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Carl Kanowsky: Due diligence can make or break a business

It's the Law

Posted: April 20, 2012 1:55 a.m.
Updated: April 20, 2012 1:55 a.m.
 


Several clients seek my advice about signing long-term leases for their businesses. I explain that there are numerous factors to consider before committing themselves.

For instance, the obvious things, such as rent, common-area maintenance charges, the condition of the building, personal guarantees, any tenant improvement allowance, incentives to sign the lease, such as forgiven rent, exclusivity and a whole host of other topics.

But one thing I always tell them to do is to visit the potential location as a customer and as an existing tenant.

In other words, how will their clients/customers feel about coming to this new place? What kind of impression does it have? Will it attract new customers based on its location or appearance or some other factor, such as convenience? How do the existing tenants feel about their decision to open business there? What’s their landlord like? What about neighbors and the neighborhood?

Based on this type of due diligence, Downtown New-hall should come across as a great place to open a business.

You’ve got the MetroLink station right there, the city has spent a lot of money to beautify the area, and the new $28 million library is about ready to open. All in all, it looks like a terrific mix.

So, why isn’t the area as busy as the Target shopping center or Granary Square or any of the busier shopping areas in the SCV? 

If you’re looking at committing your business to a lease of five or more years, you need to know the answer to this question. This is an integral part of your due diligence. 

Some of my clients have looked at locations throughout California and had questions about the wisdom of selecting one place over another. Some have relied on what others have told them rather than doing the work themselves.

For instance, some took the word of the landlord that a road was going to be built or that improvements to the building were coming shortly. They executed the lease and then started investigating.

To the prospective tenant’s horror, they learned that the promised road was years away and the great building renovations had not even been started. If they had conducted their own investigation, they would have quickly learned the truth and avoided these problems. But now, they are stuck.

Other clients spent the time to ferret out what was fact from fiction. One client was considering opening a restaurant in a redevelopment area (not in Santa Clarita). He knew that he was going to be investing hundreds of thousands of dollars in the project, so he wanted to be confident he was making the right decision. 

The client took a few days and spoke with the mayor of the city, the staff at the redevelopment agency and businesses surrounding the potential location. He learned that there was much controversy about the shopping center where his restaurant would be located, that there was a power struggle in town between various factions about how the redevelopment funds should be used, and serious questions about how that whole area would look in three to five years. 

So, what at first blush looked wonderful had significant problems. The client decided to look elsewhere. By doing his homework, he avoided a catastrophe.

In my column next week, I will explain some of the simple due diligence steps I’ve taken in considering downtown Newhall. These are steps any potential tenant should take.
 
Carl Kanowsky of Kanowsky & Associates is an attorney in the Santa Clarita Valley. He may be reached by email at cjk@kanowskylaw.com. Kanowsky’s column represents his own views, and not necessarily those of The Signal. Nothing contained herein shall be or is intended to be construed as providing legal advice.

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