are compliant with local and federal tax laws. This process includes reviewing any potential tax liabilities, verifying tax assessments, and ensuring that all taxes are being paid on time.
In many cases, a physical copy of the tax bill won't arrive, however, payment will still be expected and late fees will be levied if the bill is not paid on time. It is essential to have a plan in place for monitoring tax bill due dates. This will help ensure that any potential legal issues are avoided.
Disposition involves terminating, renewing, or assigning the lease agreement. This process includes reviewing any assignment or sublease clauses, identifying potential issues or concerns, and addressing them promptly. It's critical to have lease data organized before a sale, this will save a significant amount in legal fees.
An accurate report of all security deposits paid will ensure no money is left on the table. This may sound simple, but when managing multiple locations over a long period of time, this data can easily disappear.
Navigating the lifecycle of a commercial lease can be overwhelming and confusing, but with the right plan in place, businesses can ensure that their lease agreement is a valuable asset to their business. Understanding the different departments involved in managing commercial leases, the acquisition or development process, transitioning to operations, and other critical factors can help businesses make informed decisions and ensure that their lease agreement is being handled appropriately. By following the tips outlined in this guide, businesses can navigate the lifecycle of a commercial lease with ease and ensure that their lease agreement is a valuable asset to their business.