The latest episode of the AZ Big Podcast with Michael & Amy has officially dropped. Episode 61’s guest Jennifer Delgado stops by to talk about the Downtown Phoenix transformation and common leasing pitfalls for commercial tenants and how to avoid them.
Listen to more of the AZ Big Podcast here.
Transcript:
Michael Gossie
Welcome to the AZ Big Podcast sponsored by Burch and Cracchiolo. I'm Michael Gossie, editor-in-chief at AZ Big Media, and I'm joined by my co-host, our publisher, Amy Lindsey. Today we're very excited to be joining the studio by one of 2022's most influential women in Arizona. Jennifer Delgado, shareholder at Burch and Cracchiolo. Jennifer, thanks for being here so much.Jennifer Delgado
Thank you, Michael and Amy for having me.Amy Lindsey
Thank you and congratulations.Jennifer Delgado
Thank you.Amy Lindsey
Jennifer, start by telling us a little bit about your background and your law practice at Burch and Cracchiolo.Jennifer Delgado
Sure, I have been practicing in Arizona for 22 years. I went to Boston College and then moved out here. My practice is exclusively real estate and corporate transactions, so I do no litigation whatsoever. We like to call it the happy law because everybody's doing deals and everyone's happy at the end. So, I am originally from Colorado and right now I serve on the Business Advisory Council of Local First Arizona and I'm a board member of ACLU of Arizona and I am currently training for the New York City Marathon.Amy Lindsey
In your spare time.Jennifer Delgado
In my spare time.Michael Gossie
Well, congratulations.Amy Lindsey
Alright, Michael, I know you gotta touch on this one.Michael Gossie
One of my favorite things about you is you were very instrumental and one of the catalysts for really the transformation of Roosevelt Row, took from what I remember at the beginning, a bunch of dirt lots and a couple little restaurants to what it is today. So, thank you so much. As a downtown Phoenix lover, I really appreciate that so much.Jennifer Delgado
That's awesome. I am one of the founding board members of Roosevelt Road Community Development Corporation. I no longer serve on the board but I did serve for 10 years and it was fantastic to watch the transformation of that area in downtown.Amy Lindsey
It did transform.Jennifer Delgado
It sure did.Michael Gossie
And the continued transformation, it just seems like every time I go down there there's something new and great. So, it's just fantastic for Phoenix. So, okay. Now Jennifer, I have to ask you, what are some of the things potential tenants need to watch out for when entering a commercial lease agreement in 2022 going into 2023?Jennifer Delgado
Sure, well, it depends on how sophisticated you are. I get all sorts of tenants, extremely sophisticated business, commercial tenants and some that are just renting for the first time. So, there's a lot of things to think about. One is obviously the term of the lease. You know, do you want to be married to this space for five years, 10 years, 20 years? What's important to you and then obviously cost, how much is it going to cost you every year, every month? Is it a regular base rent? Is it a triple net? Are you going to incur additional costs for landlords, maintenance and repairs? What are your obligations going into this space? Is it rent ready, or do you have to do a lot of work? And who's going to do the work? What are your insurance requirements in the lease? There's a lot of things to think about?Michael Gossie
You know, Phoenix is a hot market right now for companies coming in. How difficult is it to find space in Phoenix right now?Jennifer Delgado
Well, I'm not a real estate broker, but my feeling is it's pretty easy at this point. I think there's, you know there's still a lot out there and a lot of different types of spaces that are available.Amy Lindsey
So, why should somebody that's looking in a commercial lease refer to an attorney before signing?Jennifer Delgado
Well, leases can be extremely tricky and depending again how sophisticated you are, you know it might not be... you don't know what you don't know and so, if you're renting space for the first time and this is your business and it's your baby, and you want to protect it. It's important to have somebody who is familiar with lease terms, familiar with what is acceptable lease terms in the climate right now or you could be handed a 70 plus page lease that has a lot of fluff you probably, you know, don't know what it means.Amy Lindsey
You call fluff, I call it. I wouldn't understand what it's saying.Jennifer Delgado
I do call myself a word nerd.Michael Gossie
Don't we all? But you mentioned some of those things. What are some of the pitfalls that people can find themselves in if they don't understand some of those real estate terms? Like, you know, triple net lease, common area maintenance? What if people don't understand that? What kind of problems can they find themselves in?Jennifer Delgado
Sure. Well, again, you're potentially married to a lease and a landlord for, you know, five, ten, fifteen years and you want to really look at the bottom line. How much is this going to cost you? So, usually with commercial leases, there is a base rent. A flat fee that you pay every month and that's, you know, pretty understandable but then there's also triple net, and cam charges. Which a landlord can tack on, which really means that the landlord is passing on their cost to the tenant, and usually that's not a set amount -- it’s not static, it will change over the life of your lease.So, it could potentially be expensive depending on what's included in the triple net and what's included in those common area maintenance charges. So, you really got to look very closely at what the landlord is passing on to you and really important, you need to have the right to audit those charges. You need to be able to take a look at your landlord's records to make sure that your landlord is actually passing on the charges that they're saying they're going to charge... that they're going to pass on in the lease.
