LEASE NEGOTIATIONS

LEASE NEGOTIATIONS Richard Muhlebach, CPM, SCSM, RPA, CRE Woodinville, Washington rmuhlebach@comcast.net 206-660206-660-6902 1 Course Objective j  Clarify confusion regarding Lease Netness (gross to triple net to modified net lease) Negotiate lease provisions      Explain purpose of scores of lease provisions Discuss the landlord’s perspective Discuss the tenant’s perspective Review how to compromised and arrive at a fair lease provision How t do a pad d l H to d d deal Develop a temporary tenant program Maximizing lease renewal opportunities g pp  Explore value added opportunities for the landlord    2 LEASE NETNESS 3 Confused? There is confusion in our industry over what is a gross lease to a single, double and triple net lease – we will presented an industry definition of lease netness that has been used for over 40 years. The most important point when discussing a lease netness is to be sure all parties are using the same definitions. 4 Types of Leases Gross Lease Single Net Lease Double Net Lease Triple Net Lease Tenant Pays Base Rent Base Rent + Taxes (T) Base Rent + Taxes + Insurance (TI) Base Rent + Taxes + Insurance + Maintenance (TIM)* *Remember Boy’s Name: TIM Remember Boy s 5 Variations of Lease Netness      Full Service Base Year Absolute Net Pure Net Modified Net (cap on pass-through charges, specific expenses excluded, etc.) What Else? Most I M t Important – E t t Everyone i th t in the transaction should b using th ti h ld be i the same definition(s)   6 Negotiating Lease Provisions Landlord’s & Tenant’s Perspectives (L.L.) (T.T.) 7 Providing Additi P idi Additional Value by lV l b Negotiating Lease Provisions 8 History of the Commercial Lease 9 Advertising (Shopping Centers) g( pp g ) • Lease Provision – Tenant required to advertise to generate sales and traffic to the shopping center – Based on % of sales or number of time in shopping center’s advertising flyer or shopping center’s newspaper ads – No longer common for Grocery Anchored Centers – Common for Malls, Life Style Centers, Specialty Centers • Landlord’s Perspective L dl d’ P ti – Want all T.T.s to support center wide advertising – Strengthens success of each T.T. g – Increases potential to collect % Rent – If tenant does not advertise then L.L. will place ad for T.T. and charge T T T.T. 10 • Tenant’s Perspective – Anchor T.T. will not agree – Other T.T.s will want to limit number of times they must advertise – T T do not want requirement to be a % of their sales T.T.s d t t i tt b f th i l 11 Acceptancy of Keys • Lease Provision – T.T. cannot cancel its lease because T.T. gave the keys to its premises (turn the premises over to the L.L.) to a representative of the L.L. (e.g. maintenance person) • Landlord’s Perspective – Just because you tossed your keys to the maintenance person you cannot claim we accepted your premises back and terminated your lease • Tenant s Tenant’s Perspective – No Comment 12 Alterations to Premises (Office Buildings) • Lease Provision – No alterations without L.L. prior written approval • Landlord’s Perspective – Maintain electrical, mechanical and structural integrity of the building – Ensure all work to L.L.s standards – Control access to building – Control use of common areas & elevator – No disturbing other T.T.s – May require union workers 13 • Tenant’s Perspective – Wants fair price – No unreasonable mark-up of L.L.s construction contracts – May negotiate for right to perform non structural non-electrical non-structural, non electrical and non-mechanical improvements, such as paint, carpet, cabinet, etc. up to $XXX without L.L.s approval – Shopping Centers T T perform TIs except L.L. wants approval of T.T. LL roof and other structural penetrations • Negotiations – If T.T. perform TIs it must: ▫ ▫ ▫ Abide by L.L. rules, e.g. core drilling, use of elevators, etc. Contractors provide L L with evidence of i C t t id L.L. ith id f insurance requirements Name L.L. and Property Management Company additional insured on contractor’s policy i d t t ’ li 14 Arbitration (Rent Dispute) • Common Method – Each party select arbitration – Arbitrators select the 3rd arbitrator – Arbitrators decision prevails • • Landlord’s and tenant’s concern arbitrators will split the difference Baseball Method – Each party chooses what they believe to be market rental rate – Arbitrators must choose the rate closest to what they believe is the market rate 15 • Lease Provision – Sate qualifications of the arbitrators, e.g. 5-yr commercial appraiser or leasing agent in the area – How long to render their decision – Define geographic area where buildings are located – Describe comparable buildings and space 16 Assignment • Lease Provision – • Tenant has the right to assign its lease Landlord’s Perspective – – – – Need L.L. prior written approval Assignee must be q g qualified Assignment without release T.T. not in default • Tenant’s