Commercial lease analysis

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3 hr. Course on Commercial Real Estate Lease Analysis.

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<ul><li> 1. Commercial Lease Analysis By D. Scott Smith CCIM Commercial Manager Professor of Real Estate Prudential PenFed Realty Commercial Sales and Consulting 5000 Lawndale Ave.|Baltimore, MD 21210 Office: 410-464-5500|Cell: 443-691-8153 </li> <li> 2. We Will Review Types of Leases Lease Value Leasing Process Landlord Vs. Tenant Clauses in leases Legal </li> <li> 3. Introductions </li> <li> 4. What is a Lease? </li> <li> 5. A lease is a contractual arrangementcalling for the lessee (user) to pay the lessor (owner) for use of an asset. For todays class all tenants will be considered a fixed term tenancy. </li> <li> 6. Several Lease Types Land Lease Capital Lease Operating Lease Gross Lease Modified Gross </li> <li> 7. Several Lease Types NNN Lease Industrial Gross Lease Percentage Lease Or any combination </li> <li> 8. Several Lease TypesEach asset type, as well as geographical areawill have different components(IE. $3 a sqft vs. $36 a sqft.)Pass through, TI, etc. </li> <li> 9. Lease Full Net of Modified NNN AbsoluteStructure Service Elec. Gross NetTaxes X X XProp. Insurance X X XMaintenance -Various X X XManagement X X XUtilities XJanitorial X XCapital Exp. Tenant ResponsibleMost typical type Office Office Flex / Lt. Retail Single Tenantof property using Industrial and Industrial orthis lease Industrial Retail </li> <li> 10. Several Lease TypesDue to a lease being legally binding wesuggest all leases be written or reviewed bylegal council.I am not an attorney and dont write leases. </li> <li> 11. Leasing Process </li> <li> 12. Leasing Process Client Application Needs Assessment Screen the client Screen the property </li> <li> 13. Leasing Process Build your team Attorney Contractor Space Planner Lender Set your timeline </li> <li> 14. Leasing Process Match Goals, Expectations with Property andLease Rentable, Useable, Core Factor, CommonArea </li> <li> 15. Leasing Process LOI First draft of lease Lease commencement Occupancy Maintenance Renewal </li> <li> 16. Leasing ProcessMany steps to get through between each stage </li> <li> 17. Lease Clauses </li> <li> 18. Summary of Legal Issues Commencement Date Relocation Use/Exclusivity Subordination and Operating Expenses Nondisturbance Assignment/Subletting Waiver by Tenant Zoning and Use Restrictions 18 </li> <li> 19. Commencement Date/ Tenant IssuesCommencement Date Date on which the obligation to pay rent starts Distinguishable from execution date and occupancy date Issues arise when tenant improvements are contemplated 19 </li> <li> 20. Commencement Date/ Tenant Issues (cont.)1. Landlords Interest a) Rent payments to commence as quickly as possible b) Minor (punch-list) items can be completed after commencement date c) Minimize tenant delays2. Tenants Interest a) Sufficient time provided to complete tenant improvements before rent commencement date b) Reasonable cancellation rights in the event delivery of premises is delayed 20 </li> <li> 21. Use/Exclusivity Use Clause: Statement of what businesses and activities tenant may conduct in the premises Exclusive Use Clause: Statement of what businesses and activities that only tenant can conduct within the project If something is not set forth in the Use Clause, the tenant normally cannot conduct that activity in the premises. If something is not set forth in the Exclusive Use Clause, then the tenant cannot stop other tenants from conducting those activities. 21 </li> <li> 22. Use/Exclusivity (cont.)1. Landlords Interest a) Wants a narrow Use Clause b) Wants either no Exclusive Use Clause, or wants a narrow one2. Tenants Interest a) Wants a broad Use Clause ... ultimately that tenant can use the premises for any lawful purpose b) Wants a broad Exclusive Use Clause 22 </li> <li> 23. Operating Expenses1. Expenses of operating real property, usually paid in addition to base rent2. Typically includes taxes, insurance, utilities, and property maintenance costs3. Typically excludes debt service, capital improvements, and depreciation4. Landlords always recoup operating expenses, whether under NNN or FSG lease 23 </li> <li> 24. Operating Expenses (cont.)1. Landlords Interest a) Recoup all expenses associated with operating the property b) Seek to recoup capital expenses (i.e., roof, paving, HVAC, capital