Essential Tips for Negotiating Commercial Real Estate in Texas

Published: 05-29-24    Category: Leasing/Renting

Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.

Austin skyline during sunset.

Doing business in Texas has plenty of advantages, which has earned it the Best State for Business accolade from Chief Executive magazine for the past 20 years.

This is why many business owners and entrepreneurs are headed to the Lone Star State, especially those who will be leasing or investing in commercial real estate (CRE).

Results of the 2021 United States Small Business Friendliness Survey awarded Texas with an A rating, based on the state's tax code (Texas has no corporate income tax), ease of starting a business, and labor/hiring practices.

If you're a business owner or entrepreneur headed to Texas or a resident who's preparing to open an independent, satellite, or franchise-based business, you'll want to become acquainted with the state's regulations for commercial real estate leasing.

First, we'll examine the commercial lease laws and statutes in Texas and how they may differ from those in other states.

Let's begin with the improvement allowances you may receive as a tenant.

Tenant Improvement Allowances

While commercial landlords based in Texas are not required by law to offer tenant improvement allowances, many will use this as a negotiation tool.

If you're offered one, here are some guidelines to keep in mind:

  • Texas has its own building codes and permitting requirements, which may affect your costs. Check your lease to see who is responsible for obtaining permits for tenant improvements and ensuring compliance with local building codes.
  • Your lease may include a deadline for completing the use of your improvement allowance, and you may lose the allowance if your improvements aren't completed by the deadline.
  • If you receive funds from a landlord to finance improvements, you or the landlord may be responsible for paying Texas sales tax on these funds. This should be defined within the lease.
  • The Texas Property Code protects contractors by allowing them to file liens against property owners and tenants for unpaid bills, including those incurred when carrying out tenant improvements.
  • Commercial landlords in Texas often require departing tenants to remove improvements at the end of the lease.

Another important section of a commercial lease is the triple net, or NNN, clause. These are generally the same within Texas and other states and define all tenant expenses in addition to rent.

What's Included in a Commercial Triple Net Clause?

A triple net lease, sometimes abbreviated to NNN, contains details of all costs tenants will assume. In addition to rent, the tenant agrees to pay other expenses or “nets,” including real estate taxes, building insurance, and maintenance.

A NNN lease often has a lower rent rate since the tenant will be paying expenses otherwise paid by the owner.

Maintenance may be described within a lease as operating expenses. These may include the cost of repairs, maintenance, trash removal, landscaping, and parking lot maintenance.

While NNN leases are popular, there are other lease structures. A single net lease requires tenants to pay property taxes, while a double net lease adds property insurance to property taxes.

If you encounter the term Absolute NNN Lease, don't panic. Defining the differences between Absolute NNN and Triple Net leases is a fairly simple process.

Absolute NNN or Triple Net Lease?

While these have plenty of similarities, an absolute NNN lease is the most popular with commercial tenants and landlords. These are found within Texas and almost all other states.

An absolute NNN lease requires the tenant to pay all expenses, while the landlord takes no responsibility for maintenance. This is usually structured as a long-term lease. It is often renewable, with the same tenant able to take it up again at any time.

A triple-net lease is similar to the absolute NNN lease, but there are a few differences. For example, a tenant with a triple-net lease may not be responsible for repairing the property. Triple-net leases also tend to have shorter terms.

Here are details of other clauses often found within Texas commercial leases that you should familiarize yourself with.

Conquer These CRE Clauses Within a Texas Lease

While some of these are seen in virtually every CRE lease, several are limited to Texas.

Lease duration: Commercial leases often range from five to 10 years. Tenants signing longer leases may be offered tenant incentives, such as reimbursement for renovations.

Waiver of tenant rights: Texas law allows tenants to waive certain rights in the lease agreement, such as an implied warranty of suitability or the right to a jury trial if problems arise. Not all states allow this type of waiver.

Deed restrictions: Many Texas landlords have deed restrictions that limit the types of uses for a property. These are less common in other states.

Foreclosure impact: In Texas, even if a landlord's lender forecloses, tenants may have the right to retain possession by continuing to pay rent.

Maintenance responsibilities: Since these are unique to each CRE property, tenants should require that the lease define these precisely, together with estimated costs.

Calculation of charges: Texas law stipulates that tenants' late fees, interest, and other charges must be reasonable estimates, not penalties intended to deter a breach.

While due diligence is important when negotiating a commercial lease, you don't have to manage this on your own. Here are some options for assistance.

CRE Broker or Tenant Representative?

You may prefer to work with a CRE professional with insight into the possible situations a tenant may confront in Texas. They may be attorneys who specialize in CRE or tenant representatives.

While Texas enjoys a reputation as being a business-friendly state with flexible CRE legislation, this “friendliness” translates into fewer laws protecting tenants. However, this also allows you to negotiate your lease.

Lastly, you can review the state statute online free of charge.

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