Thirty years ago, Geraldo Rivera created a media sensation with a TV show that focused on the opening of a special vault in a Chicago hotel owned by gangster Al Capone.
Despite all the build-up and hype, nothing was found.
While TV thrives on the unusual, the commercial real estate world does not. It tries to avoid surprises because too often they can result in unexpected costs. Most experts will stress cost certainty allows a business to grow and offer better opportunities to make smart investment choices.
I mention vaults because their removal at the end of a lease involving a bank can sometimes result in a landlord incurring significant costs if there is no stipulation in the lease for the premises to be returned to its original state.
The lack of a restoration clause could be expensive, not only when it comes to bank vaults; the removal of large freezers in flower shops or ventilation systems over deep fat fryers in restaurants can be costly operations.
Getting the right contract
The crux of the commercial real estate industry are the contracts between tenants and landlords. Ideally, all parties will be happy with the negotiated deal and both sides are able to have a profitable experience. It would be nice to state it happens all the time but too often one side lets itself down when it rushes to sign along the dotted line.
The residential real estate sector is more regulated and, as a general rule, a departing tenant must leave the property in the same condition as it was at the start of the contract.
Such a stipulation is not built into commercial real estate deals, unless there is a restoration clause. In recent years, this has become a necessary addition because of the growing and differing needs of tenants.
One business may want private offices but the next tenant may want an open plan, or require a reinforced floor or a cooling system for a computer room. With the changing face of businesses these demands can sometimes appear limitless. And with each new tenant, there could be a new request.
The details matter
When it comes to the negotiation of restoration clauses between the landlord and the tenant, many factors can tip the balance one way or the other.
If the tenant is seen as providing cache to the rest of the plaza, the landlord is not going to be in a strong bargaining position to negotiate additional clauses, as securing this tenant could be important in recruiting other tenants and determining the rental costs for the units.
So, in every negotiation it is important to have people with experience and an understanding of both the current and the long-term economic picture to ensure a fair deal is reached for both parties.
It is important to take a considered and flexible approach to the restoration clause. If a tenant has made some significant upgrades, it would be foolish not to consider keeping them . . . they could be strong selling points for the next potential client.
What we are likely to see going forward is a smarter use of the restoration clause to ensure commercial properties provide as many options and benefits for both the landlords and tenants.
After all, no one wants a ‘departing surprise’ . . . unless you are doing a television show.
Richard Crenian is the founder and President of ReDev Properties. Since its founding in 2001, Richard and ReDev Properties have grown the asset management company using a long-term approach to manage over 30 commercial properties, primarily located in Western Canada. To learn more about Richard please visit www.richardcrenian.ca