Successfully reported this slideshow.
Your SlideShare is downloading. ×

Commercial Leases, Their Provisions and Pitfalls to Avoid (Series: Real Estate Investing 101 2020)

Ad
Ad
Ad
Ad
Ad
Ad
Ad
Ad
Ad
Ad
Ad
Upcoming SlideShare
Real Estate Glossary
Real Estate Glossary
Loading in …3
×

Check these out next

1 of 40 Ad

Commercial Leases, Their Provisions and Pitfalls to Avoid (Series: Real Estate Investing 101 2020)

Like any other contract, the provisions of a commercial lease are negotiable. Yet, like so many contracts, commercial leases can be confusing to anyone who does not negotiate them for a living. This webinar explains many of the common provisions in a typical commercial lease (e.g. competition clauses, destruction/condemnation provisions, enforcement provisions, escalation clauses, purchase and renewal options, subletting and assignment provisions, use provision- just to name some examples) and discusses what is “market” with respect to them.

To listen to this webinar on-demand, go to: https://www.financialpoise.com/financial-poise-webinars/commercial-leases-their-provisions-and-pitfalls-to-avoid-2020/

Like any other contract, the provisions of a commercial lease are negotiable. Yet, like so many contracts, commercial leases can be confusing to anyone who does not negotiate them for a living. This webinar explains many of the common provisions in a typical commercial lease (e.g. competition clauses, destruction/condemnation provisions, enforcement provisions, escalation clauses, purchase and renewal options, subletting and assignment provisions, use provision- just to name some examples) and discusses what is “market” with respect to them.

To listen to this webinar on-demand, go to: https://www.financialpoise.com/financial-poise-webinars/commercial-leases-their-provisions-and-pitfalls-to-avoid-2020/

Advertisement
Advertisement

More Related Content

Slideshows for you (20)

Similar to Commercial Leases, Their Provisions and Pitfalls to Avoid (Series: Real Estate Investing 101 2020) (20)

Advertisement

More from Financial Poise (20)

Recently uploaded (20)

Advertisement

Commercial Leases, Their Provisions and Pitfalls to Avoid (Series: Real Estate Investing 101 2020)

