San Diego Business Lawyer Blog

It's now estimated that the San Diego commercial lease market will hit bottom in 2010. Whatever the future has in store for commercial real estate, the present news is not good for commercial property owners. Office vacancies in San Diego are at almost 20% and retail vacancies, while not as high, are still significant at around 8%. It's likely that most commercial property owners in San Diego cannot remember the market every being this bad. With vacancies so high, commercial landlords are forced to negotiate better lease terms in order to retain existing tenants and to attract new ones. In this highly competitive market, it's the smaller commercial property owners that are being hit the hardest.

The competition for new tenants is tough. Larger companies can afford to offer cash incentives for improvements, free rent for six months and significant first year discounts to lure the most attractive tenants, leaving smaller properties desperate to fill their empty space. For many smaller property owners, the only way to compete with these incentives is rent reduction. It's an economic reality that commercial property owners of all sizes cannot get around - continued downward pressure on rent coming from all sides.

Offering incentives to prospective tenants is a good business decision for those that can afford it. For those that cannot, holding on to existing tenants is of paramount importance at least for the foreseeable future. As the market continues to tighten, landlords are beginning to recognize that existing tenants are their most valuable asset. There is little to be gained by eviction of a tenant who can pay partial rent if it proves difficult if not impossible to fill the space once the eviction process is complete. Moreover, existing tenants are known quantities. A tenant with a history of timely payment and who is not constantly at odds with the landlord is a good tenant. This is also the type of tenant that will remember a landlord's goodwill during tough times. While it may be impossible for smaller commercial property owners to offer cash incentives to prospective tenants, they may be able to afford accepting lower rents for a fixed period of time to keep existing tenants. This also provides the landlord with some control over the term of any renegotiation.

Of course, not every tenant is a good tenant. However, commercial property owners of all sizes should carefully weigh the benefits of keeping existing tenants against the cost of eviction and the all too real risk of empty space. Struggling businesses are increasingly aware of the tightening market and, with or without the assistance of a commercial lease lawyer, are approaching their landlords hoping to trade on their track records to stay alive.

In today's San Diego commercial leasing market, some business owners are taking advantage of increased bargaining power when negotiating lease terms. Others see an opportunity to purchase property as the commercial real estate market continues to decline in value. The primary advantage of buying commercial space over leasing is the generation of equity over time via market appreciation. There can be no doubt that there are some real bargains in San Diego today, and the potential for equity growth is strong. However, the decision to buy commercial property instead of leasing requires thoughtful consideration.

One of the most important considerations is the balancing of a growing business' cash flow against the 20% down payment generally required for the purchase of commercial property. If a down payment depletes needed cash flow from a new or growing business, it's likely not the time for a risky real estate investment. If a business has excess cash in its coffers for capital investment, there may never be a more obvious time than now to snap up a great value. Most businesses, however, are somewhere in the middle and will want to prepare a detailed evaluation of both options analyzing net present value cash flow (taking into account the anticipated appreciation of purchased property versus anticipated rental increases, interest rates, costs associated with lease expiration and other expenses over the term of the lease), the value of the respective locations to the business, growth considerations, cash flow needs and opportunity costs (potential economic gains from the alternative use of cash). Moreover, in many cases commercial properties have multiple units adding to the complexity of the decision. With multiple units comes the potential for additional income, but also additional responsibility and the risk of unleased space. These considerations are especially difficult for start up businesses which require greater flexibility. Start up businesses will want to attach greater weight to its cash flow needs.

The idea to purchase commercial property instead of lease is often an accident. Businesses stumble across property for sale as they search for suitable leasing space and see an opportunity they hadn't previously considered. Whatever the reason, the benefits of ownership are appealing. It allows for complete control over the property, equity growth (especially in the long term), long-term customer relationships and permanent visibility in the community. The benefits are even greater in today's real estate market where bargains are plentiful. Consult a commercial lease attorney and/or a commercial real estate professional for assistance.

Property owners in San Diego know that their commercial leases are valuable assets. In the face of a struggling market and conflicting input from accountants and lawyers, they recognize the benefits that a long term existing tenant offers. They are inundated with bad news from the media. The San Diego Union-Tribune tells them that the commercial real estate market will not begin recovering until late 2011 or early 2012. They are reminded daily of the recession and its particular affect on the San Diego leasing market because of the abundance of "For Lease" signs around town. While well capitalized REITs (Real Estate Investment Trusts), pension funds, insurance companies and other large commercial property owners should weather the storm, mid-level and smaller companies face difficult times, especially those that purchased at the peak of the market.

