Are you truly on the road to a leasing somewhere? | 4:48 Table of Contentsmore
As we all unfortunately (whether consciously or not) channel the words of Elvis Costello as we are left “Searchin’ for light in the darkness of [the] insanity” that is COVID-19, please explore Leasing REality’s The Luv The 1 U R With, George Benson, Jerry Garcia, LeBron James & Sting “So Lonely Drive-In Movie” Theory when deciding whether or not a rental relief lifeline is in order.
Note: This tip was published on March 18, 2020.
Less Than Perfect and Substantial Completion | In any lease, substantial completion of improvements done by a landlord needs to be defined clearly. One of the more common definitions of substantial completion is when the build-out has been completed except for minor items or defects that can be completed or remedied after the tenant occupies the space without causing interference with tenant business operations or use of the premises.
Although under the foregoing definition, some cynics out there would consider the space substantially insubstantially completed, but most would view it more along the lines that the nicks, cuts, and warts remaining to be completed in the construction build-out are simply those of an immaterial nature when taken as a whole, such imperfections can readily be completed by landlord.
View more substantial completion tips here.
Does This Outfit Fit Right? | Just as any person should know how to answer that question when asked by his or her significant other, a tenant’s broker, if it hasn’t done so already, should know that he or she needs to make sure whether or not the space being contemplated fits the current and future needs of its client before it goes any further along in the process.
Many landlords will do a test fit for a tenant at little or no cost, although others might not depending on the context of the deal and the market. Please know though that a good number of furniture vendors, with the hope that the prospective tenant will ultimately use their services, will prepare a space fit design plan for a tenant at little or no cost as well. Tenants should also ask their key employees and/or department heads for their input as well at this juncture. Such input is necessary, and simply put, the respect shown the foregoing personnel at this point in time will pay off for tenants both then and in the future.
Watch, read, and/or listen to Finding New Space & Moving Tips for Commercial Tenants.
Whether you are a landlord or a tenant, or representative thereof, when dealing with a request for rental relief, you need to put yourself in the shoes of the person sitting on the other side of the bargaining table. There are tenants who simply feel that, because they perceive the world and their business as going to hell in a bucket, the landlord should unequivocally grant them rental relief. This isn’t and shouldn’t be the way it works! Tenants cannot lose sight of the fact that the landlord possesses a signed lease wherein tenant has agreed for a term of years to numerous monetary and non-monetary obligations.
Conversely, landlords need rent-paying tenants, and consequently, they should strongly consider that fact when confronted with a request for a free rent or other concession. In that context, when asking for a short-term or long-term lifeline from a landlord, tenants need to be armed and ready with not only a convincing “tale of woe” and a sensible solution to get them through their challenging times, but also with clear and written authoritative documentation in support of their request to a landlord. Put another way, tenants need to empower their landlords to make an informed and knowledgeable decision as to the granting of their requested lease concession.
Learn more about Lease Restructurings, Modifications & Workouts.
The Devil is in the Detail | To witness the transformation of an office or retail space from that of a broken down palace with great bones is somewhat akin to experiencing the birth of a child, as virtually all construction projects are somewhat of an embryonic journey, where all of the various players involved in that project play a part in shaping the characteristics of the space as the construction evolves and takes on a life of its own.
Landlords should expressly include language that all construction documents submitted for their approval must be fully detailed, show complete dimensions of the space, shall not require any changes in the structure (nor negatively impact the systems) of the building, and that tenant’s plans shall not be in violation of any laws, rules and regulations of any governmental or quasi-governmental agency having jurisdiction over the building. A landlord should also include language that, notwithstanding its approval of the plans, it nonetheless is not making any judgment or rendering whether or not those plans are in fact in accordance with applicable code.
Watch Landlord & Tenant Work: Design and Construction Drawing Leasing Tips.
Pre-Occupancy Inspection Tip for Residential Agents | After initial lease signing but before the tenant begins occupancy, the landlord is required to offer the tenant an opportunity to inspect the premises with the landlord or landlord’s agent to determine its condition. (1) If the tenant requests such inspection, the landlord and tenant are required to execute a written agreement before the tenant begins occupancy attesting to its condition and specifically noting any existing defects or damages. (2) When the tenant vacates the premises, the landlord may not retain any amount of the security deposit due to any condition, defect, or damage noted in such agreement.
Read our Changes in Management Responsibilities for Landlords E-book chapter and our Preparing and Managing NYS Free Market Residential Leases: The Housing Stability and Tenant Protection Act of 2019 E-book series here.
Compliance with Law “Cost” Provisions | As to the compliance with law section of the commercial lease, many initial lease drafts will (or if you are on the landlord side, should) attempt to have the tenant pay their proportionate share of the landlord’s costs to comply with local laws then existing as well as those enacted in the future. If faced with this type of language, a tenant should in the first instance attempt to delete its landlord’s attempt at reimbursement for such costs, or at worst, only agree to be responsible for costs that (1) relate to laws enacted after the lease commencement date and not to any then current laws, (2) represent their proportionate share of such costs on a straight line basis, (3) provide for the numerator in such calculation being the remaining years left in the lease term, (4) employ amortization determined in accordance with GAAP (with the amount not based on a useful life selected by the landlord in its sole discretion) and (5) are in some manner capped to a maximum amount per annum in order to limit their exposure. Subscribe to read and/or watch Compliance with Law, Assignment & Subletting, Tenant Work and Good Guy Guaranty Concerns.
