commercial leases: due diligence...

Commercial Leases: Due Diligence Considerations Best Practices for Landlords and Tenants to Identify and Mitigate Risks

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THURSDAY, FEBRUARY 9, 2012

Presenting a live 90-minute webinar with interactive Q&A

Yolanda Rodriguez,General Counsel, O'Neill Properties Group, King of Prussia, Pa.

David S. Houston, Partner, Pillsbury Winthrop Shaw Pittman, McLean, Va.

Mario J. Suarez, Partner, Thompson Hine, New York

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Yolanda Rodriguez, Esq.

O’Neill Properties Group, L.P.

(610) 992-5885

[email protected]

Key Market Factors in Lease Negotiations

7

February 9, 2012

Pillsbury Winthrop Shaw Pittman LLP

Retail Leases: Due Diligence Considerations

for Landlords & Tenants

David S. Houston

703.770.7544

[email protected]

23 | Retail Leases – Due Diligence

Introduction

Deals and parties come in all shapes and sizes. The likelihood of a

long-term, profitable landlord-tenant relationship will improve if both

parties perform appropriate due diligence before the lease is

signed.


Retail vs. Other Leases

There are 4 key factors that distinguish retail leases from other types

of commercial leases:

1. The importance to both landlord and tenant of the particular use

made by tenant of the leased space

2. The fact that a portion of the rent is usually based upon the tenant’s

sales at the premises

3. Most retailing takes place in integrated shopping centers and other

types of projects containing substantial common areas and a broad

mix of tenants

4. The seasonal nature of retailing


What the Landlord Should Assess Before Marketing the Property and the Premises

Market Conditions – Bargaining Position

Demand

Vacancy rate

Income stream

Property Condition

Occupancy status

Suitability for a particular use

Utilities and systems review – cost to upgrade

Legal Restrictions

Zoning – use, parking, drive-through, signage

Other laws and regulations – alcohol, smoking, accessibility

Title – restrictive covenants, easements


What the Landlord Should Assess Before Marketing the Property and the Premises (cont’d)

Existing Leases and Agreements

Exclusives

Prohibited uses

No build areas

Impact on the Property

Tenant mix

Parking

Noise, odors, garbage

Environmental


Tenant’s Assessment of the Building or Center

Location, Location, Location Access

Visibility

Parking and loading

Demographics – customers

Labor supply – employees

Safety

Tenant Mix Compatible

Competitive

Zoning and Governmental Regulations – use, signage, permitting, expansion rights

Existing Restrictions – covenants, restrictions, exclusives, protected areas and other site plan issues

Title Status – ground lessors, loans, liens, other encumbrances


Tenant’s Assessment Cont’d: Suitability of the Space

Current Occupancy Status – timely delivery of possession

Size Adequate for the Use – too small, too large, measurement,

possibility to expand or contract

Physical Constraints – shape, ceiling height, structural elements,

utility capacity, access

Physical Condition – request reports

What needs to be done and at what cost

Existing conditions – soil, hazardous materials, roof, HVAC systems

Availability of Utilities

History of Increases in CAM and Other Charges


How the Landlord Can Improve the Odds of Choosing the Right Tenant

Identify the Tenant Entity

Entity formed

In good standing

Authorized to enter into the lease

Financial Statements or Other Information About the Tenant

Credit check

Ability to build out the space – loan, allowance, performance bond, etc.

Ability to operate the business

Ability to pay rent

Franchisee – franchisor’s qualifications

Guarantor availability

Security deposit


How the Landlord Can Improve the Odds of Choosing the Right Tenant (cont’d)

Business Plan Proven concept or fad

Financing in place

Management structure

Promotion and marketing details

Business Experience Number of stores

Success at other locations

Franchisee operation

Training

Other Background Analysis UCC search – secured collateral claims

SEC filings

Court indices – litigation

Patriot Act/OFAC


Tenant:

The Premises Are Perfect, But What About the Landlord?

