Leasing Retail Space: Preparing Your Space

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When do You Start Paying for Retail Space

Tenants are generally provided time to prepare the retail space for occupancy prior to the date when they must begin paying rent. However, in hot markets and for some very desirable properties or spaces, landlords will be able to require that tenants pay for retail space beginning at the time the lease is executed. In such cases, it is possible the tenant may pay for space for four to 12 months, or even longer, prior to commencing operations within the retail space. However, this is the exception rather than the rule. In most cases, tenants are provided a reasonable amount of time to prepare the space for occupancy.

What Happens if Retail Space is Not Ready on Time

The lease should address the contingency regarding what happens if it is not possible to occupy the retail space on the contemplated date. For example, there could be delays in obtaining signage permits, usage permits, construction permits, and in completing construction due to a union strike.

Condition of "Shell"

The condition of the space which the landlord provides the tenant and the tenant improvement allowances both require careful consideration and documentation. If the retail space is currently built in a configuration which does not suit the prospective tenant, will the landlord demolished the existing improvements and dispose of the debris?

TI Details

If the landlord is providing a tenant improvement (TI) allowance, what are the mechanics of performing the construction and funding the cost of construction? If the cost of the construction is less than the TI allowance, is the tenant allowed to keep the excess funds? Is union labor required?

More TI Details

Is the tenant required to use a general contractor? Should the landlord be compensated for inspecting construction? Alternatively, is the landlord required to provide space which complies with an agreed-upon set of plans at its own expense?

ADA Compliance Expenses

If the space is not currently ADA compliant, who should pay for the cost of making it ADA compliant?

Operating Expenses for Retail Space

Retail space expenses are typically paid by the tenant. This includes items such has common area utilities, common area maintenance, insurance, property taxes and management. It would not include items such at tenant improvements for new tenants and leasing commissions for new tenants.

Depreciation

Non-cash expenses such as depreciation and amortization would also be excluded. While each lease is negotiable, most retail leases are done on a net basis with the tenant paying for most operational expenses.

Who Pays for Repairs and Replace for Tenant Space

Repair and replacement of the roof is typically handled by the landlord. However, in some leases the tenant is responsible for this expense. Repair and replacement of the HVAC system has always been a negotiated matter. In many leases the tenant pays for repairs and the landlord pays for replacement. This can cause disagreement as to whether the HVAC should be repaired again or replaced. Electrical and plumbing within the tenets defined space is typically the tenets responsibility.

Brokerage Fee

Payment of the brokerage fees should be addressed in the lease. If a tenant rep broker has been working with you to find space to negotiate a lease, you should have signed a representation agreement prior to working with the broker. This agreement would likely provide your commitment to work exclusively with the broker for a defined period. (Include a 30-day cancellation clause in case you are not satisfied with the work performed by the broker. In many cases, this agreement would still provide a level of protection to the broker if you lease space he had suggested.)

Document the Brokerage Fee, Even if You are not Paying

Your agreement with the broker should also document who is responsible for paying the brokerage fee. In most cases, this will be the landlord. However, even if you have already documented your agreement with the broker, it is better to affirm the agreement within the lease to minimize any misunderstandings.

The Market Research and Consulting division of O'Connor & Associates provides information necessary to make decision to commercial real estate professionals. Occupancy and Rental Data, ownership and management information are routinely gathered for four major land uses - multifamily, office, retail and industrial. This information allows investors to compare competitive properties, facilitate business decisions and track market and submarket performance. In addition the data is useful to brokers who for example continually monitor Houston retail space leasing, Houston office space leasing, Houston industrial space leasing, Houston apartments, Dallas apartments, Ft. Worth apartments, Austin apartments, and San Antonio apartments.