Perspective – – – – Absolute right to assign the lease L.L. L L be reasonable on qualifying assignee Assignment with release T.T. wants to move on with its life and with no worry of prior business and lease obligations 17 • Negotiations with release if: – Assignee paid rent on time for XX consecutive months – Assignee never in default of lease (T.T. want substantial default) – A i Assignee’s net worth never below $XXX ’ t th b l – If retail tenant sales are not below $XXX 18 Auditing Rights (Tenants) • Lease Provision – Tenant has the right to audit L.L.’s pass through charges L.L. s pass-through • Landlord’s Perspective – That’s fair, bu a s a , but: ▫ ▫ ▫ The audit must commence within 90 days of the date the T.T. receives the year-end adjustments The T.T. can only audit the period of the most recent year TT yearend adjustment The audit will be conducted in the place where the L.L. maintains the financial records during normal business hours The results of the audit will be kept confidential ▫ 19 ▫ ▫ ▫ ▫ ▫ The auditor will not be paid a contingent fee The auditor will be a CPA The L.L. will receive a copy of the audit The T T Th T.T. must not be in default of its lease d i th audit t t b i d f lt f it l during the dit If the L.L. disagrees with the results of the audit another CPA who is mutually selected by the L.L. and the T.T. will conduct the dit d th th audit and the results will b bi di lt ill be binding The T.T. may not withhold rent of other charges during the dispute or the audit ▫ 20 • Tenant’s Perspective – How do I know you’re being honest – T.T. wants to audit prior years – T T wants L.L. to pay for cost of audit if pass-through expenses T.T. t LL t f t f dit th h over or under stated by 2% or more – T.T. doesn’t want to be required to use CPA – Many auditing firms work on a contingent basis which T.T. prefers 21 Cancellation (Retail Lease) • Lease Provision – • T.T. has the right to cancel its lease if it doesn’t achieve specific annual sales Landlord’s Perspective – – – – – – – – NO WAY! But… Agree upon reasonable sales number T.T. must have sufficient time to achieve theses sales, say, after third calendar year (3 Christmases) One-time right O ti i ht If sales exceed the number and then drops below T.T. doesn’t have cancellation right Short window to exercise the right say 15 days after last month of right, say, 3rd calendar year 90-day or longer cancellation notification Cancellation payment (rent commission, unamortized T I s) (rent, commission T.I.s) 22 • Tenant’s Perspective – Do you really want me! – Do you have confidence in your shopping center! – O going right any ti On i i ht time sales are b l l below XXX – No cancellation payment – 30-day ca ce a o notice 30 day cancellation o ce 23 Common Area Maintenance & Office Building’s Pass-through Charges • Lease Provision – – – • Operating expenses are paid by the T.T. Office and medical office buildings. All expenses pass through to T.T. in one expense charge Shopping Centers bill CAM, taxes, insurance, etc. separately because… Pass-through all operating expenses No restrictions on which operating expenses can be pass-through Pass-through replacing capital improvements in common areas g p g p p Pass-through life safety and government required building improvements Pass-through cost of new equipment to reduce energy consumption and costs 24 Landlord’s Perspective – – – – – • Tenant’s Perspective – Want list of allowable pass-through items – Not structural repairs – Li it ti Limitations on i insurance coverage – Amortize cost of capital improvements – Exclusions from ope a g e pe e ce c us o s o operating experience: ▫ ▫ ▫ ▫ ▫ ▫ ▫ Commissions TIs Legal expense Ownership audits Owner s Owner’s staff not on-site on site Art work in the lobby Etc., etc., etc. 25 • Other Issues – Bill pass-through changes on lease or leasable square footage – Shopping centers, pass-through management fee and/or administrative fee (double dipping) – Cap on pass-through changes, controllable and uncontrollable expenses – Fi CAM (similar to office building “ Fix ( i il t ffi b ildi “expense stop”) t ”) – Mall: Interior CAM, exterior CAM, food court CAM – Maintenance reserves – Gross up 26 Gross Up Concept: • Allows L.L. to gross up the building’s operating expenses to 95 – 100% occupancy – Example of Gross Up: ▫ ▫ ▫ ▫ ▫ ▫ ▫ Office building of 100,000 square feet Tenant occupies 10,000 square f t T t i 10 000 feet Tenant pays it pro rata share of the operating expenses which is 10% The janitorial cost is $1.00 per square foot The cost for janitorial service at 100% building occupancy is $100,000 The cost for janitorial service for the 10,000 square foot tenant is $10,000 (10,000 square feet X $1.00 per square foot) The building is 50% occupied 27 ▫ ▫ The cost for janitorial service for the half occupied building is $50,000 (50,000 square feet X $ $ $1.00 per square foot) If the tenant is