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The Commercial Landlord's Perspective (Series: Real Estate Leasing Dumbed Down)

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The Commercial Landlord's Perspective (Series: Real Estate Leasing Dumbed Down)

The process of representing a commercial landlord in a lease transaction is multi-faceted. While generation of cash flow is ultimate goal, there are other very important goals. These include minimizing risk, preserving the asset, enhancing the property and about a multitude of other issues.

This webinar focuses on the major concerns of real estate professionals in advising a landlord. When should the landlord insist on the language in the lease, and when should the landlord consider a concession or compromise? What is the role of the local real estate market in this analysis and why is it so important? After participating in this webinar, one will have a solid grasp of what commercial landlords need and why.

To view the accompanying webinar, go to: https://www.financialpoise.com/financial-poise-webinars/commercial-landlords-perspective-2019/

The process of representing a commercial landlord in a lease transaction is multi-faceted. While generation of cash flow is ultimate goal, there are other very important goals. These include minimizing risk, preserving the asset, enhancing the property and about a multitude of other issues.

This webinar focuses on the major concerns of real estate professionals in advising a landlord. When should the landlord insist on the language in the lease, and when should the landlord consider a concession or compromise? What is the role of the local real estate market in this analysis and why is it so important? After participating in this webinar, one will have a solid grasp of what commercial landlords need and why.

To view the accompanying webinar, go to: https://www.financialpoise.com/financial-poise-webinars/commercial-landlords-perspective-2019/

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The Commercial Landlord's Perspective (Series: Real Estate Leasing Dumbed Down)

  1. 1. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe Insert the cover image for this webinar on this slide entirely 1
  2. 2. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe Practical and entertaining education for attorneys, accountants, business owners and executives, and investors. 2
  3. 3. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe 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 the information it publishes is accurate, Financial Poise™ makes no guaranty in this regard. 3
  4. 4. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe MEET THE FACULTY Moderator: David Levy – NRC Realty & Capital Advisors Panelists: Howard Kline – The Law Offices of Howard F. Kline Biff Ruttenberg – Atlas Partners LLC 4
  5. 5. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ABOUT THIS WEBINAR: The Commercial Landlord's Perspective The process of representing a commercial landlord in a lease transaction is multi-faceted. While generation of cash flow is ultimate goal, there are other very important goals. These include minimizing risk, preserving the asset, enhancing the property and about a multitude of other issues. This webinar focuses on the major concerns of real estate professionals in advising a landlord. When should the landlord insist on the language in the lease, and when should the landlord consider a concession or compromise? What is the role of the local real estate market in this analysis and why is it so important? After participating in this webinar, one will have a solid grasp of what commercial landlords need and why. 5
  6. 6. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ABOUT THIS SERIES: Real Estate Leasing Dumbed Down Purchasing real estate presents a number of threshold questions. Should a real estate investor use his or her own money, or seek investors? What type of legal structure makes the most sense and why? When one is in the process of acquiring a property, what are the most important items to inspect? What if the buyer finds a big problem? When one wishes to sell a real estate investment, how much is the right price? What is the value and how is it determined? At its base, commercial real estate is all about cash flow. What makes this possible is the commercial lease. A lease creates a long-term relationship between landlord and tenant, who have diametrically opposing goals. How does one navigate through the minefield of legal issues in a lease and end up with a contract that both sides can live with for years to come? 6
  7. 7. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe EPISODES IN THIS SERIES 3/11/19 Episode #1: The Commercial Landlord's Perspective 4/08/19 Episode #2: The Commercial Tenant's Perspective 5/13/19 Episode #3: The Commercial Broker's Perspective 7 Dates shown are premiere dates. All webinars will be available On Demand approximately 4 weeks after they premiere.
  8. 8. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe Episode #1: The Commercial Landlord's Perspective 8
  9. 9. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe OVERVIEW OF COMMERCIAL LEASING ⚫ Landlords are generally guided by several core principles in any lease negotiation: ➔ Receiving ongoing returns on investments in their property; ➔ Ensuring the structural integrity and safety of the property and its systems; ➔ Managing the property’s use and by whom it is used; ➔ Maintaining the property’s character; and ➔ Having tenants bear as much risk and responsibility as possible in connection with their occupancies. ⚫ Different business types have different requirements of space that can impact the finances of a property for a landlord. Landlords should consider such items as energy needs, parking spaces, signage, etc.