Defining Flooring in a Landlord Work Letter | If you are a landlord, the desire is simply to include language that you will supply building standard carpet in the offices, conference rooms, and bullpen area and building standard tile in the copy room, kitchen and storage rooms. If you are a tenant, you would like language to the effect that the landlord will not only remove all existing flooring and prepare the slab to receive new floor finishes (including leveling, if necessary), but as to the product itself, that the landlord will furnish and install a certain brand of carpet that you have viewed in advance, with the ability to upgrade over landlord’s building standard at your sole cost and expense. In addition, for both cosmetic purposes as well as the fact that in the high traffic common and bullpen areas, many tenants prefer having carpet squares installed as opposed to broadloom, which is ordinarily found in offices. Subscribe to view a baker’s dozen list of those items that need to be focused on when negotiating the detail of work to be performed within a landlord’s work letter.
Cost Savings in Lighting | Whether you are a landlord or tenant, great consideration should be given to, notwithstanding the upfront cost, changing old lighting in an office to that of energy-efficient lighting which results in cost savings benefits as well as increased efficiency and reduced electricity charges as a consequence, not to mention the more appealing cosmetic look that comes from much of the modern lighting products available.
Tenant Perspective: If you are a tenant and you cannot get your landlord to change the lighting, you should insist that all bulbs be changed prior to the commencement date by landlord, or alternatively, all bulbs must be replaced at no cost to you during the first 12 months or so of the lease term. Furthermore ask that the lighting fixtures be cleaned and that all ballasts, if they cease to function during the first year of the lease term, are replaced by the landlord at its sole cost and expense. Learn more cost savings tips here.
Rules are Rules | The impact of entering into a lease goes far beyond the basic business terms (i.e., the insertion of rental and security deposit amounts and the length of the lease), and as such, mistakes made while preparing a lease have the potential to seriously damage a landlord or tenant’s long-term financial well-being. Simply put, there is real legal liability associated with inappropriately overstepping the boundaries of the profession. Not to state the following as a scare tactic, but in the summer of 2013, New York State Legislature amended the New York Judiciary Law to make the “unauthorized practice of law” a FELONY OFFENSE in the event such unlawful practice substantially damages a client. Read The Broker Buzzkill, the Unauthorized Practice of Law, and to Prepare or Not to Prepare E-book chapter to learn more.
Beware Tenants of Loss of Renewal Rights | Tenant Advocates: Many leases subtly, yet effectively, strip a tenant of its renewal rights if it has “ever been in default during the lease term” or if it has “not been timely” in its payment of rent to landlord. Although the “default ask” by the landlord is both essential and fair, at the same time, the existence of the word “ever” and phrase “not been timely” is not. Thus, make sure that (1) “not been timely” is stricken and (2) “ever” is either stricken from the LOI (or at least changed to “then in default”). Dive into our Cheat Sheet for additional landlord and tenant pointers in regards to renewal options.
DOS Issued Guidance | On September 12, 2019, the New York Department of State (DOS) issued its guidance on certain aspects of the Housing Stability and Tenant Protection Act of 2019 (HSTPA) applicable to free market residential leases, namely with regards to the restriction on application fees and who the restrictions apply to. For a full description of the DOS guidance and for a list of the primary changes in management responsibilities for landlords of free market residential leases in New York under the HSPTA, click here.
Return of the Security Deposit | In compliance with Part M, §25 of the Housing Stability and Tenant Protection Act of 2019 (the “New Law”), the amount of the security deposit cannot exceed one (1) months’ rent. Pursuant to the New Law, the landlord is required to return the security deposit within fourteen (14) days of the date (i) the lease ends, or (ii) the tenant vacates the premises. If the landlord intends to keep any of the security deposit, the landlord must provide the tenant an itemized statement indicating the basis for the amount of the tenant’s security deposit being retained (if any), and must return any remaining portion of tenant’s security deposit to the tenant within the fourteen (14) day period. Explore Leasing REality’s Tips to Help Prepare REBNY Free Market Residential Leases cheat sheet to learn more.
Tenant’s Proportionate Share of Real Estate Tax Increases Calculation | When it comes to the manner in which a landlord determines exactly what a tenant’s pro-rata share will be in determining its annual tax increase, many tenant advocates believe that a landlord’s creativeness in arriving at such percentage is somewhat akin to a line by the old time actor and social commentator Will Rogers, who said “The [income] tax has made liars out of more Americans than golf.” Notwithstanding which side of the foregoing line you stand on, as a general statement, other than in some jurisdictions where a formula using the rent of a retail tenant’s rent to that of the total rent for a building is used (i.e., in a mixed-use building), a tenant’s proportionate share of real estate tax increases is often calculated based upon their spaces’ rentable square footage to that of the rentable square footage for the building they occupy. Read our Real Estate Tax Escalations E-book chapter here.
“Go Dark” | Most leases require a tenant to continuously operate its business while leasing its space, and in the event a tenant fails to adhere to any minimum hours of operation covenants contained in its lease, more often than not the tenant will be subject to some type of monetary pain as a consequence of not doing so. In short, unless the clause included a landlord termination right, the beauty of a well negotiated “go dark” clause to a retail tenant is that it may allow the tenant to essentially cease its business operations without being considered to be in default of its lease obligations, provided that the tenant continues to pay the rent due and owing under the lease. Subscribe here to access our E-book chapter and video on this topic.
Functionality | As a tenant, whether you and/or your landlord are building out the space, communicate what type of work place you need for your business and staff. As Steve Jobs once said, “Design is not just what it looks like and feels like, design is how it works.” The principals of a tenant need to not only work with their team of professionals, but those in their employment as to what will truly make for an ideal work environment. Playing off of the words of Walt Disney, “You can design and create, and build the most wonderful place in the world. But it takes people to make the dream a reality.” Watch to learn more about Leasing REality’s Top 10 Design and Construction Drawing Leasing Tips here.
