Commercial Leases: Choosing the Type That’s Right For You

Leo and Claudine break down the types of commercial leases available for business owners and what you should be paying attention to when choosing your lease.
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Speaker 0 00:00
Speaker 1 00:08 .
Speaker 2 00:13 Good morning everyone. Happy Saturday. Today is Saturday, March 30th, 2019 and you are listening to business illegal talk with Leah and Claudine here in power talk 1360 in Modesto. Good morning, Claudine. Good morning. How are you? Good, good. Are we wide awake today? We are and essentially turns out that’s a good thing. Beautiful day. Beautiful day. So, Hey, we’ve got a great show for you today. Um, we’re first a shout out to our audience. We been getting some great feedback on the show, uh, over the last few weeks. Um, thank you. Thank you. Thank you all in the live callers, which are great. Um, so we thought for today we will talk about a critical lease. Uh, what basically leases, you know, commercial leases. Um, this is something that is actually happening in real life and Claudine’s world right now. So you’re, it’s coming to your life as it’s happening. It is. So, um, I thought we would start, uh, today just, you know, just kind of giving you guys an updates, if any on the, uh, any business and legal updates, uh, going on in the state or at a federal level, uh, that I think business owners should know about. I think Claudia, you had something that you wanted to tell an audience.
Speaker 0 01:21 Yeah, we’ve kind of talked about the independent contractor changes that have come about after California Supreme court and um, the, um, labor unions that were supporting the trucking industry. We’re taking it and hoping to have it heard by the federal Supreme court. And so far the federal Supreme court is denying to hear it, which is it? the federal Supreme court has that, right? They don’t hear, they hear very few of cases that are presented. Um, with that said, um, there was a lot of hope, I think on both sides to have some kind of clarification on where we’re going with this. But it appears that we will be circling back around through the state courts, at least for now. So is that a good thing or a bad thing for business owners? I think it’s in the middle. I think if you’re an indie, uh, if you’re a business that uses independent contractors, um, and there truly are independent contractors, um, I think, you know, we’re, you just now you were back kind of in the same boat. Nothing’s been resolved and you’re somebody, the trucking industry was really hoping to have it. Um, you know, some sort of a decision made because the trucking industry has been for so many, many decades, a world where independent contracting was quite commonplace. Um, and if, if the trucking companies now who use owner operators, if they have to, um, run everybody as an employee, then it’s gonna completely change the face of, of the industry.
Speaker 2 02:47 Great. Well, thanks for the update on my side. I was thinking about this. Um, so tax filings, um, the March 15th deadline is coming. You know, it’s kind of came and come and gone, right? So now you, you know, if you, if you view the file, you’re, if you’re a subchapter S or a corporation or an LLC being treated as an S Corp, you should have filed by now. And if not, you better have your CPA or, or, uh, enrolled agent or whoever files your taxes. Get a, an extension so you can get at a six month extension. So you could be, you know, by September 15th. Um,
Speaker 0 03:21 this has always confused me though, but when you get the extension, you’re supposed to pay what you owe and a little penalty. Okay. But if, if you know what you owe at the time, you get your extension, why wouldn’t you just file?
Speaker 2 03:34 Well, it doesn’t mean that you have to wait the six months to file the extension. Say so if you’re technically due on the 15th of the month, you will be late. If you file on the 16th of course. So,
Speaker 0 03:46 but if you file your extension on the 15th, you’re not considered late. You’re fine. You’re covered.
Speaker 2 03:52 Yeah. Yes, you are covered. However though, you, you, you have the legal ability to file later. But yet the IRS reserves the right to charge you a penalty. A small penalty is not, it could be negligible depending on the type of business you’re in. Okay. But consult should be, I w I think we were scrambling along long about March 15th. I think that was a couple of weeks ago, if I recall correctly. Right, right. But yeah, you know, so here we are on the 30th, so, um, but you’re fine. So but I’m thinking about it in general terms. Now the next deadline is April 15th and that’s the big one. That’s your personal taxes. You know, your 10 forties, um, you’re sole proprietorships, a lot of the, you know, the, they are due on the 15th. You’re individuals. Well yeah, your, your 10 47, you’re an individual. Okay. So your 10 forties as your individuals, whether you file jointly, head of household, married, and you know, all of those, the personal income, it’s due on April 15th.
Speaker 2 04:51 So the corporations just trail 30 days behind. Um, anyway, so I would think in terms of that, um, any late violence, if you fail to file your, um, your, uh, your 10, 99 and all of that, you can do it. You, I would say always file. Even if you’re late, it’s better to file late than not to file, right when in doubt, file file. So when in doubt, get an extension. Yeah. Get an extension. So, so that’s, those are the, the, the legal and business are the update, uh, for today, uh, Saturday, March 30th. So, uh, for, for today, you know, this is, this is happening in real life. So Claudine, you’re looking at some office space and we’re, we’re looking to, you know, and this is good. I mean, getting, upgrading your commercial, your, your lease, your office space. It’s good because you’re growing, but there’s a way to go about it. And, and there’s, you know, there’s so many ways to get confused. So what we want to do today is demystify that and talk about the different types of, uh, leases that are there. And some may be good and depending on your situation. So I think everything is good if it applies to you.
