Real Estate Lease Vocab

Non disturbance conditions

"A Lease that provides for tenant subordination only in exchange for a non-disturbance clause will not guaranty that a future lender will agree. At the very least, the lender may insist that certain conditions be met before the tenant will be assured of non-disturbance, these conditions should be included by the landlord in the lease clause itself." Lease Subordination Clause, Sonny Brown Associates.

Rent insurance endorsement

"Rents insurance" (also known as rental value or loss of rents) can be a part of the Business Income endorsement, and reimburses the owner of a building for loss of rents. Thus, if the lease provides that rent abates in the event of a casualty that renders the premises untenantable, the landlord should carry rents insurance.

Prorate based on 365 day year

( ( Mo. rent * # months in year ) / # of days in year ) * # of days tenant is paying for = Prorated Rent Using a move-in DATE of July 17, and a monthly rent of $1,500, the equation would be as such: ( ( $1,500 * 12 ) / 365 ) * 15 = $739.73

LEASE COMMISSIONS

1. After a lease is signed, the landlord typically (owner of the property) pays a commission to the Listing Agent (or Landlord Rep) and the Tenant Rep. 2. Commission ranges vary and may depend on the value of the transaction (also called total consideration). 3. In terms of tenant rep situations, a tenant doesn't typically pay a commission to their rep - it is paid by the owner at the time the lease is executed unless otherwise negotiated Lease commission is some % of the lease value, To add to what Gene said, yes, you can do it a few ways. Depending on the strength/credit worthiness of the tenant (and the landlord) some landlords do not feel comfortable or are not financially able to pay the commission in a lump sum at the start of the lease. If that's the case you can agree to have the LL pay you as they collect the rent (write a check every month for the commission amount). As for actually calculating the dollar amount of a commission you take the amount of rent paid and multiply it by the commission rate (whatever % both parties agreed to). So if the annual base rent is $100,000 and the commission rate is 6% then your commission is $6,000. Assuming the rate doesn't change and the lease is for 5 years the total base rent would be $500,000 so your commission would be $30,000. If the owner can't afford/doesn't want to pay that upfront he can pay you "as-collected" and send a commission check every month for $500 ($6000/12 months= $500/month). In the Chicago commercial market, on a commercial lease we will take, i.e., 7% of the 1st year and 4% for each year thereafter up to the option. Of course, due to anti-trust, these commission rates are negotiable. This is just an example as the rates can be whatever is agreed upon between Broker and Lessor. So, to simplify on a $1,000 a month lease (I know real low---but hypothetical) the commission for year one would be $840, year 2 and 3 would be $480-----------formula is the yearly rent x the % divided by 12. We then take the 3 products of $840, $480, and $480 for a total of $1800 and divide by 3. So annually the commission rate would be $600. Due to the small amount of commission in this example, the commission would be paid in full at lease signing. Larger commissions could be paid annually, and even larger commissions, monthly.

Liability Insurance cont.

2. Coverage Period Liability policies only cover losses during a specified period of coverage. They may be written either on an "occurrence" or "claims made" basis. "Occurrence" policies cover incidents that occur during the policy period, even if the claim is filed after the policy expires. "Claims made" policies cover claims filed while the policy is in force for any incidents that occurred during the policy period. Thus if an accident happens on the last day of the policy period and the claim is filed a week later, the loss would not be covered. To avoid this harsh result, claims-made policyholders usually purchase "nose" coverage, which extends a claims-made policy back to a specified date prior to the current policy, or "tail" coverage, which provides an extended reporting period for incidents that occurred during the policy period but which were not reported until after the policy period. 3. Limits of Coverage CGL policies are now written with a "combined single limit" per occurrence for bodily injury and property damage. Older policies used to distinguish between bodily injury and property damage, e.g., "$3,000,000 with respect to bodily injury or death, and $500,000 with respect to property damage." If this language is in a lease, it is no longer correct. A properly worded lease would now require the insured to carry "$3,000,000 combined single limit per occurrence.

