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Lessons on Leasing | CFO Lounge

Lessons on Leasing

Wed, Oct 15, 2008

Best Practices and Tips

CFOs are frequently engaged in accessing the needs and costs of adding facilities or maufacturing space. Depending on whether you are having your GC review the lease or are working with a commercial leasing company such as Colliers, here is a short-list of items to keep an eye on:

  1. Include a provision for lease audits that allows you to hire a lease audit specialist (not necessarily a CPA) to audit the calculation of base lease amounts, escalations, administrative costs, HVAC, common areas charges, etc.
  2. Include a provision for subleasing - very important shit. Most landlords will want to split any excess profits above the lease price with the tenant (this is quite normal) though you might be able to push it to your favor.
  3. Make sure there is a minimum occupancy clause (generally 90%) so that you don’t screw yourself into paying for the costs of running the building if it remains unoccupied
  4. If the landlord wants a big deposit, see if you can burn down the deposit over the length of the lease. Alternatively, you can try to get a letter of credit from your bank if you don’t want to part with the cash…but remember there are annual fees to keep the LC active.
  5. If you aren’t working with a reputable lease management / consulting firm then pay an attorney (a good one with fire in his/her belly) to review the lease. If you are spending a few hundred thousand or even millions a year on lease payments, get the lease lawyered up. Totally worth it.
  6. Keep the duration of the lease short if you have any uncertainty about how your business will be performing. You don’t want to have to hunt around for a subtenant and still be on the hook for making lease payments if your business plans fall through.
  7. If the landlord won’t budge on the price/sq ft, or wants you to sign a longer lease term, get something in return, free rent for a couple months, free tenant improvements, etc.

Oh yeah and educate yourself on FAS 13 lease accounting. The auditors will nail your ass on this stuff if you don’t account for your lease properly…personal experience here.

This post was written by:

Chad Cohen - who has written 51 posts on CFO Lounge.

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2 Comments For This Post

  1. Jason Says:

    This post is a keeper. They’re all good points. I would only add w/r/t FAS13, to make sure you know you want operating lease treatment, so you don’t wind up with a capital lease.

  2. Chad Cohen Says:

    Glad you think so. Definitely make sure you get capital vs. operating treatment correct or your books are definitely in for a restatement.

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