  10. 10. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe OVERVIEW OF COMMERCIAL LEASING (cont’d) ⚫ Basic Lease Terms: ➔ Description of the premises ➔ Use ➔ Base rent ➔ Additional rents ➔ Bankruptcy/insolvency ➔ Repairs ⚫ Special situations, variables and complexities should be addressed when drafting and negotiating commercial leases terms ➔ Alterations ➔ Insurance ➔ Casualty ➔ Eminent domain; ➔ Assignment and subleasing ➔ Surrender of premises ➔ Security deposits, letters of credit and guarantees
  11. 11. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe UNIQUE CONSIDERATIONS FOR COMMERCIAL LEASES ⚫ Retail – exclusivity, co-tenancy, percentage rent, going dark; also consider larger tenants often have their own forms of lease, estoppels, subordination, non-disturbance, and attornment agreement (SDNAs), which they often have the leverage to impose upon most landlords. ⚫ Office – relocation provisions are important to allow landlord flexibility (with floorplans); operating expenses, must be sure that all such expenses are covered and uniform. ⚫ Industrial - permits and use are often necessary and must be addressed; hazardous materials and equipment must also be carefully considered. Hours of operation and access are a couple of other provisions that often require additional attention with industrial leases.
  12. 12. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe SINGLE TENANT VS. MULTI - TENANT ⚫ Single Tenant: No demising wall, entire property typically included in lease. Most often the lease is triple net meaning that the tenant is responsible for all expenses of the property, including, property taxes, building insurance, maintenance and repairs, and utilities. Single tenant leases typically have longer terms and include more tenant obligations (i.e., repair and maintenance obligations). ⚫ Multi - Tenant: Typically tenants each pay their proportionate share of the property taxes, building insurance, maintenance and repairs, and utilities.
  13. 13. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe LETTER OF INTENT OR TERM SHEET ⚫ Letter of Intent (LOI) or Term Sheet is typically negotiated directly by the parties and their brokers. ⚫ While LOI or term sheets are a useful tool in negotiated a favorable lease, they are unenforceable. ➔ Landlords should realize that their ability to lease space can be adversely affected in the long term if they earn a reputation for retracting or renegotiating term sheets.
  14. 14. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe LETTER OF INTENT OR TERM SHEET (cont’d) ⚫ From a landlord’s perspective, the more details in an LOI the better, in particular, the following terms should be included in LOIs: ➔ Term of the lease ➔ Commencement date and expiration date ➔ Base rent (if net lease), gross rent (and what it includes if gross lease) or modified gross rent (where a tenant is required to pay for some building expenses) ➔ Tenant’s proportionate share of expenses
  15. 15. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe LETTER OF INTENT OR TERM SHEET (cont’d) ➔ Permitted uses ➔ Options (i.e., extensions, expansion, rights of first refusal, right of first offer, termination) ➔ Tenant inducements (i.e., rent abatement, tenant improvement allowance) ➔ Security deposits or guaranty ➔ Who’s lease form will be used (landlord or tenant)
  16. 16. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe COMMENCEMENT DATE ⚫ One of the most important concerns, from the landlord’s perspective, is providing the tenant with possession of the premises by the agreed upon commencement date. This date must be set so that the previous occupant of the premises will have vacated and all required construction will be completed by the commencement date.
  17. 17. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe COMMENCEMENT DATE (cont’d) ⚫ Concerns: ➔ Previous tenant may hold over after the expiration of its lease and that the new tenant’s construction may not be completed on schedule. ➔ Landlords will want to set up the commencement date as a “floating date,” which is dependent upon when the premises can actually be delivered. ➔ Landlords will also seek protection in the lease from exposure to liability in the event that they are unable to provide the new tenant with possession by the commencement date.
