Commercial Real Estate - Leasing How to right-size your commercial lease to fit your business plan. Negotiation techniques to protect the tenant's rights. Presented by International Properties Group principal George F. Donohue.

1. Presented by
George F. Donohue
President
International Properties Group

2. Welcome
 Review of the Agenda
 “Housekeeping”
 Sign in
 Breaks
 Keeping it very interactive

3. Purpose
 What do you want to achieve
 What do you want to learn
 My “job” today…..

4.  Provide insight into leasing from the commercial real
estate professional’s point of view
 Separate fact from fiction (especially the “whys”)
 Answer all your questions….dedicate some Q & A time
throughout the lecture

5. What is a lease….
 And why should an appraiser care about them…
 A bundle of rights and obligations
 No two leases are alike

6. The Challenge
 Equate a lease to a “number”
 A lease will have 40 to 100 components (basically
clauses that express agreements about particular
things)
 A lease is a “good lease” depending on the market at
the moment. (It may have been initially a bad lease for
the tenant and then evolved into a great lease).

7. Basic Types of Leases
 Office
 Retail
 Industrial

8. The Determinant
 What is a primary determining or influential factor
that dictates the terms of a lease……

9. Answer……
 Supply and Demand!
 Supply and Demand causes tenants and landlords to
behave and negotiate in a certain manner…

10. What do all Landlords want?
 Even though there are many clauses in a lease the
landlord’s main priority is a…
 Dependable, cash flow……

11. Whose Perspective?
 Today will discuss parts of the lease….
 …..keep in mind the perspective of the landlord vs. the
perspective of the tenant.

12. Let’s Review Some Components
 Start with Office Leases
 Use Clause
 General vs. Specific (any danger?)
 For a tenant which is better and why?

13. Lease Start Date?
 “Date Certain” January 28th, 2013
 Earlier of……..Later of…
 At the time of an event
 Does the expiration date move along with the start
date?

14. Term of the Lease
 Can be 1 month to 99 years
 Office Leases typically 5 to 10 years
 Retail Leases: 10 to 15 years…..why?
 Medical Space: 10 to 15 years
 Industrial Leases: 5 to 10 years
 If a lease has no term cited how long is the lease?

15. USF vs. RSF
 Useable Square Footage
 Rentable Square Footage
 Why can’t you find the square footage in the lease.
 Could be “hidden” in the tax section.

16. BOMA Form of Measurement
 Most commonly accepted “Standard”
 The Rentable Area of a floor shall be computed by
measuring to the inside finished surface of the
building….”
 20% Loss Factor: Can use 800 sf but pay for 1000 rsf
 25% Add on Factor: Have 800 sf and will add on 200 sf
to arrive at 1000 rsf

17. BOMA
 Measuring space is complicated.
 Leases should cite a Standard so “anyone” can go back
and re-measure the space to make sure it is accurate.
 Why is the measurement important to an appraiser…

18.  Value is a direct function of Square Footage
Three Basic Appraisal Approaches
1.Replacement Cost Approach
Construction Area X Comparable cost per square foot
2. Comparable Sales Approach
Gross Area X Comparable Sales per square foot
3. Income Approach
Rentable Area X Comparable Rent per square foot

19. BOMA
How to cite a BOMA Standard in a lease?
Use the ANSI Standard designation and remember to
add the method:
Office Standard: “ANSI/BOMA Z65.1-2010 - Method B”
Industrial Standard: ANSI/BOMA Z65.2-2012 - Method A”
Gross Standard: “ANSI/BOMA Z65.3-2009 - EGA”
Residential Standard: “ANSI/BOMA Z65.4-2010; Method A”
Retail Standard: “ANSI/BOMA Z65.5-2010”
(ANSI is the American National Standards Institute – non profit founded in 1918.)

20. Security Deposit
 Based on creditworthiness
 Tenant may or may not gain interest on the money
 Check or Irrevocable Letter of Credit
 “Burn down”….good tenant….deposit gets burned down

21. Subleasing
 The areas of concern:
 When
 How
 Who keeps the profits
 Sub-tenant: equal or better
 Sub-tenant: must pass a financial “test
 How does a LL prevent tenant from making a lot of
requests?