Construction Escrow Agreement | When used in conjunction with a lease, a construction escrow agreement is one where a landlord and tenant agree that the tenant will deposit a sum of monies, with an escrow agent, to be used as partial (or full) payment for the construction of the tenant’s work, with the funds on deposit distributed periodically for payment of supplies and labor upon the presentation of documentation specified thereunder to the escrow agent. Explore Leasing REality’s Top 6 Construction Risk Mitigation Tools here.
Advertisement | Landlord Advocates: Please recognize that landlords should not readily give away the roof and sides of a building to tenants – where if zoning permits – given that such building roofs and sides can operate as additional revenue streams by way of (1) signage placement for those wishing to advertise or (2) placing antennas or other equipment on a rooftop. For example, on the sides of a building in Harlem where Bill Clinton maintains his former presidential office, prior to NYC prohibiting such signage, the landlord used to gross nearly $500,000 per year for movie, clothing and alcohol-related signage on its eastern and western walls of roughly 80 to 100 feet in height. Watch our Signage Clause Negotiating Tips video here.
Broker’s Ability to Help Restructure Lease Obligations | A broker can be a tenant’s agent of change by conveying to its landlord the message that unless it works with its tenant in an effort to help it weather the storm, the landlord will soon be in a position of vacancy turnover, loss of revenue and faced with a variety of other turnover costs such as paying for a full brokerage commission, tenant improvement build-out allowances and free rent concessions. For more on brokers making a difference, click here.
Don’t Get “Brokered” by a Landlord’s Broker | Landlords and their listing agent have far more experience negotiating letters of intent than a tenant does. Posed in the form of a few questions: What do landlords and their agents do for a living? Stating the obvious, they rent out commercial space. What do tenants do for a living? Once again stating the obvious, they rent out commercial space to conduct their business so they can make a profit. So who has the upper hand in lease negotiations if a tenant is not represented by a tenant broker? For no nicer way of putting it, since a tenant is going to get “brokered” in some way, shape or form, having a tenant’s broker looking out for your interests as a tenant advocate is essential. Watch Leasing REality’s The How & Why Brokers Can Make a Difference in all Phases of a Lease Negotiation here.
Knowledge is Power | A business’s ability to make an informed decision about their real estate needs is only enhanced by the knowledge a good commercial tenant representative brings to them, not only about the marketplace, but also about how to navigate the leasing process and choose among the many attorneys, architects, contractors, designers, furniture providers and other trades a business will need to rely on when looking for new space. The greater the knowledge a broker can pass along, the better that client will fair in its lease negotiations and its new space. Explore Leasing REality’s Top 13 “Pitch Tips” as to Why Brokers are Integral here.
At both the beginning and end of the day, it is our firm belief that in order to succeed in commercial leasing, life and in business, a major component of doing so is all about being a part of the solution and not part or all of the problem. For no better way of putting it, you need to “just deal with it” and navigate to the best of your ability and skill set the metaphorical 40 foot wave of life which seemingly on occasion finds a way without warning, to rain down on your close to crossing the goal line real estate transactions. With that all said, it brings to mind what we like to call our Winston Wolf, Vivian Greene, Forrest Gump and Gene Kelly Be Part of the Solution Theory. In adapting the theory as your mantra, as the bridge to ultimately closing your deals, real estate professionals need to… Read or watch to view the complete theory.
Given that no real estate professional or owner for that matter knows everything (with a few of us sometimes being a can or two short of a full six pack), a key to success is to fill in the holes in your knowledge base by surrounding yourself with those capable of doing so. By way of example, a real estate agent should have a good number of reliable contractors, architects and attorneys “on call” as part of their “team.” The hope, the prayer and the dream would be for the broker to call on their “teammates” for a consultation or walk-through of a space at no or little charge, given that real estate agents represent to these three professions not only “free advertising,” but sources of free referrals as well. View Leasing REality’s complete Ho Ho Ho, Dr. Evil & Jerry Maguire “You Complete Me” Theory here.
When it comes to tenant retention, lease renewals and lastly, those cycles where the context of the times sometimes scream out for a lease restructuring, given the consequential financial fallout associated with vacancy turnover, as well as costs for legal, brokerage, architecture, tenant improvement allowance, landlord work, and lastly, free rent concessions associated with a tenant channeling the Grateful Dead song “Truckin’” and moving on to another office or retail space, landlords need to become bigger fans of musicians known as CSNY, George Benson, and Sting from The Police. Stated differently, from the school of “life is a lesson and I won’t make the same mistake next time,” landlords should respectively consider listening to the songs “Love the One You’re With,” “Never Give Up on a Good Thing” and “So Lonely” as they stand in the once occupied space of a dearly departed and rent paying tenant who has made like LeBron James and taken their “talents” to another landlord’s building. View Leasing REality’s complete Luv The 1 U R With, George Benson, Jerry Garcia, LeBron James & Sting “So Lonely Drive-In Movie” Theory here.
Making a Difference: The Broker’s Mantra of “We Can Work it Out” | At times, it can be said that a few rather large egos are on display when sitting in a room or on a conference call negotiating a letter of intent or lease. Given that the broker is only paid if the deal is consummated, it is amazing sometimes how some brokers have the talent to channel Paul McCartney and Mahatma Gandhi simultaneously and become the voice of reason in the room by conveying the message that hey “there’s no time for fussing and fighting, my friend,” and help navigate resolution on an issue of contention by having a “we can work it out” mindset. For more on brokers making a difference, click here.