Know full replacement cost for INSURANCE

5. Amount of Coverage Often leases will require a party to carry property insurance at "full replacement cost", which means that the policy will pay the full cost of replacing the damaged property, with certain limitations (e.g., if the property cannot be restored to its former condition due to a change in law, the added costs would not be covered unless there was also ordinance and law coverage). In order to receive full replacement cost coverage, the property must be restored. If, instead, the property is demolished and not replaced, the insured can only recover the actual cash value. "Actual cash value" is generally the value of the property at the time of the loss, determined based on the replacement cost, less depreciation, calculated over the useful life of the property. If a lease does not require full replacement cost coverage, it should at least require the insuring party to carry sufficient property insurance to avoid "coinsurance." Normally, in the event of partial damage, after the insured pays the deductible, an insurance policy will cover the balance of the loss. However, if the insured carries too little insurance, e.g., less than 80% or 90% (depending on the policy) of the value of the insured property, and there is a partial loss, the insurance company will require the insured to participate in paying for the restoration. This is co-insurance. For instance, suppose there is a loss of $5,000 to a $100,000 property. The policy has a $1,000 deductible, but the insured only carried insurance with a limit of $50,000 (50% coinsurance). The insured will pay the $1,000 deductible, plus 50% of the $4,000 balance of the loss ($2,000), for a total of $3,000. If the insured had instead carried full replacement cost insurance, he would only pay the $1,000 deductible.

Business income Endorsement

A "Business Income" endorsement covers loss of income that results from loss of use of a property damaged by a covered cause of loss, up to a specified amount of time. E.g., if a lease does not permit an abatement of rent in the event of a casualty that renders the premises untenantable, the tenant should carry business income insurance to cover its obligation to pay rent.

Utility Service Endorsement

A "Utility Services - Time Element" endorsement covers loss due to disruption of utilities services, such as electrical, water or telecommunications incurred in connection with a covered cause of loss to property of the utility away from the insured's premises. Depending on whether the lease entitles the tenant to an abatement of rent on account of an interruption in utility service, either the landlord or the tenant should consider this type of coverage.

