Signed a 2 Year Rental Agreement on a Warehouse
Indexation of rents. As an alternative to a complex operating cost clause, some landlords index their rents. This allows owners to keep their books private. It also saves tenants from an expensive and time-consuming review of expenses, which can lead to legitimate disagreements. Leases often include a clause that states that in a dispute over things like operating costs, electricity, and property taxes, the tenant must pay, but can sue the landlord. This is a bad deal for you. It doesn`t give you anything you haven`t already had, and the owner has no incentive to settle down. Long and costly litigation can leave you unanswered for years. In the meantime, the landlord has your money, even if the court ends up thinking it`s wrong and orders the refund. Base. Office tenants are typically responsible for increasing construction costs and property taxes beyond a certain basis point – either a reference year or an expenditure freeze.
These escalations can easily exceed the base rent, and courts will usually enforce the terms of a lease you sign, regardless of the amount of your rent. Therefore, it is important to understand the mechanics of climbing formulas. Renting office space is often a big effort for a small business. But it can be unnecessarily expensive if you don`t understand the hidden costs and limitations buried in many leases. Renewals. An extension option can be useful. Aside from profitability, this allows you to continue your business permanently in one place for more than three, five or ten years. If you accept a fixed rent during the renewal period, you and the landlord are betting on a future market. For this reason, leases often include a formula – usually linked to the fair market price – to determine the rent during the extended period.
Exclusions. Some elements must be explicitly excluded from operating costs: the electricity that serves the tenants` premises (the landlord removes it from each tenant individually); executive salaries; Consulting fees; fees for market research; commissions and advertising costs; initial landscape costs; structural repairs or replacements; penalties incurred because the landlord does not pay taxes on time; higher fees and interest charges caused by the landlord`s refinancing of the property; Money that the landlord must pay if they default because of a lease or other agreement; lawyers` fees to resolve disputes in which the landlord is involved; any excessive amount that the landlord pays to a contractor or seller because of a special relationship. But be careful. There are a variety of clues, with many subtle variations in common use, and their behavior can vary greatly. It`s surprisingly common for even large, sophisticated companies to be hit by higher-than-expected rent scales. In 1969, for example, Avon Products signed a 27-year lease for nearly half of a 50-story tower in Manhattan. Avon`s rent increases were related to “Porter`s wage” – hourly wage and increased benefits that some employees receive under a collective agreement. Since the contract calculated marginal services weekly or annually, Avon`s owner, Sheldon Solow, had to convert these benefits into an hourly rate.
The fair market price depends on many individual considerations, such as a tenant`s credit rating (for example, IBM is likely to get a discount on a two-year startup because the owner`s risk is lower), the formula for calculating operating costs, and the duration of the lease. If you accept a fair market value renewal option, you specify factors that would be particularly important in your case. Also emphasize that space is valued to be used as office space, even if it is not the highest and best use at the time of renewal. Limit your obligation to property taxes or taxes that a municipality can levy instead of property taxes. Your lease should protect you from paying income tax, corporate tax, rent tax and gross income, estate tax, capital gains taxes, and a landlord`s payroll taxes. Beware of language that tries to hold you accountable for any indefinite taxes a government agency might possibly impose. A tenant who failed to do so many years ago paid their landlord`s income taxes after the Sixteenth Amendment initiated them.5 The base year is usually the first 12 months you occupy your space. Cost shutdown is a number that represents the average and reasonable operating costs per square foot in the first 12 months.
Since this is the lease reference point if you accept an early reference year or an expense freeze that is too low, your landlord will receive higher profits each year of your lease. Landlords sometimes argue that the reference year should be the 12 months prior to occupancy, but this would mean that you would face a rent increase on the day you move in. For another reason, be careful with such estimates. They may include an important “security factor” that unnecessarily increases your costs. Let`s say your landlord pays $2.25 per square foot for electricity, but adds $2.75 per square foot to your base rent. A 10% increase in the rate would increase your fee to 3.02¢, and your landlord`s profit would increase from 50¢ to 55¢ per square foot. If your office were 10,000 square feet, that extra 5¢ alone would cost 5,000¢ over a ten-year lease period. Your landlord`s profit on your utility bill: $55,000. And this presupposes that there are no more increases. For ten years, Solow`s calculations assumed that unionized employees worked 40 hours a week.
But in 1980, Solow told Avon that he had revised his calculations to base them on the actual hours worked by employees – 31 hours per week. The impact on Avon was dramatic: rent would increase by $780,000 per year, or more than $13.5 million over the remaining term of the lease. In 1981, Avon sued Solow over the increase, but the case was dismissed. The judge ruled that the lease required the parties to reach an agreement through arbitration. Since then, they have been fighting against procedural skirmishes. Seven years into the litigation, Avon has paid significant legal fees, but still doesn`t know the actual rent.3 The first thing you need to understand is that your landlord is likely to have an advantage when negotiating an office lease. If you`re like most tenants, you negotiate a lease every five or ten years and they put the rent in the same category as other current and ongoing business expenses, weighing the monthly payment against your cash flow. Even with an exclusion, large capital expenditures – cleverly relabelled – can end up in your utility bill if you`re not careful. For example, a lease may require you to pay for the equipment rental. This is a common technique for converting capital expenditures into expenses that are passed on to the tenant. You should agree to pay for the lease of the equipment only if it does not replace the capital goods that the landlord would otherwise have to purchase.
Tenants should be on the lookout for such fees, as the Tax Reform Act of 1986 changed the depreciation provisions in tax legislation and made renting equipment more attractive to owners than buying. Some capital improvements, such as new, more efficient elevators or a new HVAC system, are designed to reduce the cost of operating the building and therefore your share of operating costs. These investments are generally not included in operating expenses. However, landlords often insist that you cover some of the cost. Ask for proof that these capital expenditures will actually reduce operating costs. Then, if you agree to a lease that allows your landlord to charge you for the annual depreciation of these items, make sure your share is limited to the savings you make in a given year. In other words, your net cost of ownership should not be higher than it was before the economic installation. In some leases, the landlord only has to commit to the rental price of the extension after the start of the term. While the mechanism for determining the renewal rate may be clear, you`re unlikely to want to commit to paying for storage unless you know the cost in advance.
Make sure your landlord offers a fixed price well in advance so you can look for alternatives. Otherwise, give up the leverage that could help you ensure a fair renewal rate. An ambiguous agreement has other hidden costs if you decide to move: you may have to pay high residual prices – 11/2-2 times the normal rent when buying new neighborhoods. A doctor in Suffolk County, New York, has signed an eight-year lease for offices. .