Facility leasing issues during transition

by Randy Marie Daigler

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Practice transitions often require buyers to deal with leased facilities and a host of unfamiliar issues. Stability is the name of the game in a transition, so leaving a practice in its current location is wise. This does not mean you’re stuck without options on the lease of the current facility. The seller has one important option to consider, too.

The buyer must know the following:

1 Form an LLC or corporation first — Enter negotiations with your entity formed and ready to be named lessee. This may allow you to avoid a personal guarantee. 2Know your needs — Review your needs prior to going to the landlord. If you need to redo the space to make it functional for your practice, you may want to request a rent abatement until the build–out is complete. You may also request an allowance for the build–out. Think through the process before signing the lease because it is too late afterward. 3Money Counts — Know your budget. Consult your practice accountant or transition advisor to know exactly what you can afford to spend on any build–out and rent. If the facility expense falls outside of normal benchmarks, know where that additional money is coming from. Only then can you negotiate a lease. Be specific with your attorney about your needs, and what you can afford to pay. 4Clear communication — Stay in close communication about the negotiation progress. Have your attorney check to make sure you are not unwittingly taking on environmental liability. Another item to consider is the financial health of the landlord. If he/she were to go bankrupt or default on the mortgage, it could impact your lease rights.5 Assignment vs. new lease — Today landlords frequently offer discounted rents. A buyer may actually be better off negotiating a new lease rather than taking assignment. This way the buyer gets lower rent and the landlord gets a longer lease than the assignment would allow. Be sure to request décor updates if the suite needs it. Paint and flooring are relatively inexpensive updates to freshen an office. 6Negotiation is the name of the game — Consider the landlord’s generic lease as a start for discussion. Ask for what you want or need. With new buyers, I frequently suggest they request a ramp–up of rent, which allows time to get the practice going before paying full rent. Remember, the decreased rent needs to be made up, so the longer the rent decrease runs, the more the stabilized rent will increase.7Liability limitations — Negotiate a limit of your liability under the lease in case of default. Negotiate this now or you’ll be responsible for the lease’s entire term. Request a specific time limit or until the space is rented, whichever comes first. Some landlords will settle for a specific amount. This is “sure” money while they seek new tenants.8Understand the leasing terms and impact — There’s a difference between net and gross lease. Triple net leases are standard in most places. Leases that are not in triple net form often include common area maintenance expenses. Be clear about the services the landlord provides vs. those that are your responsibility. It is also good to demand an itemized accounting of any additional charges. Landlords often just present a single line invoice for these charges. 9Stricter credit requirements — The economic downturn has made everyone more cautious. Developers/landlords tend to be less willing to negotiate if they have cash flow problems. This may slow down or halt a sale. If a buyer is not a solid credit risk, the landlord may not be willing to sign a lease with that buyer. 10Should seller renew before sale? — Review your lease to see how it fits your transition plan. Discuss this with your broker, who can guide you about renewing, or whether the market allows the buyer to negotiate on his or her behalf. In a potential merger transaction, a long–term lease can kill the deal. So don’t limit your sale options.

With the dark space in buildings, landlords need you as much as you need them. Remember, most practitioners are not prepared to deal with sophisticated commercial landlords who live and breathe this transaction. Have an attorney who is expert in facility leasing do the heavy work for you.

Randy Marie Daigler is transition manager of the DBS companies, one of the founding members of ADS. Reach Daigler at (800) 327–2377 or [email protected].