While it may come as a shock to first hear that leasing a building obliges you to maintain it as if you owned it, there are ways to mitigate your risk when it comes to maintenance costs.
In our last post, we discussed the responsibilities of a tenant in regard to building maintenance.
Many of the business owners we represent are surprised to learn that they will essentially be responsible for taking care of their leased space as if they owned the building, whether they lease on a gross or NNN basis. Even if the landlord assumes responsibility for the hands-on maintenance duties, as is often the case in spaces that are part of a business park, the tenant will still be the paying party through a common area maintenance charge (CAM).
So, if you are about to sign a lease, it is very important for you to understand your responsibilities and your risks as it relates to the maintenance of your new facility.
As most buildings in Orange and Los Angeles Counties were built 20 to 50 years ago, the whole issue of maintenance looms even larger than it would if the region had a steady new flow of state-of-the-art buildings being delivered as there are in other major markets like Dallas, Atlanta and our own Inland Empire. In essence, what you see out there now is all you will ever have to choose from, and a good chunk of that space has aging componentry, has been poorly maintained, or both.
You as the tenant will be responsible for securing service contracts for all major building systems and paying for all repairs, unless the cost of a single repair exceeds 50% of the replacement cost. If the item is a 10-ton AC unit, repair bills can run into the thousands before the capital replacement requirement kicks in.
So, how do you know that the 40-year-old building you are about to lease has been properly maintained? Simply put, you don’t, but there are several ways to mitigate your risk.
First, demand proof from the landlord that building componentry has been properly maintained prior to your occupancy. If you as tenant will be required to secure service contracts, ask to see the contracts that, presumably, the previous tenant had in place.
They will give you a clearer picture of what your own exposure will be going forward. If the landlord can’t produce them, that means they probably don’t exist and it strengthens your case for negotiating limits to your exposure. Sadly, the absence of service agreements is the rule rather than the exception these days, and we could, but won’t, share some real horror stories with you on this one.
The fact is, too many owners are just not engaged to the degree they should be and focus solely on collecting rents.
Second, have all major building systems inspected by your own professionals, or, if existing contracts are in place, by the current service providers. Seeking the advice of experts is the only way to really know.
Isn’t that what you are to your own customers, an expert? Isn’t being an expert how you create the value that encourages people to buy your product or service? Too often we get pushback from prospective tenants who balk at paying a few hundred dollars to protect themselves from tens or hundreds of thousands in exposure over the terms of their leases. A roll-the-dice attitude prevails, but carries with it, in our opinion, way too much risk.
The solution lies in protecting your interests at the beginning rather than scrambling and pointing fingers after an irrigation sprinkler controller blows up and floods the interior office space (that happened to a client of ours just last week).
Third, negotiate limits on your exposure. While it is true that landlords hold most of the cards these days, not all are unreasonable and most realize that good maintenance practices are in their interests, as well. If your prospective landlord has a roof on his building that is 30 years old and cannot produce proof of current good condition or routine maintenance, you have a pretty good case for limiting your exposure. You could offer to pay for the service contract for the term of the lease, but limit your repair exposure to a certain amount per year.
If the roof needed to replaced, you could negotiate your obligation to pay your pro-rata share (1/144) of the replacement cost since the roof had already exceeded its useful life before you came along. If the paint on the south and west sides of the building is faded and chipped, insist that the owner assumes your responsibility for painting the building.
He may actually be able to go after his previous tenant to pay for it. We could go on, but you get the picture. Once you evaluate the age and current condition of any building component, you can build a case for limiting your exposure. How hard you can push on any given issue depends on market conditions and the unique circumstances of the building condition and ownership.
Next week we delve into the issue of alterations, and utility installations, a little-understood but critical issue in industrial property leasing. Stay tuned. We’ll be back.
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