THE LEASE AND ITS ADMINISTRATION

Elizabeth A. Napoli, SCSM, SCMDManagement Concepts & Motivations

MC & M, Ltd.Pomona, New York

http://www.mcandm.com

WHAT TO DO BEFORE THE LEASE IS SIGNED

• Create a positive relationship with your Leasing Representative.

• Local Managers should create a list of up-to-date Additional Rent Charges and distribute to all internal parties to ensure that they are being quoted correctly.

• Ensure your Leasing Representative is aware of your concerns related to site-specific or corporate operational issues.

WHAT TO DO BEFORE THE LEASE IS SIGNED

• Ownership/Managing Agents should:– consider having the Property Manager

and/or Corporate Director of Property Management review lease drafts or specific provisions concurrently with the Leasing Representative prior to lease execution.

• Tenants should:– consider internal department reviews of

lease drafts prior to lease execution.

HOW TO ADD VALUE TO THE LEASE

• Protect the content and quality of the key lease clauses that enhance the income

• Fully understand the consequences of negotiations

• Make sure language is:EnforceableDetails remediesCrystal Clear

DON’T ALLOW KEY CLAUSES TO BE

•Watered down

•Eliminated

•Omitted by oversight – Leasing Representative– Legal Team

•Management must consider the needs of:

The Shopper

The Tenant

The Owner

MANAGEMENT’S ROLE

MANAGEMENT’S ROLE

• To make the property look good

• Administration of Financial Terms of the Lease

• Enforcement of Clauses to ensure the integrity of the property

• Keep Tenants “Happy”

LEGAL COUNSEL’S ROLE

Legal

• Standard Lease Agreements or Conformed Leases

• Legal Representatives Role is to– protect their client– be reasonable to get the deal done

• Legal Representatives and Business People (i.e. Leasing Representatives) must work together to finalize deals

WHAT’S IMPORTANT IN THE LEASE AND WHY

• Base or Minimum Rent:– Expressed on an annualized per square

foot basis (in the United States)

• Per square foot basis allocation used for other charges including:– RET, CAM, Mall HVAC, etc.

PERCENTAGE RENT - EXHIBIT A

The term “Gross Sales” shall mean the total amount in dollars of the actual sales price, whether for cash, on credit or both, of all sales of merchandise and services and all other receipts of business conducted in or from the Demised Premises, including all mail or telephone orders received or filled at the Demised Premises, all deposits not refunded to purchases, orders taken, although said orders may be filled elsewhere, and sales by any sub-lessee, concessionaire or licensee or otherwise in said Demised Premises. No deduction shall be allowed for uncollected or uncollectible credit accounts. Gross Sales shall not include: sales or excise tax, nor the exchange of merchandise or ???? (Internet?)

PERCENTAGE RENT CALCULATION

Percentage Rent = Overage Rent

Gross Sales – Breakpoint =Applicable Sales

to Percentage Rent

Applicable Sales x Percentage Rent Factor =Percentage

Rent

Annual Rent= Breakpoint

Percentage Rent Factor

PERCENTAGE RENT CALCULATION

Percentage Rent Example:

Annual Rent = $100,000

Annual Sales = $1,200,000

Percentage Rent Rate = 10%

$100,000 / 10% = $1,000,000

$1,200,000 - $1,000,000 = $200,000

$200,000 x 10%

= $20,000 in Percentage Rent

EFFECTIVE RENT CALCULATION

Effective Rent = Minimum Rent + Percentage Rent

• ExampleMinimum Rent = $100,000Percentage Rent = $20,000Effective Rent = $120,000

WHAT’S IMPORTANT IN THE LEASE AND WHY

• Dates:– Effective Date: Mutually agreed

upon date when Lease takes effect– Turnover Date: When Tenant takes

possession and begins construction– Rent Commencement Date: When

Rent Begins– Lease Termination Date: When

Lease ends

WHAT’S IMPORTANT IN THE LEASE AND WHY

RECOMMENDATION

• Include language in the Lease that all dates must be confirmed in writing at or near completion of construction

CAM EXHIBIT B

Common Area Charge: “Common Area Charge” means the Landlord’s gross actual costs and expenses of every kind or nature incurred by or imposed upon Landlord, in or by reason of Landlord’s ownership, operation, management, maintenance and/or replacement of the Common Areas, the cost of operating, repairing, heating, lighting, air-conditioning, cleaning, painting, removing snow, ice, leaves and debris, providing off-site parking, providing security, sewage and trash disposal charges, insurance for hazard and other risks and any other insurance Landlord deems necessary, licensing fees, a reasonable allowance for the depreciation of, or for the rental of, vehicles and maintenance equipment, direct and payroll overhead and payroll taxes and benefits.

(Controllable or not?)