charged 10% (its pro rata share of the building) the tenant is charged only $5,000 ($50,000 ÷ 10%) for j it i l f janitorial services when th actual cost t clean th i h the t l t to l the tenant’s premises is $10,000 When operating expenses are grossed up to 100% occupancy th cost for janitorial service is stated at $100,000 the t f j it i l i i t t d t $100 000 (100,000 square feet X $1.00 per square foot) and the tenant is billed $10,000 for janitorial service (10,000 square feet X $ $1.00) which is the actual j ) janitorial costs to the tenant’s space regardless of the occupancy of the building When does Gross Up benefit the T T ? T.T.? ▫ ▫ 28 Continuous Operations (Shopping Centers) p ( pp g ) • Lease Provision – T.T. must never close and always operate its business • Landlord’s Perspective – Important to T.T. mix of shopping center – T.T. must keep center’s hours – T.T. must keep store fully stocked adequately staffed – Prohibit T.T. from closing except approved holidays g p pp y – Violation is monetary penalty and or L.L. right to cancel the lease • Tenant’s Perspective – Wants to close if its business is not successful – Believes as long as it is paying the rent L.L. shouldn’t have a problem 29 Co – Tenancy ( y (Shopping Centers) pp g ) • Lease Provision – A tenant has the right to cancel its lease if another tenant closes or the shopping center occupancy falls below a specific percentage. • Landlord s Landlord’s Perspective – NO WAY! – Could affect financing new development or refinancing existing shopping center • Tenant’s Perspective – N d th traffic draw of specific T.T. or T.T.s to achieve sales Need the t ffi d f ifi T T TT t hi l goals – Signed its lease because of anchor tenant(s) 30 • Negotiations – Instead of lease cancellation T.T. rents changed from base rent vs. % to % rent only – If must give cancellation right add requirements to the right, such as, – T.T. sales must decline X %, say 10%, before T.T. can cancel – L.L. has 1 year to replace the T.T. that vacated or bring shopping center above X % occupied t b i d 31 Default by Tenant y • Lease Provision – Action and remedies for monetary and non-monetary defaults • Landlord’s Perspective – Rent due on 1st paid it on 1st – Does not want responsibility to remind T.T. to pay its rent – Cure non-monetary default in 15 days • Tenant’s Perspective – If L.L. doesn’t receive rent on time please tell me – P id me with reasonable ti Provide ith bl time t cure non-monetary default to t d f lt 32 Estoppel pp • Lease Provision – T.T. acknowledges in writing its lease terms, status of rental payment and neither party is in default • Landlord’s Perspective – Need the signed estoppel ASAP to sell or refinance property – If T.T. doesn’t sign within 10 days of receiving estoppel T.T. represents the info on estoppel is correct • Tenant’s Perspective – Need more time for its attorney or corporate offices to review the estoppel t l – Maybe concerned with the estoppel form provided by the L.L. it’s lender or buyer 33 Exclusive Use • Lease Provision – T.T. has the sole and exclusive right to sell a product or offer a service • Landlord’s Perspective – NO WAY! – Limits L.L. control over building’s tenant mix • Tenant’s Perspective – Doesn’t want competition – May have expensive equipment needs to pay off such as an MRI 34 • Negotiations – It should not apply to existing tenants, their assignees and subleasees – It should be limited to specific product or service – It should exclude incidental sales of the product – It may be limited to a specific period – It may be limited to an area in the shopping center – Must provide for the damages if exclusive is violated – No monetary damages!!! 35 Expansion Rights • Lease Provision – Tenant has the right to take additional space • Landlord’s Perspective – Concern T.T.s right may get in the way of leasing space, possibly to large user in area of expansion right user, – If L.L. forgot about the right and leases the space, there could be a problem • Negotiations – Designating the space the tenant has the first right of refusal – I Increasing the rent on the additional space t market rate i th t th dditi l to k t t – Require that after the landlord notifies the tenant that the space is or will become available, the tenant has three days to notify the landlord of its intent to take the space 36 – Require the tenant to lease the space within a specific period – The tenant must not be in default – Providing the tenant with a one-time right one time – Provide who pays for the tenant improvements – State the expiration date – If the tenant exercises this right it has a limited time to sign the lease for the new space – If landlord violates the right no monetary damages and T.T. has g y g right to cancel its lease 37 Floor Area • Lease Provision – States the approximate square footage of the premises on either rentable or usable basis – May state