Transactions involving these groups differ dramatically from typical commercial leases. Here’s how.
Churches and other religious organizations have some of the least used real estate of any property category. Meeting rooms, classrooms, and the sanctuary are usually left vacant during most of the week. Understandably, many organizations often consider how to monetize these infrequently used spaces by leasing them.
The target tenants are primarily private schools, charter schools, childcare operators, and smaller unaffiliated religious groups. The sanctuary and large meeting rooms can be leased for special events or regularly scheduled meetings. Problems occur when the tenant and the landlord (the religious organization that owns the property) don’t approach the use process as a business transaction.
My company has worked with both sides in these transactions and experienced many issues. I cannot understate how different these transactions are from typical commercial leases. After working on some recent (and frustrating) transactions, I decided it was time to share my thoughts on how to avoid some of the major problems, from the landlord’s perspective.
• Determine what is available to lease. Before marketing any space, the landlord must determine what areas will be available for leasing. An architect or space planner should be retained to measure the designated rooms, overall size of the building, and determine a common area factor for the common areas. The room sizes (usable square footage) will have the common area factor added to them (rentable square footage) becoming the basis for what is available to lease.
• The space is not a traditional office building when determining expenses. Going from the primary use of the property one to two times per week to five full days a week will dramatically increase the wear and tear on the property, including costs of electricity, water, cleaning and garbage collection. Allocating expenses on a pro rata basis could create a situation where the landlord is not covering the true increased costs and could lose money. I have seen this happen in many situations: Landlords cannot understand why it isn’t making any money or may be losing money by having a tenant because they did not factor the added costs. I recommend that the landlord determines the actual expenses for two years prior to occupancy by the tenant. The base year should be the year prior to the tenant’s occupancy. The tenant should be charged for the total actual increases over the base year for the entire property.
• The tenant must be responsible for any upgrade to the restrooms and plumbing issues. School tenants substantially increase the usage of the restrooms. Depending on the age of the students, restrooms may need to be modified for small children. With older students, there may be increased vandalism or abuse causing needed repairs. These need to be paid by the tenant and written into any agreement.
• Specific use permits (SUP) and certificates of occupancy (CO) should be the tenant’s responsibility. If a prospective tenant is a school or child care provider and not affiliated with the landlord, that tenant should be responsible for obtaining a SUP, CO and any other required permits. In the City of Dallas, obtaining a SUP could take 4 to 6 months. The timing will need to be addressed in the lease document.
• Shared spaces need a license agreement. Frequently, the landlord and the tenant will share classrooms, meeting spaces or the fellowship hall. The tenant may need to vacate spaces on Friday afternoons to give the landlord access on the weekends. It is also not unusual for the landlord to need rooms in the evenings during the week. The tenant may want to use the fellowship hall one to two hours a day to serve lunches. The landlord needs the fellowship hall after services and for special events. This is unlike commercial space where the landlord rarely shares space with a tenant. With shared spaces, the landlord and tenant should enter into a non-exclusive license agreement (not a lease) that details the expectations for each party. This could easily result in the landlord and tenant having both lease and license agreements.
• Determine responsibility for and use of outside play areas. The tenant is usually responsible for maintaining and replacing equipment in the outside play area since they will use it more than the congregation. The tenant may require exclusive use of the area, and the congregation should not assume it will have access. However, if the congregation wants to use the play area, shared costs or offsets for other expenses may be necessary. The play areas must be included in any lease or license document for clarity.
• Few comparable rental rates. Because of their unique issues, rental rates in religious facilities are not comparable with traditional commercial properties. Most landlords want to be fair with their tenants. I usually recommend the tenant pay all or 90% of the expenses above the base year. Rental rates are typically in the $7 – 10 per square foot range plus expenses for leased space. Space used under a license may be a fixed rate per day. Nonprofit tenants usually have lower rental rates because it is unlikely they will trigger property taxes for the landlord. However, this can vary from county to county. (My experience is that the Tarrant County Appraisal District is the most difficult on this issue.) Any lease should provide that if the property is ever deemed taxable because of the tenant’s use, the tenant will be 100% responsible for the property taxes.
• Pay for professionals. I strongly recommend the landlord retain an attorney with experience in commercial real estate to draft and assist in negotiating the lease and license agreements. In addition, if the landlord intends to actively market the property for lease, a real estate agent with an expertise in commercial real estate should be retained, and the landlord should expect to pay real estate commissions. I also recommend that these professionals not be members of the congregation. This impartiality ensures that all parties are providing independent assistance and can be terminated without causing hurt feelings among the congregation.
• One designated person representing the landlord. Large religious organizations usually have a business manager who will oversee the leasing process. Rarely is it the religious leader. However, smaller organizations may need to rely on a member of the congregation (and not a committee) to serve as the point person or primary contact. That person should have a business background and experience with leasing commercial space. He or she typically reports to a real estate or facilities committee that oversees the process. Of course, all final decisions will be subject to approval by the landlord’s governing board, often designated leaders or elders.
Overall, I have found that when a religious organization becomes a landlord and approaches a transaction and the on-going property management in a businesslike manner, it increases the likelihood that all parties will be happy. Ideally, it will become a partnership with both parties working cooperatively to create an environment that allows everyone to thrive.
Eliza Solender is president of Solender/Hall Inc.
This article was originally posted in DMagazine Commercial Real Estate | CRE Opinion