  18. 18. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe COMMENCEMENT DATE (cont’d) ➔ Conversely, tenants will desire protective language in the lease regarding the possibility that the landlord will not have the space available by the targeted commencement date. ➔ Landlord wanting tenant to open and pay rent as soon as possible ➔ Who is doing the work to the space (smaller spaces vs. larger spaces; type of work being done before commencement)
  19. 19. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe COMMENCEMENT DATE (cont’d) ➔ If Tenant is the only party performing significant work prior to lease commencement, having a set rent commencement date based on when Landlord delivers the Premises ➔ Delays in Commencement Date (i.e.. If Tenant delays, want commencement date to start sooner; avoiding Tenant imposing any deadline or rent abatement/lease termination rights because of Landlord's delay in delivering the Premises)
  20. 20. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe RENT ⚫ Triple Net Lease – Tenant pays a base rent to the owner/landlord and is responsible for all of the property expenses (including: real estate taxes, property insurance, utilities, maintenance and repairs) ⚫ Gross Lease – Owner/landlord covers all the property’s operating expenses including real estate taxes, property insurance, maintenance and repairs, utilities and janitorial costs. ⚫ Modified Gross Lease – Hybrid of a triple net lease and a gross lease.
  21. 21. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe RENT (cont’d) ⚫ Percentage Rent – Typically found in retail leases, percentage rent essentially means that in addition to receiving annual basic rent, landlord will also receive a percentage of the tenant’s gross sales (typically only in effect after gross sales exceeds a certain agreed to amount called a “breakpoint”).
  22. 22. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe REPAIR AND MAINTENANCE OBLIGATIONS ⚫ In a “triple net” lease, the entire obligations for repair and maintenance are shifted to the tenant. In a full service office lease, most repairs are performed by the landlord. ⚫ In a retail lease, it is not uncommon for the tenant to be responsible for the maintenance, repair and, if necessary, the replacement of the HVAC unit serving its space.
  23. 23. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe OPERATING EXPENSES ⚫ “Operating Expenses” are all of the landlord’s expenses incurred in connection with the operation of the property. Typically, this includes: taxes, insurance, maintenance and operating expenses. What is included and excluded in “operating expenses” should be specifically listed in the lease and is typically the subject of much negotiation. ⚫ Both for administrative reasons and economic reasons, an owner of a multi-tenant property should try to maintain the uniformity of the operating expenses in its leases.
  24. 24. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe OPERATING EXPENSES ⚫ In order to prevent landlord abuse, most leases will include audit rights for the tenant to review the actual operating expenses of the property. The audit provision should include: ➔ The specific documentation that landlord must make available to tenant, ➔ The time period for tenant to review and, if necessary, to notify landlord of any errors, ➔ It is a good idea for landlord’s to restrict the type of 3rd party auditors to those who are non-contingency based, and ➔ In the event of an error, the mechanism and timing for correcting the error and if applicable, having the landlord pay for the cost of the audit to the extent that landlord was responsible for any errors.
  25. 25. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe OPERATING EXPENSES (cont’d) ⚫ “Gross Up” provision allows a landlord to calculate the operating expenses for a building that is less than fully occupied to the amount that such expenses would have been had the building been fully occupied (or typically 95% occupied as negotiated). Although this seems at first glance to favor the landlord, it is also for the tenant’s protection. The expenses that are “grossed up” are the variable expense (i.e., janitorial, maintenance and utilities) in a building not the fixed expenses (i.e., property taxes and insurance).
  26. 26. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ASSIGNMENT AND SUBLEASE ⚫ Most leases provide that the tenant may not assign or sublet without the landlord’s consent and that the landlord may withhold its consent for any reason or no reason ⚫ These provisions can have a major impact on a tenant’s ability to engage in corporate transactions or exit a location for an alternate site. ⚫ The landlord will often take the position that it should be the sole judge as to the suitability of a proposed subtenant or assignee. However, when pushed, most landlords will at a minimum set for the requirements and parameters, which will be used to judge the suitability of a proposed subtenant or assignee. Examples of parameters include: suitable financial statements, reputation and experience. This criteria could also be added in the lease form to avoid any questions when this issue arises.
  27. 27. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ASSIGNMENT AND SUBLEASE (cont’d) ⚫ Most tenants would prefer the flexibility of being able to assign or sublet for a use that is different from their own. Most landlord would prefer to limit this flexibility. ⚫ It is a good idea to include that the original tenant shall remain liable under the lease notwithstanding any such assignment or sublease (this is often negotiated) ⚫ Since the landlord’s review is often based on the creditworthiness of the assignee (and to a lesser extent the sublessee), the provision in the lease should explicitly require the tenant to deliver all necessary financial information and documentation for landlord to complete its review and include a net worth limitation provision which requires a minimum net worth for any such assignee.
