What are the most important risks to identify during lease analysis?

2 Lease term and options

Another key risk to evaluate during lease analysis is the lease term and the options available to both parties at the end or during the contract. The lease term determines how long you are committed to the lease agreement and how much flexibility you have to respond to changing market or business needs. A longer lease term may offer more stability and lower rent, but it may also limit your ability to relocate, expand, or renegotiate. A shorter lease term may offer more flexibility and leverage, but it may also expose you to higher rent volatility and renewal uncertainty. You should also consider the options to extend, terminate, or sublease the lease, and the conditions and costs associated with them.

3 Tenant improvements and allowances

A third risk to examine during lease analysis is the tenant improvements and allowances that are required or offered by the landlord or the tenant. Tenant improvements are the modifications or additions that are made to the leased space to suit the tenant's needs or preferences. Allowances are the funds that are provided by the landlord to cover part or all of the tenant improvements costs. Tenant improvements and allowances can have a significant impact on the value and attractiveness of a lease, as they can enhance the functionality and aesthetics of the space, as well as reduce the upfront capital expenditure for the tenant. However, they can also entail risks such as delays, disputes, or overspending. You should carefully review the scope, quality, and timing of the tenant improvements and allowances, and the responsibility and liability for their completion and maintenance.

4 Operating expenses and taxes

A fourth risk to assess during lease analysis is the operating expenses and taxes that are incurred or passed through by the landlord or the tenant. Operating expenses are the costs that are associated with the operation, maintenance, and repair of the building and its common areas. Taxes are the property taxes that are levied by the local authorities on the value of the land and the building. Operating expenses and taxes can vary depending on the type, age, and location of the property, as well as the market conditions and regulations. They can also affect the net income and cash flow of the landlord and the tenant, depending on the type of lease structure and the allocation of these costs. You should verify the accuracy and reasonableness of the operating expenses and taxes, and the method and frequency of their calculation and payment.

5 Default and remedies

A fifth risk to identify during lease analysis is the default and remedies that are applicable or enforceable by the landlord or the tenant in case of a breach of the lease agreement. Default is the failure to comply with any of the terms and conditions of the lease, such as paying rent, maintaining the premises, or obtaining insurance. Remedies are the actions that can be taken by the aggrieved party to recover damages, enforce performance, or terminate the lease. Default and remedies can have serious legal and financial consequences for both parties, as they can result in losses, penalties, or litigation. You should understand the definition and scope of default and remedies, and the rights and obligations of both parties in case of a default.

6 Market and environmental factors

A sixth risk to consider during lease analysis is the market and environmental factors that may affect the performance and viability of the lease agreement. Market factors are the external forces that influence the supply and demand of commercial real estate, such as economic cycles, demographic trends, or competitive developments. Environmental factors are the natural or human-made conditions that affect the quality and safety of the property, such as weather, pollution, or hazards. Market and environmental factors can have positive or negative impacts on the value, occupancy, and profitability of the leased space, as well as the reputation and satisfaction of the landlord and the tenant. You should monitor and anticipate the market and environmental factors that may affect your lease, and plan for contingencies and opportunities.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?