When it comes to commercial leasing, tenants in Pennsylvania face some unique challenges.
However, there are also some challenges we share with tenants all across the United States.
For businesses, the terms of your commercial real estate lease can have a profound impact on your ability to conduct business and earn a profit.
The best way to navigate the challenges of commercial leasing, right here in Central Pennsylvania as well as nationwide, is to be aware of potential roadblocks and develop a plan to maneuver around them, when necessary.
Here’s what you need to know:
- Permitted Use — About 57 percent of Pennsylvania’s townships and boroughs (the 2,562 municipal corporations) have their own zoning ordinance. This can make commercial leasing complicated and uncertain for businesses to know whether they are adhering to the permitted use of their commercial lease. Often municipal zoning ordinances will use similar names for zoning districts (e.g. Business Commercial, Business General, and Commercial General). However, permitted uses vary from zoning ordinance to zoning ordinance. Unfortunately, the due diligence of checking to make sure a commercial space is zoned for its desired use falls on the potential tenant. Typically, landlords will not directly warrant that a space is suitable for a particular use.
- Building Codes — In 1999, the Pennsylvania Legislature passed Act 45, the Pennsylvania Uniform Construction Code Act of 1999 (since amended in 2004), mandating a statewide building code across Pennsylvania. Much like permitted use, each of the municipal corporations within Pennsylvania have the independence to determine whether or not they want to administer and enforce the Uniform Construction Code (UCC) locally. Over 90 percent of Pennsylvania’s 2,562 municipalities have elected to administer and enforce the UCC locally using their own employees or via certified third-party agencies that they have retained. If a municipality has “opted out” the Department of Labor and Industry is responsible for all commercial code enforcement in the municipality. As you might expect, even though there is a statewide building code, enforcement can vary greatly form municipality to municipality.
- Delivery — Pennsylvania’s complicated building codes trickle down to further complicate the delivery of a commercial space. A commercial lease should clearly communicate the expected work to be done by each party to prepare the space for occupancy and identify the deadlines for completing such work. This is called the work letter. The work letter, typically an exhibit to the lease, is the most overlooked part of the lease negotiation. What makes it a challenge is that companies invariably sign leases before knowing what work is needed. That’s because architectural drawings are too expensive and time-consuming to produce for space that may never be rented. A smart tenant will try to predict potential problems and negotiate lease provisions to cover them. The tenant will then secure price estimates based on preliminary drawings for the work.
- Subleasing — Be sure to take a critical look at sublet clause in your lease agreement. As many businesses need to ebb and flow in order to stay afloat, you don’t want to be stuck in a lease that no longer fits your needs, without the ability to sublease to another entity. Whether you are expanding or contracting, both scenarios may require you to quickly change the size of your work space. Being stuck in a commercial space that no longer fits your needs can greatly hinder the success of your business.
- Term – Similar to wanting flexibility in your subleasing options, a challenge of commercial leasing can be negotiating your lease term. Often landlords will want a minimum term of three years, which for some businesses is nearly three years too long. Small businesses and start-ups need flexibility, such as shorter lease terms and very few strings, to establish themselves in the market. Landlords prefer longer term leases for a stable rent base.
How likely is it that your business will need a different amount of work space in the next year, three years or five years? No matter how much a space may seem perfect for your business, if the terms of your lease lock you into a space that may not be able to accommodate your changing needs, you could face challenges and regrets in the future.
What issues have you run into as it relates to leasing commercial real estate such as retail space, office space or industrial space? Share your story by providing a comment below.
Mike Kushner is the owner of Lower Paxton Township-based Omni Realty Group.