  28. 28. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe EXCLUSIVITY, PERMITED USES & USE CLAUSES ⚫ When a landlord grants an exclusive use provision to one tenant, it limits the number and type of other potential tenants to which it may lease other premises in the shopping center. Once a landlord grants a tenant an exclusive use provision, the landlord must be very careful to not enter into a new lease that would violate this exclusive use provision. ⚫ Depending, the landlord may also be obligated to make sure an existing tenant is not currently engaging in the prohibited use and does not modify its use of its premises in the future in a way that would violate the new tenant's exclusive use provision (if the landlord has approval power over a change in the tenant's use of its premises).
  29. 29. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe EXCLUSIVITY, PERMITED USES & USE CLAUSES (cont’d) ⚫ Landlords should keep detailed records of all of the exclusive use provisions granted to all of the tenants. ⚫ A landlord should want any exclusive use provision to be drafted in such a way that it is easy for both tenant and landlord to understand and easy to enforce when the landlord is obligated to do so. ⚫ What the tenant may sell or operate in its premises not only affects the tenant but also impacts the tenant mix of the center and the landlord's future leasing plans, as well as the center's profitability.
  30. 30. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe RECAPTURE RIGHTS ⚫ A recapture clause permits a landlord to terminate the entire lease or a portion of it for the proposed assigned space. By giving control of occupancy to landlords, such clauses ensure that they receive all enhanced value of leased property. ⚫ Although any number of events can trigger a landlord's right to recapture property, they frequently are activated by a tenant requesting assignment of a lease. ⚫ A recapture clause allows the landlord to be somewhat arbitrary in its consent to the assignment. A contract stating that a landlord must be reasonable in consenting to an assignment may require a court's interpretation of the term reasonable, an uncertain result at best. Landlords can create an exit strategy and sidestep this issue by providing a mechanism to recapture the property without being held to a reasonableness standard.
  31. 31. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe INSURANCE ⚫ Insurance and indemnity provisions must be reviewed carefully both by landlord and its insurer. Typically the tenant’s insurance must include sufficient coverage for its personal property, commercial general liability insurance (typically in a range of $1 million to $3 million) and all other insurance applicable to the particular use. ⚫ Additional insured vs. named insured ⚫ Policy limits ⚫ Landlord must consult with its insurer to confirm that there are no “gaps” in coverage ⚫ Indemnity and subrogation ⚫ If there is a lender, landlord should always include any of its lender requirements in the insurance provision.
  32. 32. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe GUARANTEE AND SECURITY DEPOSIT ⚫ It is important to always know exactly which entity is the tenant, i.e., if it is an affiliate of a creditworthy entity that does not have any assets of its own. ⚫ The underwriting for the tenant should be included in the LOI and the possibility that a guaranty or security deposit may be required should also be expressly stated in the LOI. ⚫ Some factors to consider for the amount of a Tenant’s Security Deposit include: balance sheet and income statement of the prospective tenant; tenant’s historical track record; nature of the tenancy (retail, office or industrial); the length of the lease term; the amount money a tenant is putting into the space (cosmetic v infrastructure) and if there is a straight personal or good guy guaranty.
  33. 33. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe GUARANTEE AND SECURITY DEPOSIT (cont’d) ⚫ There has been a rise in the incorporation of Good Guy Guaranties, which is not intended to be a straight personal guarantee. One or more of the principals of a corporate or limited liability company (a “Guarantor”) will guarantee to the landlord that it pay all base and additional rent payments provided for under the lease up until the day the space is surrendered to the landlord – whether or not prior to the expiration of the lease term.
  34. 34. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe DEFAULTS ⚫ The default provision in the lease should not be the subject of too much negotiation. ⚫ The tenant is often concerned with having an opportunity to cure defaults. For this purpose defaults should be divided into 2 categories, monetary and non-monetary. ➔ Monetary should be simple, i.e., if payment is not made within 5 days of when due, the lease is in default. ➔ Typically, 30 days is given for non-monetary defaults. ⚫ The lease should also contain a term that the cure period does not apply in the event of more than one default in a given period of time. This is critical because (i) landlord’s want the ability to exercise remedies against chronic defaulters, and (ii) such default may also cause the landlord to be in default under its loan.