BOMA’s method for measuring space in office buildings and industrial properties – No standard method for shopping centers • Landlord’s Perspective – Be accurate – Get maximum amount of square footage possible – No T.T. challenges to the square footage • Tenant’s Perspective – Doesn’t want to pay for more square footage than is in the premises – No drip line measurement 38 • Negotiations – State method used to measure the space – Provide “approximate” amount of space – T T doesn’t want rounding up T.T. d ’t t di – T.T. can have space measured prior to move-in and not again 39 Go Dark (Shopping Centers) ( pp g ) • Lease Provision – T.T. may close its store and continue to pay rent • Landlord’s Perspective – NO WAY! – Anchor T.T. closing is likely to “kill” traffic to the center – L.L. gave concession to get T.T. to sign lease because of its drawing power • Tenant’s Perspective – If the area cannot support the store it must close store, 40 • Negotiations – L.L. want right to recapture premises – L.L. want plenty of advance notification – L L want reimbursement of unamortized commissions, TI etc. if L.L. t i b t f ti d i i TIs, t L.L. recapture space – T.T. want right to assign or sublease premises – T.T. want to earn spread between its rent and market rent – T.T. doesn’t want to pay anything to cancel 41 Guaranty y • Lease Provision – Rental payments are guaranteed by one or more third parties • Landlord’s Perspective – Party signing the lease need to be able to fulfill its financial obligations – If not need as many guarantees as possible • Tenant’s Perspective – Wants to reduce its risks and not guarantee the lease • Negotiations – Limit time period of guarantee – Base the period on T.T.’s net worth – Base the period on T.T.’s paying rent on time for X consecutive months 42 – T.T. never in default – Base guarantee on T.T.’s sales exceeding XXX for specific period and if drops below guarantee kicks in – T.T. will want one grace period for late payment – T.T. will want substantial default 43 Hold Over • Lease Provision – If tenant remains in possession after lease expires lease is on monthto-month • Landlord’s Perspective – Prefer to renew the T.T. – If L.L. has space re-leased needs T.T. to vacate • Tenant’s Perspective – Need to remain in premises until another location is ready for move-in • Negotiations N ti ti – Typical provision states rent increases 150% – L.L. prefers 400% to motivate T.T. to renew or vacate 44 Hours of Operations (Shopping Centers) p ( pp g ) • Lease Provision – Tenant will remain open during the hours established for the shopping center • Landlord’s Perspective – All stores need to maintain same hours to best serve shoppers – Longer the T.T. is open greater chance of paying % rent • Tenant’s Perspective – Prefer to choose its own hours to control occupancy and labor cost 45 • Negotiations – 1970 Maintain the hours established by the Merchants’ Associating – Disaster – 1980 Maintain hours of anchor stores then grocery stores stayed open 18-24 hr/day – Didn’t Work – 1980 Maintain hours of like businesses in the area – Some o s e businesses controlling e center’s ou s offsite bus esses co o g the ce e s hours – 1990+ Hours stated in the lease and L.L. can change them 46 HVAC Maintenance (Shopping Centers) ( pp g ) • Lease Provision – T.T. responsible for maintaining HVAC unit • Landlord’s Perspective – T.T. responsible for cost of maintenance and replacement of HVAC unit – L.L. will contract for maintenance – L L doesn’t want several contractors on the roof L.L. doesn t • Tenant’s Perspective – Will maintain unit – It must be in good condition when I assume maintenance – Not fair for me to replace L.L.’s unit 47 • Negotiations – T.T. wants unit inspected and repaired before assuming maintenance responsibility – T.T. doesn t want to replace L.L.’s “old unit” doesn’t L.L. s old unit – Evolution of this provision ▫ ▫ ▫ ▫ ▫ T.T. responsible for maintenance, no evidence provided T.T. responsible for maintenance and provides L.L. with copy of maintenance contract L.L. maintains HVAC and bills T.T. for cost L.L. maintains HVAC and contractor bills T.T. for cost T.T. wants maintenance cost to be at market 48 Insurance • Lease Provision – L.L. insures the building and common areas and T.T. pays its pro rata share of the cost per its lease • Landlord’s Perspective – Fair pass-through operating expense – Lender may require specific coverage • Tenant’s Perspective – OK but be reasonable regarding type and limits of coverage – Anchor retailer will either self-insure or have their own policy on their self insure building – Pad T.T. has own policy 49 • Negotiations – L.L. wants to determine type and amount of coverage – T.T. wants limit on amount of liability coverage – T T may want to negotiate out loss of rent coverage and T.T. tt ti t tl f t d earthquake coverage – L.L.’s Lender may require earthquake coverage – L.L. may