Tom was grinning widely as he clapped James on the back so hard it jarred him forward unexpectedly. 

James is a licensed agent with the brokerage firm Tom and his brother Mark enlisted to be their landlord representative. The brothers are first-generation Americans who set out to live the American dream through commercial real estate — purchasing a building in Phoenix is their first venture.

Negotiating the deal

James, accompanied by his boss Lisa, shared good news with the brothers — he found a tenant to lease their commercial building, and the tenant is agreeing to all their stipulations.

Tom nods at James and excitedly responds, “Good work getting a ten-year tenant. We still can’t believe they agreed to everything. You say this is your first deal?”

James nods and smiles proudly, “Pretty amazing, right? It’s exactly what you wanted — a triple net lease, no tenant improvement allowance, five percent annual rent bumps, and drum roll please…a long-term lease.”

Lisa tilts her head with an amused grin. She radiated professionalism in her navy Veronica Beard suit and said, “It’s everything you wanted, Tom. Now we need to draft the lease. Do you have a commercial real estate attorney, or should we recommend one?”

Tom’s brow furrowed. “An attorney? We hired you — that’s part of your job. It’s just a form, right?”

James’ smirk faltered. Lisa, unphased, held her ground. “Tom, we’re real estate brokers, not attorneys. We have your best interests in mind, and that’s exactly why we recommend hiring a seasoned CRE attorney.”

Tom scoffed, shifting his weight. “They’ll just rack up billable hours. You’ve been in the business long enough. I’m sure you have a template we can use.”

Lisa exhaled. “Would you argue with the IRS yourself, or hire a CPA to represent you?”

Tom pressed his lips into a thin line. “Of course, I’d use a CPA.”

James’ eyes darted between them like a spectator at a tennis match.

Lisa planted her hands on her hips. “Then trust us,” she said. “This tenant is unique. You need a lease tailored to protect you.”

Tom exchanged glances with his brother Mark, reluctant but nodding. “Well…okay.”

Lisa discovered at the first meeting with Mark and Tom that they bought the dated building at a discounted rate without understanding the true cost of ownership: broker commissions, attorney fees, maintenance costs, property taxes, upfront tenant expenses — investing in real estate involves more than just the purchase price. She and James recognized their goals and needed to provide valuable guidance.

“Trust us on this, it is a sticky deal. You need to pay an attorney to draft an ironclad lease to protect you if anything goes south,” Lisa pressed. “We can email you sample NNN leases, but those are tailored to other deals. This tenant is unique. You need an attorney and a strong lease to address your specific concerns.”

Tom exhaled through his nose. “Just send us the templates. We’ll tweak them.”

Lisa and James exchanged glances, knowing this wasn’t over.

The deal gets interesting

The stale tang of cigarette smoke clung to the first-floor space of the commercial building as CJ, the new lessee, sauntered in with the contractor trailing close behind. The building, a relic of the 1970s with filtered dusty light through long, skinny windows, was clearly in need of updates.

CJ took a slow turn, eyes lingering a moment too long on Lisa’s frame. “Perfect,” he murmured, stepping into the center of the room.

He sliced through the air with his hands. “Bar in the center, dance floor north. Lounge and kitchen to the south, restrooms with, you know, peepholes,” CJ smirked.

The contractor grins and quickly says, “Epoxy floors, then. Any color you want.”

Excitement buzzed from CJ like static electricity as he led the contractor upstairs, voices dipping low as they discussed specialty rooms.

Lisa leaned toward James. “I’ve spent thirty years in CRE and this is a first — a swingers’ club.”

James chuckles, “My buddies are never going to believe this.”

Lisa tells James, “That’s what I love about working in commercial real estate — we learn about all types of businesses. This space is perfect for him. There’s a monument sign on the main street where forty thousand vehicles pass by every day. It has a secure lot, a nondescript building, and it’s zoned correctly. There aren’t many locations in Phoenix that check all those boxes. That’s why he’s willing to pay the price.”

James nodded, rubbing the back of his neck. “Yeah, I didn’t think of that.”

James’ phone dings, and he pulls it out to see an email with the new tenant’s financials. “The numbers just came in and they look weak.”

Lisa reviewed the numbers over James’ shoulder and frowned. “Not good. When you send these numbers to the brothers, recommend a strong personal guarantor.”

