David Cook: The day-to-day operational due diligence on a new facility can be so easy to short-cut. I really value brokers like yourselves who intimately know a client’s business and take a deep-dive on projects. How do you approach this?
Susie Detmer: Tenants really should be wading into the details of the new facility as they relate to every aspect of their operation. To give just a few examples…for a restaurant, is the building designed with any vertical chases that could accommodate a type one or two hood and ventilation system? Horizontal and reduced odor venting is expensive to install and maintain. Typically the maintenance is several thousand dollars a year more than a vertical chase with no odor reduction. Another example is where the loading dock and trash areas are and how the retail staff will access them. Overlooking seemingly small details like these, especially as they aggregate, could lead to significant and unanticipated costs and delays.
DC: Clients can shy away from attorneys for being too expensive, or risking a cratered deal. Do you encounter this pushback from your clients?
Salina Hailey Gray: For most real estate brokers, the old adage “ABC – always be closing” applies. We like to keep things moving along to the finish line, smoothing out bumps in the road as they come along. We try to steer our clients around pitfalls and things that can stall a deal, precisely the reason for those sighs and groans when attorneys weigh in. But it takes only one time to be on the wrong side of a bad lease to appreciate the value of having documents reviewed by an experienced legal professional. I’ve learned that I would rather have a deal slow down than to have a client turn back to me because I let them sign a bad lease. I work primarily with restaurants, and let’s face it, the failure rate can be high. One of the most important things attorney reviews can do for a restaurant is to preserve the exit route.
DC: So do your clients talk “positive exit strategy”, i.e. business sale, with you, or is that further ahead than tenants are typically planning?
SHG: Yes, and I start by reiterating that to preserve your exit route, you must have something to exit from. In order to sell your business you need to have enough time (initial term, options) remaining on your lease(s). If things go well and you have not negotiated to be able to stay for a longer period, then you, or your business buyer, are at the mercy of the Landlord when time comes to negotiate for more time.
DC: Ok, so what are some of the “exit strategy” clauses you eagle-eye for?
SHG: Watch out for early termination clauses. The Landlord will likely say “we don’t have plans for the building right now, but we want this clause just in case…” That “just in case” clause could kill your ability to sell or assign the lease. If you absolutely love a location and the Landlord insists on a termination clause, protect as much as possible by putting the right to terminate as far off into the lease as possible, require long notification periods, and require compensation for your business if the lease is terminated early.
Make sure your lease is assignable to another tenant should you decide to sell. Also make sure terms of the assignment are reasonable and not too restrictive for you to find a replacement tenant. Try to avoid large assignment fees. If there must be an assignment fee, then let it be a set amount, not tied to Landlord’s attorney fees to draft an assignment.
Control the rent on options as best you can, for instance an impartial third party market appraisal. Not having control on how the rent can change in the option period can allow the Landlord to raise rent to something that is untenable for you or your successor.
DC: What are some other “blind spots” you are commonly advising clients on?
SD: Many sites have a grade change that could require ‘floating the floor’ or installing a ramp to provide ADA accessibility. So review ceiling heights, size of ramp that would be required, potential reduced rent for ramp space, or a small ADA elevator. In Seattle, the slope of a ramp can be no more than 1 inch per foot, so that modest 10 inch grade change can turn into a 10 foot ramp at 3 to 3 ½ feet wide. That’s 30 to 35 square feet of unusable space you don’t want to be paying rent on.
Also, parking is commonly under-scrutinized. Make sure you understand any parking garage fees, maintenance and security that will be passed through to the Tenant. Is there adequate parking for your customer, or is the area walkable enough that the requirement is minimal? One Tenant found their cost to subsidize the garage parking added nearly $2 psf to the annual rent. Make sure the access to the customer parking is intuitive, or, excellent ‘way finding’ and directional signage is provided.
DC: I hear clients complaining about the increases in their utilities and HVAC charges. How is this affecting your review of leases?
SD: Yes, tenants need to make sure the utilities provided to the space are adequate to accommodate the business, because increasing utility capacity later is very expensive. As an example, many of the old buildings on Capitol Hill have only 100 or 200 amps of electrical power and some are still on knob and tube. If a tenant changes the use, upgrades could be required to meet code, and not just for the space, but for the entire building! Review the HVAC to be delivered with the space. Is it adequate for tenants use? Is the air handler, thermostat and ducting included with the delivery condition? An air handler alone can add $5,000 to construction costs.
Salina Hailey Gray, of Pacific Commercial Brokers, focuses on restaurant tenant representation. salina1231@comcast.net
Susie Detmer, Senior Vice President at CBRE Seattle, focuses on retail tenant representation. susie.detmer@cbre.com