Background Research of the Landlord

reputation in the community and industry

length of ownership

publicly traded

other properties

litigation history

Future Expansion or Redevelopment Plans

Historical Details - are they good managers

Lease Approval Process – additional consents required

Landlord’s Title – liens and lenders

SNDA


When All Else Fails… Lease Provisions to Mitigate Risk

Exclusive Use Protections and Prohibition of Certain Uses

Competitors

Incompatible uses

Parking intensive uses

Co-tenancy Protections – named tenants, percentage of tenants

Assignment and Subletting Rights – Release

Fixed or Capped Increases in Operating Expenses/CAM

Radius Restrictions – percentage rent

Continuous Operation vs. “Going Dark”

Changing the Permitted Use


When All Else Fails …(cont’d)

Tenant Termination Rights

Co-tenancy failure (in not termination, significant rent reduction)

Poor performance – low sales (if not termination, rent solely based on sales)

Violation of exclusive

Failure to deliver possession

Failure to obtain permits – building, liquor license

Failure to obtain financing

Landlord Termination Rights

Poor performance

Failure to open and continuously operate

Traditional defaults


When All Else Fails…(cont’d)

Representations and Warranties a Tenant Should Seek

Clean title to the property

Free of claims from previous tenant

Compliance with laws – original construction, zoning, environmental, accessibility

Authority to enter into the transaction

Representations and Warranties a Landlord Should Seek

Authority to enter the transaction

Entity formed and authorized to do business

Compliance with laws – buildout, labor agreements, business operation, future

changes

Financial information accurate

Continuous operation

36

Assembling the Lease Diligence Team

Lawyer

Inside

Outside

Broker

Leasing consultant or investment banker

Client facilities director

Relocation consultant/owner’s rep

Architect/designer

Engineer

MEP

Structural

Contractor or construction manager

Experience with owner

Approval by owner

Special consultants

Environmental and environmental diligence

Communications

Roof space

Telecom

Other

Elevator

Specifications

Programming

Signage

Coordinating with landlord; competing tenant signage

Identity signage

37

Legal Lease Due Diligence

Title review

Deed/ground lease

Encumbrances and mortgages

Certificate of occupancy

Zoning due diligence

Principal use

Ancillary use/user permits

Tax lots and status

One or more lots

Abatements and incentives

Local assessment practice

Recorded covenants

Master declaration

REAs

PILOT agreements

Development rights agreements/ zoning lot mergers

38

Legal Lease Due Diligence

Filed plans/permits

Filed plans review by A/E

Existing conditions survey by A/E

Permits

Violations and administrative actions

Impact of existing violations

Impact of administrative actions

Litigation

Injunctions

Ownership disputes

Foreclosure and bankruptcy

Google/blogs

News

Blog searches

Data compilers

Google Earth (virtual visit)

Local Web resources

39

Building Analysis & Diligence

Tenant programming and goals

Building comparison

Floor plate size

Efficiency

Rentable/usable loss and add-on factors

Location

Proximity to transportation

Employee needs

Status/visibility

Working systems

Stacking plan and options

Expansion

Extension

Purchase

Building cost analysis

Taxes

Operating expenses

Overtime charges

Gross and net deals

Parking

40

Engineering Lease Due Diligence

Structure

Floor loads

Reinforcement

Slab cuts and placement of stairs

Mechanical

Cooling requirements

Available chilled and condenser water and cost

Cooling towers

Electrical

Status of power

Dedicated risers

Generators

UPS

Plumbing

Private lavatories

Shower rooms

Environmental

Phase I

ACM

Mold/ducts

ADA and local barrier acts

Life safety

Security systems and personnel

Sustainability/green building issues

Status

Goals and timetable

Unique tenant concerns

41

Ownership-Related Lease Due Diligence

Owner history and reputation

Management history and reputation

Management

Cleaning contractor and opting out

Owner “credit issues”

Work allowance

Work letter

Completion of phases

Completion of amenities

Ground lessor and senior debt SNDAs

Litigation

42

Lease Due Diligence – New Building Issues

Status of construction

Core and shell

Lobby and sidewalks

Availability of building systems

Commencement date and triggers

Substantial completion of work

Completion of lobby

Available elevators

HVAC prior to CD

Access to floors for construction

Competing lease deals and available facilities

Reservation of elevator cabs

Hoists/tie-backs

Tax and operating expense base years

Gross-ups

Status of project amenities and project phases

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