crc section three 9 9-14

Commercial Real Estate

Section ThreeLeases

1. Parties to the Lease

a. Lessor – Landlord or building owner

b. Lessee – Tenant

c. Lessor and lessee want each other to be healthy

2. Why lease – why not own?

a. Flexibility – tenant may outgrow

b. Capital restraints – it costs money

c. Business focus – it is complicated to build

3. Types of Leasesa. Full Service Gross Lease/ Full Service Lease – Tenant

pays only a lump sum rent. Landlord pays everything (tax, insurance, utilities, maintenance) – i.e. Executive Suites (exceptions can be phones/janitorial).

b. Modified Gross Lease – Tenant pays their utilities and janitorial but no taxes, insurance, or common area expenses.

c. Industrial Gross – Tenant pays own utilities, janitorial, and common area (maybe not common area maintenance). Landlord pays taxes and insurance.

3. Types of Leasesd. Net Leases

“N” - Tenant pays their own utilities and some maintenance (usually inside the unit). Landlord pays everything else

“NN” – Tenants pays utilities, taxes and insurance and some maintenance (landlord often pays “roof” and “structure” - “structure “ can include pipes and wires to/from building). Some NN landlords pay all common area expenses.

“NNN” – Tenant pays everything – with a few legal defenses: If building is destroyed by fire, taken in eminent domain proceeding in which case tenant may not be obliged to pay.

“TRUE NNN – BOND Lease” – Tenant responsible for everything no matter what (often tenant holds a ground lease). Building burns down tenant still has to pay.

3. Types of Leasese. Hybrid Lease – A little of everything

f. Ground Lease – Only the dirt!

Real, true NNN (Bond Lease)

Tenant usually gets the depreciation!

Be careful! Be sure you understand if the site is a Ground Lease

(ask if it is “fee simple”)

g. Build-to-Suit – usually vacant land, but can be a building

CAPRE

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4. Lease Clausesa. Rents - Usually quoted in $ / square foot /

year

b. Percentage Clause – All or part of rent based on percentage of tenant’s business.

Usually includes a fixed minimum rent plus a percentage of tenant’s sales

Often there are thresholds

Can be in any type of lease (NN, NNN, etc.)

4. Lease Clauses

c. CAM Fees – “Common Area Maintenance”

▫ Usually for maintenance and utilities for common areas. May include “management” and/or advertising

▫How is it computed?

▫Estimate paid monthly – adjusted annually

4. Lease Clausesd. Lease Increases

Base Year – Usually (not always) beginning year of lease. All things measured from this year

CPI – Which index?

Fixed Rate Increase – flat % or dollar amount

Market Value – often for option periods

Computed yearly or “blocks” of years

Leases are said to be “Flat” if there are no rent increases

4. Lease Clausese. Insurance

Casualty (fire or flood)

Building structure

Contents (almost always tenant’s responsibility)

Terrorism? Tornado? Earthquake?

Tell client to talk to their commercial insurance advisor and/or legal counsel. Don’t try to interpret insurance policies!

4. Lease Clausese. Insurance

Liability – Usually both landlord and tenant carry (recommend it!).

• “Umbrella” can be added to some Homeowner’s policies

“Self” insurance – big companies

What happens if there’s major damage to the building?

• Can buy “rent” insurance – some lenders require it

4. Lease Clausesf. Tenant Improvements (“TI”)

Initial - often paid by landlord and amortized into the lease (consider the “present value” of money)

Subsequent - requires landlords consent

Lenders often require reserves (escrow account) for TI – especially if lease terms are less than the mortgage term

4. Lease Clausesg. Repairs and Maintenance

Inside the suite

Outside the suite

Common areas

Can be landlord for first year then tenant (new buildings)

h. Term – Usually 1 to 10 years. Longer if Landlord did TIs

99 years is the limit

4. Lease Clausesi. Options to Renew

Options are almost always a benefit to the tenant

Rents usually increase during option periods

j. Restrictions on use by tenant / sublessees

▫

4. Lease Clausesk. Restriction on Landlord

Cannot lease to competing business

Cannot build competing center within xx miles

l. Taxes and Insurance increases

Even in a NNN lease the Tenant may not be responsible for an increase in taxes that result from the sale of the property (Prop 13)

There may be a limit on the times it can increase as the result of a sale of the property

May be capped to not increase more than X% in a given year

4. Lease Clausesm. Landlord’s right to enter the property

May need access for appraisals, work to complete Phase III etc.

n.Sublease Rights - Usually restricted

Does 1st tenant stay liable?

4. Lease Clauseso. “Exit” Provisions – Tenant may cancel/reduce rent or

CAM if something happens:

The tenant’s business performance does not meet thresholds (not enough sales) in a given period of time

Other tenants (anchor) leave

Business becomes illegal (check cashing companies)

4. Lease Clausesp. Estoppels / Subordination and Attornment (SNDA)

I will respect your interests if you respect mine

Required by almost all lenders

Form is often part of the lease (better to say “per lender”)

Can be a big issue for some lenders and some tenants

Can take 30+ days to get. May be limits on how many per year.

May be a fee (who pays?)

4. Lease Clausesq. Environmental Guarantees – Bigger tenants demand

them

r. Right of First Refusal – They can buy if an offer is received – they must act in a certain time.

What if the price is reduced later?

4. Lease Clausess. Inclusions to Leases

REA – Reciprocal Easement Agreement

Phase I and/or Phase II – So tenant is aware of any problem

Title Reports / ALTA Survey

Site Plans

Building Construction Plans – at least descriptions

Certificate of Occupancy

4. Lease Clausess. Inclusions to Leases

• Certificate of Delivery Date

• “Statement of Lease” – which may be recorded (lease is usually not recorded)

• “Statement of Acceptance” – commencement date (new construction). Sets date rent begins. (Often hard to find)

t. Amendment(s) to Lease – often includes “Statement of Acceptance” or any of the above inclusions to lease.

Watch for referenced amendments in the Estoppel – do you have those amendments?

4. Lease Clausesu. Lease Forms

CAR – not too good

AIR – Better – you can edit it

Attorney Written – Most common

Big tenants write their own

Little tenants get stuck with landlords version