Speaker 0 06:04 Right. And, and there is a lot of, um, there’s quite a bit of difference between how we do leases and maybe not so much how we do them, but what types of leases and what you can negotiate here in the Valley versus say the Bay area. So, um, just because it happens over in, you know, San Francisco or San Jose doesn’t necessarily mean that that’s how it plays out here in the central Valley. We have different, different needs, different demands. Um, and to some extent we have a different ability to negotiate.
Speaker 2 06:32 Correct. I agree. Um, so, so this are the things that we, you know, the, the, that are important to us. Um, I think we should, uh, you know, if you’re listening to this show and it’s something that we have to remember from time to time, is we realize that you’re not listening to us for the whole hour. So if you just started listening to the show right now, um, and you are a business owner, this is the place for you. So we help business owners to be profitable. And sustainable, right? I am all about helping businesses be profitable and using accounting as a means for that. In Claudine, you’re all about the sustainability and making sure that you are defensible.
Speaker 0 07:12 Yeah, absolutely. That we have some ammunition for when the day comes along where, um, you know, you, you get that nasty gram from another attorney, whether it be on behalf of a previous employee or, um, you know, in this case, and we’ll talk about it a little bit later. Um, you know, the accessibility to your building, whether you’re a tenant or a landlady, atheists shovel ADA thing, we walked away from a great, um, a great opportunity today on a building of, because it wasn’t upstairs with no elevator, right? There was a great space for a great price.
Speaker 2 07:49 Wow. Well, okay, just let’s put a place holder and that ate this whole ADA that is hitting like, it’s, it’s, it’s, it’s going through the state right now is sweeping this state where litigation. Um, so that’s what’s important to us. So if you have any questions, if you want to reach out to us, you can. Um, you don’t have to reach out to us live. You can actually go to our website so you can reach, reach me. Uh, isG , R E E N L a N D And Claudine, where should we reach you
Speaker 0 08:19 at the um, And that’s Sharon S H E R R O Or our number is (209) 427-2200.
Speaker 2 08:31 Great. So the reason we’re talking about this whole thing about commercial leases is because you are in the process of looking for some space.
Speaker 0 08:39 Yeah, it was a, it was something that we’re talking about cause we were talking about it not only from the, um, the side of functionality and what I need need in a, in a space. Um, but as well, every time we make a decision we consult our CFO and we, we, you know, we want to get the green light. We get, look, look for the green light from Greenland and
Speaker 2 09:01 write that down. You should do, you should look for the green light from Greenland. Can we afford it?
Speaker 0 09:06 This is this, is this a good move financially? Um, and commercial leases have a tremendous number of, um, variable terms that are not common that you would have in a normal residential lease. Uh, so there’s a tremendous financial impact depending on what type of lease you are, uh, considering entering into the term. Um, they’re typically a lot longer than a normal residential lease. Um, I mean, I know I’ve drafted leases for 25 years. Wow. 25 year lease yet.
Speaker 2 09:37 So this is going to be a great show. So you’re listening to business illegal talk with Leah and Claudia here on power talk a M 30 and 60. We’ll be right back.
Speaker 3 09:45
Speaker 4 09:56
Speaker 2 10:08 all right, everybody, welcome back. You’re listening to business and legal talk with Leah and Claudia here on power talk and we’re back talking about commercial leases. So why don’t we get into that? I’m glad I didn’t take us through this whole historical development. Well,
Speaker 0 10:21 you know, back in the, in the 60s and early seventies, most of our leases here in California on the commercial side were rather simple. Typic typically looked like a residential lease. Um, it was just as simple and straightforward. Um, but as businesses began to grow and we saw a lot of growth in the seventies and eighties, even here in California that, um, businesses came here. I know it sounds surprising now, but you know, back then businesses did come to California. Um, and the more businesses came, the more the leases became sophisticated. So we started really seeing law firms develop an entire leasing piece, um, where they could guide and that’s what they did solely, uh, real estate firms also started setting up, um, commercial realtors and commercial leasing agents. And then the documentation just got longer and longer. Now with, on the residential side, for example, when you go to purchase or you go to lease, there are standard forms that everybody uses and you know, we refer to them as car forums or California association of realtors forms.
Speaker 0 11:23 Uh, for those people who are licensed, um, they can use those. And there it’s, you know, it’s very, um, uniform. Whereas on the commercial side, just anything goes and there is no really common simple form or you know, one form fits all. Um, so we often see the drafting get left up to attorneys, um, or you know, very experienced commercial agents. Um, the, you know, they’re very, very competent as well. Um, so, you know, don’t, don’t get me wrong, I don’t want to insinuate that if you are, you know, not an attorney or you, you know, you should only have an attorney do something like this. There are many, many very competent commercial agents, particularly right here in the Valley, um, that can assist you with going through a lease. But you know, as the later part of the 90s and the two thousands came, it really swung because then we saw the, bust or boom or bust.
Speaker 0 12:15 Um, however you want to look at it. It, what it did is it now, we suddenly had gigantic corporations taking up gigantic amounts of office space, particularly in the Bay area. Um, and so things got very, very, um, sophisticated. And then, you know, of course everybody felt including the commercial industry, everybody felt the downturn of 2007, eight, nine, 10, 11, 12 to however, and now we’re stable. It’s a much, much more stable market here. Businesses have come back. It was a a period of time where you would go through town and there was just a ton of commercial buildings just empty, you know, and, and I’m sure you remember that even down in the Fresno area. So now you know where the pendulum is swung and we’re back in, um, you know, a comfortable place. And even with that said, particularly here in the Valley, you can have a huge variety of what’s available, what’s required of a tenant, um, and what is required of a landlord.