Many would rather accept a short or long term rent reduction than face the prospect of losing their tenants to failed businesses. The solution is particularly attractive to smaller-scale landlords facing vacancies rates approaching 25%. By offering rent reductions to help potentially failing businesses survive the recession the property owner not only keeps the particular space filled, she strengthens the business relationship with the tenant and creates a goodwill that cannot be valued highly enough. In addition, the business owner is less tempted to take advantage of the lease opportunities offered elsewhere around the San Diego County.

Under the right circumstances, rent reductions offer a viable business solution to a tough economic dilemma. This is a forward looking approach that leads to long term prolific relationships. When the time comes for current tenants' businesses to expand, they will look to the property owner that took care of them during hard times first. Rent reductions present a short term practical solution for the commercial property owner while simultaneously creating invaluable goodwill.  Consider contacting a San Diego business lawyer to evaluate your lease. 

As the San Diego commercial leasing market continues to struggle, opportunities abound for young and growing businesses to obtain favorable leasing terms. With the abundance of "For Lease" signs reminding folks of the current recession, commercial property owners are anxious to fill space and are willing to negotiate to do so. 

Businesses and commercial property owners alike would do well to look ahead, and consult with their business attorney regarding their options.  Whether the economy has bottomed out is a question that will remain unanswered for some time.  However, it appears that the economy is in that soft zone somewhere in the bottom of the trough and there isn't much room left to bottom out on. Fear of a depression with bread lines extending around the corners of major metropolises stifles productivity and investment. Such fear is almost certainly unwarranted. These are the moments that entrepreneurs seize! They don't seek to weather the worst case scenario. They see opportunities and commercial property owners benefit from their aggressiveness. So does the economy.
 
A strong relationship between the commercial property owner and tenant is itself a valuable asset. The property owner benefits from successful business tenants. They are long term reliable tenants that pay their rent on time and, depending on the lease, pay additional monies based on profits or sales. The business benefits immeasurably from positioning itself in the right location in the right community with a structure that has the right physical properties, and from favorable lease terms. Working closely with their attorneys to draft mutually beneficial lease terms provides much needed security to both the landlord and tenant. Each side should take a hard look at their short and long term business goals, their immediate needs, and the unique fit between them. Most importantly, they shouldn't be afraid to step out of the box and look to creative lease terms that benefit both sides. Property owners are presently more willing to entertain new and innovative proposals even with existing tenants.

Finding that "it" location for a new or growing business is priceless. Filling space for the commercial property owner is just as important. Whether you are a new or existing business or the owner of commercial property, an aggressive approach to finding the right match will help you over this economic hump and might just be the start of a thriving or rejuvenated business.

It is a great time for small businesses in San Diego to lease commercial space. The recent economic downturn has resulted in an increase in the supply of commercial space putting downward pressure on rents. More importantly, small businesses now have the ability to negotiate better lease terms as commercial property owners scramble to fill empty space.

Over the last 10 years, small businesses have had little bargaining power when it comes to negotiating lease terms. Faced with a highly competitive market, commercial property space was available at a premium. Eager to scoop up a nice location, small businesses were ready to agree to whatever lease terms were proposed or risk losing the space to the next highest bidder. While a good attorney could negotiate some favorable terms, prospective tenants remained largely at the mercy of a very competitive market.

The terms of a commercial property lease have value in and of themselves, and negotiating a lease that best suits your needs can have a profound impact on the future of your business.  Today, small businesses concerned with expansion may be able to negotiate shorter leases.  Some businesses may wish to negotiate the ability to make alterations to a space.  Others might be concerned with the ability to sub-lease.  Retail businesses may expect to rely on the traffic brought into an area by an anchor store and seek to negotiate a bailout clause which would terminate the lease if the anchor store went out of business or moved.  Whatever the terms, commercial property owners are more likely to consider the tenants proposals.

In today's market for commercial property in San Diego, businesses have a remarkable opportunity to negotiate beneficial lease terms.  It is a great time for new businesses, businesses looking for new locations and entrepreneurs interested in new start-ups to explore the San Diego market for suitable commercial space.  Contacting a commercial real estate agent is a good way to get started.  Once a suitable location is found, businesses should work with their attorneys to negotiate the best lease terms possible.  CityFeet and LoopNet are two resources that allow businesses to search on-line for properties in their area. Commercial real estate agents can be found in the Yellow Pages.