Amy Lindsey
No small little markups in there.Jennifer Delgado
Right, right.Michael Gossie
Okay, Jennifer, we have a million questions for you, but I know you have to go take a lap around the block to get ready for the marathon and I have to say, the attorneys at Burch and Cracchiolo have been proving for more than 50 years that a successful business or legal case of any kind starts when you hire the right lawyer, like Jennifer. Let them prove it to you. Learn more at bcattorneys.com that's bcattorneys.com.Amy Lindsey
So, given the business climate we've... I don't want to say we're coming out of... that we've all learned to adjust to. Is there anything a company can do to alter its lease?Jennifer Delgado
Well, again, so our state statute for commercial leases really has no protection for tenants whatsoever. So, it's really important to have the terms that you want in your lease or try the best you can to negotiate those terms in your lease. So, when it comes to amending a lease, it depends on what you've agreed to at the beginning.Amy Lindsey
That’s why you should have hired an attorney to begin with. That was a shameless plug, but it’s the truth.Jennifer Delgado
Right. So, do you have the option to assign your lease to somebody else if you get into financial trouble and you need to get out of it? Do you have the option to sublease? Does that require the landlord's consent first, or are there certain circumstances where you can do it without their consent? What is required to amend the lease? I mean, usually both the landlord and the tenant have to agree to the terms of an amendment, but there are some other subtle changes that you can write in there at the beginning, like if you do want to get out of it, is there an early termination right? If you pay a certain fee, can you get out of your lease without any additional liability? Something else to think about are personal guarantees, usually with businesses that the tenants are a legal entity, a landlord will require a personal guarantee from the owners of that entity. So, what does your personal guarantee say? Does that burn off after five years or 10 years, or after you pay a certain amount of rent? So, those are all things that you can negotiate up front so that if you do need to amend it, if you do have some financial issues and you need to get out of your lease, it's already set in there to give you an exit.Michael Gossie
Are their mistakes that you see people make all the time that you say, hey, if they just would have hired an attorney, they wouldn’t have made that mistake?Jennifer Delgado
All the time. I think at least for businesses that are new to leasing. What I see as the biggest is that a landlord will hand them a 5 page lease and they'll say, Okay, this is great we'll sign it and then obviously there is nothing in that lease to protect you that sets out that you know really basic terms of a relationship that need to be in there and so, you're really left, you know, holding the bag if you get into trouble. If you have a disagreement with your landlord there is nothing in there that protect you. There are no state statutes to protect you. You know, it's not like a residential landlord tenant act that has lots of provisions that protect tenants. There's nothing for commercial tenants. So, you're on your own.Amy Lindsey
So really, to protect yourself, your only option is to make sure that the lease is written to protect you as well and the landlord's not going to...Jennifer Delgado
Correct, the best you can, the best you can. I mean in Arizona, landlords really still have a lot of power. So, they do have the upper hand to the best that you can you try to negotiate and...Michael Gossie
I guess I never realized that once you sign that lease, you're kind of like locked in and there's nothing you can really do as a business owner.Jennifer Delgado
Correct, I mean it is a long-term relationship. It's very much like a marriage and I have had clients, both landlords and tenants walk away from negotiations because after dealing with the other party, they say I don't want to be connected with this person for the next 10 years.Michael Gossie
Oh my gosh. Wow. Wow.Amy Lindsey
So, do you spend the majority of your time helping people sign leases or helping people get out of leases that should have called you up front?Jennifer Delgado
Well, certainly during COVID there was a lot of lease renegotiations, lease amendments. A lot of panicked tenants calling saying, I can't pay my rent. What do I do? How do I get out of this? Those types of scenarios, but it really runs the gamut.Amy Lindsey
So, are there any basic terms a tenant should make sure are in the lease agreement before signing it?Jennifer Delgado
Well, it's very... It's specific to the tenant but you know the bottom line really for tenants are cost, you know you just want to really make sure that you're not paying more than you can afford. That there's an out, you really want to make sure what are the default provisions? What's going to trigger a default? How much time, if I can't pay my rent, how much time do I have before I get kicked out? Usually there is a provision in there that says the landlord has to notify you in writing, and then you have 5 days to pay or 10 days to pay. If provisions like that are not in your lease, there is a State statute that says that you can... that the landlord can lock you out after 5 days of non-payment. So, you really want to make sure that the default provisions are a little bit more favorable in the lease because the lease terms are going to govern?Michael Gossie
So that's significantly different... evicting a commercial tenant is significantly different than a residential tenant.Jennifer Delgado
Correct.Michael Gossie
Wow, that's kind of scary.Amy Lindsey
I’m picturing all these wedding dress shops that you always see closed on the news that have all the ladies wedding dresses with the ladies looking at the... I mean that's scary if it's, you know, five days isn't a lot of time to move inventory and to readjust.Jennifer Delgado
No, and if you can't get your stuff out, your landlord has a landlord's lien by statute, on all of the possessions that are in the space.Michael Gossie
Okay. So, Jennifer you're getting ready for the New York City marathon.Jennifer Delgado
Yes.Michael Gossie
I have to ask you, how does marathon running compare with practicing law and how does each one help the other?Jennifer Delgado
They're both exhausting. You know, marathon running, obviously you're looking for a long-term goal and you're training and you're hoping that the end is in sight at some point. It's the same thing with legal practice. You know you want to guide your clients looking at long term goals for them, especially in business and real estate transactions. It's not a quick fix, it's not, I'm going to sue you and then we'll be done. It’s how are you going to operate your business long term and be successful at the end, just like the marathon. Hopefully!Amy Lindsey
There's a reason I don't run marathons. Many reasons.Michael Gossie
I've always told people that I run because it's much cheaper than therapy, so...Jennifer Delgado
I am in total agreement with that.Michael Gossie
But okay, Jennifer, if people have questions about real estate issues, how can they get in touch with you?Jennifer Delgado
They can reach me through our website, www.bcattorneys.com or they can e-mail me at jdelgado@bcattorneys.com.Michael Gossie
Well, great. Well, thank you so much, Jennifer, congratulations once again on being one of our most influential women of 2022. Thank you for listening to the AZ Big Podcast with Michael and Amy and thank you once again to our sponsors, Burch and Cracchiolo.