The Ability to Channel Elvis Costello and George Benson Simultaneously – Simply Asked, “What’s So Funny ’Bout Peace, Love and Tenant Retention?” | The ability to retain a tenant takes talent and perseverance. Although not all landlords might see it as we at Leasing REality do, a savvy commercial representative has the ability to work with a landlord while advocating for its client when negotiating a potential lease renewal, by convincing the landlord (as well as its client, the tenant) that like George Benson sang, it should “never give up on a good thing.” If a tenant’s existing space works for the tenant but for it needing a bit of tender loving care in the form of cosmetic improvements and/or space efficiency reconfiguration, the tenant’s broker can be the conduit for keeping the current marriage between the landlord and tenant alive and full of spark. For more on brokers making a difference, click here.
Relocation Clauses | Generally speaking, in addition to the obvious flexibility that benefits a landlord by having relocation language contained in its master lease template, a landlord is better equipped to provide space on the same floor of a particular tenant to a prospective tenant looking for a large block of space by folding in and combining the smaller tenant’s existing space with its then available inventory of vacant space on that very floor or in a mall or strip center.
Simply put, for a landlord to have the built-in ability to land a “big fish” tenant at the expense and inconvenience of a “little fish” tenant (e.g., 5,000 RSF or less of office space depending on the market) is truly priceless. In the event that tenants do not possess the negotiating power (or alternatively, have been struck down in their attempt) to delete a substitute space clause contained in its initial lease draft, view our “8 is NOT Enough” negotiating tactics to combat its inclusion here.
Electrical Capacity and Power | Tenant’s Perspective: For office tenants, the question to be asked is whether or not the space has sufficient amperage based on your usage type. If it is a high density build-out with 1 employee per every 50 square feet, each having 2 monitors on their desks, does the space have enough electrical capacity? If not, tenant advocates need to confirm whether or not the landlord has sufficient power in the building for the tenant’s required electrical capacity, and if it does not, tenant’s attorney or broker needs to channel the song “Take The Power Back” by Rage Against The Machine and ask the landlord if it’s willing to bring such additional power to the tenant’s space at no cost or a nominally reasonable cost.
Landlord’s Perspective: Although not as dire as it may be in older buildings, where electric capacity should be hoarded as if it is a rare and precious commodity, if a tenant requires additional electrical capacity, not only should there be a charge for same, but furthermore, prior to agreeing to make it available, the landlord should require a load letter from the tenant’s electrical engineer confirming that such additional capacity is in fact needed. Read or watch for more electricity clause LOI negotiating pointers.
For those tenants in urban settings or multi-floored suburban buildings which periodically require scaffolding, consider negotiating the following language into the lease:
Landlord should be prohibited from using such scaffolding to display signage of any nature not related to a tenant of the building, and if the scaffolding remains in place for an extended period (such as 6 months), or alternatively, if scaffolding is in place at the time a new tenant is ready to commence business operations, consider asking for a partial rent abatement. For more scaffolding and signage related negotiating tips explore here.
Choosing Your Rent PSF Poison | An evaluation of a “tenant’s appetite for risk” versus “how you like to sleep at night” is essential when evaluating whether to go with a pre-set rent versus one tied into fair market value for the renewal term. For those who like Las Vegas or Atlantic City, do you go to the 25 cent slot machines or the $100 blackjack tables? Although most landlords won’t feel the same way, when representing a tenant, we at Leasing REality are from the school of having a set rent for the renewal term, even if it’s 5% over and above the rent then payable in the last year of the initial term. Cost containment, budgeting, and knowing that the potential to renegotiate, if market rent has then dropped, is the primary logic behind the foregoing. Discover more about tenant retention and lease renewal options here.
Tenant’s Extra Work | In most cases, if a landlord is going to be building out a space for a tenant, if the tenant ultimately decides that it wants work to be performed by its landlord over and above that to be performed in the work letter by the landlord, many tenants will elect to have the landlord perform such extra work as opposed to going out and hiring a separate contractor to do so. In such cases, please know that most landlords will consider that tenant extra work to be subject to the same rules and conditions that the landlord establishes for change orders. Explore more about landlord work and tenant work clauses here.
Many tenants prefer not to commit to a space long-term simply because they are a start-up of some sort, and at that particular point and place in time, they simply cannot make an informed and educated decision as to how much space they will need over the following 3 to 5 to 10 year period.
Coming at it from the landlord’s perspective, if you are only obligated to deliver the space “as is” with little in the way of free rent concessions, brokerage commissions and/or tenant improvement allowances, depending upon the landlord’s long and short term vision for the property, having a shorter term lease very well might not be a bad thing.
From a broker’s perspective, given that the longer the term of the lease, the larger their commission will be if free rent is part of the equation (and free rent will be deducted from the calculation of a broker’s commission), it is Leasing REality’s suggestion that the period of free rent be added to the desired term in a broker’s letter of intent (e.g., for a 10 year lease with six months of rent abatement the term should be 10 years and 6 months). Learn more about The Lease Term & Delivery of the Premises in Negotiating and Preparing a Letter of Intent here.
Scarring visuals aside, from the landlord’s perspective, your job is to be a financial proctologist when conducting due diligence on a prospective tenant, in order to determine your level of comfort as to the security deposit amount and type of guaranty (where applicable) required. Tenants, on the other hand, truly need to walk a tight rope in their attempt to give their future landlord comfort in their quest to minimize the security deposit required at lease execution, and wherever possible, to simultaneously have the landlord agree that the security deposit can be reduced at a specified point in time to a lower amount (provided there is then no default under the lease, beyond the expiration of any applicable notice and cure period).
Generally speaking, (1) the greater the free rent concessions and improvement allowances granted, and the commissions to be paid, by the landlord, and (2) the shorter the lease term, the worse the financials of the prospective tenant (and of its principals, when a straight or good guy guaranty is required), (a) the larger the security deposit is going to be and (b) the larger “the dose of legal and business steroids” the landlord will require within the straight or good guy guaranty. Check out Leasing REality’s Negotiating Security Deposits & Good Guy Guarantees in a Commercial Lease series here.
