How To Conduct An In-Depth Commercial Lease Audit

How To Conduct An In-Depth Commercial Lease Audit

Owning a commercial rental property is both a boon and bane.

From owning a commercial real estate portfolio to managing it end-to-end as a desirable property is not a one-man’s task. A professional property management ally can lessen the trivial assignments such as CAM estimation, square footage of rental, lease commencement, etc., enabling the proprietors to enhance the company’s growth and focus on building the property portfolio. As well, commercial lease audits to ensure that landlords and tenants honor the terms and conditions negotiated in the commercial lease.

However, there is a high chance of misinterpreting specific real estate terms and building operating expense languages. Lease auditors are someone with an innate knowledge of the financial and legal lease terms of the property. An expertly performed commercial lease audit can lower future compliance risks and unveils potential cashflow and refinance the profit for business improvements.

Let’s take a closer look at the terms of a commercial lease.

It’s worth budgeting for a commercial lease audit.

Square Footage Of Leased Space

The base rent is dictated based on the square foot reserved for the tenants. The common practice is to calculate the rent by cost per square footage. Unfortunately, square footage calculation leads to all sorts of paradoxes. The square footage terms are:

  • Usable square footage is the square footage of the rented office space.
  • Rentable square footage is the square footage of the rented office space with shared areas. The rents include the shared percentage expenses to maintain the shared areas.

Since the entire financial tie-up is from the square footage, it is essential to analyze the square footage calculation and exclude gross square footage. 

Rental Rates In That Area

Rent an enviable office, at a fair price.

Rent adds to significant expenses of a lessee’s monthly budget. Therefore, it is imperative to pay the fair value for the rented space in the desired location rather than over-paying for the area. For example Manhattan is one of the expensive real estate market in the world. Searching for a space in Manhattan within your price range can be a tiring task. Many organizations hire tenant rep brokers to get the right office at the best possible price without going through the hassle of seeing 100’s of property in a week.

Assignment And Subleasing

Times are unpredictable, and business strategies change.

It is utterly misguided to pay for unused or vacant rental space to comply with the lease term. Instead, learn whether the lease offers the option to sublease or assign the area. Terms to looks for in the commercial rental contract:

  • Right to sublease the part of the space or
  • Assign a new tenant

Note that the right to execute subleasing might come with a fee.

Lease Extension

Before signing the lease, a corporate tenant should infer the possibility of their lease extension and tender a prior notice of their lease extension to the landlord. A growing business tends to expand and extend its lease. A professional lease auditor eliminates the recurring concerns of tenants, such as

  • The rent calculation for additional space and
  • Renegotiate terms in the previous lease.

Right Of First Refusal

Office space is integral to business

The chances of finding an exact office space within your price range in a high-density customer base is slim. Therefore, why not extend the lease for another year? It is vital to verify the lease agreement for the right of first refusal terms. It gives you the right to refuse the property firsthand before letting the property available on the market.

The commercial lease agreement is complicated and easy to misinterpret, and if you are new to the business, you might overlook specific lease terms. An experienced lease auditor will review the lease and suggest including the ‘right of first refusal’ clause if necessary.

Use Of Premises

Your lease isn’t the deciding factor in expanding or restricting your business growth. Lease auditors will double-check crucial clauses that might not be negotiable. Your commercial lease auditor will validate the

  • List of restricted businesses and
  • Protection from competitors from moving in across the hall.

Common Area

Eliminate any doubts in advance about the rent and any additional or potential fees collected monthly. The lease auditors carefully review all the transactions that precede the property and verify the corresponding charges to the property.

Common Area Maintenance (CAM) costs are the fees collected from the tenants for the upkeep of the shared area in the rental. The landlords can either charge the tenants full or partial CAM fees. The commercial lease audit report must justify the additional expenditures along with the base rent.

Pandemic Clause

Many businesses potentially miss out on the pandemic/epidemic clause that protects both the tenants and owners from severe monetary damages. For example, the COVID-19 pandemic has caused many start-ups to go out of business or close shops without a steady income to pay their rent. In situations like this, tenants can invoke force majeure and protect themselves from bankruptcy.

Force Majeure in the contracts excuses all parties involved from fulfilling their lease obligations when an unusual event or circumstance beyond control occurs, i.e., in case of natural disasters or unforeseeable catastrophes.  

What To Expect From A Stellar Commercial Lease Audit

  • Sensible feedback to deploy new business strategies
  • Landlord awareness
  • Hyper-focused contract review and analysis
  • Obtain past CAM chargers and future benefits
  • Real-time market observations
  • Lease language recommendation
  • Peace of mind knowing the lease audit is dealt by an expert

PreludeSys is your leading business partner in several real estate lease service needs. Most leases contain errors in rent bill calculation, repairs, and maintenance charges – lease auditors rightly identify out-of-scope costs and get a fair deal on the commercial lease. We help refine ongoing business improvements and include new business development ideas in every aspect of the property portfolio and acquire the maximum return on investment with a streamlined workflow. Revitalize your lease negotiations with a crafted business game plan for success.

For more ingenious insight on our lease audit and other lease services, contact us today!

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