Preleasing undeveloped property: pointers for commercial tenants.

• Author: Grandfield, Jeff
• Position: SPECIAL SECTION: Building Alaska

As either a new or existing commercial tenant, you may be tempted to prelease undeveloped property (to open a new business or move your business to). As we explain in our book, Negotiating Commercial Leases & Renewals FOR DUMMIES, this is potentially the most unpredictable lease agreement for a tenant to enter into. Why? The answer is simply because you are making a long-term leasing decision based on little more than a hole in the ground and you can't visually assess the property or physically touch the bricks and mortar.

Unilateral Changes

Often in these types of deals the commercial tenant is required to make a long-term leasing decision and commitment based only on the landlord's design drawings--which the landlord can typically unilaterally change. We remember one prelease deal where the landlord not only changed the color scheme and exterior look of the property (so as to save money), but also did so against the wishes of all the tenants who had signed up to date. Additionally, there are no existing tenants to talk to about how their business is doing within the property (as there are no tenants open for business yet).

On the other hand, some of the best leasing locations are preleasing opportunities or new properties under development, especially if the physical location or land is well situated. The Lease Coach has successfully completed many prelease deals for our clients with excellent long-term results. Just keep in mind that landlords often reserve the right to make changes to your unit without tenant consent. This can affect the size, shape, physical location of the tenant's desired premises, the building itself, or even the grouping of buildings.

Traps to Avoid

One trap to avoid is signing the lease agreement and then waiting months while the landlord tries to finish leasing up the property. Some landlords won't--or can't afford to--start construction until they hit a set percentage of done deals or leased space. The agreement with the mortgage holder may be that once the landlord gets signed lease agreements for 50 or 60 percent of the property, the funding package is approved and finalized, and then (and only then) the property can be built. Ensure that you have a termination date in the event the commencement of the development is delayed beyond a reasonable timeline or your requirements.

Another trap to avoid is where the landlord is going forward with the development but has only secured a handful of tenants. This...