Tenant’s Access; Limited Hours | Landlord Advocates: Although the landlord intends to give tenant full possession and enjoyment of the premises, the landlord may have reasons to limit tenant’s ability to access the premises during certain hours. For example, if the landlord shuts down a building’s common areas after business hours, the landlord will include a provision in the lease stating that tenant only has access to the premises during specified hours (e.g., “from 8:00 AM to 8:00 PM EST”), with access thereafter limited to entry through the freight entrance. Tenant Advocates: Make sure the lease provides that tenant has access to the premises 24/7/365. Subscribe to learn more about Access to Premises from a Landlord’s & Tenant’s Perspective here.
When it comes to a landlord sharing in the profits of a tenant in a retail lease, the question that needs to be asked by the tenant of themselves is quite simply, “What is my breaking point?” In the context of a retail lease, the breakpoint is that monetary threshold which, when the gross sales of a tenant’s business exceeds said amount, such tenant’s landlord will share in the party that is the excess of the tenant’s gross sales over and above the pre-established breakpoint. Generally stated, in the vast majority of retail leases nationally, seven percent (7%) is the percentage that a landlord will receive in the form of additional rent from a tenant for the tenant’s annual gross sales exceeding the breakpoint. Learn more about percentage rent and retail lease related clauses.
Creating Competition between Landlords, and Respect and Credibility for the Tenant | Whether a tenant is considering a relocation of its business or a renewal of its lease, a tenant will generally not receive the respect it rightfully deserves from a landlord, nor maximize the amount of concessions a landlord very well would be willing to grant to a tenant, without having a broker advocating on its behalf. By pursuing parallel paths, brokers can create negotiating leverage for its client while simultaneously allowing a landlord on the verge of losing its tenant, to retain that tenant on a long-term basis by (a) providing market data to that landlord as to what other landlords in the sub-market are willing to give to its client if it became the real estate equivalent of a free agent, and (b) securing the tenant more suitable and nicer space in the same building with the landlord providing a new turnkey build-out at no cost and (albiet at a hometown discount) a bit of free rent as well. Learn more on how and why brokers can make a difference here.
Generally stated, the “poison” preferred by most landlord advocates is that of an operating expense escalation as opposed to that of a CPI or straight predetermined percentage bump in the rent. Why, you ask? Aside from the fact that base rent theoretically already includes landlord’s costs for operating the building as of the commencement date, an operating expense escalation clause not only passes all operating cost increases on to the tenant, but more importantly, to the uninformed tenant (and a large portion of leasing professionals negotiating the clause), the language contained in an operating expense clause operates as a profit center for the landlord. To a tenant, there are more holes and landmines in an operating expense clause than a “Swiss cheese prevent defense” many football teams use in the last two minutes of a game. Watch Operating Expense Escalations & Percentage Rent Increases in a Commercial Lease (Part 1).
In order to induce tenants to open a location in a landlord’s shopping center or mall, the landlord may have to represent and warrant in a tenant’s lease that major anchor tenants will occupy and operate their business throughout the term of the non-anchor’s tenancy. Landlord advocates, when making a representation of this nature, should be aware that many skilled tenant advocates very well may attempt to negotiate an escape hatch for their smaller, non-inducement tenants by way of counteractive language allowing such tenant to “hoist anchor” and terminate its lease, if and when the inducement anchor tenant is no longer operational. Learn more here.
Bifurcating Free Rent | To make it more appealing for a landlord to be generous with offering free rent: When representing a tenant, instead of asking for 100% of it to be granted up-front, it’s a good idea to bifurcate the free rent by spreading it out over a period of months, with a good portion up-front and the remaining balance in either full or ½ month increments. For example: Spread out 9 months of free rent as 5 months up-front, 2 months thereafter in ½ month increments and lastly, 1 month free in month 18 and another in month 30. Check out Leasing REality’s Free Rent Concessions in a Commercial Lease Outline here.
Subject to compliance by the tenant with a myriad of terms and conditions to be contained in the lease, in most cases it is nonsensical for a landlord to not show its tenant (and channel the Led Zeppelin classic) a “Whole Lotta Love” by agreeing to a renewal option while negotiating the LOI, as we consider having vacant space the equivalent of going to an old drive-in movie by yourself, in a cab, with the meter running, while paying for a babysitter for the kids at home … yes, it makes no sense, especially in light of the fact that (a) loss of revenue is a byproduct of a tenant relocating to another building and (b) when it comes to a tenant paying its rent to a landlord other than themselves, like the song by The Police goes, landlords “Can’t Stand Losing You.” Learn more about renewal options with Leasing REality’s E-book chapter and Video on this topic.
Blondie and “Union City Blue” | From a tenant’s perspective, even at the point of searching for a space, tenant needs to know whether or not the building is a union or non-union building. Aside from the compatibility issue, the cost of performing work with union workers versus that of non-union workers adds a significant amount to the cost of your build-out. Watch Leasing REality’s Landlord & Tenant Work: Compatible Labor, Union/Non-Union Labor & Legal Compliance video here.
It is imperative that a landlord require within its lease that their tenants furnish, from time to time when requested by landlord or a prospective purchaser or mortgagee of the landlord, a certificate signed by the tenant confirming and containing such certifications and representations within no more ten (10) days following receipt of said certificate from landlord. Similar in importance as legendary U2 rocker Bono’s “Music can change the world because it can change people,” tenants and their advocates need to be aware that although many estoppel certificates are generally just a few pages in length, great caution should be taken when signing them, as the estoppel can potentially act as an amendment to the lease changing the terms contained in the lease! Accordingly, at a bare minimum, in addition to reviewing each and every term contained in the estoppel, it is advisable that tenants have their attorney review the estoppel (and make comments thereto) prior to its execution. Read more about estoppel certificates here.