22. Subleasing vs. Assignment
 What is the difference?
 Assignment: Transfer of tenants entire interest in the
lease and the premises.
 Sublease: Could look like an assignment but it ends 1
day before the lease expiration date
 (A “lease within a lease”)

23.  Most important and least understood….
 Neither a sub lease or an assignment releases the
original tenant’s liability …..UNLESS the landlord
agrees to release the original tenant

24. Recapture Clause
 Why do they exist?
 More rent to Landlord
 Landlord wants to accommodate a bigger tenant
 Sell the building vacant

25. ******
Questions & Answers
25/71

26. Statistics
 Who is telling you and why are they telling you.
 Can be controversial
 Lease info is about “asking rates” since leases are not
recorded.
 Following data is general and rounded up nearest
single number (no decimals)

27. Some Statistics
Vacancy Rental Rate
 Long Island Retail 5% $30/sf
 National 7% $15/sf
 Long Island Office 8% $27/sf
 National 12% $22/sf
 Long Island Industrial 5% $12/sf
 National 8% $5/sf

28. Manhattan
Class A Office Space Vacancy Rental Rate
Midtown 10% $80/sf
Midtown South 6% $73/sf
Downtown 9% $55/sf

29. Self Help
 Sometimes called “self cure” clauses
 Obtained by larger tenants
 Tenant fixes problem if landlord can’t
 Tenant deducts cost from rent

30. Defaults
 Monetary
 Non-monetary
 If a tenant “breaks a rule” or an agreement is he in
default….?

31. Acceleration of Rent
 What is it and “what room” does a Landlord need to
explain this in……

32. Asbestos/Environmental
 Landlord should make representations
 Landlord to pay for the costs to remove
 Landlord to indemnify the tenant

33. ADA
 American Disabilities Act (July 1990 by Congress)
 Who is responsible for ADA compliance in a lease?
 If silent…it is landlord’s responsibility
 However, landlords try to push responsibility to
tenant with a “Compliance with laws” type clause.

34. Relocation Clause
 Relocate within building or to another building in LL’s
portfolio……Deal killer?
 Why?
 LL wants to sell building vacant; big tenant; etc.
 LL pays moving costs, telephones, stationary, etc. ???
 Limit the # of relocations

35. Maintenance vs. Replacement
 Overhaul?
 Replacement?
 Maintenance?
 Routine Maintenance?

36. Non-Disturbance
 In a foreclosure tenant remains on same terms and
conditions
 Lender wants to maintain good cash flow

37. Electricity
 $/sf (e.g. $3.00/sf/year)
 Direct meter
 Sub meter (Metering after
the LL’s meter)
 Load calculation

38. After Hours HVAC
 Often HVAC is not free after hours (After 6 pm?)
 Tenant pays for extra service
 Could be quite costly
 Landlord could “double dip”, “triple dip”

39. ******
Questions & Answers
41/71

40. Right of First Offer
 Landlord makes an offer of a vacant space to a Tenant
 What vacant space?
 Anywhere in the building
 Just on that floor
 Only adjacent space
 In the elevator bank

41. Option to Expand
 Anywhere in the building
 Just on that floor
 Only adjacent space
 In the elevator bank
 At the “then going rent in the lease”
 FMV or FMR (is there a difference?)
 …or 90% of FMV or FMR

42. Option to Contract (Downsize)
 What Space
 What kind of notice must be given
 When and how often can they contract
 What adjustment is made to the lease
 Do you need the lender’s consent

43. Investor’s Priority
 Bricks and mortar?
 Quite often it is ….cash flow.
 How does an investor know what the rent is:
 Rent Roll?
 Income Tax Statement
 What is written in the lease?
 The best way to know is found in what clause?

44. Estoppel Clause
 What is it?
 Why is it so very important?

45. Alterations
 What alterations are allowed with and without the
Landlord’s consent?
 What is the process?
 Does tenant have to pay for landlord’s supervisor

46. Restoration Clause
 Extremely Dangerous
 Sometimes hidden in another clause
 Tenant must return the space back to the Landlord in
the original condition it was given.
 A method to hold onto the security deposit or clean up
arrearage. “Pay what you owe or restore”

47. Work Letters
 What is the difference between the terms:
 Work Letter;
 Landlord’s Contribution;
 Tenant Improvement Allowance……
 nothing….they all mean the same thing.

48. Work Letters
 Sometimes written as a Schedule to the lease
 $/sf amount
 Set amount
 Tenant is responsible for $ over the allocation
 What happens if the tenant doesn’t use the full amount…..
 Nothing
 Rent credit
 Check for difference

49. Cleaning
 The landlord’s contractor
 Tenant Pays
 Landlord Pays
 The tenant’s contractor
 Tenant Pays
 Pay landlord a $/sf or pay your cleaning contractor a
negotiated amount

50. Operating Expenses
 Primary goal of landlord……
 ….is to push the economic risk of “running the
building” to the Tenant
 This is accomplished through Operating Expense
clauses.