As James and Lisa step outside, the Arizona heat slams into them like a boxer’s punch. James immediately dialed Tom and put him on speaker. “CJ’s financials are weak. You need a solid guarantor.”

Lisa pressed. “And this is why you need an attorney. Two entities — tenant and guarantor. If the lease isn’t airtight, the guarantor could walk.”

James caught CJ and the contractor stepping outside and signaled Lisa by dragging his finger across his throat. Lisa smoothly ended the call and she and James greeted the two men.

CJ clapped his hands together. “The building is perfect. The contractor says two to three months for renovations. Perfect timing with our lease. Perfect time of year to open. We already have memberships.” A hint of dry sage curled through the heat as CJ exhaled. Another big grin and a wink at James.

James, to his credit, didn’t flinch under CJ’s lingering gaze. CJ’s grin widened.

Lisa patted CJ on the back. “This place is perfect for your swingers’ club with all the strip clubs up the street. I understand why you want to sign the lease ASAP. There aren’t many locations that will allow your type of business to operate.”

“Yeah, perfect,” CJ purred. He arched a brow and skillfully undressed Lisa’s lean frame with a sigh.

“Thanks for sending the financials. The landlord reviewed them, and unfortunately, they aren’t strong enough. He needs someone to guarantee the lease who has net worth to support a million-dollar lease commitment. Got anyone in mind? Maybe one of your patrons?” Lisa cocks her head.

“Hmmm, I think so. Give me a day. But let’s get this lease signed ASAP.” He glances at James and says, “For you, a lifetime membership, my friend. On me.” 

CJ and the contractor get into a Dodge Charger and fishtail out of the lot.

Next steps

James enters Lisa’s modern office to deliver the latest news, “Tom approved the guarantor’s financials. His attorney is emailing us the draft.”

She instructs James and asks, “Send the LOI to the attorney. Who’s the guarantor?”

“Laura something. I met her and her husband yesterday. They seem normal.”

Lisa winked, “You never know what happens behind closed doors.”

James smirked. “Is every deal like this one?”

Lisa leaned back, shaking her head, “No. Make sure the lease details the tenant’s buildout. We don’t want CJ gutting the place and walking.”

She raised her stand-up desk and electronically retrieved the signed letter of intent for reference. 

James twirled his pen, and it flipped to the floor. Stooping to retrieve it, he says, “Mark keeps saying that this type of business makes big bucks and once they open, the tenant will be able to pay their rent, no problem.”

“One would think, but we need to stay all over this.” Lisa removed her plaid Ralph Lauren jacket and slung it over the back of her drafting chair.

Ding. Lisa checked her phone. “Tom’s pushing to get this signed.”

Another ding. CJ: Got my lease?

Lisa and James exchanged knowing looks.

Orange flags turn red

Three weeks later, after the lease was fully executed, demolition began. As James sips his coffee he tells Lisa, “Getting CJ to produce a Certificate of Insurance and floor plan was worse than pulling teeth.”

Lisa retrieved the floor plan CJ sent for the landlord to attach to the lease as an exhibit. “Tell CJ this works as an initial exhibit, but he needs an architectural drawing,” She tossed the building keys to James. “Mark said you can hand these off.”

James caught them midair. “Consider it done.” He glanced over his shoulder before stepping out the door and added, “They didn’t teach me any of this in business school.”

Two weeks later James bursts into Lisa’s office, Mark’s voice blaring on speaker through James’ phone.

“You gotta come see what he did. Oh, my God! The place is destroyed! Electricity lines hanging, sledgehammers everywhere — it’s a crime. My brother’s gonna lose it.”

Lisa intercepted, “Mark, what do you mean by ‘destroyed’?”

“The place is a mess. It wasn’t supposed to be like this. My brother will go ballistic if he finds out.”

“We’ll be there in thirty.”

Lisa and James arrived at the ‘crime scene’ and walked through the workers lingering by the back door. Cigarette smoke choked them. Inside, the once-cramped space stretched wide and open. The obsolete, dingy offices were gone.

Mark shook his head. He waves his arms expansively, “See? They took everything out.”

Lisa scanned the room. “It looks better. They’re prepping for the buildout.”

“They cleaned up the space since I saw it yesterday, but the wires! What if someone gets electrocuted? Liability —”

James cut in. “That’s why you hired an attorney, and the COI removes liability from you.”

Mark crossed his arms. “I’m a contractor. Where are the permits?”

