What is the Biggest Sticking Point in a Commercial Lease in Arizona?
At Commercial Property Connect we represent tenants of all sizes, and tenants of all types of Commercial Real Estate. We have successfully helped clients locate the perfect space that was everything from 800 S/F retail space on up to several thousand feet of industrial warehouse space.
The Importance of HVAC in Commercial Leases
There are always many areas of consideration when looking at a space for a client. We are negotiating with landlords for favorable terms on price, term, signage, tenant improvements and many more details. One topic we educate our clients about in advance and that we will address in each LOI we craft on their behalf is their obligation related to the HVAC in their prospective space. With temps that are triple digits for about 4 months out of the year we run A/C in Arizona pretty much 24/7. This is taxing on the equipment. Who maintains that equipment? Who replaces that equipment when the time comes? It might surprise you to learn that the default answer will always defer this obligation to the tenant.
A Near-Disaster Experience
The best way to tell you how important it is to you to have an agent that protects your interests going into a lease is to tell you a real-life story that is not that unusual. Associate Broker Amy Gibson was working with a client that did custom coatings for various products. While negotiating the proposed lease terms she always proposes terms related to the HVAC equipment that protect her client from suffering big unplanned expenses. In most leases the landlord will want the tenant to be responsible not only for maintaining the AC but also REPLACING it if needed. Amy wrote a provision in the lease that insured the Landlord provided a 100% warranty on the HVAC equipment for 6 months. This was essential because the lease started in the HOT Arizona summer.
Amy’s client was so excited to begin their journey in this space that was perfect for them. They finally got their keys and walked into the space and got situated when—lo and behold—the air conditioning unit died. It was not a simple fix that was repairable; it had reached the end of its life and had to be replaced.
Because of the provision that Commercial Property Connect had negotiated into the lease with a 6-month warranty the responsibility to replace this unit fell to the Landlord. This resulted in the Tenant getting a brand-new unit and they saved the $8,000 expense they would have otherwise been obligated to incur. As you can imagine, this size of an unexpected expense to a business that has just invested in moving to a new location could be devastating to say the least. The first call they made was to their CPC Agent with heart felt gratitude.
Strategies for Negotiating HVAC on a Commercial Lease
Without a broker advocating on your behalf with the experience to know what COULD happen, many small businesses are behind the eight ball before they have begun. The warranty was just one strategy that a good broker might suggest to protect their client in a lease. Another strategy that might be used is to negotiate a maximum annual out of pocket expense to the tenant. That means that if this unit had to be replaced in any given year of the lease, the maximum amount of that expense that the tenant might incur would be $500 or $1000. This is a way to show the landlord that the tenant has ownership in maintaining the equipment but does not want to be responsible for a replacement of a unit that was not under their control in the past. After all, you really have no idea how the previous tenant maintained the equipment.
This presents another tactic that might be used in negotiating the HVAC portion of a lease. Knowing that you do not know the condition of the unit(s) and do not know how well they were maintained, it might be a good idea to have a licensed HVAC technician out to inspect the units prior to finalizing this portion of the lease. Use a company that you might use for your ongoing maintenance during your lease term, and they may do this inspection for little to no cost. If they find the units to be relatively new and seem to have been maintained well, then the tenant night be provided peace of mind that a potential $1000 maximum annual repair/replacement obligation might be a safe bet. On the other hand, if there are four units and two of them are 10 years old and seem to be unmaintained then you have a good reason to negotiate additional protections for the tenant. This might be a lower out of pocket maximum or it might be excluding very old units from their responsibility. It will be a negotiation that occurs in the scope of the entire deal.
As is the case with so many things; every situation is different when it comes to negotiating a lease. Remember you are not just obligating yourself for rent when you sign a lease you might be obligating yourself for other expenses that can be significant. It is critical that you have an experienced professional representing your interests that knows not only what to watch out for but also what is a reasonable alternative. After all, you can ask for the world, but it doesn’t mean you will get it. In summary, make sure a commercial professional is the one striking the best possible deal for you.