  1. 1. 1
  2. 2. 2 Practical and entertaining education for attorneys, accountants, business owners and executives, and investors.
  3. 3. 3 Thank You To Our Sponsors
  4. 4. Disclaimer The material in this webinar is for informational purposes only. It should not be considered legal, financial or other professional advice. You should consult with an attorney or other appropriate professional to determine what may be best for your individual needs. While Financial Poise™ takes reasonable steps to ensure that information it publishes is accurate, Financial Poise™ makes no guaranty in this regard. 5
  5. 5. Meet the Faculty MODERATOR: William McGuinn - Sugar Felsenthal Grais & Helsinger LLP PANELISTS: Scott Picken - Wealth Migrate Scott Weinstein - Field and Goldberg, LLC Tracy Treger - Syndicated Equities Michael Peck - Harbor Freight Tools 6
  6. 6. About This Webinar Commercial Leases, Their Provisions and Pitfalls to Avoid Like any other contract, the provisions of a commercial lease are negotiable. Yet, like so many contracts, commercial leases can be confusing to anyone who does not negotiate them for a living. This webinar explains many of the common provisions in a typical commercial lease (e.g. competition clauses, destruction/condemnation provisions, enforcement provisions, escalation clauses, purchase and renewal options, subletting and assignment provisions, use provision- just to name some examples) and discusses what is “market” with respect to them. 7
  7. 7. About This Series Real Estate Investing 101 Real estate has always been a popular asset class for investment. After all, as the adage says, “they’re not making more of it.” More and more investors are turning to real estate as an investment class. Investors considering making an investment in real estate have a variety of choices: retail, office buildings, industrial, raw land, and, of course residential. This Financial Poise webinar series covers several types of real estate classes that one may choose to invest in, explaining where to look for opportunities; how to diligence them; possible funding solutions; and best practice for execution. Each Financial Poise Webinar is delivered in Plain English, understandable to investors, business owners, and executives without much background in these areas, yet is of primary value to attorneys, accountants, and other seasoned professionals. Each episode brings you into engaging, sometimes humorous, conversations designed to entertain as it teaches. Each episode in the series is designed to be viewed independently of the other episodes so that participants will enhance their knowledge of this area whether they attend one, some, or all episodes. 8
  8. 8. Episodes in this Series #1: Investing in Residential & Multi-Family Real Estate Premiere date: 2/18/20 #2: Investing in Commercial Property Premiere date: 3/10/20 #3: Commercial Leases, their provisions and pitfalls to avoid Premiere date: 4/14/20 9
  9. 9. Episode #3 Commercial Leases, their provisions and pitfalls to avoid 10
  10. 10. What are the Essential Goals of a Commercial Lease? 1. Leases are both transfers of possessory interests in land and contracts 2. As such, a lease needs to specify both the precise rights transferred, but also provide a roadmap for the interactions of the landlord and tenant (and other interested parties) 3. Unlike residential leases, there is often no statutory law to provide a framework and the parties are able to fully negotiate all of the terms of their particular deal 11
  11. 11. The Size of the Premises and how It and the Size of the Building are Determined 1. One thing to consider – is the size of the building AND the premises set and locked at the beginning of the lease, or does landlord have the right to remeasure (hint – that remeasurment will not likely benefit tenant). Does tenant have a right to remeasure? 2. What if the size of the premises cannot be known at lease execution, because demising walls are not yet constructed? 3. In any case where the size of the building or the premises can either change or cannot be determined at lease execution, it is important to understand how the method of measuring. 12
  12. 12. The Difference Between Usable and Rentable Square Feet  Usable square feet includes the specific area the tenant will occupy in order to do business. For a partial-floor lease, this includes all office space plus any storage or private restrooms. There are no exclusions for columns, recessed entries, or the like, either – column space is fair game in the calculation of total usable square feet.  To calculate rentable square feet, landlords use what is called a load factor (also called a common area factor, or an add-on factor). This number is based on the percentage of common areas found in the building. If a building has a total square footage of 100,000, with 90,000 usable square feet (which is to say 10,000 square feet of common areas), the load factor would equal to the rentable square feet divided by the usable square feet, or 1.11. 13
  13. 13. The Difference Between Usable and Rentable Square Feet  Building Rentable Square Feet ÷ Building Usable Square Feet = Load Factor  This load factor is then multiplied by individual tenants' usable square feet to come up with the total rentable square feet. If a company desired to lease 5,000 usable square feet, for example, this number would be multiplied by the load factor of 1.11 to reach the number of rentable square feet: 5,550. That’s the number on which tenant would pay rent. 14
  14. 14. Net Leases  Single Net Lease – Lessee pays base rent plus a pro-rata share of the building's property tax (meaning a portion of the total bill based on the proportion of total building space leased by the lessee); the landlord covers all other building expenses. The lessee also pays utilities and janitorial services.  Double Net Lease – Lessee pays for base rent plus a pro-rata share of property taxes and property insurance. The lessor covers expenses for structural repairs and common area maintenance. The lessee is responsible for its janitorial and utility expenses. 15
