Scott Smiler

Partner, Gallet, Dreyer & Berkey

Getting your money’s worth. At buildings with commercial tenants, boards can’t afford to undersell themselves. So the first important step is to engage a real estate broker, who will know the fair-market price for a particular space. Once you’ve settled on the rent amount, the next step is negotiating the terms of the lease. Let’s say the tenant wants a 10-year lease and wants modest annual rent increases of 2% or 3%. But with today’s high inflation, you could peg the increase to adjustments in the Consumer Price Index instead of locking into 2% or 3%.

Other ways to cut the pie. Another option is to lock someone in for five years at a 2% or 3% annual increase, and then renegotiate the rent for years six to 10. Each side would hire a real estate broker, and the two of them would settle on a number. If they can’t, you would bring in a third broker whose decision would be binding. 

Bake in a payment guarantee. Whatever the lease terms are, you need to protect yourself if someone defaults on the rent. If the tenant is a limited liability company, or shell corporation — which means it has no assets — you can get a traditional guarantee that another party will stand behind the tenant financially for the full term of the lease. The other option is a “good guy” guarantee, where tenants can be let off the hook prematurely provided that they give notice within a certain period of time, there are no arrears and they surrender the space in good condition. You don’t lose the right to go after the tenant in court for other reasons, and you have your space back and can start renting to someone else.