Lisa stayed calm. “Maybe they forgot to post the demo permit? If you doubt the contractor’s credentials, call him.”

CJ strutted in, hands in his pockets, cigarette dangling from his lips. “Mark, my man. What’s the problem?” He gestured around. “This place is looking good, don’t you think??”

Mark exhaled. “I admit, now that it’s clean, I see your vision. But where’s the demo permit?”

CJ spread his arms. “Mark, my friend, we’re good, all good. I’m sure the contractor just forgot to post it. It’s late, I’ll ask him about it tomorrow. Don’t worry, we have friends in the planning department. They’re very happy to work with us. We’re doing this right, my friend.”

Lisa placed her manicured hand on CJ’s forearm. “Text a photo of the permit by tomorrow.” Her tone was steel. “And we need the architectural drawing. When will we get it?”

CJ shifted his weight to the other leg, “Soon, very soon.”

Money talks

Six weeks later, the building remodel is at a standstill. “What’s up?” Lisa asks as James walks into her office.

James hesitates, “CJ says he’s having problems with Laura, his guarantor, and he doesn’t want me to tell Tom.”

Lisa locked eyes on him, “Who do you have a fiduciary duty to?”

James exhaled, “Our client.”

“Then tell him.”

At that moment, Lisa’s phone rang. As she held a finger up to James, “Hold on —”

Lisa picked up the phone. “Davis Commercial, how can we help?”

A confident female voice responded, “Is this Lisa?”

“Yes.”

“My name is Laura. I’m CJ’s partner. You wouldn’t believe what I had to do to get your number. I asked CJ for it, and he said he didn’t have your cell.”

Lisa pressed the mute button and looks at James, “It’s Laura — CJ’s partner.”

James’ eyes widened. Lisa unmutes herself, “That’s interesting,” she said, keeping her tone even. “Our contact info is on the lease. Anyway, what can I do for you?”

A brief pause. Then, Laura continued, her voice measured, “I’m not accusing CJ of anything, but I have some concerns. I’m not from Arizona — can you walk me through the tenant improvement process?”

Lisa outlined the city’s requirements. “For an extensive remodel like CJ’s, the city requires architectural and engineering drawings, city approval, and then permits before work can begin. CJ finished demolition, but he can’t move forward without permits. So far, the landlord hasn’t seen any architectural drawings. Once submitted, permit approval could take two to three months.”

Laura exhaled. “Do you have any idea how much tenant improvements might cost? CJ told me we’d be open by now, and next month, our rent obligation starts.” Her voice remained professional, but there was an underlying tension.

James leaned back in his chair, smirking. “This is getting good,” he whispered.

Lisa shot him a sharp look and scribbled on a notepad, holding it up: No, it’s not. This reeks of a BIG problem.

She returned to the call. “Your first lease payment is already coming due? Let me pull up your lease.” As Lisa typed, she added, “I’m not a contractor, but based on similar projects, the total buildout cost could range from $500,000 to $800,000 after demo, depending on finishes.”

The lease popped up on her screen. “And yes, your rent payments start in two weeks.”

James, now pacing, folded his arms.

Laura hesitated. “So, if I understand this correctly, we’ll be paying $12,000 a month before we even open? And it might take three more months?”

“That’s right,” Lisa confirmed.

Laura sighed. “I’ve already given CJ over $400,000, and now he says he needs more. How could demolition cost that much?”

Lisa quickly pressed mute. She and James exchanged a wide-eyed look.

“This is going from bad to worse for the money partner,” she muttered.

Then, she unmuted the call.

Lessons learned Part 1

This deal highlights several key lessons for first-time commercial real estate owners and industry pros alike:

• Early wins, like securing a tenant, don’t eliminate the need for ongoing diligence. 
• Professional guidance should never be optional; while brokers facilitate deals, attorneys make sure they hold up if things start to go sideways
• Enthusiasm from a tenant should never outweigh the importance of strong financials and a reliable guarantor
• Any buildout must follow proper permitting and compliance — verbal assurances or early demolition without documentation is a red flag
• Maintaining transparency with clients and prioritizing fiduciary duty is non-negotiable, especially when warning signs begin to surface

Stay tuned for Part 2 of this deal as we find out how the landlord recaptures their losses: does the tenant pay up? Does the personal guarantor take over the lease and/or business? Does the landlord engage an attorney and sue?