Although certainly not applicable in all facets of life, when NO truly means NO, when negotiating a commercial lease, it is our belief that more often than not, a “NO” very well is an invitation to a “YES,” or at least a potential “maybe.” If you believe in the adage “where there is life, there is hope,” and like us prefer to look at the glass as always being 3/4 full, while metaphorically speaking accessorizing yourself on a daily basis with a pair of rose colored glasses tainted with a hint of a little thing called “reality,” you will have a better chance of turning your goals and leasing dreams into a self-fulfilling prophecy! No offense out there to anyone with the following names, but if you go around life and in your negotiations with a “Negative Nicky, Debbie Downer, doom and gloom” attitude, you will not be successful in the majority of the deals that you negotiate. Part of the art of negotiation, playing off of a song often sang by the Grateful Dead titled “When I Paint My Masterpiece,” is to put yourself in the heart and mind of the person sitting across the table from you, and once you are able to ascertain exactly what makes them hot, and what makes them not, you have created – as the name of the Kevin Costner movie goes, a negotiating “Field of Dreams” for you to relentlessly and passionately make a difference for your client, and consequently at some point in time, your bank account as well. View the remainder of Leasing REality’s Theory (9 of 9) here.
In its simplest form, an SNDA (better known to some as a “subordination, non-disturbance and attornment” agreement) is a document wherein the lender will agree that the tenant’s occupancy will remain undisturbed (and as such its lease not terminated), notwithstanding the foreclosure of the landlord’s mortgage. Sadly, when it comes to the subordination clauses contained in their leases, more often than not landlords do not agree to make the subordination of the lease contingent on the landlord securing – for the benefit of the tenant – an SNDA, despite the fact that, to virtually any retail tenant and to many office tenants, attempting to secure an SNDA is absolutely imperative. Learn more about subordination and SNDA’s with Leasing REality’s Cheat Sheet on this subject.
In a retail lease, more often than not, there will be little or no concessions granted to an incoming tenant in the way of landlord’s work and/or a tenant improvement allowance. Conversely, by way of example, on a Manhattan office deal, it would not be unusual to find that the upfront costs to a landlord on a 10,000 square foot lease transaction for Class “A” office space (a) renting at $60 per square foot, (b) with a $60 per square landlord work letter and (c) 6 months of free rent concessions, to be approximately $1,200,000 in the aggregate (i.e., $600,000 for the work letter, $300,000 for free rent and $300,000 for commissions if there is both a landlord and tenant broker). Given the foregoing large up-front costs, the landlord and its broker (and attorney for that matter) should incorporate into their letter of intent and the lease as many strategies as possible to not only protect the landlord legally, but to also help minimize its costs and risks while maximizing its profits during the lease term. Read or watch Leasing REality’s E-book chapter or Video on Financial Factors to Consider When Entering into a Commercial Lease (Part 1 of 4) for more on this topic.
A basic “Desk Sharing/Permitted Occupants” clause in the most simplistic of terms should state that provided the tenant is not then in monetary or material non-monetary default hereunder beyond any applicable notice and cure periods, tenant shall have the right to license or assign in the aggregate up to one-third (1/3) of its space: Within the permitted use set forth in the lease; provided that: the named tenant is in occupancy and tenant is continuing to use the premises for the conduct of its business, landlord is given prior notice of such sublet/license […]. See additional conditions to include here.
Give Me Your Vision and Be Clear About It | Landlord Advocates should establish a date certain that the tenant must provide specific details playing off of an existing schematic design plan or test fit plan as to exactly what tenant wants done to its space. By doing so, the landlord will be able to have its architect prepare construction documents for the build-out, including architectural and electrical, mechanical, plumbing, structural, and fire protection plans. Details of such items including the placement of heavy cabinets, special equipment, openings in the walls, electrical outlets, air conditioning, plumbing, and with locations and dimensions of all partner, junior partner and associate offices, open areas and bullpen locations and whether or not special work, such as millwork, variations to ceiling heights, selection of floor and wall coverings, sizes of conference rooms and special details such as glass walls and vision panels, must be provided to a landlord in a timely fashion. Subscribe now to access Leasing REality’s Landlord & Tenant Work: Timing Issues in a Landlord Work Letter E-book chapter.
Mind If I Come Over Early? | If you are a tenant and the landlord is also going to be performing work to the space, having the right of early access is essential. That said, Tenant Advocates should negotiate language to the effect that, somewhere between ten (10) and twenty (20) business days prior to landlord’s substantial completion of its work, tenant shall have the right to access the premises early for the purpose of installing it’s telecom and data wiring contemporaneously with the landlords installation of any of its own work. Tenants will have to agree that their work shall not unreasonably interfere with landlord’s completion of its work, and that although the lease technically has not yet started, the tenant must supply a certificate of insurance from itself and tenant’s contractors for the insurance that is required under the lease. Listen or read Leasing REality’s Landlord & Tenant Work: Compatible Labor, Union/Non-Union Labor & Legal Compliance Audio or E-book chapter to learn more.
“Good Clean Fun” | A letter of intent (“LOI”) provision for cleaning should provide for whether the tenant or landlord will clean (and consequently pay for such cleaning of) the premises, at what frequency they will cleaned, and by whom they will be cleaned by. LOI Cleaning Provision for Tenant Advocates: “Landlord’s cleaning contractor, at Landlord’s sole cost and expense, shall clean the Premises five (5) nights per week in accordance with Landlord’s cleaning specifications annexed hereto as Exhibit “A”.” View an example LOI cleaning provision for Landlord Advocates here and/or watch Leasing REality’s Cleaning: Negotiating & Preparing a Letter of Intent (“LOI”) (Part 22) Video.
