As I pen this, it’s
Good Friday and Passover. Happy Easter and Zissen Pesach! Most of you have
folks from whom you solicit advice. Those of you who own a business most likely
get counsel from a banker, attorney, or a CPA. Others may seek wise words from
priests, clergy or a sage family member. And finally, maybe you get direction
from Tik Tok, Facebook or Instagram. Regardless, you rely upon a trusted
advisor. I am such a source for many of my clients. Today, I’d like to review
some of the advice I’ve given this week and the situation that preceded the
request for counsel.
Lease renewal on
preset terms. We originated a
lease in 2017. We are the owner Included in the transaction were five years of
term with an option to renew for an additional five. As we’ve discussed here
before - options are “personal” to the tenant and must be exercised within a
specific time window. Also known as “time is of the essence” - you fail to give
your owner the proper notice and you no longer have the option. In this case,
the tenant wanted to remain in the building but missed his option window. He
also wanted the owner to contribute to some construction expenses and wanted
the right to buy the building.
So what advice did I
give? I recommended the owner renew the tenant at the preset option terms and
contribute a small amount of the construction expense. Additionally, I
suggested not granting a right to purchase. But why? The family that owns the
building relies upon the rent for their livelihood. The tenant wants to remain
an keep paying. An interruption of this stream through a costly vacancy plus
the expense of originating a new lease would not be offset by a small bump in
rent that could be achieved with a new occupant. As to buy rights. These come
in several flavors - option to purchase, right of first offer, and right of
first refusal - and most favor the occupant. Vs limiting flexibility through a
purchase right grant - I offered the owner approach their tenant first if they
desire to sell. No commitment to the resident but they’re the most likely buyer
anyway.
Lease term remaining.
I was introduced to a light manufacturing company several years ago. They’ve
not had a need for my services but we’ve kept in touch. Recently, the owner
made a decision to exit the business she worked hard to build. Trouble was -
time remained on her lease and the business buyer only wanted to occupy the
premises for a short while - just enough time to relocate the business out of
state. This is typical of a strategic buyer who purchases a competitor but has
adequate physical plant to consume the operation - thus potentially creating
redundancy. Consequently, some time would remain once the new owner of the
enterprise vacated.
So what advice did I
give? Fortunately, the lease rate she pays is dramatically below market - so
she has a few paths forward. The easiest is to approach the owner and request a
buyout of the remaining obligation. Sometimes a landlord will see a benefit if
new tenant will pay more. The buyout is based upon the cost once downtime,
broker fees, free rent and improvements are calculated. If that approach isn’t
palpable, the tenant can sublease - in this case at more money than currently
being paid. Some leases will ding you with a sharing if this profit - so
beware.
Allen C. Buchanan, SIOR, is a principal with Lee &
Associates Commercial Real Estate Services in Orange. He can be reached
at abuchanan@lee-associates.com or 714.564.7104. His
website is allencbuchanan.blogspot.com.
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