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12. Commercial Property Purchases 

Commercial Leasing

Leasing a commercial space instead of committing yourself to owning commercial real estate can be an excellent move. But there are fewer tenant-friendly laws when it comes to commercial leases, and no standard lease agreements. You'll need a lawyer’s help to negotiate the best deal on a commercial lease.

Every commercial lease should be in writing and should include the following details:

  • How much rent is due, including any increases (called escalations). You’ll want to know the going rate for space in the neighborhood before you begin negotiating. It also helps to let the landlord make the first offer, and ask for a lower rent than you think you can get initially. Escalations should be for specific dollar amounts or tied to a known method of calculation, such as cost of living indexes.
  • How long the lease runs, when it begins and under what conditions you can renew the lease. A shorter lease means less commitment, but less predictability for the long run. If location is very important — for example, if you have a retail store — you may want to opt for a longer lease. You can always attempt to renegotiate lower rents or improvements as time goes on. If you have a month-to-month lease, you’ll want to make sure the landlord has to give you as much time as possible when terminating the lease.
  • Whether your rent includes utilities, such as phone, electricity and water, or whether you’ll be charged for these items separately.
  • Whether you’ll be responsible for paying any of the landlord’s maintenance expenses, property taxes and insurance costs, and if so, how they’ll be calculated.
  • Any required deposit, and whether you can use a letter of credit instead of cash.
  • A description of the space you’re renting, square footage, available parking and other amenities.
  • A detailed listing of any improvements the landlord will make to the space before you move in. Your landlord may be more willing to make lots of expensive improvements if you’re signing a longer lease.
  • Any representations made to you by the landlord or leasing agent, such as amount of foot traffic, average utility costs, restrictions on the landlord renting to competitors (such as in a shopping mall), compliance with Americans With Disabilities Act requirements and so forth. These may come in handy later when you want to renegotiate your lease.
  • Assurances that the space is zoned sufficiently for your type of business. Of course, you’ll also want to check out this information with local zoning authorities.
  • Whether you’ll be able to sublease or assign the lease to someone else, and if so, under what conditions. You’ll want to negotiate the ability to sublease so that you can move with as little financial pain as possible.
  • How either you or the landlord can terminate the lease and the consequences.

When it comes time to renegotiate your commercial lease, you’ll want to document your reasons for a lower rent or more space improvements with hard facts regarding lower foot traffic than represented, a downturn in your industry and so forth. Some landlords will even be willing to take a percentage of your sales instead of a flat rental fee when economic times are slow.

As a tenant, you have far more leeway when negotiating a commercial lease than with a residential lease, which is one reason why having your own lawyer to represent you in negotiations is so important. A lawyer can also research zoning laws and local ordinances and fill you in on local real estate market conditions and customs.

Leasing Checklist

In many states, commercial leases are not covered under consumer protection laws that normally safeguard tenant rights. It is assumed that commercial leases are contracts between knowledgeable business people, and therefore less government regulation is needed than in residential leases. Thus it is essential to scrutinize every aspect of the lease and renegotiate unfavorable terms before signing.

Non-Compete Clause

If you run a retail establishment, insist upon a provision that prohibits the landlord from renting space in or near the same retail center to a competitor.

Dispute Resolution

If there is a dispute involving you and the lessor, by what method will it be resolved? Negotiating for mediation or arbitration rather than regular court is usually advantageous.

Spatial Specifications

Exactly how much space is being rented, and which areas are included? It is wise to take a tape measure and confirm the lessor's measurements, as they are often exaggerated. Finding a discrepancy in reported space and actual space is a valuable bargaining tool. Do you have the right to move to another space in the complex if you need more room to expand?

Default and Termination

Under what conditions can either party free themselves from the lease and what notice requirements are required?

Pets

In an effort to attract skilled employees, more employers are allowing pets in the workplace. Will the lessor permit pets in the leased space?