  35. 35. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe DEFAULTS (cont’d) ⚫ It is also important that the lease provide that if a default occurs tenant will not have the benefits of any rent abatements or options (i.e., extension, expansion, etc.). ⚫ It is also a good idea to have a notice provision in the lease which allows for the most efficient means of providing notice (i.e., email or fax) so that there is no delay.
  36. 36. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe REMEDIES ⚫ Important to know statutory remedies which vary by state, this should be included in the lease. ⚫ Termination of lease and acceleration of rent. Landlord should have the right to both terminate the lease and accelerate all rent in the event of a default. ⚫ Landlord should also have the right to enter and take possession of the premises. This is important to allow the landlord to re-let the premises which may mitigate the damage. All of landlord’s expenses (including, legal, brokerage, tenant improvement, etc.) should also be the responsibility of tenant. Note that having a guaranty or security deposit is obviously of significant value in such instances.
  37. 37. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe RELOCATION ⚫ Relocation provisions provide the landlord with flexibility to move a tenant to another comparable space in the building to utilize the rentable space in as efficiently as possible. ⚫ Benefits include: ➔ Maximum flexibility in connection with future management of Property. ➔ Flexibility with respect to prior granted rights (expansion rights, rights of first refusal). ➔ Flexibility to certain large tenants that may have future expansion needs that have not been negotiated. ➔ If Center is older, provide flexibility for reconfiguration of Center.
  38. 38. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe SURRENDER ⚫ The surrender provision provides the terms for returning the premises from tenant to landlord at the expiration (or earlier termination) of the lease term. ⚫ It is important to provide that the premises will be returned in the condition it was delivered, subject only to wear and tear. Any permitted alterations should be removed as well. ⚫ Any security deposit or guaranty should include a period past the expiration of the lease term so as to allow for the turnover of the premises. ⚫ From the landlord’s perspective the surrender of the premises should be as efficient as possible to avoid delays with any new leases/tenants.
  39. 39. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe SURRENDER ⚫ The surrender provision provides the terms for returning the premises from tenant to landlord at the expiration (or earlier termination) of the lease term. ⚫ It is important to provide that the premises will be returned in the condition it was delivered, subject only to wear and tear. Any permitted alterations should be removed as well. ⚫ Any security deposit or guaranty should include a period past the expiration of the lease term so as to allow for the turnover of the premises. ⚫ From the landlord’s perspective the surrender of the premises should be as efficient as possible to avoid delays with any new leases/tenants.
  40. 40. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe HOLDOVER ⚫ This provides the terms and conditions if a tenant fails to surrender the premises at the expiration (or earlier termination) of the lease term. ⚫ In addition to providing that monthly rent shall be (typically) 150%-200% of the monthly rent applicable on the last month of the term, it is important that this provision state: ➔ The tenancy shall be a tenancy at sufferance ➔ The landlord shall be entitled to all damages incurred by landlord as a result of such holdover ➔ The landlord is entitled to exercise its re-entry rights and all other rights under the lease.
  41. 41. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ESTOPPELS ⚫ Estoppels are critical for property owners. This provision becomes very important particularly during times that either the property is for sale (or being marketed) or is being re-financed. During either of these scenarios, timing is critical and therefore the language in the provision must be carefully considered accordingly. ⚫ This provision must clearly provide for: ➔ The timing of the estoppel (typically 10 days) ➔ The specific items that the tenant will be certifying in the estoppel ➔ A form estoppel (typically this is the lender’s form)
  42. 42. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ESTOPPELS (cont’d) ➔ What happens if the estoppel is not returned in the given time period (i.e., that tenant is estopped from claiming that there are any defaults under the lease or that the lease is not in full force and effect and that any such non- response is a default under the lease). ⚫ It is important to also provide that, if applicable, the tenant will also cause any guarantor to also affirm its obligations under the guaranty in the estoppel.
  43. 43. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe SUBORDINATION AND SDNAs ⚫ It is important to include a provision that the lease is automatically subordinate to both mortgage financing existing at the time of the lease and to any future mortgage financing. This provision should be self-operative without the need for any further documentation unless required by landlord or its lender. ⚫ A subordination, non-disturbance and attornment agreement should only be included for tenants with more leverage (or as required by lender). However, in the event that this requirement is negotiated into the lease, it is important to include a form that is agreed upon by tenant, landlord and its existing lender at the time.