include the property on its master policy with high limits of coverage 50 Key Money • Lease Provision – • T.T. pays the L.L. a fee or payment - usually substantial - to have the right to enter into a lease for space Landlord’s Perspective – That’s the market • Tenant’s Perspective – – O’Shucks But…if assignment doesn’t disallow, tenants can get key money from g , g y y assignee • Negotiations – – – Amount of key money Whether T.T. can keep key money when assigning its lease and receiving key money Compromise L.L. and T.T. split key money from assignee LL TT ke mone 51 Late Charge g • Lease Provision – L.L. has right to assess late fee for not paying rent on time • Landlord’s Perspective – Pay rent on time and late charge is a non-issue – Motivating factor to pay rent on time • Tenant’s Perspective – Ok, but amount should be fair and give me a grace period of a few days • Negotiations – L.L. rent due on 1st pay on fist or automatic late charge – T.T. rent sent by mail US Post Office may deliver late so give me 5 day grace 52 – T.T. if I’m late notify me and give me 3 days to pay before assessing late charge – L.L. you’re nuts just mail your check a few days before the end of the month f th th 53 Lease Commencement vs. Rent Commencement • Lease Provision – Lease commence when possession given to T.T. and rent usually commences date premises turned over to T.T. if L.L. builds out p p premises (office buildings) or within X days if T.T. builds out premises (shopping centers) • Landlord s Landlord’s Perspective – – Retail Leases: T.T. typically builds out the premises L.L. wants T.T. to start paying rent on date T.T. opens but no later than “X” ( (30-90) days ) y • Tenant’s Perspective – Need sufficient time to build out premises • Negotiations – If T.T. opens before “X” days want free rent till that day as reward for opening early which benefits the shopping center 54 Maintenance of Tenant’s Premises • Lease Provision – – – – – • Retail Lease: T.T. responsible for maintenance of the premises Industrial Lease: T.T. responsible for maintenance of the premises Office Lease: L.L. responsible for almost all maintenance of the premises Medical Office Lease: L.L. responsible for almost all maintenance of the premises If T.T. doesn’t perform its maintenance responsibility L.L. may do so and charge T.T. Landlord’s Perspective – – Retail Industrial R t il & I d t i l properties: “d ’t call me” ti “don’t ll ” Office & Medical Office buildings: L.L. will be responsible for “normal” maintenance any damage by T.T. is T.T.’s responsibility 55 • Tenant’s Perspective – When L.L. does work what’s level of service, # days/week janitorial service provided, response time, etc. • Negotiations N ti ti – Which items in office and medical office buildings are T.T. responsibility, carpet cleaning, window covering cleaning, spot cleaning of carpet, etc. l i f t t 56 Marketing Fund / Merchants’ Association g (Shopping Centers) • Questions – What are they? – What are their differences? – Wh Where are th b i used t d ? they being d today? • Lease Provision – If L.L. elects to form a marketing fund T.T. will belong and pay dues LL TT – State amount of dues – State how dues are increased – May be grand opening assessment – L.L. may or may not agree to pay dues – L.L. typically contributes 25% of amount T.T. contributes 57 • Tenant’s Perspective – Anchor T.T. will not belong, may make voluntary contribution – Most T.T.s prefer marketing fund – T T want L.L. to contribute T.T.s tLL t t ib t • Negotiations • • • • T.T. T T wants L.L. to pay dues t LL t d Amount of dues All tenants must belong ( g (except anchors) p ) If T.T. moves in after grand opening for up to one year, they are assessed for the grand opening dues 58 Most Favored Tenant • Lease Provision – T.T. is provided with all concessions other T.T. s receive • Landlord’s Perspective – Are you nuts? • Tenant’s Perspective – If you are giving me the “best” deal then prove it 59 Options • Lease Provision – • T.T. has right to extend its lease for X period at X rent for X number of times Landlord’s Perspective – – – L.L. should seldom give options Right for the T T and obligation for the L L T.T. L.L. Anchor retail T.T.s, restaurants and some large users in office buildings and industrial properties get them because of their size and investment into their space p May have a better replacement T.T. T.T. may be a “problem” – – • Tenant’s Perspective T t’ P ti – – – Wants option to remain in business for as long as possible The more options and the longer the options, the better Easier to sell its business 60 • Negotiations – Whether to give/get an option – Length of option – H How T T loses option right T.T. l ti i ht ▫ ▫ ▫ ▫ ▫ If in default of lease If ever was in de au e e as default If ever didn’t pay its rent on time Severity of default Retail T.T. – sales or % rent paid – Multiple options must exercise them