Rent

Prices are always negotiable in commercial leases, and may depend greatly on concessions made with regard to other aspects of the lease as well as general market conditions. If options to renew are considered, what rent increases are allowable, and how are they calculated?

Additional Costs

The cost of utilities, taxes and maintenance are often passed on to the tenant. If you agree to pay them, make certain that your portion is in line with the percentage of the building that you occupy.

Buildouts

Improvements, modifications and fixtures added to a rental space are called buildouts. Negotiation should include whether these are allowed, which party will pay for them, and who owns them after the lease ends.

Sublease

The term "sublease" refers to a transfer of less than the entire term of the lease. Under a sublease, the subtenant is not directly responsible to the lessor whose recourse against the subtenant is only through the original tenant. If your business fails, or if the location doesn't match your needs, do you have the lessor's permission to sublet the space to another party?

Term Options

Many new businesses negotiate a short initial lease with one or more options to renew. Options give you the right to stay by notifying your landlord in writing a certain number of days or months before the lease expires. Landlords may want a higher rent for the renewal period, as well as an extra fee in exchange for the option.

Leasing Pitfalls

The following factors may adversely affect the tax status of your leases:

  • rental payments that establish equity or lead to a property title
  • rental payments that exceed the fair rental value of the property by a wide margin
  • rental payments that are actually the equivalent of interest on a purchase
  • when, subsequent to the end of the lease, the option to purchase is exercised at a rate that is quite low in comparison to the actual property value.

Zoning Overview

Zoning Ordinances and Regulations
by Sherrie Bennett

Zoning ordinances and regulations are laws that define and restrict how you can use your property. Cities, counties, townships and other local governments adopt zoning plans in order to set development standards to assure that land is used for the common good.

Why Zoning Is Such a Big Issue

Zoning laws come into play on every single real estate development, regardless of how big or small. So if you are thinking about buying property or making improvements to property you already own, you’d better be sure you understand the zoning restrictions before you commit to anything.

One zoning use is typically not compatible with another. For example, a commercial building usually cannot be constructed on property that’s zoned for residential uses.

If you buy open ground to build your dream house that is in an agricultural zoning, you may not be able to build it without a change in the zoning.

Getting the zoning changed on property is a very difficult process. It requires a process of giving public notice and then having a variance approved by government agencies that oversee enforcement of the zoning plan. Opposition to zoning changes by neighbors and other interested parties can be fierce.

You can find out how property is zoned by calling your local planning department. They can also explain what you would need to do to get a variance.

Before getting too involved in a zoning issue, it would no doubt be in your best interests to hire a local land use attorney to help you through the process.

Zoning Restrictions

Use requirements refer to how property can be used. Typical zonings categories include:

  • Residential
  • Commercial
  • Industrial
  • Agricultural
  • Recreational

These categories usually break down into further sub-categories. For example, there are sub-categories for single family (i.e., residences) and multiple family (e.g., apartments or condominiums) residential use.

Zoning laws will set forth many use restrictions, such as:

  • the height and overall size of buildings
  • their proximity to one another
  • what percentage of the area of a building lot may contain structures
  • what particular kinds of facilities must be included with certain kinds of uses  

For example, zoning ordinances will typically limit the number of stories and total height of a building, require a certain number of parking spaces for a commercial building, and require a driveway and garage on a suburban residential property. The bulk requirements of a zoning ordinance refer to:

  • the height and size restrictions on buildings including the number of stories in a building
  • the square feet of space which a building provides
  • the percentage of area it covers on a building lot
  • the minimum lot size requirements, if any

The setback and side-yard requirements of a zoning ordinance refer to the distance between the front and back property lines and the distance from the side property lines.

Subdivisions

Land is divided up into legal parcels. If you own land and want to divide it up, you have to go through an authorization process to create new legal parcels.

Most zoning ordinances place limitations on a property owner’s ability to subdivide land. There are rigorous procedural requirements for notices, hearings, and consideration by zoning authorities before permission can be given to subdivide property.