Beware of a Landlord’s Backdoor Boot | Whether intended or not, most fire and casualty clauses effectively allow a landlord to take advantage of a casualty that occurs by canceling a tenant’s below market lease in a market that has risen significantly since lease execution. Tenant Advocates: To partially protect against this, include language that provides that in order for the landlord to cancel the lease, they must concurrently terminate leases affecting at least 35% to 50% of the rentable area of the space leased to tenants in the building exclusive of any rentable area leased by the landlord. Subscribe now to access Leasing REality’s Fire & Casualty Clause Negotiating Tips.
Exit Strategies from a Commercial Lease | Landlord Advocates: Landlords should include a right to recapture and/or leaseback a tenant’s space if and when a tenant requests to assign its lease or sublease its space. Tenant Advocates: From a tenant’s point of view, in the case of an assignment of a lease involving (1) a sale of a tenant’s assets or business, or (2) transfer to a related entity such as a parent, affiliate, subsidiary or franchisor, or in the case of a sublet to a permitted subtenant such as one for permitted desk sharing arrangements, landlords must waive their right of recapture and leaseback. Learn about Leasing REality’s Snagglepuss, Groucho Marx, The Clash & Steve McQueen Great Escape Theory by way of Video, Audio, E-book or Cheat Sheet.
Cold as Ice and Hot Hot Hot | As to both air conditioning and heat, respectively, in those leases where a landlord is providing the service, the majority of leases do not address what minimum temperature must be maintained by the building owner in the winter or what maximum temperature you must endure during the high temperature months. Tenant Advocates: Either specifically negotiate those respective temperatures, or conversely, refer to compliance by the landlord with the comfort chart of the American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE), whose mission is to advance technology to serve humanity and promote a sustainable world. Watch Who’s Cooler Than You?, Leasing REality’s Video on Heat, Air Conditioning & Electricity Clause Pointers within a commercial lease.
Off The Wall | Tenant Advocates: Unless your landlord is truly unsophisticated, as a general statement, tenants at a bare minimum will be required to remove any “specialty alterations,” such as a built-in vault, a private bathroom or shower, a sound room for recording, a raised floor, an internal staircase, a decorative floor with a tenant’s embossed logo or mirrored walls and/or ceilings. Subscribe now to learn more about restoration and removal obligations in a commercial lease with Leasing REality’s Cheat Sheet and/or Video on this subject.
What’s the Use? | Landlord Restriction: To have a use clause for a nail salon that merely states that “tenant shall use the premises for a nail salon and no other purpose” is an example of a narrowly-defined use cause that will, down the road, come back to bite the tenant in its proverbial butt. Tenant Counteraction: Conversely, when it comes to a landlord consenting to a potential sublease or assignment of the space down the road, but for the use of the space as a restaurant or other “wet” use, a tenant can, metaphorically speaking, drive an eighteen-wheel tractor trailer sideways through a use clause that broadly states, “tenant may use the premises for a nail, health, fitness and/or beauty facility with the sale of health related and men’s and women’s clothing.” Explore our Use Clauses within a Letter of Intent (“LOI”) Cheat Sheet to learn more.
The Letter of Intent (“LOI”) and Leverage | When negotiating a letter of intent (“LOI”), a tenant never has more leverage in its negotiations with the landlord than during the LOI preparation and negotiation stage. Once the LOI terms have been agreed to, although the deal is not truly effective until such time as the lease has been fully executed and delivered to all parties, once the lease has been prepared and while it is being negotiated, the tenant has most definitely lost a fair portion of its leverage. Stated a bit differently, at the LOI stage the landlord is either attempting to seduce a prospective tenant to lease space in its building, or alternatively, for an existing tenant to remain in its space to avoid vacancy and lease up costs (and the absence of revenue loss) associated with a tenant making like the Grateful Dead as they go Truckin’ to another building at lease expiration. View a few basic examples of why we at Leasing REality feel that a tenant has lost a significant portion of its negotiating leverage subsequent to the LOI stage.
There are No Savings for a Tenant if it Doesn’t Hire a Broker | Generally, a landlord will pay no less than a full commission on a lease regardless of whether a tenant has a broker. Simply put, if a tenant has a broker, that fee is shared with the landlord’s broker. If the tenant does not have a broker, the landlord’s broker gets the entire fee. Even on many office deals where there is an “override” increasing the full 100% commission up to an additional 50% (with a 100% commission going to the tenant’s broker and 50% commission going to the landlord’s broker) – many landlords will agree that for the sake of getting a lease signed, it is worth the extra cost to have both parties represented by sophisticated brokers. Watch a Video or view Slides to see our not-so-dirty baker’s dozen list as to why commercial real estate brokers are an essential and integral part of any commercial lease transaction and “the system” itself.
“It Isn’t What It Is – Size Does Make a Difference Theory” | Although loss factors and rentable square footage (“RSF”) are generally non-negotiable, depending on the nature of the deal, the market place, the financial strength of the tenant, the size of the space itself, and lastly, the negotiating “juice” that a tenant brings to the table, it is not totally uncommon for tenants to request: (1) A verification of the RSF calculation by way of re-measurement or architect certification; (2) the inclusion of language requiring the percentage used by the landlord for the loss factor calculation not to exceed a certain set amount (for example, on Long Island, many brokers for Class “A” space include in their proposals that the loss factor cannot exceed twenty percent (20%)); and/or (3) the loss factor calculation be based on a locally, regionally or nationally recognized measurement standard. Why Was There Shrinkage? Watch our Loss Factors in a Commercial Lease Video to find out.