consecutively – Option Rent ▫ ▫ Pre determined At market 61 – Define Market Rent ▫ ▫ ▫ ▫ What geographic area Comparable properties Location in the buildings Rent no less than last month of lease – Never say “Rent is X, lease expires X and all other terms and conditions remain the same” 62 Overstandard Utilities • Lease Provision – • L.L. may bill T.T. for its consumption of utilities in excess of the standard consumption Landlord’s Perspective – – Doesn t Doesn’t want pass-through changes to be burden to other T T s by T T who pass through T.T.s T.T. uses excessive utilities If pass-through charges are higher all T.T.’s occupancy costs are higher • Tenant’s Perspective – – – – Don’t over charge me Who determines what is excessive utilities Charge going utility rate, no add-ons Extra charges must be credited to the total utility cost of the building and not kept by the L.L. t k t b th L L 63 Parking (Shopping Centers) g( pp g ) • Lease Provision – T.T. required to park in designated areas – Fined if violated • Landlord’s Perspective – Save prime parking stalls for shoppers – Fines assessed to T.T. not T.T.’s employee (violator) • Tenant’s Perspective – Ok, but… – Depending on my use I may need a reserved stall • Negotiations – T.T. want one warning per year before L.L. assesses fine 64 Percentage Rent g • Lease Provision – T.T. will pay the greater of a % of its sales or minimum (base) rent • Questions • • • How do you justify getting a % of a T.T.’s upside & not share in the T.T.’s downsize? How do you justify % rent?? Landlord’s Perspective – Industry standard – Retail environment or unique location 65 • Tenant’s Perspective – National and sophisticated T.T.s understand concept – Some “mom & pop” T.T.s resent paying % rent – M prefer fixed step-ups May f fi d t • Negotiations – Wh t % rate – use ULI’ “D ll What t ULI’s “Dollars & C t of Sh Cents f Shopping C t ” i Centers” 66 67 Tenant Classification Number in Sample GLA in Square Feet Sales per Square Foot Rate of Percentage Rate Total Rent per Square Foot 68 Tenant C Classification f Number in Sample GLA in Square Feet Sales per Square Foot Rate of Percentage Rate Total Rent per Square Foot 69 Tenant Classification Number in Sample GLA in Square Feet Sales per Square Foot Rate of Percentage Rate Total Rent per Square Foot 70 Tenant Classification Number in Sample GLA in Square Feet Sales per Square Foot Rate of Percentage Rate Total Rent per Square Foot 71 Tenant Classification Number in Sample GLA in Square Feet Sales per Square Foot Rate of Percentage Rate Total Rent per Square Foot 72 – Declining % rate – Increasing % rate – Exclusions from sales – N t l or artificial b k i t Natural tifi i l breakpoint ▫ ▫ ▫ Natural bkpt. – rent ÷ % rate (2500 ÷ 05% = $50,000 monthly bkpt. $50,000 X 12 = $600,000 annual bkpt.) Artificial Negotiated – above natural bkpt. Artificial Negotiated – below natural bkpt. – % Rent Payment ▫ ▫ Shops tenants monthly Anchor tenant annually – Year-end Adjustments ▫ Refunds credited or paid to tenants 73 Radius • Lease Provision – T.T. may not open similar store within X miles from premises • Landlord’s Perspective – Wants to protect T.T. sales & traffic to the center – Wants to protect % rent • Tenant’s Perspective – Doesn’t want any restriction • Negotiations – Radius distance 3 miles, 5 miles? – Penalty for violation ▫ Rent adjustment 74 ▫ ▫ Lease cancellation T.T. doesn’t want monetary penalty – T.T. wants to exclude any stores it purchases – L.L. may want sales of “that” store add to sales of the store in her center to calculate % rent due 75 Recapture Premises • Lease Provision – If T.T. wants to assign or sublease its premises L.L. has right, not obligation, to take premises back and cancel the lease or reduce the g , p size of the T.T.’s premises • Landlord’s Perspective – – It’s my property and only I should earn profits from the leases If it’s an anchor retailer, L.L. wants to control the use of the premises • Tenant s Tenant’s Perspective – – I signed a lease at market rent If rents drop and I assign my lease I fund the difference so I want the ups de (if any) e upside ( a y) • Negotiations – Compromise: Split the profit (rent in excess of what assignor is paying) i ) 76 Recycle Program • Lease Provision – • If building initiates a recycling program T.T. will cooperate and fully p participate p Landlord’s Perspective – – Wants all T.T.s to comply May be a city requirement • Tenant’s Perspective – – – OK Must apply to all T.T.s No unreasonable requirements of my staff • Negotiations – T.T.s want savings and or income earned from the program to be applied to the building’s operating expenses & not kept by the L.L. building s 77 Relocation • Lease Provision – L.L. has right to relocate T.T. to comparable space and L.L. pays relocation costs • Landlord’s Perspective – If I need the space for a bigger or better tenant you need to move • Tenant s