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How To Save $1 Million In Real Estate Leases

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Presentation to commerical tenants on how to save significant occupancy costs and reduce risk through key real estate lease clauses. Millions have been saved directly due to this presentation.

Presentation to commerical tenants on how to save significant occupancy costs and reduce risk through key real estate lease clauses. Millions have been saved directly due to this presentation.

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How To Save $1 Million In Real Estate Leases How To Save $1 Million In Real Estate Leases Presentation Transcript

  • How To Save $1MM in Real Estate Lease Costs And Reduce Risk For Commercial Tenants By Doug Gordon, CRE [email_address]
    • Real Estate lease negotiations is an intense, somewhat intimidating
    • process. Enclosed is my checklist of key issues from the Commercial
    • Tenant perspective to consider during this process to make it less
    • intimidating to a business owner.
    • This is based on my own 25 years of Real Estate Lease negotiations,
    • having reviewed and negotiated thousands of lease arrangements, and
    • having managed over $2.6 Billion in occupancy expense. This by no
    • means is an exhaustive list of items to cover in your leases, however, it
    • is a start, and it is important to note, there are always exceptions. The
    • lease negotiation process is a give and take process, and horse trading
    • always takes place. This is only a guide….
  • Ways To Reduce Your Occupancy Costs During Lease Negotiations (Commercial Tenant) What You Want
    • Obtain the right to audit LL records for additional rent charges without time restraints -Tenant should be able to audit at any time and audit records as far back as three years. Tenants must have the right to audit LL records and books to prevent over charging and inaccuracies. The audit process will also ensure the LL is following GAAP standards for accounting.
      • If the LL is refusing to allow auditing, or is limiting the time or scope of the audit rights; keep it silent in the lease. Do not allow any expressly written language in the lease forbidding the tenants right to audit. Legal precedent will side with tenants when audit rights are not expressly written.
    • Obtain a "kick-out" clause -Kick out clauses allow tenants to vacate a space early. Often based on special criteria (such as performance or time) and including some monetary penalty payment. Allowing the tenant the option of getting out of an under performing or ill suited location.
      • Based on the performance or occupancy % of the center. .Based on the presence of an anchor store.
      • Based on the sales/performance of our store.
      • Based on a trial period (kick out option after operating in space for 1 year). Based on a one time settlement payment.
    • Obtain a broad use clause -Broadening the use clause allows tenant flexibility for future endeavors; such as, new products, additional services, or future partnerships.
    • Obtain as many options as possible at fixed rent rates -Fixed rate rent payments protect tenants from rent increases, give tenants more control over their expenses and allow for easier budget forecasting and planning.
    • Obtain caps on annual increases to CAM, Tax, Insurance, and Management fees -Every year LL will provide estimates on what annual fees will be for the following year. These fees should be limited to a small % over the prior year's actual expenses. Make sure the caps are non-cumulative.
  • Ways To Reduce Your Occupancy Costs During Lease Negotiations (Commercial Tenant) What You Want
    • Obtain a very precise definition of CAM -CAM can become a catch-all where many questionable miscellaneous expenses can be passed through to tenants. Creating a clear definition of what can or can not be charged to CAM helps protect the tenant from over charges. (No advertising, no management over ride, no office expenses, no telephones, etc.)
    • Obtain an industry standard definition for the measure of tenants space -For shopping centers use ICSC definition. For office space use BOMA definition. There can be significant differences in space based on the way it is measured. Using the correct measurement will prevent overcharges to tenants.
    • Increase grace period for late rent payments -Reducing unnecessary expenses to tenants. Allowing greater time before penalties.
    • Increase time allowed to cure defaults -The more time tenants have to resolve defaults, the better.
    • Obtain a broad exclusivity clause -This will prevent businesses that could be possible future competitors from entering the center.
    • Obtain rights to retain interior furniture, fixtures and equipment -Allows tenant to keep more of it's assets.
    • Obtain right to rebuild yourself (self help) -Gives tenant the option to do their own repairs.
    • Obtain right to offset rents against tenant repairs -Allows tenant to offset rent payments to recoup repair expenses.
    • Obtain first right of refusal -This allows the tenant options when changes to the center occur . On any adjacent space . On option to purchase
    • Obtain a LL guarantee on HVAC, electrical, plumbing, etc. -Many LL will guarantee the service and equipment in a center, especially if the center is new.
