RISKS from page 1
Lenders will also carefully consider the fl exibility of a development when mortgaging a property. With diversity in rental revenue and fl exible leasing terms, a development will be more resilient to economic impacts. Flexibility is key during challenging times.
Plan for the Future
With the shift in market trends and fl uctuations in market forces, landlords need to anticipate “what-ifs” and reduce risk by being proactive in prescient planning. In essence, plan for the unplanned. New market risks continue to emerge, with inimical eff ects on market stability. These include things like fl uctuations in interest rates, infl ation, construction and renovation costs, material costs, vacancy rates, utilization rates, demand for space and turnover.
Given uncertainty with market conditions, parties should plan for transition and potential impacts. Considering potential early termination or relocation rights where feasible, for example, will allow for added optionality. This will help rejuvenate a landlord's development, including transitioning new tenants into a development and capturing increased rental rates. It will also increase the marketability of a property for prospective buyers or allow for a complete redevelopment of the site.
Hedge Your Risk
Risks evolve as businesses evolve. This makes it essential to manage risk exposure by incorporating risk management policies and protections. Commercial leases typically require basic insurance requirements, such as general liability coverage and property damage coverage. More recently, landlords should consider insurance policies that provide coverage for business interruption, cyber liability, environmental hazards and even pandemic-related risk coverage.
Parties should consider obtaining additional insurance coverage and requiring tenants to carry applicable policies for such new risks. Delineate the specifi c types and amounts of coverage with proof of coverage prior to the commencement of the tenancy. Landlords should also consider requiring additional coverage or modifi cations to existing coverage during the term to better address the need for new coverage, additional coverage or to mitigate new unforeseen risks.
“Standard provisions” should now be challenged with a greater priority in lease negotiations. A well-negotiated commercial lease can reduce your risk to a number of market forces. Implementing risk-reduction strategies at the onset, including fl exibility in terms, prescient planning and requiring additional insurance coverage, will help with the overall success of your business.
Originally Published by Western Real Estate Business Magazine
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