Tenant’s Perspective – Retail T.T. - location is important to my business – Many retail T.T. will not accept relocation provision – Does not want any out of pocket expense to move – Space must be comparable 78 • Negotiations – T.T. wants all cost to relocate paid by L.L. including new stationary, phone and computer connections, etc. – T.T. wants no rental charge during the moving days – If location is inferior T.T. will want rent reduced – If retailer agrees may limit relocation to specific area in the shopping center h i t 79 Rent Adjustment – CPI • Lease Provision – • Rent increased based on increase in CPI Landlord’s Perspective – Keeps income stream par with inflation • Tenant s Tenant’s Perspective – – – CPI may not reflect T.T. cost to do business Concern with high inflation/CPI double digit inflation of the early 1980’s Retailers concern CPI may raise faster than their sales • Negotiations – – – – Which index is used How often to adjust rent Cap on the adjustment for the T.T. Floor on the adjustment for the L.L. 80 Rules & Regulations g • Lease Exhibit – Do’s & Don’ts in the building • Landlord’s Perspective – Needed for orderly operations & safety of the building – Right to change rules & regulations • Tenant’s Perspective – R&R’s must be reasonable – Apply to every tenant 81 Sales Reports (Shopping Centers) p ( pp g ) • Lease Provision – T.T. will submit their sales to L.L. by the end of the preceding month – T.T. will provide L.L. with annual sales certified by officer of the company or a CPA – L L has right to audit T T ; T T pays for audit if sales report off by L.L. T.T.; T.T. 2% or greater • Landlord’s Perspective – Need sales reports to ▫ ▫ ▫ ▫ Evaluate performance of the T.T. Used to detect potential T.T. f financial problem Used to determine whether to renew the T.T. Used to evaluate over all center’s performance center s 82 ▫ ▫ • Used to evaluate performance of different categories of T.T.s Use to evaluate and improve center’s T.T. mix Tenant’s Perspective – Reasonable time to submit the reports • Negotiations – Define gross sales – What is excluded from gross sales – Limit L L audit rights to frequency place and be confidential L.L. frequency, place, 83 Signs g • Lease Provision – Retail Lease: T.T. must have prior written approval of its sign and it must be consistent with center’s sign criteria – Retail Lease: Prohibit signs attached to windows – Office Lease: No signs, # of lines on directory signs • Landlord’s Perspective – Shopping Center: Aesthetics of the center – Office Building: Aesthetics of the office building and keep building clean of paper signs/business cards • Negotiations – Retail tenant wants its logo and standard sign 84 Security Deposit y p • Lease Provision – T.T. will pay deposit to L.L. to be used as a recourse if T.T. is in default of lease • Landlord’s Perspective – Want more $ if T.T. is financially weak • Tenant’s Perspective – Pay as little as possible • Negotiations – M j corporations d not pay Major ti do t – Usually equal to one month's rent so when rent increases security deposit should increase 85 – L.L. - if weak T.T. want 2 to 3 month’s deposit – T.T. - if financially weak and pays rent on time for X months refund or apply excess deposit to rent payment – No interest paid on security deposit 86 Site Plan • • Exhibit to the Lease p Landlord’s Perspective – – Wants the right to change the site plan Add disclaimer on site plan ▫ ▫ ▫ ▫ • Not drawn t scale N td to l L.L. has right to alter the site plan without T.T.’s approval Right to add buildings (Pads) No representation that T.T.s listed on site plan will remain in occupancy Tenant s Tenant’s Perspective – – Shopping center anchor T.T.s want protection of their sight lines and parking field All T T s concerned with parking and their visibilities T.T.s 87 Title To Improvements p • Lease Provision – • L.L. has title to improvements and they remain when T.T. vacates Landlord’s Perspective – – L.L. pay for some or all the cost of T.I. and they shall remain Removing some T.I. may do harm to the premises • Tenant’s Perspective – If I paid f some of them or for a specific improvement I may want to id for f th f ifi i t tt remove them • Negotiations – – L.L. want to select which improvements T.T. must be removed – cabling, wiring, etc. T.T. may want to identify which improvement it wants to take 88 Taxes on Overstand Improvements p • Lease Provision – T.T. pay for the increase taxes on the O/S improvements • Landlord’s Perspective – Only fair; O/S improvements benefits only the T.T. – Why should other T.T.s pay P/R share of taxes on O/S improvements • Tenant’s Perspective – Prove my improvements caused taxes to increase 89 Use of the Premises (USE) • Lease Provision – – – – • State the use the T.T. may conduct in the premises May also state uses the T.T. may not conduct in the premises (other T.T.s exclusive) If T.T. wants to modify use