Co-Tenancy continued

A co-tenancy requirement may have substantial negative effects, including a domino effect if more than one tenant ceases to operate. Most landlords resist giving such rights to a tenant, especially an in-line tenant. However, if an important tenant has sufficient negotiating leverage, a landlord may be forced to roll the dice, agree to a co-tenancy requirement, and hope that the designated co-tenant will continue to operate during the term of the benefited tenant's lease. This article focuses on ways a landlord can limit the impact of co-tenancy requirements. Broadly Define Co-Tenancy Requirement Percentage Tests: The benefited tenant may be willing to live with a requirement that a specified percentage of tenants remain open, rather than a requirement that one or more particular co-tenants remain open. Any percentage occupancy condition should specify whether the required percentage relates to the percentage of stores or the percentage of the rentable floor area in the center. Based on the arrangement of the center, one alternative may be more advantageous to the landlord than the other. For example, a landlord may prefer to have the provision refer to a percentage of stores if the landlord owns a center with a number of tenants leasing small stores that reflect a minor percentage of the rentable floor area. If the provision instead refers to the percentage of the rentable floor area, consideration should be given to whether certain large stores should be excluded. If one large tenant ceases to operate, it might be difficult to satisfy the co-tenancy requirement even though the rest of the tenants continue to operate. On the other hand, such exclusion would prove to be detrimental to the landlord if the large tenant continues to operate. If a co-tenancy requirement is satisfied only by operation of both a percentage of stores (or rentable floor area) and one or more specific tenants, the landlord should consider whether the specific tenants (typically larger stores) should be included or excluded in determining whether the percentage test has been satisfied. Moreover, in mixed use projects, should non-retail uses, such as office and residential, be included and, if so, how should their floor area measured for purposes of satisfying percentage tests? Specific Co-Tenants: When the benefited tenant insists on a big box or department store co-tenancy requirement, the hardship of such requirement may be limited by referring to the occupancy of the applicable building or a retailer in excess of a minimum size, as distinguished from a named occupant. In multiple big box or department store co-tenancy situations, the impact of can be diminished by providing for alternate ways to satisfy the co-tenancy requirement, such as including only some of the big boxes or department stores (say, three out of the four located in the center) within the co-tenancy requirement and requiring that only two of those three continue to operate. The benefited tenant may insist on proximity requirements. When a specific set of co-tenants is required, it is important to create some flexibility by permitting the specified co-tenants to (i) change names, such as in connection with a merger or sale of substantially all of such co-tenant's assets, and (ii) be replaced by suitable replacement co-tenants. If a tenant is included in a co-tenancy requirement of another tenant, it is important to negotiate a recapture right upon cessation of operation after any required operating period so that the tenant can be replaced. The definition of a suitable replacement co-tenant should be as broad as possible, and could include an exhibit with a list of specific suitable replacement co-tenants. Preferably, the list should be representative rather than exhaustive, with a basket category that contains either objective criteria or a reference to the list for comparison purposes. If the benefited tenant's consent is required for a replacement co-tenant, it should not be unreasonably withheld. The concept of permitting replacement co-tenants to be located elsewhere in the center, perhaps with the benefited tenant's reasonable consent, should be broached. It is important to be creative since it is difficult to determine in advance the a mix of tenants that will be attainable for the center at any time in the future. Limit the Duration Another way to limit the impact of a co-tenancy requirement is to reduce its duration. It is preferable (though often not achievable) to limit the co-tenancy requirement to an opening co-tenancy or, if an ongoing co-tenancy is required, to provide that it terminates when the center stabilizes. This approach may be used to entice a benefited tenant to enter into a lease at a newly developed or redeveloped center. The co-tenancy requirement should terminate if the benefited tenant has permanently closed for business or fails to operate under a specified name or for a specified use or in a specified portion of the store. It should also terminate in the event of at least some types of assignment and subletting transactions. The co-tenancy requirement is often for the term of the lease, including options, but there is no reason it cannot be limited to a specified period. Narrowly Define Violations The co-tenancy provision should be drafted to limit or delay when a co-tenancy requirement will be deemed to have been violated. For an opening co-tenancy requirement, the landlord should insist on additional cure periods and lower percentage thresholds before draconian remedies kick in because the landlord may need some time to lease up the center in the case of a new development or redevelopment. For example, the benefited tenant may have the right to delay opening for business and pay a reduced rent but may not have the right to terminate the lease. The relationship between opening and ongoing co-tenancy requirements should also be thought through. The landlord should make sure that there is a grace period and perhaps a worsening of the situation before any ongoing co-tenancy requirement is triggered after violation of an opening co-tenancy requirement so that if the benefited tenant opens for business notwithstanding the violation of an opening co-tenancy requirement, the landlord will not be in immediate violation of the ongoing co-tenancy requirement. A violation of the co-tenancy requirement should also be tolled while the benefited tenant is in default under its lease. (The benefited tenant may demand that the violation be postponed only after notice and after cure periods lapse and only during a material default.) The violation may be tempered by limiting when a co-tenant is deemed to have failed to operate--for example, only a closure continuing at least several months, exclusive of closures due to force majeure events, including casualty, and closures attributable to remodeling. It will be easier to negotiate a mutually acceptable definition of a closure if the benefited tenant loses its rights to enforce the co-tenancy requirement in the event of its closure (as suggested above). Provide for Notice and Cure Rights Once a violation is deemed to have occurred, the landlord can create another hurdle before the tenant can exercise its remedies by requiring written notice to the landlord and an opportunity to cure the failure to comply with the co-tenancy requirement. The landlord may need a significant period of time to obtain a suitable replacement tenant. The time period may be longer for an anchor tenant. The violation should preferably be deemed cured when the landlord has entered into leases with tenants that satisfy the required co-tenancy if such tenants are required to open within a specified time, rather than actual opening for business (the timing of which may be substantially beyond the landlord's control). Limiting Remedies Once a violation of the co-tenancy requirement has occurred and all notice and cure rights have lapsed, the impact of the co-tenancy requirement can be further limited by restricting the tenant's remedies. The violation of a co-tenancy requirement should not be a default under the benefited tenant's lease; it should be clearly provided that such violation is a failure of a condition, not a default under a covenant. The tenant's remedies may be limited to payment of alternative rent, such as an amount equal to a percentage of gross sales or a lower minimum rent. The tenant, however, should continue to be obligated to pay additional rent (such as operating expenses, utilities, insurance and taxes) at least so long as it is operating. If the alternative rent is solely a percentage of gross sales, the landlord should ensure that any breakpoint provision in the percentage rent clause is deleted (since, if there is no minimum rent, there should be no breakpoint). The parties will also need to negotiate the effect on the percentage rent breakpoint if percentage rent remains payable but the minimum rent is reduced. The benefited tenant may insist on having the right to terminate the lease after a violation. A compromise may be to allow the tenant to pay alternative rent for a specified period (perhaps a year), at which time the tenant must elect either to terminate its lease or to resume paying full rent if the co-tenancy requirement remains unsatisfied. If the tenant elects not to terminate its lease, the tenant should not be able to exercise its remedies for a continuing failure of the co-tenancy requirement, at least for some period of time and so long as the failure does not significantly worsen. Should the tenant have a right to cease to operate after a violation, then this right should be in lieu of a percentage rent alternative rent since no rent would be payable. Another way to limit the tenant's remedies is to require proof that the tenant has actually suffered a decline in its gross sales before the tenant may exercise any remedy and to tie damages to the extent of the decline. The tenant will argue that the absence of a decline is not a good indication of the damage it has suffered because its sales might have significantly increased but for the failure of the co-tenancy requirement. Conclusion When executing a lease, the landlord bets that its tenant will remain open for business (whether or not the landlord has bargained for an operating covenant). If the landlord agrees to a co-tenancy requirement in a second lease (with respect to that original tenant), the landlord has now effectively doubled its bet because it may lose the benefited tenant in addition to the original tenant if the original tenant ceases to operate. If additional co-tenancy rights are granted, the landlord is putting its entire center at risk as the dominos start to fall. Co-tenancy provisions are nevertheless a fact of retail life. A landlord must carefully consider the escalating risk and impact each co-tenancy requirement can have on the future of its center and attempt to limit such impact through specific language in the letter of intent and in the lease.