  44. 44. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe SUBORDINATION AND SDNAs (cont’d) ⚫ You want to avoid entering into extended negotiations about the form of SNDA. Since there are three parties involved and each has its own priorities, it is often a sticking point that causes both additional cost (landlord typically pays both its own cost and that of its lender) and time.
  45. 45. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe TENANT IMPROVEMENTS ⚫ The tenant improvements provision contains the terms and conditions under which tenant may make any improvements to the premises during the term of the lease. ⚫ Typically, this should specify the process for landlord approval of such tenant improvements. Often tenants are allowed to make improvements which are less than a certain dollar amount without landlord approval however they should always notify landlord and it is imperative that the provision contain requirements which protect the landlord and the building, i.e., prohibition on mechanics liens, all contractors must be fully insured and approved and use high quality materials, work must only be completed during specified hours and noise and waste must be minimized and controlled as well.
  46. 46. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe TENANT CONCESSIONS ⚫ These are negotiated based on the leverage of the specific tenant and the market. It is recommended that all concessions be specifically described in the LOI. ⚫ Rent abatement – it is a good idea to try and spread this out through the term of the lease so landlord does not have such a large up front risk. The provision should also specify that the abatement is only for base rent and not for operating costs and that in the event of a default, tenant must pay back any abatement and the provision is otherwise void.
  47. 47. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe THIRD PARTY CONSIDERATIONS ⚫ Although the lease is between tenant and landlord, consideration must be given by landlord to the interests of: ➔ Its lender(s) ➔ If applicable, other parties to declarations or covenants, conditions, and restrictions (“CC&R’s”) which apply to the property ➔ In particular with regard to retail properties, the rights of other tenants in the property (i.e., exclusives, co-tenancy and use restrictions)
  48. 48. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe THIRD PARTY CONSIDERATIONS (cont’d) ⚫ With respect to landlord’s lender, special attention must be given to the following provisions: ➔ Payment of rent (i.e., lockbox, timing of debt service payments, payment of taxes) ➔ Default (including notice and cure) ➔ Insurance (lender requirements must be incorporated into provision) ➔ Estoppels and SNDAs ➔ Subordination ⚫ To the extent there are restrictions contained in any declarations or CC&Rs that are recorded against the property, the lease must be consistent and contain any applicable terms including, typically, that the lease is subject and subordinate to such documents.
  49. 49. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ISOLVENCY ⚫ Tenants can not simply surrender the leased space to the landlord before the end of the term of the lease, without any consequences. However, many tenants fail to anticipate the need for flexibility on both the lease term and the amount of space. ⚫ If a Tenant is unable to find a subtenant, and are forced into a bankruptcy filing, they have a right to assume and assign a lease as part of a restructuring process. ⚫ To assign a retail lease in Chapter 11, among other things, the assignee must provide “adequate assurance of future performance” (See 11 USC Section 365(b)(1)(C)) ⚫ Bankruptcy Courts will disregard the “use” clause when a lease is not in a shopping center.
  50. 50. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ISOLVENCY (cont’d) ⚫ Section 365(b)(3) provides, “adequate assurance of future performance of a lease of real property in a shopping center includes adequate assurance— ➔ of the source of rent and other consideration due under such lease, and in the case of an assignment, that the financial condition and operating performance of the proposed assignee and its guarantors, if any, shall be similar to the financial condition and operating performance of the debtor and its guarantors, if any, as of the time the debtor became the lessee under the lease; ➔ that any percentage rent due under such lease will not decline substantially;
  51. 51. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ISOLVENCY (cont’d) ➔ that assumption or assignment of such lease is subject to all the provisions thereof, including (but not limited to) provisions such as a radius, location, use, or exclusivity provision, and will not breach any such provision contained in any other lease, financing agreement, or master agreement relating to such shopping center; and ➔ that assumption or assignment of such lease will not disrupt any tenant mix or balance in such shopping center. (emphasis added)
  52. 52. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe EFFECT OF BANKRUPTCY CODE CHANGES ON LEASE SALES ⚫ Changes: ➔ Code limits the time to assume or reject to 7 months (210 days). ➔ First 120 days are automatic, ➔ Additional 90 days for cause, ➔ Any additional time requires the consent of the landlord. ➔ Assumption or assignment of a lease of real property must be subject to the provisions o the lease, such as use clauses. ➔ Defaults must be cured, or adequate assurance will be promptly cure, before a lease can be assumed.