  • Ways To Reduce Your Occupancy Costs During Lease Negotiations (Commercial Tenant) What You Want
    • Obtain a guarantee of signage use - This will assure tenants ability to obtain and retain proper signs.
    • Review property's rules and regulations - This document can indicate possible issues or conflicts. Make sure the rules and regulations do not conflict with tenants business needs . Make sure the rule and regulations cover potential issues; such as neighbors who will use excessive parking space, create excessive noise, or operate non-synergistic businesses (pawn shops, strip clubs). These rules can make tenants occupancy more trouble-free.
    • Obtain a SNDA - This document will guarantee that tenant leases will not be terminated if LL defaults on loans from their lender.
    • Ensure there is appropriate space for tenant needs - Make sure space for items such as trash & recycling receptacles, outdoor seating, and parking is sufficient to meet customer's expectations -not just code.
    • Review a copy of LL's latest operating expense budget - This can indicate potential overcharges to tenants. If ambiguous expenses such as management or administration fees, wages, legal counsel, and accountants; exceed CAM and repair expenses by 20% or more; there is a problem -tread very cautiously. Also make sure the LL is using independent contractors and not subsidiaries of their own parent company (or their brother-in-law).
    • Ensure LL is responsible for complying with governmental regulations at no cost to tenant - ADA, and other issues with the center is not tenant responsibility and should be at sole cost of LL.
    • Review haz mat (hazardous materials) and environmental language of lease - Ensure proper indemnities, insurance, liability, and that LL is providing proper documentation including but not limited to a Phase 1 report if necessary.
  • Ways To Reduce Your Occupancy Costs During Lease Negotiations (Commercial Tenant) What You DON’T Want In A Lease
    • Remove any non-assignability clause -This clause will prevent tenant from transferring lease to business partner or purchaser. Tenant needs to be free to vacate a space if necessary.
    • Remove space substitutions clause -This will prevent the landlord from relocating the tenant within the center.
    • Remove the term 'operating expense' or 'OPEX' -Operating expense is a vague term that could include everything under the sun. Only agree to pay CAM, not operating expense. CAM is well defined by ICSC and prevents many ambiguous fees.
    • Remove management and administration fees from CAM -If there is a management fee to pay make it a separate payment. This makes CAM a clearer more defined expense that is more manageable. Separating out the management fees makes them more evident and therefore easier to audit and find discrepancies in.
    • Remove any possibility for duplicate billing -Many landlords charge administrative fees and then add a second management fee into CAM. Mgmt. and admin. fees are the same we should pay one or the other but not both.
    • Reduce late penalties -Always try to get late rent payment penalties reduced as low as possible.
    • Reduce events that can cause tenant default -Always try and minimize the items in a lease that lead to tenant default.
    • Reduce LL remedies of default -If a LL defaults reduce their options to resolve the default.
    • Remove any limitations on the tenants ability to sue -Landlords will often limit tenants ability to sue to the amount of equity or interest they have in the premises; which is usually little to nothing because they don't own the property their lenders do. Removing this restriction allows us to sue based on the landlords total worth not just the worth of the center.
  • Ways To Reduce Your Occupancy Costs During Lease Negotiations (Commercial Tenant) What You DON’T Want In A Lease
    • Reduce insurance requirements -This will lower the tenants' uncontrollable expenses.
    • Reduce the LL's ability to lease to parking intensive tenants -Prevents future parking disputes.
    • Reduce LL's rebuilding period -Forces LL to put tenant’s space back in operable condition ASAP.
    • Remove any clause mandating participation in a tenants/merchants association -This will reduce tenant's uncontrollable expenses.
    • Remove any percentage rent agreements -Percentage rent is a labor intensive accounting process that creates undue burden on the tenant. And these agreements can often act as radius restrictions.
    • Remove radius restrictions and limitations of trade area -These restrictions can prevent tenant to expanding to neighboring centers.
    • Remove clauses that limit LL liability to the premises or center -If the LL is not liable for the property what incentive it there for maintaining it?
    • Remove excess space -Do not lease more space than the tenant can use. Sub-tenants are an unnecessary burden and expense for tenants. Don't lease excess space that you don't need.
    • Remove the clause that allows the LL to bill for utilities -If at all possible always pay utility bills directly. This gives the tenant greater control over their use and their expenses. If not possible, ensure there is sufficient language that LL shall not charge in excess of current rates as if tenant purchased directly from utility provider.
    • Remove any reference to “AS IS” conditions - Tenant could be liable for any latent (unforeseen) defects within the premises or outside the premises.