Retail leases

A property with higher rent with the same foot traffic doesn't necessarily make it a better property. Could have higher operating costs per sq. ft. Sometimes cheaper base rate isn't better. As a tenant you generally want fixed rent and not variable (indexed), that way you can budget and know how much you are spending Want to negotiate long leases in retail Retail lease might provide a few months of free rent since they have to do their own work on the property to make it fit their standards.

Property Tax payment

A tenant is responsible for their prorate share of property taxes assessed to the building. Annual property taxes = $20,000. The Unit = 10,000 square feet of a 40,000 square foot building. Monthly payment toward the property tax = $400 The system pulls the expense of $20,000 from the GL The tenant's share = 25% (10,000 SF/40,000 SF) The share of the property tax = $5,000 --> ($20,000 * 25%). The tenant's share of $5,000 is compared to the total paid in of $4,800 ($400 * 12 months). A charge is created for $200 for the difference.

Long term leases - The landlord's perspective

Advantages Stability - Long term leases offer stability of income and a guaranteed ongoing tenancy. Certainty - A long term lease allows you to calculate your ROI over the period of the lease. This pays off in the long run as commercial properties are valued and sold based on ROI or yield. This is particularly so if your premises are located in an area where supply outstrips demand. If there is a likelihood the premises will remain vacant for any length of time while a new tenant is found, a long lease will work in your favor. Disadvantages More complex negotiations - Commercial leases can be lengthy and complex and negotiating a long term lease that satisfies everyone can be challenging. Rigidity - Terminating or exiting a long term lease is difficult. Landlords may only do so under pre-determined, specific circumstances. To avoid these problems, consider the situations under which you might want to exit the lease. You can pre-empt them to a degree by including appropriate exit provisions in your lease agreement. However, as with everything in life, you can't predict, nor plan for all of life's future events with certainty.

Short term leases - The tenant's perspective

Advantages Flexibility - For tenants with an uncertain outlook, short term leases offer the ability to scale up or down, moving locations as finances dictate. They're also a great option for short term or 'pop up' businesses wanting to test the market. A bail out option - It's estimated that one in three Australian businesses fail in their first year of operation. Another two out of four fail in the second year, and three out of four by the fifth year. A short term lease is a less significant financial risk and offers tenants an 'out' in the event of business failure. Disadvantages Moving costs - For tenants changing locations with each lease, relocation costs can be high. Lack of security - Tenants operating under a short term lease may lack security of location and tenure. If the goodwill of your business is dependent on a secure and longer term location, a short term lease may not provide the security of location you need. Lack of stability - Under a short term lease, tenants may struggle to attract a solid customer or client base, particularly if they're frequently changing location.