  53. 53. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe EFFECT OF BANKRUPTCY CODE CHANGES ON LEASE SALES (cont’d) ⚫ Observations: ➔ 7 months is not a lot of time, particularly for a retailer with a lot of leases. ➔ Assumption requires “curing” defaults. Thus, by forcing an “early” assumption, the landlord gets its pre-petition defaults paid quickly and paid in full, while other creditors wait for distributions under a plan. ➔ Assumption creates administrative liability for remaining rent, subject to new two year cap.
  54. 54. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ABOUT THE FACULTY DAVID LEVY – david.levy@nrc.vom David Levy is Vice President of Business Development for NRC Realty & Capital Advisors. NRC conducts structured sales, sealed bid sales, and auctions of all types of real estate and real estate-based businesses. NRC is distinguished for being the largest broker of gas stations and convenience stores in the U.S. The firm also provides financial advisory services with a focus on the gas station and convenience store and franchise restaurant sectors. NRC’s clients include corporations, small businesses, banks, private equity, hedge funds, non- traditional lenders, receivers, trustees, investors, and more. The firm has experience in consensual sales of premium, surplus or non-strategic assets, as well as those involved bankruptcy, restructuring, and other distressed situations. NRC has sold $1.5 billion in commercial and residential real estate assets in its 26-year history. Mr. Levy has an MBA from Miami University and holds the prestigious CCIM designation. 5 4
  55. 55. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ABOUT THE FACULTY HOWARD KLINE – howard@hfklaw.com Howard has been involved in commercial real estate for over 39 years now as both an attorney, broker, arbitrator and now radio show host and founder of CRE Radio & TV, since December 2010. Over the years, I have worked in-house as General Counsel and Director of Real Estate for a national user of office, R &D and retail space, utilizing both my legal and brokerage licenses, General Counsel for a major regional supermarket chain that owned its own shopping centers. As an attorney, I have also practiced law as outside counsel to many major commercial landlords doing lease transactional work and lease litigation, including unlawful detainers and rent collections. As a real estate salesperson, I have served as a tenant rep in New York City and as a broker for numerous lease transactions throughout the United States. While I continue to practice law on behalf of commercial landlord’s and tenants, my passion has become the radio show. It is incredibly fulfilling to inspire others to improve themselves and reach for the stars. 5 5
  56. 56. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ABOUT THE FACULTY BIFF RUTTENBERG – biff@atlaspartners.com Biff Ruttenberg has 48 years of retail development, redevelopment, management, and leasing experience. His real estate background, including mortgage banking, construction, real estate brokerage and lending experience, has contributed to Mr. Ruttenberg’s years of successful business projects and relationships. He holds a BA from the University of Pennsylvania and an MBA from the Kellogg Graduate School of Management at Northwestern University. He is the president of Atlas Partners, LLC, a real estate services firm focusing on consulting to asset-based lenders, institutions and other users of commercial space. It specializes in workouts, turnarounds, dispositions, and maximizing the value of difficult properties. The company’s registered slogan is "The real estate department for companies that do not want to be in the real estate business...but are."®. Affiliates of Atlas Partners also acquire distressed debt and operating businesses. To read more, go to https://www.financialpoise.com/financialpoisewebinars/faculty/biff-ruttenberg-2/
  57. 57. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe 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. 5 7
  58. 58. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ABOUT FINANCIAL POISE DailyDAC LLC, d/b/a Financial Poise™ provides continuing education to attorneys, accountants, business owners and executives, and investors. Its websites, webinars, and books provide Plain English, entertaining, explanations about legal, financial, and other subjects of interest to these audiences. Visit us at www.financialpoise.com. 5 8 Our free weekly newsletter, Financial Poise Weekly, educates readers about business, business law, finance, and investing. To receive it simply add yourself by going to: https://www.financialpoise.com/newsletter/ Email addresses are never sold to or shared with third parties.

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