expenses that reduce operating expenses) c) No cap on operating expenses2. Tenants Interest a) Limit operating expenses to only those expenses associated with operating the property b) Cap controllable operating expenses to 3-5% annually c) Exclude all capital improvements, if possible 24 </li> <li> 25. Assignment and Subletting Assignment: The transfer of the legal rights and duties of the tenant under a lease to a third party called an assignee The assignee pays its rent to the landlord, and the landlord and assignee now owe each other the same duties that applied to the original tenant/assignor. Sublease: An agreement in which the tenant contracts with a third party to assume all or part of its rights and/or obligations under a lease. The third party in this case is called a sublessee. The sublessee generally pays rent to the sublessor (the original tenant), and has no privity relationship with the landlord. The landlord doesnt owe duties to the sublessee. 25 </li> <li> 26. Assignment and Subletting (cont.)1. Landlords Interest a) The landlord would usually prefer that the tenant not have any assignment or sublease rights (unless, of course, the assignee or sublessee is a better tenant than the assignor or sublessor was).2. Tenants Interest a) The tenant would like to be able to assign or sublet to anyone he/she chooses. In both assignment and sublet situations, the tenant is usually responsible to the landlord for rent payment. So, the landlord (in theory) still gets his/her money. 26 </li> <li> 27. Relocation1. A relocation provision or clause in a lease allows the landlord to move the tenant to another location in the building.2. Frequently, the landlord will agree to pay some amount for the tenants inconvenience (i.e., moving expenses, cost of stationery, etc.).3. Unfortunately, tenants rarely focus on this provision. 27 </li> <li> 28. Relocation (cont.)1. Landlords Interest a) Provides flexibility to accommodate a new or bigger tenant in the future2. Tenants Interest a) Possible nicer suite or space in the building 28 </li> <li> 29. Subordination and Nondisturbance Subordination: A lease clause requiring the tenant of a property to subordinate its rights under the lease to the rights of any present or future lender on the property. Landlords require subordination clauses, because lender requires it. He who has the gold makes the rules. Nondisturbance: A lease clause requiring the lender in a foreclosure situation to leave the tenants lease in place. Tenants require nondisturbance clauses. If the tenant executes a lease with a subordination clause or a subordination agreement without a corresponding nondisturbance clause, then the foreclosing lender could kick the tenant out of its premises. 29 </li> <li> 30. Subordination and Nondisturbance (cont.) Why do these items matter? In the event of a foreclosure, the lender can remove from the project any tenant whose lease is subordinate to the loan. Alternatively, they can require a change in the business terms of the lease, or change the legal terms. Landlord cant remove this requirement because it greatly impacts the landlords ability to finance its project. The compromise Lenders will generally agree not to kick a tenant out, or to change the lease terms, if the tenant will agree to subordinate the lease to the loan. Usually, tenants and lenders execute a document called a subordination and nondisturbance agreement (SNDA). 30 </li> <li> 31. Waiver by Tenant/Release of Landlord1. Tenant waives any claims and releases the landlord from liability for certain acts and conditions relating to the premises.2. In some cases, tenant agrees to bear risk even if landlord is at fault.3. Provisions tend to be overly broad and unfair. 31 </li> <li> 32. Waiver by Tenant/Release of Landlord (cont.)1. Landlords Interest a) Shift the risk of contingent liabilities to the tenant to the greatest degree possible. b) Maintain income stream without unbudgeted or unexpected expenses eating into that income stream.2. Tenants Interest a) Avoid consequences of the landlords negligence or failure to perform its obligations under the lease. b) Limit waiver to exclude negligence or willful misconduct of landlord. 32 </li> <li> 33. Zoning/Use Restrictions1. Master zoning laws and use restrictions in your market.2. Failing to do so is a great way to bring your client spaces that they cant occupy.3. Mastering these items will set you apa...</li></ul>