Speaker 2 13:17 So, wow. So that’s, that’s great. Historical background. Thank you, Claudine. Um, several things. I was, as you were talking, I was writing and, and one of them is, I think that I want to make sure that we talked about is this whole thing about coworking space. You know, it’s, it’s big. You know, this whole, um, uh, there’s several executives we know, it’s kind of like, well there’s the Regus, right? The, the model in which you can basically, it’s a full service. They pay for everything. You just show up, there’s even a desk, somebody will pick up your phone calls, you get the reception. Great. If you’re a, if you’re, if you’re incubating an idea, if you’re a solopreneur and if you don’t have employees and you need a desk, that’s a great place to be. Right. I’m talking about does this traditional model of executive office space, I’m talking about the ones that you’re, it’s a coworking space, so you’re part of an open floor plan.
Speaker 2 14:13 Okay. Right, right. And there are couches everywhere. What does the name of this cubicle cities. Yeah. But, but they’re, they’re pretty big in the Bay area and they’re pretty big in LA. They’re, they’re, um, venture VCs got involved and then you know, the, to this class a buildings, you take an entire floor, you redo it, and then you have, you know, 20,000 open or no, a square feet of open floor plan. And then with couches and you can just choose whatever you want to, you pay for the privilege of hanging out with other people that are like minded, perhaps other software companies. And there’s a, there’s a, there’s a price on that and it’s very unique. Is it working? It’s working.
Speaker 0 14:52 I, I, you know, if you heard anything down in the Bay area, yes. And I know I’m even companies, not necessarily just the coworking environment, but even it strikes me, what brings to mind is some of the bigger tech companies have utilize a lot of remote employees. And so employees either, you know, they work from their home or whatever, but they come into the office, you know, maybe once a week, once every other week or something. And those folks don’t actually have like a desk space that’s assigned. They actually have just, you come in and there’s just a whole bunch of open desks and then there’s some little smaller rooms where you can shut the door and have a phone conversation. Um, but there’s no, like you don’t have a desk, you just go sit down at whatever desk is open. Um, when you ha when you have to go in. A friend of mine worked for, um, one of the big tech companies and, and did that for a number of years and would go over to the Bay area once or twice a month and, you know, just go sit down and do work and make her appearance and um, you know, do a conference call and they have all of that stuff set up there. So there’s so many different variations. Um, there really is it whatever you need. I think if you look hard enough here, you’ll find it.
Speaker 2 16:02 Yeah. Yeah. Yeah. So a couple, a couple of things. Thanks, Claudine. Um, so here are some things that I am thinking about, uh, that I, I’m imagining what would a business owner would be thinking about if they’re looking into office space is you, you mentioned something very important now nowadays the amount of, because of the technology that we have in, in, in, in the, the connection that you have from home, you can actually have a T1 bonded line at home and you can actually work from home and you may even be productive from home. Should that be a consideration for a business owner looking to upgrade their space?
Speaker 0 16:37 It is. If you, particularly if you are not open to the public, so for say for example, you’re a construction company, um, and this is super common in the construction industry or the janitorial industry when you’re not needing space to have the public. Um, but even still, I think we did it both ways. Um, for many years we had a business out of our home. Um, and it works, but there’s drawbacks. Um, you have to be very good at being able to do what you do and not get sidetracked with other things that are going on at home. Um, and so having an office space, even if it’s a micro space, is really a nice, a nice place to get up and go to and sit down and, you know, be able to do your estimates or, you know, call your clients or you know, get your scheduled together. Um, but a lot of people work out of their vehicles. Now remote working is super popular.
Speaker 2 17:30 Well, so I remember I was, look, I was, I couldn’t come up with a name. We work, we work that’s up, VC funded. Um, that’s a, millions have been pumped into this new way of doing business. So I’m, so I’m looking at it, so if you’re looking at my, you know, my phone is, it’s, it look like traditional office space. So he just looks like this very unmodern Kanuka like Starbucks kind of you go and then there is a coffee shop, there is music playing and people are, and it’s a very creative workspace. Right? That’s different than having your own like a regas when you go in and close the door and you can be all alone. So, all right, so let’s get into it. What are, I have a list of things here that we can talk about. Critical list terms. Do you want to just go through this list? Um, okay.
Speaker 0 18:21 So well your business, you really, any decision you make really comes from how well do you know yourself and know your business. Um, you know, I’ve, I talk with people on a regular basis and, and you know, try to come to an understanding. There’s people who are project managers and there’s people who are people managers. So in business, uh, from our perspective, we kind of try to break them into two categories. You’re either a really good project manager, which means your dates, deadlines, times, you know, your, um, that type of, of person or you’re a really great people manager and there’s, you oversee and help people and motivate people and try to get things done. And sometimes you have to wear both hats and you have to be a little bit of both. But we, I think by nature just generally fall into one or the other categories.
