Whether they own an office building, a shopping center or an industrial park, every commercial landlord should create (or re-evaluate) the overall operating or strategic plan for their property.
Not only is today’s environment competitive for attracting high-quality tenants, but tenants’ needs and wants are changing as quickly as new technologies pop-up and intentionally (or inadvertently) change the leasing business model. Let’s take WeWork as an example. WeWork offers shared workspaces for small to large business nationwide through short-term “memberships” instead of leases with amenities like high-speed internet, fresh fruit and professional and social events. Most traditional landlords neither offer nor encourage short-term or temporary leasing arrangements.
Are you missing out on business opportunities due to old ways of doing business? Outside of a lease, do you have a written operating or strategic plan for your property? If so, how often do you update the plan?
If the answer to the last question is never or longer than every three years, then the plan is antiquated. Maybe you don’t have an operating or strategic plan but instead, rely on your standard lease form as an operational guideline. When is the last time the form was reviewed and/or updated? How does the form measure up to how business is done today? Even if you have no desire to alter the way you do business, changes in the market or law could render your current form outdated.
Sending your lease form to an attorney for periodic legal updates addresses a major area of concern. However, to maximize the benefit of engaging legal counsel, you should provide your attorney with an updated operating or strategic plan for your property. While each plan should be developed in accordance with each landlord’s property type and market, and in accordance with contractual restrictions (e.g., if there is a mortgage on the property, you will undoubtedly need lender’s approval prior to making operating changes), we suggest you develop your plan by first evaluating the following areas: permitted and prohibited uses, parking and liability.
Permitted and Prohibited Uses
The permitted uses at a property grant insight into how the property operates. All landlords should evaluate business trends to determine if there are any new business opportunities they would like to explore or explicitly prohibit. Some landlords grant their tenants the right to use their premises for “any legal purpose,” but such a broad grant limits the landlord’s ability to prevent a tenant from engaging in an undesired business, especially if the business was not contemplated at the time the parties entered into the lease.
Each landlord should customize each tenant’s permitted use in accordance with the tenant’s proposed business and should explicitly state prohibited uses at the property. Traditional prohibited uses for a retail property include carwashes, pawn shops, and even health clubs and gyms. However, modern-day prohibitions might include hookah and vaping lounges or cannabis dispensaries, even if the state law does not yet permit such a business. Office and industrial landlords’ sensitive to spikes in the consumption and costs of electricity should consider prohibiting data mining (i.e., for cryptocurrency) at their property.
Traditionally, parking is a highly negotiated point between landlords and tenants. Tenants desire exclusive parking rights, and landlords have been willing to grant such rights because local municipalities set minimum parking requirements for the property. However, due to the increased use of ride-sharing services like Uber and Lyft, some cities are steadily decreasing local requirements for parking. As a result, future thinking landlords are partnering with ridesharing companies and valet on-demand services like DropCar to offer tenants’ alternatives to on-site parking. Landlords should work toward eliminating parking exclusives and evaluate potential development or income generating uses for their current parking sites.
Whether you develop a new plan or update an existing one, evaluating the landlord’s exposure to liability is a critical component. An attorney can advise as to changes in the law. However, in addition to an attorney, each landlord should engage its risk management team and/or insurer to confirm landlord’s insurance policies and the policies required to be maintained by each tenant are sufficient for the property’s strategic and operating plan.
Every landlord should be strategic in evaluating the current and future uses of its property to not only assess new business opportunities but to also protect against undesired uses, risks, and liabilities generated due to changes in market, law, and technology.
Erreka T. Campbell Associate, Polisinelli
Erreka Campbell is a business-minded real estate attorney who focuses on representing developers, investors, and lenders with their acquisition, disposition, financing, development, and leasing matters. Erreka’s goal is to mitigate risk and exposure to liability for clients prior to taking title to real estate assets. She advises clients across various jurisdictions and property types, including, but not limited to data centers, offices, industrial, multi-family, multi-use, and retail.