51. Operating Expenses
 Operating Expense Escalations
 Tenant is given a Base Year….. e.g. 2013
 Say it cost $8.00/sf to “operate” the building
 Each year the Tenant pays the incremental amount
over that Base Year
 If in 2014 it cost $8.50/sf to “operate” the building, the
tenant pays $.50/sf
 If in 2015 it cost $9.25/sf to operate the building, the
tenant pays $1.25/sf

52. Porters Wage
 Operating Expenses using a Porters Wage formula
 Porters Wage
 (Porters Wage with fringes...penny for penny
penny for penny and a half.)
 So.. if the Porters Wage Rate in 1990 was $12.34
 And if the Porters Wage Rate in 1991 was $12.91
 Tenant pays $0.57/sf more

53. Straight Percentage
 Landlord and Tenant agree on a fixed percentage
increase to cover the Landlord’s increases in operating
the building.
 3%
 If the Tenant is paying $40/sf and the increase is 3%;
the tenant pays an increase of $1.20/sf…in essence the
Tenant now pays $41.20/sf

54. CPI
 Using a CPI formula
 The Tenant pays the “additional rent” based on the CPI
index.
 For example, if the CPI is 4%
 If the Tenant is paying $40/sf and the CPI is 4%; the
tenant pays an increase of $1.60/sf…in essence the
Tenant now pays $41.60/sf

55. Pass throughs
 If the expenses go up the tenant pays…
….it’s proportionate share.
 Very fair, hard for small tenants to obtain
 Proof of the expenses are required.
 Right to Audit is essential
 Problem….marketing expenses, etc. (other buildings, too!),

56. Real Estate Taxes
 Tenant is provided a Base Year …. “2013/2014”
 Tenant pays its proportionate share above that Base Year.
 If the Tax Expense in 2013 was $10/sf and then the next year
it was $10.30/sf….
 The Tenant pays an extra $0.30/sf
 If in 2015 it goes to $11.00/sf…Tenant pays $1.00/sf

57. Caps
 Caps can be helpful to a Tenant
 Anything can be capped:
 Rent
 Electricity
 Op Ex
 Appraisers must be extra careful if they are trying to
project out the income over many years.

58. Insurance
 Tenants required to have a basic insurance policy
 Often tenant’s pay for their insurance and the
landlord’s insurance. How is that accomplished?
 What insurance policy caused many tenant’s “rent” to
increase?

59. Retail Rent Clauses
 Base Rent
 % Rent
 Base plus a percentage
 Overage Rent is additional
rent Tenant pays once sales
reach a certain pre determined
target.
Supermarket: 1% Jewelry: 7%

60. Radius Clause
 Tenant can not open another store within a 5 mile
radius of the location cited in the lease.
 Avoid “cannibalism” which could reduce sales which
could reduce percentage rent.

61. Co-Tenancy Agreement
 If a retail tenant moves into a mall or shopping strip
because a National Chain or a specific type of store is
already there……
 ….and that specific store leaves……
 ...the tenant can either:
 Pay lower rent
 Terminate the lease

62. George’s Survival Ratio
 Retail Store
 The rent and op ex should not be more than 15% of the
projected gross sales
 Office Tenant
 The rent and op ex should not be more than 10% of the
projected gross sales.
If it is …it could be a red flag financial trouble could be
ahead.

63. Retail “Kick out Clause”
 Tenant’s Option (Please kick me out)
 Landlord’s Option
 Mutual Option

64. Quiet Enjoyment
 Quiet as in “peace and quiet”
 What else?
 Basic Services; working elevator, heat, water, etc.
 Landlord puts a dance studio above a music store
 Similar to an Implied Warranty
 There is the same phrase in DEEDS but it means that the deed is clear;
no encumbrances

65. Right of First Refusal
 Landlord gives tenant the option to lease a space on
terms the Landlord has already negotiated with a
prospective tenant.

66. Holdover
 If the Tenant remains in the space after the Lease is
expired…..
 Holdover Rent can be 3x the normal rent!
 How can this happen…..another lease deals fall through
 Or the Tenant did not know his lease expired
Landlord does not have to notify tenant.

67. Option to Terminate
 Landlord or tenant may want a way to terminate the
lease (or carry out an Early Surrender)
 State the circumstance….Landlord has entered
negotiations to sell….Landlord has submitted demo
plan to City…..
 Does Tenant get compensated?
 Different amounts depending on the year

68.  Tenant may want to terminate or give up the space
early…
 Hard to obtain (depends on the market and size of the
tenant).
 If obtained, usually Landlord wants long enough
Notice…..so he can re-rent the space

69. Option to Extend
 Option provides the Tenant to extend the lease
 Usually at the then going rent in the lease or FMV or
FMR or a specified amount
 Simple ….just give notice ….NO NEW LEASE….lease
continues “unbroken”.
 Danger is that all the escalations keep going instead of
being recalibrated.

70. Option to Renew ***
 Similar to an Option to Extend…..
 However a NEW LEASE DOCUMENT is required.
last

71. Thank you….
 SOME TIME FOR….QUESTIONS & ANSWERS
George F. Donohue
President
International Properties Group
Telephone # 347-573-8354 gdonohue@realestateipg.com