Speaker 0 19:08 Um, predominantly. So you have to know your business. What do you look at in terms of being the length of term that this business is going to be here. Um, and so for example, we have done leases for restaurant owners. Restaurant business is up one day down the next, but if you’re an experienced restaurant owner and you’ve had some experience and you’ve, you’ve done this awhile, you want to come in, you’re going to do improvements, are going to do repairs, you’re going to brand it. You’re, it’s going to be lighting packages that are expensive and decorations that are expensive and you need a kitchen that’s set up your way. And so you don’t want a three year lease on something like that, but then you’re talking about tenant improvements. That’s right. That’s all we’ll get to that. But that’s where you know your business. So you, you, you know, the length of lease is, is really critical.
Speaker 0 19:55 Um, the rent itself is important, but as you know that there are other add ons, um, to the rent. So the rent may be a basic rent per square foot. And then you need to know, you know, do you have cam rates, which are common area maintenance. So if you have, you know, and what is covered in the common area maintenance, is it just, you know, keeping the bathrooms clean and keeping the bathroom stocked or you know, the lights that power, the common courtyard. Um, or is there a real maintenance that’s going on with the building? So do we have a roof that needs to be redone? And is that going to be a part of it? Because again, the takeaway here is when it comes to commercial leasing, anything goes right? Anything goes. So you really need to read your lease.
Speaker 2 20:41 So if you are listening to us right now, you’re listening to business and legal talk with Leo and Claudine here on power talk. And today we’re talking about, you know, second to hiring employees. Your second largest expense most likely will be your lease. That’s right. So you gotta go on it eyes wide open. And if I were, don’t go, don’t go at it alone. Have any, have an advisor?
Speaker 0 20:59 Yes, absolutely. Because there’s nothing worse than getting that bill for your cam and you had no idea what a cam was
Speaker 2 21:05 and to get adjusted once a year according to their P and L the may or may not disclose. Do you know that? Um, I’m dealing with a situation right now. Um, new customer gets hit with a a one time fee of three grand in addition to their lease in addition. So what they get is the statement for the lease in a one line item says, uh, once a year cam adjustment and they’re like, they’re panicking, right? Of course. And I was not part of the whole leasing negotiation. So I, first thing I asked is, show me your contract. Show me the fully exit, not just the one you signed. Show me a fully executed lease. Right. And there was a line item that says that, you know, that, you know, because this is part of this shared office space. And they just said, you know, we’d reserve the right to charge you up to a percentage of your prorata of, of the space that you use against all the common area maintenance.
Speaker 2 21:58 Right. But very, very small print says, well, you know, we know we may or may not give you our profit and loss. So how do they come up with that number? So they got $3,000 and they were just willing to pay without actually looking at the back, the source documents, right? So we went ahead and asked for the source documents, which is the financial statements that lead to that $3,000 low and behold, should it be cut in half? It was an error. So that $3,000 cam area charge for the one year should have been $1,500. So
Speaker 0 22:29 were they basing it off of there? They’re basing off their P and L not their projected maintenance.
Speaker 2 22:34 There were just, according to the agreement, it was a, it’s so they were looking at the prior, the trailing year, right? Profit and loss. Right. And there they were just supposed to be divided at bonds. You know, they had about 1500 square feet, so on a 30,000 square foot, our workable office space. So whatever the numbers that, whatever the math didn’t add up did not happen. So once we asked for the source documents, the landlord got very panicky and there was a pretty big size company and they were like, well yeah, you ride. Um, we just, I guess, uh, what do you, what kind of, what kind of discount do you want to, I said, we just, I just, we just want to pay what it is.
Speaker 0 23:09 Right. But they couldn’t come up with that. Right. So they give us a 50% discount. Anything goes, anything goes, anything goes. So, um, if,
Speaker 2 23:18 so I’m talking to him, you know, called the India attorney. So if you are a business owner, what would be the number one thing that you think they have to be the biggest landmine? Or is there a such thing as a biggest
Speaker 0 23:31 yeah. And mind absolutely two things. There’s actually two things. One, know exactly what you are responsible for in your lease and exactly what the landlord is responsible for. So is the landlord responsible for the roof or is the, is the tenant? Um, I remember the first time I realized that I was responsible for the air conditioning systems. Okay. And that wealth, you know, which I missed that and never, never missed that again. That was on my lease. Um, there was two and it was my own personal lease. Um, and it was so unfortunately wasn’t something we had overseen for a client. But I’ll tell you now, um, ever since then, and that was many years ago, but you know, you, if you are coming into this custom, um, two residential leases where that type of stuff is just, it’s not the, the responsibility of the tenant plumbing, um, is typically responsibility. The tenant, um, AC system and plumbing. So the first time you call the landlord when the toilets are overflowing in the, in the bathroom, um, they just kind of laugh at you and give you a number to a plumber and tell you to go handle it cause you go look at the lease again. Yeah. So really, really understanding and having a clear understanding of what your responsibilities are within that building.
Speaker 2 24:43 Stay tuned. There’s so much to talk about. We’ll come back. You’re talking to or business and legal talk with Leah and Claudine here on KFI V power talk.
Speaker 4 25:04 .
Speaker 2 25:17 Hey, what’s up everybody? Welcome back. You’re listening to business, illegal talk with Leah. Claudine, having some fun talking about commercial leases. As fun as commercial leases can be. Uh, so we’ll come back.