  15. 15. Net Leases  Triple Net Lease – This is the most common net lease in the commercial setting. In this lease the tenant pays property taxes, insurance, and common area maintenance (CAM) in addition to base monthly rent. Base rents are typically lower a than with other types of leases and the lessee has transparency regarding the costs. However, Lessee’s ability to forecast expenses can be challenging given the possibility of fluctuation. To address this Lessee’s can negotiate caps on the amounts that can be raised annually. Typically, the caps will be seen on fees that are controllable by the lessor such as management fees. 16
  16. 16. Escalations  The parties and especially the lessee should have a clear understanding of how the base rent will escalate over the term of the lease. 17
  17. 17. Non-Indexed  This is common and is typically based on a % increase year-over-year for base rent.  Determine if it is based on percentage of original base rent or prior year base rent.  Confirm that rates are in line with the market (often confirmed by real estate broker).  If the calculations are within the lease confirm all dates and calculations. 18
  18. 18. Indexed  Consumer Price Index or other  Based on calendar year or lease year  Is % capped by a percentage or dollar amount 19
  19. 19. Factors in Permitted Signage  Location – where on the premises and the building (and any pylons, building directories, etc.) will tenant to be allowed to place signage  At whose cost will signage be put up  What size signage will be allowed  Does landlord represent that permitted signage will be allowed by applicable code? 20
  20. 20. Factors in Permitted Signage  What type of signage is allowed (light up?)  Who pays to maintain signage  Ideally, all of these things are very clearly specified in the lease agreement, but often that is not possible or just not done. In those cases, a landlord usually has right to approve signage 21
  21. 21. Landlord’s Right to Relocate Tenant  Tenant should push for the following:  Same or higher floor/similar views  If corner office – same corner  Same elevator bank  No increase in rent – even if space is larger/higher  No increase in proportionate share of expenses  Landlord should build out space similar to tenant’s existing space  Landlord should pay moving costs  Landlord should pay for reasonable incidental costs (re-printing stationary, new signage) 22
  22. 22. Parking in Retail Leases  With retail leases, parking may be a critical factor in the success of a business. In those cases, parking rights need to be clearly spelled out and understood. The lease should cover:  Rates  Total number of spaces in the facility  Total number that will be made available to Tenant, other tenants and the public  Increases in rates  What if enough parking is not provided 23
  23. 23. Buildout of Space  If landlord is doing the buildout:  It is critical to spell out in detail exactly what landlord will do. Need detailed plans  When will the landlord’s work be done?  What if landlord is late on its work? Damages? Right to cancel?  Procedure for punchlist 24
  24. 24. If Landlord Proves a T.I. Allowance  Need to have procedure describing how landlord approves plans, reasons for objecting and time limits, beyond which plans are deemed approved.  What is the procedure for draws on the allowance money? Does it synch with the construction contract? Will the landlord pay the contractor directly, or does tenant need to pay and get reimbursed  Can any unused portion of the TI allowance be used for:  Moving costs  Soft costs (architect’s fees, etc.)  Furniture, Fixtures and Equipment  Rent 25
  25. 25. Assignment and Subletting  Leases generally prohibit the assignment or sublease of the lease without Landlord’s consent. Landlord will want to make sure the assignment prohibition includes certain corporate change in control transactions. Tenant will want to make sure Landlord cannot unreasonably withhold, condition or delay its consent. 26
  26. 26. Preapproved Subtenants/Assignees  A tenant may have certain anticipated subleases and assignments. The lease can be structured so that Landlord consent is not required for these (notice to Landlord is still usually required):  Affiliates  3rd parties occupying less than x% of the Premises  Clients/customers, or specific anticipated uses (i.e. a juice bar in a health club) 27
  27. 27. Landlord Recapture Rights on Assignment  Landlord may want the right to recapture the Premises and terminate the lease if Tenant tries to sublease or assign.  Beneficial in a rising market or when Landlord has large existing tenants that may want to expand into the Premises  If Landlord has recapture rights, Tenant will want to:  Make sure that those rights aren’t triggered with permitted assignees  Make sure the rights only apply to the portion of the Premises Tenant is looking to sublease  Make sure that Tenant is release from all obligations under the lease to the extent of Landlord’s recapture 28
  28. 28. Insurance Requirements  Insuring the risk allocated to a party must be carefully reviewed and understood. Insurance provisions place insurance requirements on the parties which through the indemnification and subrogation party’s risk. 29
  29. 29. Tenant Requirements  Always advise the tenant client to have their insurance provider review the insurance obligations prior to signing the lease.  Common Types:  Liability  Worker’s Compensation  Property  Business Interruption  Plat glass  Are limits specified and reasonable?  Deductible obligations  Policy Terms (Notice of cancellation)  Is tenant self-insurance an option?  Is there a requirement for minimum rating with insurance company? 30
  30. 30. Guarantees  Tenant will want to try to negotiate a cap or a burnoff.  Cap – the lease guaranty is capped at $x or some set number of months of rent  Burn off – this rewards a tenant who has not defaulted over some number of years. The guaranty may start at some capped number or the full amount due under the lease, but then with each year of the lease without a default, the amount of the guaranty is reduced. 31
  31. 31. Option to Expand (ROFR and ROFO)  Notice  Terms of Exercise of Option  Scope  Triggering Event 32
  32. 32. Option to Terminate  Breach by Landlord?  Event frustrating the purpose of the lease? (i.e. destruction of property).  Straight Option  Notice  Terms of Exercise of Option (usually a payment)  Scope 33
  33. 33. About the Faculty 34
