Lease terms should be determined early in the acquisition process. It obviously makes no sense investigating and negotiating the acquisition only to discover a suitable lease cannot be obtained. Preliminarily, the buyer would want an estimate of the essential terms, including the proposed rent, rent escalations, ancillary charges, length of lease and option periods. Other points essential to the buyer may be included during this initial inquiry, however, the less important issues left for formal lease negotiations, once the acquisition process is well along.
Planning for Negotiations:
Planning begins with a through analysis of market conditions to determine the prevailing rates for similar properties within the area. The investigation should be confined to locations comparable in terms of traffic count, tenant mix and the ability to generate the same sales per square foot. Although properties are never equivalent in all respects, a comparative analysis will provide a reasonable rental range for the location under consideration.
Determining prevailing rents and terms granted by the landlord to other tenants within the site should next be investigated. Verify what similar tenants are paying for rent and the concessions extended. It is important to concentrate on the most recent leases, as older leases, of course, may not accurately reflect current rental values, and concessions made to earlier tenants when the complex was first developed may not be offered once the complex is established and successful.
The seller’s own lease can provide a basis for projecting new lease terms. Don’t assume a new lease will automatically result in a higher rent. While this will be true in most cases, there are many situations where rental values have decreased with new leases offered at reduced rents and with other concessions.
Check and demand for space within the site and the landlord’s bargaining position. Vacancy rates, tenant turnover and the length of vacancy are clear signals. The analysis would include whether weaker tenants are replacing strong tenants and whether renewal options are being exercised. Of course, a deteriorating condition should cause concern over the suitability of the location and desirability of the business. The reputation of the landlord must also be explored. Some are notorious for granting only short term leases, only to demand excessive rents for renewal. Others are financially weak, with their properties in disrepair or are in jeopardy of foreclosure. Many more disregard their own responsibilities under the lease or unreasonably interfere with the tenant’s rights. These landlords often have a history of poor tenant relationships and you can enter negotiations better armed to protect yourself.
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