legal and practical advice – negotiating a commercial lease

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LEGAL AND PRACTICAL ADVICE NEGOTIATING A COMMERCIAL LEASEBUSINESS ADVICE- FROM START UP TO SALE 2016 SERIESPremier date: March 9, 2016

LEGAL AND PRACTICAL ADVICE NEGOTIATING A COMMERCIAL LEASEPremier Date: March 9, 2016

BUSINESS ADVICE- FROM START UP TO SALE 2016 SERIES2

WE WOULD LIKE TO TAKE THIS OPPORTUNITY TO THANK OUR SPONSORS

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meet the facultyPANELISTSPeter D. MorrisGreenstead Consulting GroupHoward KlineCommercial Real Estate Radio CEO and Host

MODERATOR Michael SchwarzmannCrowe Horwath LLP4

Practical and entertaining education for business owners and executives, accredited investors, and their legal and financial advisors. For more information, visit www.financialpoise.com

DISCLAIMER: THE MATERIAL IN THIS PRESENTATION IS FOR INFORMATIONAL PURPOSES ONLY. IT SHOULD NOT BE CONSIDERED LEGAL ADVICE. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS.5

about this webinar

There comes a time when the business needs to move from the kitchen or garage into a larger space that is either more production or customer friendly. This is frequently one of the larger financial commitments the start-up will make, and it can either support growth or threaten financial survival. How much space do you need? Do you sublet? Personal guarantees are commonly requested but can you limit your exposure? Is it better to lease more space than you need for growth, or do you want to minimize expenses so you can live to the next payroll? This Financial Poise webinar discusses things to consider when executing contracts, and provide some helpful tips.6

about this series

Great companies fail for lots of reasons that have nothing to do with the product or service they are selling. Turning an idea into a business is hard, often because the creative entrepreneur with the great idea does not have the same level of skill, training, experience, and passion in the other critical areas required to make a product into a successful company.

These areas include knowing how to attract and retain people, understanding accounting and finance, and being able to negotiate various contracts - including potentially a contract to buy a competitor or, ultimately, to even sell the business. This Financial Poise webinar series covers some of these topics, as always, in plain English.

As with all Financial Poise webinars, each episode in the series is designed to be viewed independently of the other episodes, and listeners will enhance their knowledge of this area whether they attend one, some, or all of the programs.7

episodes in this series

EPISODE #1Legal and Practical Advice 2/10/2016Starting a Business

EPISODE #2Legal and Practical Advice 3/9/2016Negotiating a Commercial Lease

EPISODE #3Legal and Practical Advice 4/13/2016Roadmap to Selling your Business

EPISODE #4Legal and Practical Advice 5/11/2016Roadmap to Buying a (Competing) Business Dates above are premier dates All webinars also available On Demand through West LegalEd Center and Vimeo 2016 DailyDAC, LLC d/b/a/ Financial Poise8

Property Uses

The type of business or product shapes the emphasis and priorities for the leased space.

Office Space in Class A Building

Retail (food vs. fashion)

Manufacturing

Warehouse / Distribution

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What Is Important

Map out the priorities for your new space:

Frontage on busy street needed?

Proximity to Freeway, School or Water?

Customer parking? Loading dock?

Class A office space or working cubicles with few visitors?

Warehouse with limited offices?

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Must it be Custom?

New build or Site Modifications

Do you need a custom configuration?

Can you use equipment that is in place (Commercial Oven)Is association with space positive or negative?

ModificationsAdditional restroomPatio / fencingHeating / AC upgrade11

Commercial Leases are ComplexHow is it different from residential lease?

Fewer consumer protection laws

No standard forms

Long-term and binding

Negotiability and flexibility

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The Issues Are Not SimpleDont simply focus on whether rent includes:Insurance

Property taxes

Maintenance costs

Common areas

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Terms To Consider Length of the Lease & available extensions

Rent and Rent Increases (renewal options @ fixed rent)

Tenant Improvements (who pays and restrictions)

Subleases and Assignments

Signage

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Terms To Consider Repairs & Maintenance (who pays, including CAM repairs)

No Competitors in property (what is a competitor)

Parking (Dedicated? Sufficient? Lighting?)