Top 6 Construction Risk Mitigation Tools | (1) Construction Escrow Agreement, (2) Payment Bond, (3) Performance Bond, (4) Individual and/or Corporate Construction Completion and Payment Guaranty, (5) Builder’s Risk Insurance, and (6) Requiring Periodic Delivery of Lien Waivers Throughout Construction Project. View our Construction Project Completion & Payment Mitigation of Risk Leasing Tips Cheat Sheet to learn more.
Finding New Space & Relocation: The Construction Process for Commercial Tenants | (a) Order any long lead items, new equipment or furniture, and given that the majority of landlord’s will want nothing to do with your telephone and internet wiring – find the right firm to take care of this – as well as your long-term telecommunication needs. (b) If the landlord is building out the space, make sure that, as a tenant, you will be on the hook for little or none of the build-out cost, if possible. (c) Have a kickoff meeting with all parties involved in the construction and build-out process, in order to set expectations and have everyone on the same page. (d) During the construction process, have weekly or bi-weekly meetings – whether by phone, videoconference, or at the job site. Check out our Top 12 Finding New Space & Relocation Tips for Commercial Tenants Cheat Sheet and our Tenant’s Guide to Space Searches & Moving Short Video series for additional pointers.
Cannabis Industry’s Potential Impact on Commercial Real Estate and Leasing | Given that cannabis is technically a controlled substance, federal authorities may enter business establishments and charge those involved with forfeiture proceedings. Be aware of what is known as the Crack House Statute, which under Title 21, makes it a felony to knowingly open, lease, rent, use, or maintain any place for the purpose of manufacturing, distributing, or using any controlled substance. In addition to the foregoing, there is other liability under the federal Controlled Substances Act. Percentage Rent | Keep in mind that given the current federal laws, essentially profit sharing of any kind is out of the question. In short, landlords need to avoid having a financial stake in the tenant’s business as it will technically have a stake in an illegal business! Explore our “I Want to Take You Higher” Blog, Top 20+ Things to Know about the Cannabis Industry’s Potential Impact on Commercial Real Estate and Leasing Cheat Sheet and Cannabis Issues in Commercial Leasing (Part 1) Video to learn more.
Assignment & Subletting Leasing Trade Secrets and Other Truths | Landlord’s Goal: Landlords should seek to control the mix and strength of its tenant base and the ability to maximize its profits. In a landlord’s world, if anyone is going to make money of the space it leases out – but for the profit a tenant can make from its retail sales – it will be the landlord who does so and not the tenant! Tenant’s Goal: The tenant’s goals will usually be directly opposed to that of the landlord. Tenants will want to have as much business and financial flexibility as possible throughout the term of the lease, given all of the changes that may occur in business, the economy, the marketplace and among the owners of a tenant. Subscribe now to unlock our Assignment & Subletting Cheat Sheets. View our Top 20 Assignment and Subletting Provisions Cheat Sheet here.
A Landlord’s Control Freak Nature | Landlord Advocates: All landlords need to have some semblance of control over (a) what work is going to be performed in its building, (b) who will be performing that work, and (c) what protections it will have when that work is being performed. Landlords should include language in its lease that any work that is to be performed (and any contractor who may be performing that work) must be subject to landlord’s approval. Tenant Counteraction: The phrase “not to be unreasonably withheld, conditioned and/or delayed” must always follow any language requiring landlord’s consent or approval. If language appears in the lease requiring that landlord’s consent to any work be subject to landlord’s sole discretion, tenants should at the very worst, change it to reflect that landlord’s sole discretion be reasonably exercised. Watch Landlord & Tenant Work: Design and Construction Drawing Leasing Tips Video now.
“Going Through Changes” | Until the new Financial Accounting Standards Board (FASB) reporting changes take place for public companies subsequent to December 15, 2018 and for private companies subsequent to December 15, 2019, commercial leases will essentially continue to be reported as an “off-balance sheet” item. After those periods come into play, commercial space leases will be considered capital leases, which in laymen terms means … Find out what that means with our FASB Commercial Lease Accounting Reporting Changes Cheat Sheet.
Incentivizing Tenant Renewal | Landlord & Tenant Advocates: If a landlord has a reliable tenant in possession of the premises, it may be prudent to incentivize the tenant to stick around for another term. Given the costs associated with a tenant vacating a space (e.g., loss of revenue from a vacancy turnover, payment of a full brokerage commission or even a one hundred fifty percent (150%) commission on an office deal with an “override,” legal and architectural fees and the possibility of providing both landlord’s work and a tenant improvement allowance), landlords should consider some sort of “hometown discount” when it comes to free rent concessions on a renewal although it might not be necessary to treat an existing tenant as a true free agent. Dive into our Free Rent Concessions Cheat Sheet here.
A good guy guaranty (“GGG”) in its simplest form is not intended to be a straight personal guarantee. The generally understood meaning of a basic GGG is that one or more principals (a “Guarantor”) of a corporate entity (such as a corporation or a limited liability company) will guarantee to the landlord that it shall, at a bare minimum, pay all base and additional rent payments provided for under the lease until the day the space is surrendered to the landlord – whether or not prior to the expiration of the lease term. Once the space is returned to the landlord in broom clean condition, vacant with all rent paid through the date of surrender, the GGG will be satisfied. At its most basic level, a GGG serves to (a) incentivize the corporate tenant to pay its rent during occupancy and (b) helps a landlord expeditiously regain control of the space if tenant becomes non-paying while somewhat minimizing a landlord’s short and long term risks. To view the Top 10 Legal and Business Steroids Injected into Modern Day Good Guy Guarantees (and Tenant Counteractions Thereto), click here.