Short term leases - The landlord's perspective

Advantages Flexibility - Short term leases give you flexibility in your tenant selection. If your property is in a high demand area - i.e. where demand outstrips supply - you can have the pick of the crop. If the market continues to perform well, you'll have the security of continuous occupation, along with the opportunity to increase your rent (and alter your lease terms and conditions) with subsequent leases. Disadvantages Lack of security - Under a short term lease, you may lack security of income and continuous occupation. This in turn may affect the value of your property and ROI. Lack of stability - Under a short term lease, you'll lack the stability that comes with a long term, reliable tenant.

Disadvantages of Leasing

Control. Tenants tend to have little or no control over the types of the other tenants that lease space in the building. These other tenants can have an adverse impact on parking, hours of operation, use and compatibility, or building services. Cost. For an established business with easy access to capital, leasing is could be a more expensive alternative to ownership. Contractual Obligations. Even if a leased property becomes less desirable or unsuitable, or the tenant's business become unprofitable, the tenant must continue paying rent or face penalties for any default. Loss of Salvage Value. Most leases stipulate that certain improvements made by the tenant become the property of the landlord at the end of the lease term. Alternatively, the landlord may require that the tenant remove certain improvements made to the premises at the tenant's expense.

lease vs. buy

Advantages of Leasing Liquidity & Cash Resources. Leasing usually requires less cash out of pocket than ownership alternatives, leaving more capital to invest in the core operating business and other expansion opportunities. Financing Source. Leasing can be viewed as an attractive source of financing, with the cost of leasing falling below the cost of ownership. For example, many small or marginally profitable firms may find traditional financing expensive or more difficult to obtain, while a commercial landlord may be more eager to sign a lease with them. Cost Stability & Predictability. The long-term occupancy costs of leasing are usually easier to forecast and budget. While some leases may expose a tenant to minor capital expenditures, most commercial lease structures allow the tenant to avoid unforeseen capital costs such as the replacement of mechanical systems, structural repairs, and roof or parking lot replacement. Tax Benefits. Unlike ownership, the occupancy costs of leasing are fully deductible, where as an owner is required to depreciate the property's improvement costs, and cannot depreciate the value of the land itself. This benefit can help to shield the business's operating income from federal, state and local income taxes. Flexibility & Mobility. A lease's expiration date allows users specific dates by which to plan and reevaluate their real estate needs. For this reason, leasing can provide greater flexibility to a user who many need to expand or contract, and mobility if this user needs or wants to relocate. Location. Leasing can allow a user to occupy space at a premier or strategic location this user could not afford to own directly. Focus. Leasing allows tenants to concentrate on its primary business without the distractions of the many types property management issues which come with ownership.

Ongoing CAM cap

Although an ongoing cap may not provide any protection for the first lease year, it protects the tenant from unexpected increases through the rest of the lease term. Typically an ongoing cap will provide that CAM will not increase by more than the lesser of (1) the actual increase in tenant's pro rata share of the CAM costs or (2) a set percentage over the immediately preceding year. The amount of the CAM cap increase may be tied to a consumer price index or some other index. If an ongoing cap is used without a first-year CAM cap, then the cap is of limited use to the tenant if the first-year actual costs are unexpectedly high. This situation can cause the tenant to feel misled by the landlord. Therefore, some tenants seek both a first-year cap and an ongoing cap. This permits the tenant to have more control over its costs. Some landlords prefer fixed initial CAM increased annually by a fixed percentage, such as 4% to 5%, without any tie to the landlord's actual costs.

Attornment Clause

An attornment is the act by which a tenant acknowledges a new owner of the property as the new landlord. The purpose of the attornment clause in an SNDA is to obligate the tenant to recognize any new owner of the property as its landlord, whether the new owner acquires the property in a normal sale or following a foreclosure. The main goal of the clause is to ensure that the tenant continues paying rent to the new landlord throughout the remainder of the lease term, even if the property is foreclosed or sold

Estoppel Certificate

An estoppel certificate is typically used when the owner of a commercial property wants to sell or refinance the property, and the buyer or lender requires confirmation of the status of all leases in the property, to ensure that the tenant(s) do not have any claims against the landlord which would allow the tenants to offset or withhold future rent payments. Landlords need tenant estoppel certificates in order to confirm certain basic facts about a lease. Those facts include (i) the term of the lease, (ii) the amount of rent payable under the lease, (iii) the date through which rent has been paid, (iv) any options to renew the lease, and (v) whether any defaults exist under the lease. Why do landlords want them? Usually because someone else - a new lender or a prospective buyer of the property - has demanded that the landlord get them from the tenants on the property. Lenders and buyers need tenant estoppel certificates in order to understand the economics of the lease - such as the rent stream and whether the tenant has a right to terminate the lease - and to determine the potential exposures they face if they become the owner of the property by either purchasing it or foreclosing a mortgage. http://www.bakerdonelson.com/what-should-you-do-when-your-landlord-asks-you-to-sign-an-estoppel-certificate-11-05-2009/

What provisions in a landlord's estoppel certificate should you object to?