CAM charges (what do they cover)

Personal Guarantee

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Terms to Consider

Ability to expand occupied space as need arises

Building Code compliance with use

Ability to install / remove equipment (is machine poured into floor of the warehouse?)

Can you access the required electricity?

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Get professional AdviceExperience in Commercial Leases

Entrepreneurial Approach will Identify and Include Helpful terms

Negotiator

Diplomacy17

Get professional AdviceTrustworthy (you will follow advice)

Zoning (can you operate in the leased location / how difficult is variance)

Lender review (will lender loan against proposed lease terms)

Experience in the Geography

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Details To Consider

Issues to be aware of:Agreements impacting your business (prohibition on selling competing products)i.e. does liquor stores sale of sandwich or frozen pizza violate Subway / Dominos leasesPass through CAM chargesAre they arms length vendors?Do you pay more if there are vacancies?Do you pay for actions of others?Require Good Faith / Reasonable efforts by landlordLimitations on landlord liability?Can you go beyond equity in fully mortgaged property?19

Details To Consider

Issues to be aware of:We dont enforce that clause is not a waiverEveryone signs that is not a reason you shouldIts boilerplate does not mean it is not negotiableUse restrictions can business evolve without violating leaseUsable vs Rentable square feetAfter Hours / weekend? costs lights, AC, heating, security after close of business max on costsEnd of lease restoration costsRight to take better space in building if it becomes available?

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Details To Consider

Clauses to consider carefully

Holdover

Percentage Rent / Kickout clauses

Radius restriction

Default clauses

Relocation clauses (within property)

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Preparation

Preparation for the Negotiation includes both the terms you want / dont want, but also your approach to the interaction.

Where you meet mattersKnow your priorities AND their prioritiesDo they need you for a refinance?How long has the space been available?Think through the issues and how you will address them, including the order and who will raise the issue (if you bring a professional / business partner)22

Negotiating

Rank deal points and concede on lower priority items to gain higher priority concessions

Make the first offer to anchor the negotiations

Request range in counter

Ask questions to determine areas of flexibility

Draft the documents (email summary and contract)

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Negotiating

Style Matters

Have an alternative it helps you get the right deal

Mirroring

Give first on minor issue important to other side

Negotiate where you are comfortable host the meeting

Disclose personal information to build a rapport

Show signs of disappointment24

Negotiating

Communicate share your perspective and prioritize

Prepare how badly do you need the space

Leverage understand who has it and on which points

Ask for things you can get

Deal breakers what MUST you have

Rank priorities rent, length, TIs, signage, etc.

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Negotiating

Be realistic

Compromise to help both parties reach consensus, not just to move

Eye on the Prize dont lose sight of the big picture

Sleep on it dont feel obligated to agree on the spot

Culture consider cultural nuances

Be honest

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Negotiating

REMEMBER:

Losing the property is sometimes the best result.

A bad deal can cripple a company, and not making a deal may set you up for future success because it opens you up to the next opportunity.

Dont be afraid to walk away27

More About The Faculty: MICHAEL SCHWARZMANN

DMichael.Schwarzmann@crowehorwath.comMichael Schwarzmann is a Director at Crowe Horwath LLP.Michael has over 20 years experience providing advisory services to lender groups, companies, bondholder groups, unsecured creditors committees, and other stakeholders on financial, operational and strategic issues affecting underperforming, stressed, and distressed companies. Michael s advisory and consulting work experience focuses on assisting distressed companies, revitalizing underperforming businesses, marketing troubled companies and advising their creditor constituents. In addition, he is a licensed bankruptcy attorney.

Michael has assisted clients in developing and evaluating business and turnaround plans, analyzing financial and operational performance, and formulating successful workout, restructuring or bankruptcy strategies to preserve or improve asset values for stakeholders. Michaels industry experience inc