Speaker 0 25:28 They may not be fun and exciting, but they very necessary,
Speaker 2 25:30 very, very necessary, necessary evil. Yeah. So talk us through, walk us through the different options that a business owner has and then we just started getting into the .
Speaker 0 25:39 Okay. And, and these, these are the different types of leases and these leases, um, you find find them very common. It’s not like there’s just like 99% of them are going to be triple net leases or you know, 90% of them are full service leases. Um, but there’s a real, a real mixture. So depending on what type of space you’re needing. So if you’re a construction company and you need, um, an industrial, uh, warehouse warehouse slash office space, that’s going to be a little bit different than if somebody needs professional office space downtown. But with that said, full service leases are typically just what they say, full service. Everything is included. So you pay one flat rent. Um, and, and that’s it. Um, and those are really nice because that really makes it easy for budgeting. You know exactly what you’re up against. The only thing from that point that you have to determine is exactly what are you responsible for in terms of maintenance.
Speaker 0 26:34 Um, and then there’s the net leases. And so the net leases are, there’s net one net to net three and net lease is it at least agreement. The landlord charges a lower annual rent, uh, compared to the full service lease. But the landlord can also include a monthly usual costs for such things as property taxes, um, property insurance and common area maintenances. So the single net, th the tenant pays rent plus a pro rata share of the building’s property taxes. Um, and that’s something that we, depending on the situation, we’ll push back on. Um, the triple net leases are oftentimes the most expensive. Um, and you’ll find these a lot more in the professional spaces. But, um, you know, it’s, it’s kinda one of those things that as a, as the tenant or the business owner who needs, who has to pay that you think, well why am I paying his property tax? I mean, so that’s kind of surprised that we have to pay that property tax. Well because the market allows it and so that’s just the way it goes. And if you want that particular place, then that’s the game you start to play. And so it is, I don’t know it, to me from a business owner perspective, I think it may be a little bit overreaching, but it’s very, very common. So it is what it is. One thing I have
Speaker 2 27:47 to say, if you know, if you are thinking about starting, you’re not operating a business and you say you need and you absolutely convinced yourself that you need office space. Now one thing that even a full service gross lease will not cover is your internet or your phone service, right? So some people go in and they expect the full service lease to accommodate a phone service. Then you’re thinking about something else. You’re thinking about executive office space, you’re thinking about coworking space covert, which is going to be a little more priced per, you know, if if a full service lease we’ll go, you know, two to $4, say per square foot per square foot in a triple Nick and go from 50 cents to a dollar a dollar 50 a that type of executive will be at least 20 to 30% higher than a full service lease would be because they will be paying for the phone, they’ll be paying for the internet.
Speaker 0 28:40 And if you are a business owner who’s moved into a building, you’ve probably dealt with this. The whole phone thing is, is something you don’t want anybody else being involved with because the phone boards are very complicated nowadays and you know, a lot of us go with VoIP, but every time the internet goes down then the phone goes down. So that is, if you’re responsible for that, which you typically are responsible, um, you definitely want to get a good it person on your side. But so then you go into the, the net leases usually will, you will share a portion of the property taxes, the cost of the insurance that the landlord, um, bears, and then the common area maintenance or cams. And so if you see an ad that says triple net lease, understand you’re probably gonna pay a little bit less dollar per square foot, but you’re going to be paying a portion of all of those other things on top of it. And those other things are variable. And I think, you know from the numbers side is where you know, that’s something that you would key in it if somebody was coming to consult with you. And let me chime in. Amen.
Speaker 2 29:39 So if you’re looking at industrial, if you need a ton of space, um, chances are you’re going to be, you’re going to have access to more than one, uh, AC unit. And the average AC unit two to three tons will set you back. You know, brand new, about seven or eight grand. Oh, easy does not include labor. So you may be paying for up to 10,000. So say you, there are two tenants, um, in a building is a 10,000 square foot building. It’s say his services by one unit you, if it breaks down and there’s the legal language that you’re going to have to look at, you’d be responsible for half of the replacement cost if you’re in a triple net situation. Now here’s the thing and here’s the fine print. I’ve, I’ve read leases and I’m not an attorney and I always pair up with an attorney because I look at things from the business side, right from how is it going to be able to afford and what percentage of the, of, of the, of the rent can we afford as a business owner in relation to sales.
Speaker 2 30:32 But beyond that, there’s language and you can back me up on this. There’s language to saying, well, if the cost of the replacing the unit exceeds 50% more of the co, if the cost of repairing the unit exceeds 50% or more of the cost of buying a new unit, then we’ll just buy a new unit and charge you for it or illegal. You ever seen language like that in which you, you, you come across a fence right in, in, and then you’re splitting hair. So wait a minute. So I’m going to spend three grand to fix it. And then the landlord said, well, that exceeds 50% of the cost of experience. So now I’m going to have forced you to buy a new one. Right, because it’s better for the owner. You of course, this is so, so what have you run up? Like a things like that. Yeah, yeah,
Speaker 0 31:15 yeah, absolutely. And, and I had did a lease for a client, um, I don’t know about a year and a half ago, um, for a restaurant that is going in in a very, um, we’ll say a very popular area, um, here locally. And the, the restaurant owner already owned one business in this area and was opening a second one. The building that he was moving into was an old, old building. It used to be some sort of, um, like department store, like, you know, old Woolworth’s back in the forties, you know, and the building was very, very old. But it, and then from then it had been, um, so, uh, a type of retail. So there wasn’t a lot of stuff going on. It doesn’t require a lot of power. D, you know, we can run with old, old units. And the, the, the restaurant owner was coming in to do a complete, beautiful, gorgeous, very popular restaurant that he was putting in, um, and the repairs alone.