  34. 34. About The Faculty William McGuinn - wmcguinn@sfgh.com Bill’s real estate practice extends to the acquisition, development, sale, leasing and financing of commercial, office, residential and retail properties. In his affordable housing practice, Bill has represented owners and developers of thousands of housing units in numerous states with multi- layered financing including taxable and tax exempt bonds, low income housing tax credits, HOPE VI, Community Development Block Grants, Neighborhood Stabilization Program funds, Tax Credit Assistance Program and Tax Credit Exchange Program. Bill has also represented developers of conventionally financed projects, both residential and commercial. He also guides buyers and sellers, landlords and tenants through all aspects of their respective transactions. Aside from real estate matters, Bill has worked with numerous closely held businesses on a variety of matters including representing business in obtaining credit facilities, structuring start-up organizations and the purchase and sale of a number of business entities. Bill is an avid sailor and participates annually in the Chicago Yacht Club Race to Mackinac. Bill has also competed in the Transpac, racing from Long Beach, California to Honolulu, Hawaii. 35
  35. 35. About The Faculty Tracy Treger - ttreger@syneq.com Tracy Treger is the Senior Director of Corporate Strategy at Syndicated Equities, a private equity real estate investment firm established in 1986. Tracy assists current and prospective investors in understanding and assessing the company’s various real estate investment offerings, and she evaluates prospective properties for the company’s acquisition. She also aids investors in identifying replacement properties so that they may defer their taxes under the § 1031 “like-kind” exchange rules, either through fractional ownership of larger projects or as stand-alone net leased properties. Tracy joined the Syndicated Equities team in 2013 after a 20-year career practicing law. She served as vice president and assistant general counsel for a private REIT, where she handled the legal aspects of the company’s daily operations and its joint venture relationships in the U.S. and Mexico. Prior to working with the REIT, she was a partner in two large Chicago law firms with national and international practices. Tracy holds a B.A. in Psychology and an M.S. in Psychological Services from the University of Pennsylvania and a J.D. from Chicago Kent College of Law, where she graduated with honors and was a member of the Law Review. She also holds FINRA Series 22 and 63 Registered Representative licenses. Tracy is an active member of CREW (Chicago Real Estate Women) and the Association of Corporate Counsel. She has published numerous articles, and is a frequent speaker on real estate and finance topics, including recent seminars on § 1031 tax-deferred exchanges and real estate syndications. 36
  36. 36. About The Faculty Scott Weinstein - SWeinstein@fieldandgoldberg.com Scott A. Weinstein comes to Field and Goldberg, LLC having developed a broad-based background in commercial real estate. Mr. Weinstein's experience includes working with a fortune 500 company where he handled transaction financing and deal structures. Having served as president, counsel and co-owner of a successful real estate title company, Mr. Weinstein brings a unique perspective and understanding of the daily and ongoing business issues clients face and is able to provide practical and proactive counsel. Mr. Weinstein regularly represents commercial real estate clients in all aspects of commercial transactions including lease negotiations for landlords and tenants (including franchisees) nationwide on retail, office and industrial leases; acquisitions and sales of office, industrial and multi-family apartment buildings, and shopping centers; financing; and condominium deconversions. Admitted to practice in the State of Illinois and the U.S. District, Northern District of Illinois, Florida and New York, Mr. Weinstein received his Juris Doctor degree from Temple University Beasley School of Law and his Bachelor's degree from the University of Maryland at College Park. 37
  37. 37. About The Faculty Michael Peck - MPeck@harborfreight.com Michael Peck is the National Director of Real Estate for Harbor Freight Tools, a national retailer of deeply discounted tools and tool accessories. Mr. Peck has led the growth efforts of Harbor Freight in multiple capacities starting as Director of Real Estate, transitioning to Senior and National director over his 7+ years with the company. In his various roles at Harbor Freight, Mr. Peck has overseen 700+ store openings throughout the entire new store pipeline process, with responsibilities including market planning, site selection, Letter of Intent and Lease negotiation, as well as supervision through the construction and opening phases. Mr. Peck has over 15 years of experience in the commercial real estate field starting his career with a publically traded national retailer of fine home décor and furnishings. He has been personally responsible for hundreds of store openings throughout the United States working various territories and leading multiple high-power teams including brokers, deal makers and attorneys to execute the high volume corporate growth plans of the companies he has worked for. Mr. Peck is a member of the International Council of Shopping Centers and a recipient of the Chain Store Age “10 under 40” in retail real estate award. He is based in Dallas Texas and lives with his wife Pam and 2 dogs Norman and Stanley. 38
  38. 38. Questions or Comments? If you have any questions about this webinar that you did not get to ask during the live premiere, or if you are watching this webinar On Demand, please do not hesitate to email us at info@financialpoise.com with any questions or comments you may have. Please include the name of the webinar in your email and we will do our best to provide a timely response. IMPORTANT NOTE: The material in this presentation is for general educational purposes only. It has been prepared primarily for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education. 39
  39. 39. About Financial Poise 40 Financial Poise™ has one mission: to provide reliable plain English business, financial, and legal education to individual investors, entrepreneurs, business owners and executives. Visit us at www.financialpoise.com Our free weekly newsletter, Financial Poise Weekly, updates you on new articles published on our website and Upcoming Webinars you may be interested in. To join our email list, please visit: https://www.financialpoise.com/subscribe/

×