must have L.L. prior written consent T.T.’s use must be legal Landlord’s Perspective – – L.L. wants T.T.’s use to be limited and stated Use provision is L.L. control over T.T. mix and how T.T. operates in the building • Tenant’s Perspective – – Do not hinder my success Want broad definition of uses 90 • Negotiations – Food use L.L. want specific type of food, with or without liquor, take-out or not – L.L. doesn t want T.T.’s use to state “the same as its other doesn’t T.T. s the stores” – Can limit a product to square feet or line of display area such as ca dy (don’t candy (do use % o sa es) of sales) – If T.T. has broad use provision may violate another tenant’s exclusive – Common mistake in office buildings is “general business purposes” – T.T. will negotiate for as broad a use provision as possible with “any legal use” being its favorite any use 91 Value Enhancement Opportunities 92 THE PAD DEAL 93 The Pad Deal 1. Free standing buildings on the parking lot of shopping centers and possibly office and industrial properties 2. Great opportunity to generate additional cash flow and value 3. Uses are usually restaurants and banks 4. 4 Create a separate parcel for building and parking 5. Types of Pad deals A. Ground Lease B. Built-To-Suite Lease C. Sale of the Pad 94 6. Two major issues to consider or investigate before creating a “Pad”: A. Issue One: Municipality’s Parking Requirement a. Parking Code – Ratio of number of stalls to gross leasable area of the shopping center (e.g. 5.5 stalls to 1,000 sq. ft. is referred to as 5.5 to 1) b. Count number of stalls to determine the property’s parking ratio c. If do not have sufficient parking stalls to add a pad then possibly: i. i Restrip the lot and add more compact spaces restrip spaces, behind the buildings ii. Apply for a variance iii. “Shopping Center Parking Requirement” published b iii “Sh i C t P ki R i t” bli h d by Urban Land Institute 95 B. Issue Two: Check restrictions in tenants’ leases a. Usually in anchor tenants’ leases i. ii. Sightlines from building to street (visibility) Height and size of building g g iii. Concern with use of pad building iv. Maintain XX number of parking stalls in front of their store b. Check all leases c. Check site plan in tenants’ leases C. C Other Issues a. When adding a pad X number of parking stalls are being eliminated from the building b. Size of the building c. Drive-up lanes may impede traffic flow d. Drive-up lanes reduce number of p p parking stalls g 96 7. Lease Issues A. Tenant insures the building (typically) B. Separate parcel separate tax bill paid by tenant C. Who C Wh maintains landscaping around b ildi ? i t i l d i d building? D. If tenant open 24 hours a day will light poles be on tenant’s electrical meter? E. Need to pro-rate CAM correctly F. Cross easement to use parking areas and have access to the p pad and the shopping center pp g 97 TEMPORARY TENANTS – AKA – Specialty Leasing Programs 98 • • • Turning vacant spaces and areas into revenue generators More opportunities on shopping center and retail properties Benefits – – – – – – Additional Revenue (HUGE $ for regional malls) Enhance shopping center’s tenant mix Generate additional traffic Eliminate an “eye sore” eye sore Can be a tenant morale booster Some temporary tenants may become permanent tenants 99 • Areas and Spaces to Lease – Parking Lot ▫ ▫ Who was the first temporary tenant Possible tenants: * * * * * Fireworks stand Christmas tree lot Pumpkin sales 3-day weekend car or RV sale Book sales in a tent 100 • Vacant Spaces – Seasonal tenants ▫ ▫ ▫ ▫ – ▫ ▫ ▫ – Hickory farms Candy store Halloween store Tax service Furniture store (large space) Auto sales Almost any use Non seasonal Non-seasonal tenants May use just front 20 to XX feet of the space 101 • Use of Common Areas – – – – – Kiosks Carts Retail merchandising units (RMU) Wall shops Dead spaces - under escalator 102 • Leasing Issues – – – – – – – – – – Lease vs. License Agreement Very limited use Height of merchandise display Rent paid all in ad ance or weekly in ad ance advance eekl advance Short Term Percentage Rent g Security deposit - not refunded until sales submitted Require advertising Maintain hours of shopping centers If during Christmas season T.T. must remain open until Dec. 31 for returns 103 • Existing Tenants – – – – May object Offer existing tenants a temporary location Be careful not to duplicate uses of exiting tenants Anchors may restrict Kiosks, RMU’s, etc. from in front of their entrance 104 ICSC’S ANNUAL SEMINAR ON SPECIALTY LEASING & ICSC S ICSC’S BOOK ON SPECIALTY LEASING 105 Lease Renewals • • • • • • #1 Value Enhancement … - Keep the lease updated -No Addendum -Use latest lease form Not an automatic to renew the tenant(s) Look for L k f opportunities to enhance value of the property ii h l f h ─ Improve T.T. mix ─ Replace with credit T.T. ─ Split the space 106 MAKE A REALLY GOOD DEAL 107