Speaker 0 32:11 And so the, this is when we really had to arm wrestle over every little thing because, you know, some things needed to be repaired and the landlord needed to do that in order to prepare the space for a new modern, um, you know, higher technology business. And he had gotten away many, many years without having to do anything cause it was just kind of a space that, you know, they had owned outright, they didn’t require a lot. Um, and then we had to arm wrestle over literally everything because we wanted a minimum of a 10 year lease, a month, 10 year lease. And so we’re, we know, and my client was coming to the table with a tremendous amount of experience and already had had a business in this area that had already been tremendously successful. So, you know, if we wouldn’t have gotten as much had the client not already been established, had this been a brand new upstart idea, we’re going to throw a restaurant in and it’s going to be in this 10,000 square foot space and you know, all of this stuff. So absolutely. Um, you’re going to, depending on the uniqueness of the situation, you’re going to arm wrestle over every single one of those things.
Speaker 2 33:19 Okay. So that’s number one, right? So we’re looking at the AC unit two as the roof, the right and the condition of the roof. Are you talking about a 10 year lease? You better be looking at that roof, right? Yep. You almost have to go at it. Like think you’re going to buy the building. Yeah, because 10 years is a long is a lifetime and it’s a long time.
Speaker 0 33:35 We’ve gotten involved with stuff over safety. Um, if, if this, the police department made a decision that there was safety upgrades that needed to be done, let’s just say something changes in five years from now and say the police department or city, you know, determines that we need to have something different than what we’re using today. Who’s paying for that? That’s just an open check. We have no idea.
Speaker 2 33:56 So stay on the triple net situation, right? So we talked about the AC unit, the roof, the electrical. If that electrical panel is 30 years old and you’re about to get into a five year lease, you better believe that you’re going to pay for that upgrade. Yep. Parking is something that we don’t talk about very often, but parking is a, it’s only a finite amount of parking. So if you’re looking at a building, I had a situation with a company in LA that they had about 25 employees and um, the language was unclear, uh, best as to how many, um, parking spaces we got per thousand square feet. Clearly we didn’t have enough, but the owner was saying, no, don’t worry about it. Don’t worry. Some people are going to move out. I said, I don’t care what you say, it’s what we are going to be fully executing on this lease. Right. Long story short, they were like five parking. So people have to park on the streets. Long story, they would have to park a mile up, two blocks away, right? What happens at night when the boys are walking back to their cars?
Speaker 0 34:54 It’s interesting. And this is just as a decide I’m in the Bay area. That’s a huge problem because we have these huge buildings that are going upwards. And what are the parking? Where’s all the parking is gonna go down. Right. And so my brother-in-law actually runs a business down there, um, started off as shuttle business and transporting people from parking areas to the businesses downtown LA. Yeah. And he’s been doing that for many, many years now and puts together entire plans for companies like Kaiser and things like that. So it is a big issue. But even here, if you’re going to have something in downtown Modesto, um, you know, and maybe you want to open a restaurant downtown parking is an issue. So number five, ADA compliance. Well, this is something that it is putting a lot of this near and dear to your heart right now. It is near and dear to my heart.
Speaker 0 35:44 Um, as I said earlier, we, we really had it had a nice building that I was really kind of excited about all weekend and, uh, and I found out that it did not, it was an up, up store upstairs, second story and it did not have an elevator. So what would happen if a very savvy plaintiff’s lawyer got ahold of that building and somebody, you know? Yeah. Well, so in this, we can maybe even talk about this in the, in the next segment because we, we typically see landlords and tenants trying to contract around the ADA compliance. And for those who are not familiar with what it is, is that, um, Americans with disability act requires that we provide access to all people, including those people, units to all floors, all floors, and to all people no matter what their disability is. So, um, and there are many, many, many, many, many rules.
Speaker 0 36:43 Um, as to what does access look like, what does it mean? So if you have a building that has, say a ramp up to the door, the ramp can only be so steep. Um, and those things have changed over the years. So what was considered acceptable five years ago, um, is not considered acceptable any longer. So those pitches or those, um, you know, the, the percentage of the grade, so to say on a ramp might have to be changed based on what it was like one or 2% percent. How long? I don’t know. There’s, there’s, there’s a formula, there is a formula and there are people, um, we refer to them as CASP cast C a S P certified accessibility specialists. I’ll have to look it up. Um, but they will come for a price and they will go through your entire all consultants yes. To give you your exposure. Yes. And they’ll pay a fee and they go through your, yup. Your parking lot, your indoor size of your doors, the, the weight on the PR, the amount of pressure it takes to push your door open. No way. Yes. And that changes by the way. Wow. Okay. Well we’re going to pause right here because there’s so much more that we want to discuss. So you are,
Speaker 0 37:59 we’ll be right back.
