When you’re considering investing in a commercial property, you will want to know everything about it before making a decision. Lease reviews are a crucial step in this process. They involve taking a close look at all the existing rental agreements for the property, giving you a clear picture of the property’s current and potential income. These reviews also help you spot any potential risks or responsibilities you might be taking on with the purchase.
While every aspect of a lease agreement is important, there are three key elements in a lease that you may want to take a closer look at when evaluating the overall value and potential challenges of the investment.
Rent escalation clauses
Rent escalation clauses determine how and when the rent will increase over time. In New York, there are usually three types:
- Fixed percentage increases: The rent rises by a set percentage each year.
- Consumer Price Index (CPI) adjustments: The rent increases depending on changes in the cost of living.
- Fair market value adjustments: The rent adjusts to match current market rates.
These clauses significantly impact a property’s long-term value. For example, a lease with regular CPI adjustments might keep pace with inflation better than a fixed percentage increase.
Tenant improvement allowances
Tenant improvement allowances (TIAs) are financial incentives provided by landlords to help tenants modify or upgrade their rented space. These allowances can be a crucial factor in attracting and retaining quality tenants, especially in competitive markets like New York.
While TIAs are an upfront expenditure, you may be able to recover this investment by including a part of the costs into base rent payments or by extending lease terms. An attorney can help you evaluate the terms of existing TIAs and potentially negotiate these terms as part of your purchase agreement.
Renewal options
Renewal options give tenants the right to extend their lease under specified terms. These can greatly influence a property’s value and stability, particularly since they can be attractive to long-term tenants. However, these also could limit an investor’s ability to raise rent or redevelop the property. You may want to consider how these options might affect your long-term plans for the property.
Protect your interests
Given the impact these elements can have on your investment, it’s wise to seek legal counsel. An attorney can help you conduct thorough due diligence, ensuring you haven’t overlooked any critical details.
