Tips on Evaluating a Lease - Start with Standards

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Investors are taking a fresh look at income producing real estate. Other investors are hanging on to their existing income real estate investments wondering how they will be affected by the vagaries of this vicious down cycle.

In either event, the focus is on prudent, professional management. Believe me...I've been around this block a few times.

At the very heart of good property management is a sound, well written lease, the contract between the landlord and tenant and the crux of their relationship.

While I have put on a three day workshop on writing a good lease, I will just address some key principles and concepts on this article. (Look for future articles to address many of these subjects individually and in more detail.)

The term "good fences make good neighbours" is the rule of thumb here. If the three most important words in real estate are "location, location, location", the three most important words in leasing would have to be "clarity, clarity, clarity".

Using an industry standard form produced by an organization such as the American Industrial Real Estate Association (AIR) is a good start. They have versions to fit almost any situation. But avoid defaulting to your old lease form or the form used by the previous owner. The AIR forms are constantly revised to keep up to date with evolving legal precepts.

Here are some basic bullet points.

1. State the name of the parties accurately or you may have trouble enforcing the lease later in case of a default. Don't think you know which legal party has what legal name. Find out.

2. Enter the date at the top of the lease: this is unrelated to the lease term dates, but will serve as a critical reference in all future official or legal correspondence. As a property manager, I, received, too many times, a "fully executed lease" from a national institutional client, authored by their $500/hour attorney, without the lease date filled in. Amazing!

3. Clearly state the rent schedule iin actual dollars (i.e. $3,250.51 per month) instead of dollars per square foot ($2.05 per square foot per month), as the latter focuses attention on the size of the premises. Size can be contested down the road by sophisticated commercial tenants and gadfly consultants, but actual dollars cannot.

4. Accurately and clearly spell out the parties' mutual repair and maintenance responsibilities. This is a key to avoiding fights later.

5. Address respective insurance requirements thoroughly. In particular, this is an area that has evolved legally.

6. Make sure the default provisions are clearly spelled out. These will serve as the rules of engagement in case of a dispute.

Finally, Your property manager should be fluent in all practical lease matters. If he or she isn't, keep looking!

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About this Entry

This page contains a single entry by Aaron Weiner published on March 24, 2015 9:00 PM.

How to Use the Best Franchise Owner Testimonials For Your Franchise Sales was the previous entry in this blog.

Creating Customer Loyalty Programs that Work is the next entry in this blog.

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