CAM RECOVERY CONSIDERATIONS

• CAM = Common Area Maintenance

• CAM Recovery CalculationPro-Rata basis = LeasableProportionate Share Basis = Leased

Understand the importance of these terms

CAM EXHIBIT C

Tenant’s proportionate share of the Common Area Charge, which shall be computed on the ratio which the floor area of the Demised Premises bears to the total floor area of the Shopping Center which is leased, occupied and producing Rent, including the Demised Premises, but excluding floor area Landlord designates as Anchor Tenant and/or Specialty Store Tenant space and space of Recreational and Convenience Uses; provided, however, Tenant’s share of the Common Area Charge shall be calculated on the basis of not less than eighty percent (80%) of the gross leasable area of the Shopping Center (excluding Anchor Tenant space, Specialty Store Tenant space, and space for Recreational and Convenience Uses).

WHAT’S IMPORTANT IN THE LEASE AND WHY

•Taxes– Proportionate Share or Pro-rata?– Controllable or Uncontrollable?

• Insurance– General Liability ($1M-$3M)– Indemnification Clause– Additional Insureds– Demised Premises– Controllable or Uncontrollable?

TAXES - EXHIBIT D

Tenant’s share of Taxes shall be computed on the ratio which the floor area of the Demised Premises bears to the total floor area of the Shopping Center which is leased, occupied and producing Rent including the Demised Premises but excluding floor area Landlord designates as Anchor Tenant space and/or Specialty Store Tenant space, and floor area used for post office, child care nursery purposed, or other principally for service, convenience or recreation to customers of the Shopping Center provided, however, Tenant’s share of Taxes shall be calculated on the basis of not less than eighty percent (80%) of the gross leasable area of the Shopping Center (excluding Anchor Tenant space, Specialty Store Tenant space, and space (as noted above).

WHAT’S IMPORTANT IN THE LEASE AND WHY

• Use Clause Controls tenant mix for both the Landlord and the Tenant

• Exclusives – Precise as to type, style or manner of business– Carefully consider the effect on the future of the

center– Use very sparingly for highly coveted tenants only

• Radius Restrictions– Ensure a penalty for violations is included in

Lease (i.e. LL gets % of sales from competing store within radius and/or LL’s right to Lease Termination.)

WHAT’S IMPORTANT IN THE LEASE AND WHY

• Co-Tenancy– Huge issue in current retail climate…WHY?

– Tenant’s Obligations are contingent upon the presence of specific other tenants

– Continued Operation of Anchor Tenants or specific retail units by name, by minimum square footage or by percentage of GLA

– Typical Remedy: • Reduced Rent OR• Conversion to Percentage Rent in lieu of Minimum Rent

WHAT’S IMPORTANT IN THE LEASE AND WHY

• DefaultApplies if either LL or Tenant fails to fulfill Lease requirements

• HoursContinuous Operation

• Include monetary penalty if Tenant fails to operate in a first class manner

Should hours be negotiable?

CONTINUOUS OPERATION - EXHIBIT E

Except when, and to the extent that, the Demised Premises may be untenantable by reason of damage by fire or other casualty, Tenant shall: (a) continuously and uninterruptedly use, occupy, operate and conduct its business in the entire Demised Premises using its best efforts to produce the maximum volume of Gross Sales and to help establish and maintain a high reputation for the whole Shopping Center, (b) unless prohibited by law or required by Landlord to close, open for business each day (except Sundays) at 10:00 A.M. at the latest and remain open for business until 10:00 P.M. at the earliest and further hours as may be designated by Landlord from time to time, (c) open for business on Sundays from 10:00 A.M. until 6:00 P.M. or at such other hours as Landlord shall designate from time to time, and (d) open for business on holidays at times as Landlord shall designate from time to time. Notwithstanding the foregoing, if Tenant’s business is controlled by governmental regulations, the hours of operation prescribed by such governmental regulations shall apply. Tenant shall keep its store fully staffed continuously, and fully stocked with saleable seasonal merchandise of quality and otherwise appropriate to the Permitted Uses. Failure on Tenant's part to comply with this section shall result in an assessment of Five Hundred and No/100 Dollars ($500.00) per day.

TENANT IMPROVEMENTS/PAYMENTS

Tenant Improvements and the Payment Schedule

• Tenant Improvement = Preparation for a space to be occupied

• Tenant Allowance = Actual Cash given to Tenant

• Payments should be based on – % of completion of construction – Landlord Inspections to confirm adherence to plans and

specifications

WHAT’S IMPORTANT IN THE LEASE AND WHY

• Favored Nations Clause– Any provision or consideration given to

one store must also be given to the tenant signing the Lease in which the favored nations clause appears

– Places LL at serious disadvantage– Not used very often

• Kick-outs– Retailer figure is low– Landlord figure is high– Tenant to reimburse the Landlord for the

cost of any LL-paid build-outs or improvements

RELATED DOCUMENTS

Reciprocal Easement Agreement (REA)

Grants each party certain rights to their respective property

• Parties can be:• property owner• anchor store

• Rights can include:ParkingAccessSignageControl Zones/VisibilityCan impact Tenant Mix, Redevelopment

Opportunities, Extra Income Options

THANK YOU!

Questions and

Discussion Points

Elizabeth A. Napoli, SCSM, SCMDManagement Concepts & Motivations

MC & M, Ltd.Pomona, New Yorkhttp://www.mcandm.com