Speaker 4 38:01
Speaker 1 38:09
Speaker 0 38:28 you’re listening to business legal talk with me and Claudia. And if you’re driving around town on a beautiful Saturday morning and you want to hear about commercial leases, this is the place to be
Speaker 2 38:36 because that’s what we do. We help, you know, we’re giving you in the feedback has been great. By the way. Thank you to our audience. We are really all about not just conceptually, we actually running a business ourselves and dealing with leases and dealing with hiring employees and growing sales and marketing and, and dealing with compliance and filing taxes. And so if you’re a business owner, um, the chances are that anything that we’re going to talk about every Saturday pertains to you. If you have any employees, you indefinitely to listen to this show. So today in particularly, we’re talking about commercial leases. And so my, my end is I will help you as a business owner interpret, strategize and see how your office space is going to help your business get to the next level. Right. Because my passion is helping business owners scaled their businesses in a profitable way.
Speaker 0 39:30 Yeah. And if you’re, if you’re a retail business, it’s very common for, um, as part of the advertising of that, of that lease. Um, that retail space is the number of vehicles that drive by because it’s an advertising piece. And so, you know, if you’re in an industrial area or you know, again, construction and you know, in, in a different area that doesn’t have a lot of traffic. But if you’re out here on McHenry, um, there is a quantification of the number of cars that drive by that you can expect. We’ll see your sign. Okay. Um, so for example, I mean, people pay a lot of money to get a billboard put up anywhere, you know, five to $20,000. Really? Is that how people paid for billboards? Oh yes. Per month, per month, or a month? No, in Turlock, there are around five to six different ones that we see in the 99.
Speaker 0 40:19 No way. So if you have a site and you’re out there and you can put up a decent sign, um, signage is another thing that you negotiate with your landlord. Um, right. It’s not a, it’s not just a given that you at least the place and you can just go through a signup. We had a client who the landlord wanted to be able to veto any of the, um, outside decorations. That meaning that the sign, the doors, any lettering windows, the landlord or the landlord had a little power and we had to come back and say, you know, that’s just really encroaching on the business. She much, um, wanted to be able to do, you know, inspections that we thought were a little bit overboard and, and so forth. But it, you know, it’s all about the fine print. And, and I wanna just take a moment and get back to this idea of the ADHD and how tenants and landlords, um, tried to contract around it.
Speaker 0 41:15 And, and contract around their responsibilities. Um, it’s not uncommon to see a lease where the landlord says, you know, all accessibility issues are, you know, that of the tenant. Um, the tenant’s responsible for any repairs or modifications that need to be made. Um, and then there’s times where maybe the tenant thinks that they can negotiate that out of the landlord. Um, the tenant, if the tenant can negotiate it from the landlord, they’re likely going to be a little bit more successful than the landlord who tries to put it on the tenant. And the reason being is that when the lawsuit comes, it, it goes to both parties. Any plaintiff, ADA, plaintiff is going to Sue the landlord and the tenant regardless of the contract. Because the contract does it involve the plaintiff? The contract is between the landlord, the tenant. And so if the landlord and tenant want to go dispute it at some point later, that’s fine. But the landlord gets involved because the landlord is the one who owns the asset, the tenant, let’s just say for example, the tenant gets hit with an ADA lawsuit and many, many, many tenants have gone bankrupt over it. It is a tremendous amount of .
Speaker 2 42:25 You know where I go when you start talking up, talking about, um, the litigation is do I go, do I have enough insurance and my general liability, do I have a provision that will cover defense for ADA? Now we don’t have the insurance guy here today, but I would definitely be asking, Hey, look, if and when, because this is happening throughout the state of California, you better believe it’s happening probably in our neighborhood is probably anywhere from San Diego to Sacramento and our business are being sued by shutdown ADA and shutting down for ADA noncompliance. So this is a really, really hot topic.
Speaker 0 43:02 It is, and it’d be very careful if you’re looking at property that’s in a quaint downtown section where these buildings are older. That is really, um, that is really it. And the penalty is $4,000 for every time the person entered the building and was denied access in some way, um, 4,000 per time per person, per year, per person, per entry of the building. And so when you have, um, you know, multiple violations, and I, I think we talked about this a couple of shows ago, um, a client because they were, it’s an older building in a downtown section in, in a, in a really nice town here in California. Um, there was so much that needed to be done with the front of the building that was the city’s the responsibility, but the city amazingly just kinda threw their hands up and said, well, gee, we don’t know what to tell you.
Speaker 0 43:52 Um, if you want to rip the sidewalks out, by all means, you know, go for it. So we were able to negotiate on that a little bit, but we were not able to negotiate on, you know, the weight of the door and the client opted to go ahead and put one in the automatic door. You know, the buttons that you push, that automatically opens the door. Because the w the, the a number of pounds that it requires to push the door open changes over time. So as the door gets older and you know, it takes more and more to push the door open. So rather than worry about, um, you know, that maintenance piece of it, the landlord just decided to go ahead and throw a $15,000 door opener was very, very
Speaker 2 44:31 expensive proposition. Very, yeah, we were, this was a very small, um, situation in the scheme of things. It was only four entries and I think we ended up getting out of it for, um, 30,000 in costs and 30,000 in settlement. Really, that’s still a lot of money and it was a small, um, uh, cell phone store, not one of the big, you know, big carriers. Okay. So as a small business, so let’s get, okay, so I’m going to, we’re going to give you a list of things that you should be thinking about. And the following list includes many items that are often addressed and commercial leases or pay attention to items. So the terms regarding number one, the length of the lease, right? Think long and hard about how long you want to be. If you think you’re going to be in this place and you’re going to take advantage of the, of the, of the, you know, of the traffic that you want to be there longer.
