Importance of due diligence before leasing up tenant space in New York City

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In the real estate transaction industry, a due diligence report refers to a thorough investigation conducted on a potential space to identify any factors that could impact a development project.

This investigation is typically carried out by architects or engineers who carefully examine and coordinate with various authorities to uncover any relevant issues.

They delve into local regulations, zoning laws, specific site conditions to the building or tenant space, and other jurisdictional requirements to ensure a comprehensive understanding of the space’s suitability for the intended project.

Here is a good example of a typical due diligence clause in a lease transaction:

Prior to entering into this Lease, the Lessee, in the exercise of due diligence, has made a thorough, independent examination of the Premises and all matters relevant to the Lessee’s decision to enter into this Lease, and the Lessee is thoroughly familiar with all aspects of the Premises and is satisfied that they are …

 

 

Due Diligence report is the single most important expenditure you can spend as a potential tenant, in my opinion. We all know that a soft cost (architectural, engineering, designing effort, and related consultants) is a fraction of the overall project.

I can add that fees for an accurate Due Diligence report can save a great deal on the project. Consequently, it can also continue bleeding of operation cost of new establishment due to not addressing pitfalls at the beginning of the project. There’s no argument for not getting a comprehensive Due Diligence report if you are seriously considering the potential space.

Here are a few specific arguments to support the case:

  1. Cost & Time: Once you sign the lease and the free leasing terms are in effect, your budget clock runs in dollars per second. Given the cost of leasing the space, finding any long-term lead items that may hurt the project is imperative.
  2. Often lease agreements are negotiated and contracted by the legal department or person that is outside the sphere of actual operation. This situation is compounded if the potential tenant requires installing special equipment. It is a lot harder to deal with any item if you have lost the negotiation power as a tenant. By the same logic, it’s much more productive to put forth these issues to the landlord for potential solutions prior to the lease agreement.

 

A due diligence (DD) report is indeed a crucial investment for potential tenants. The costs associated with architectural, engineering, design efforts, and related consultants, often considered soft costs, are relatively small compared to the overall project expenses.

However, the value they add by ensuring an accurate DD report can be substantial and can save a considerable amount on the project.

Let’s delve into some specific arguments supporting the necessity of a comprehensive DD report:

  1. Cost and Time Efficiency: Once you sign a lease and the free leasing terms take effect, every second counts in terms of budget. Identifying any long-term issues early on through the DD report can prevent costly surprises down the line. Given the significant investment involved in leasing a space, it’s crucial to uncover potential pitfalls that could impact the project’s budget and timeline.
  2. Negotiation Power: Lease agreements are often negotiated by legal departments or individuals who may not be directly involved in the operational aspects of the project. This can lead to challenges, especially if special equipment installation or other operational considerations are required. Addressing these issues before signing the lease empowers the tenant to negotiate more effectively and seek solutions from the landlord, ultimately streamlining the operational process.

 

By highlighting these arguments, it becomes clear that investing in a comprehensive DD report is a proactive and strategic approach for potential tenants seriously considering a space. It not only helps in cost and time management but also strengthens the tenant’s position during negotiations and ensures a smoother transition into the operational phase of the establishment.

Only to find unique building conditions as professionals such as engineers survey the entire site and areas that might be relevant to the program of the tenant space.

Case Study

We recently worked with a new client who was interested in leasing a vacant restaurant space in the Lower West Side of a bustling 4-story coop building. With successful operations in various parts of NYC, they aimed to expand into this vibrant district. The ground floor offered nearly 2,000 square feet, accompanied by an additional 1,500 square feet in the cellar for accessory use. While the space had an existing kitchen and hood system, it didn’t comply with the building code, necessitating updates to the ventilation system to support a larger kitchen.

The Challenge: Navigating the complexities of NYC real estate, our client encountered a common hurdle: dealing with two “landlords.” On one hand, there was the commercial landlord involved in business transactions. On the other hand, the coop board, representing the shared building’s owners, had to approve any renovation work. This arrangement posed a significant challenge, as the coop board had no strong motivation to lease the commercial space. They seemed content with the space remaining vacant, avoiding potential disturbances like odors or noise for the occupants above. Despite months of effort to meet the coop board’s requirements, the potential tenant ultimately abandoned the space.

The Lesson: Reflecting on this experience raises an important question: Could a comprehensive due diligence (DD) report have prevented this outcome? While it may not have entirely averted the situation, a thorough DD report would have empowered our client to make more informed decisions much earlier in the project. It would have shed light on the challenges posed by the coop board’s approval process, allowing for better strategic planning and negotiation tactics.

 

Ready to secure your next commercial space with confidence? Don’t leave it to chance! Click here to learn how a comprehensive Due Diligence report can save you time, money, and headaches by uncovering potential issues before you sign. Dive deeper into the benefits and protect your investment today!

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