There are usually simplified procedures if you want to divide your property into only a few parcels (e.g., not more that 4 parcels). These are sometimes called lot splits.

A major subdivision, however, will be subject to more rigorous rules. At a minimum, these rules would include requirements that a developer prepare a site plan or a subdivision map, which is a comprehensive map showing the planned use of a particular property, in detail.

In addition, subdivision laws may require:

  • the lots be of a particular size
  • the streets be of a particular width and quality
  • the water, gas, and sewer lines of a particular type be supplied

Some states permit local governments to require developers who are subdividing property to pay for some portion of the municipal improvements that are necessary for residential use, such as:

  • Sewers
  • Schools
  • Roads

A subdivision will go through many public hearings, giving ample opportunity for anyone to speak in favor of or against a project.

Zoning Problems

You may be unpleasantly surprised to find you can’t use your property as intended without violating of zoning ordinances. There are many ways a lawyer can help you to get around the technical requirements of the regulations.

Non-Conforming Use

Existing properties are often used in a manner that’s inconsistent with a new zoning ordinance. Such uses are referred to as ”non-conforming" uses because they don’t "conform" to the requirements of the zoning ordinance.

A use may be non-conforming because:

  • the nature or characteristics of the building itself don’t conform to the zoning ordinance
  • the activity going on in the building doesn’t conform
  • For example, a factory located in a residential zone is a non-conforming use. A two-story building located in a one-story zone is also a non-conforming use.

Generally, you don’t have to quit an existing non-conforming use and may continue after the adoption of a zoning ordinance.

But the right to continue a non-conforming use may be lost if the non-conforming use is abandoned. For example, if a fast-food restaurant is operated in a storefront in an area that is later zoned to exclude all food-related operations, the restaurant may continue to operate. If the restaurant closes, the right to continue the use may be lost if the same restaurant is not re-opened, or if some other similar food-related use is not begun within a certain period of time. If the building itself is non-conforming, the right to be non-conforming may be lost if the building is completely, or even partially, destroyed.

Amortization is another way to limit non-conforming uses. Under this approach, a non-conforming use is permitted to continue for a specific period of time, after which it must be converted to a conforming use.

Conditional Use

A conditional use is a use which is permitted under a zoning ordinance, but which must meet certain conditions. For example, a zoning ordinance may permit professional offices in a residential zone, if at least four off-street parking places are provided.

When a use is conditional, the zoning ordinance often will require the property owner to file an application with local officials so that they may determine whether the conditions have been met.

Variances

A variance or special use permit is an exception to the requirements of a zoning ordinance. Most statutes permitting the adoption of zoning ordinances also detail the circumstances under which variances may be granted.

Usually, you must show some kind of hardship to justify getting a variance. Some examples of hardship are:

  • an under-sized lot on which a variance is needed to construct any useful structure
  • an odd-shaped lot cannot satisfy the side-yard and setback requirements for the construction of a residence that would otherwise be permitted in the zone

Spot Zoning

Local land use plans and zoning ordinances usually contain restrictions on land uses in specific areas (or "zones") outlined in the plan or ordinance.

Once local officials have adopted a plan and ordinance, property owners may seek exceptions to the requirements and limitations, either through:

  • An amendment to the plan or ordinance
  • An application for a variance or special use permit.
  • In both cases, the amendment or application may be opposed on the ground that permitting special exceptions for specific properties is inconsistent with the overall land use plan or ordinance, and constitutes illegal “spot zoning.”

Whether or not a particular exception constitutes illegal spot zoning, or is merely a permissible exception, greatly varies according to:

  • the facts of the property use
  • the provisions of the applicable enabling statute
  • the land use plan in question

Signage

Signage is a critical component to the success of a retail business. It is also subject to numerous government regulations.

Signage Tutorial

For help making the most of your commercial signage, visit SBA's signage tutorial.

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