Speaker 2 45:22 If you’re in retail, you definitely want to think at least a five year lease. So the lease term is really important. Um, when it begins and where the renewal options in the year over year increases, they’ll get written into the leases and the average is 3%. 3% is as they average, however anything goes. So you’ve got to read it because if it’s 10 or 15% yeah. And then you need to, that’s probably not okay. Yeah. So the rent itself, including allowable increases, uh, so the escalations that we’re talking about, how they will be computed and you have to have the mechanism to understand and you have to, it has to be written into the lease, the mechanism by watch, which get the source documents, right. You are entitled as a tenant in a building to know if you’re going to be charged for cam charges, you need to be able to inspect the documents, right?
Speaker 2 46:10 So number three, whether the rent that you pay is going to include insurance, property taxes and maintenance costs called a gross lease, or whether you, that you will be charged for these items separately. Call a net lease, which we talked a lot about the security deposit and the conditions for its return. Now it’s not uncommon that there are some very to Shrew for their own good landlords that will use any excuse not to return the deposit for whatever reason, right? Well the car paid, you know, it’s, it’s, it’s going to cost me, gosh, 99% of your deposit to replace because you spill water a couple of times, right? You gotta you know, there’s two, there’s just too much to worry about. You got to look at that. Um, the exact space that you renting hands, you need to get you, you don’t just take their war for it.
Speaker 2 46:59 So you got, if you think you’re getting 2000 you want to make sure that you’re actually getting 2000 of usable rentable space. Right. And how the landlord makes measure the space is very important. Uh, the next one is whether there will be improvement modifications in the build out and attendant improvements that we spend a lot of time. Some tenant improvements could be half a million dollars. Right. And if you’re going to see if that much money is going to be invested, you better believe you’re going to be on the hook for something happening. We, and we did, we had, we did one lease and the tenant
Speaker 0 47:29 improvements were upwards of seven 57 feet, seven 50. But it gave us a tremendous amount of um, negotiating power. Right. Well, well you’re going, you’re throwing that kind of money around. Well then, then when we walk into the building, we want a new air conditioner before we start. We want all new brand new wiring, new roof and the roof. Yeah, the, it was an old building. So yeah, we did. We did it. They basically don’t have to go rebuild a building. Well give me a shell. What I wanted, what that was, what the, the, the deal was, is we wanted a solid shell that was ready to go.
Speaker 2 48:04 So next, uh, specifications for science. Um, and we were just talking about that, you know, some landlords do you, you don’t want to be, you don’t want anybody encroaching on your business. And when, when do you draw the line? Uh, also who will be maintaining and repairing the prime, the premises. Um, true story. So, um, there was a situation in which a tenant got broken into and um, stuff was stolen from the tenants and it just so happens it was one of the key that somebody got in with a master key to the building. Hmm, this happened. Right? So what is your responsibility? But you can, you know, well, this stuff was stolen. I don’t know how many thousands of dollars were stolen, but what do you do about that and what is, how do you mitigate against it? There has to be some mechanism. Now, if, if you cannot be in business nowadays, if you don’t have enough insurance and there should be a clause in your insurance about property damage or theft or loss, um, pay attention to that when there’s an option to renew the lease or expand the space that you’re renting. Um, if in how the lease may be terminating written notice requirements. So I know that two-story I have, I’m full of stories when it comes to landlords. When do you get, okay, when is it fair that you get a three day pay or quit? What is your experience with that? Um, what is a three day pay or quit notice from the landlord? What about it? When do you think it’s a fair for a landlord to send that over to a tenant?
Speaker 0 49:44 Well, typically it gets sent over immediately because landlord wants his money.
Speaker 2 49:48 So say your rent is due on the 10th of the month and then you’ll be, you’ll have $400 for you and a sizeable rent, but say is not there by the 10th. Okay. Then we’re definitely getting a three day notice. So if you’re, is this the 10th of the month, you should be getting a, it’s reasonable to speculate that the 10th of the month, right? Right. Do you get it on the first, on the third of the month? If, if you actually have embedded language that you could actually have the right, you can actually pay. Yeah. Like upgrading like, okay, so you’re thinking of grace period. Yeah. You’re getting a three day pay or quit within the grace period. Right. Okay. That happened. Yes. So one of my clients, I would do
Speaker 0 50:28 that using the language in the lease probably says it’s due well yet. And that was the confusion, but it was, it was a bit of gray. So, Hey, um, gosh, the show is over, so I can’t believe we’ve been talking for about an hour. Can you believe this? Get, get, get assistance and read every, every word of it. It’s your lease. It’s your, it’s your agreement, it’s your contract, it’s your signature. And you probably gonna personally guarantee it. Yep. Absolutely. Um, I have a lot of, I have clients that will come in and, and they, you know, want us to read it and, and, and kind of like, well, that’s what we hire you for. Um, but you know, remember, this is your contract. This is your thing. You’re going to live by it and don’t go at it alone. So thank you so much for listening. Uh, we had a great time of clothing today on Saturday, March 30th as CEO talk to you next week. Business legal talk with Ian, Claudine
Speaker 4 51:19 .