An estoppel certificate should not be used as a substitute for the buyer's or lender's review of the lease itself. So, as a general rule, you should object to any statement in an estoppel certificate that can be determined simply by reading the lease

What should you as a tenant be willing to confirm in an estoppel certificate?

As a general rule, a tenant will want to limit your estoppel certificate to those facts that cannot be determined through a review of the lease. Some of the tenant assurances customarily seen in estoppel certificates include the following: • The date through which rent has been paid • Whether any event has occurred that constitutes a default under the lease • Whether there have been any oral or written amendments to the lease • Whether the tenant or landlord has notified the other that it is in breach of the lease in some respect • Whether there are any outstanding rent concessions not stated in the lease • Whether the tenant has any defenses to performing its obligations under the lease • Whether the tenant has assigned the lease or sublet the premises • Whether the tenant uses hazardous substances at the premises or has violated any environmental laws • Whether the tenant has paid a security deposit

Fixed Cam Audit

Because the amount of the CAM payment is fixed, tenants have much less incentive to negotiate the lease provisions to narrow or limit the items included in CAM. Similarly, because the number is fixed, landlords typically demand that tenants forego the right to audit CAM. The landlord's theory is that the fixed CAM clause represents an element of additional negotiated rent for occupancy that is not based on, and therefore does not vary because of, the actual costs incurred by the landlord. Both the landlord and the tenant enjoy advantages from a fixed CAM charge, including the avoidance of CAM audits, easier administration of CAM charges, and easier lease negotiations once the CAM starting number has been determined and increases have been fixed.

CAM cont.

Because the condition of certain common areas has a direct affect on tenants, fees associated with the costs of maintenance and repair of hallways, elevators, stairwells, lobbies, and common area restrooms are fairly standard in CAM fees. Also typically assessed to tenants in CAM fees are costs associated with parking lot maintenance (including lighting and landscaping), and sidewalks. A landlord typically will try to pass through as much of the overhead as possible through CAM charges. It is common to find administrative and maintenance fees, costs for repair and replacement of roofs, lighting, plumbing, electrical wiring, HVAC, etc., for the common area parking lot striping, parking lot lighting, and landscaping.[3] CAM charges can be broken into two subcategories—controllable and uncontrollable. Uncontrollable CAM charges are security costs, utilities, and snow removal expenses. All other expenses charged as a CAM charge are considered controllable.

CAM/Utilities

CAM = Reception, facility management, security, parking maintenance Utilities = Janitorial/Cleaning, Electric, Telephone,

LL

LL usually takes care of structural problems. If they don't, lease may be called quadruple net, tenant usually pays less rent. Think roof and exterior walls Tenant might want in tax clause that if LL sells property, that they want to keep paying the taxes they are paying when they were first assessed around the original signing of the lease.

Uncontrollables

CAM caps can exclude certain types of costs from the cap. These exclusions are typically referred to as "uncontrollables," because these types of costs are outside of the landlord's control. For this reason, landlords argue that such costs should not be reduced by the cap. As a result, the tenant pays its straight pro rata share of uncontrollable costs, which usually include utilities, insurance, snow and ice removal, and security. The tenant should understand that if there is a first-year cap on all charges, then the uncontrollable costs are backed out of the first-year number used to calculate the allowable increase for the second and succeeding years. If the uncontrollable costs are included in this base amount, then the first-year number will be artificially inflated and all future increases will be based on that inflated starting figure. Fixed CAM provisions also have been devised so that only controllable CAM is, in fact, fixed. This concept is very similar to the uncontrollable expenses typically excluded from a CAM cap. Volatile expenses such as snow and ice removal, insurance, security, and utilities can be excluded from the fixed CAM calculation and billed on the basis of actual costs. Obviously, the benefit to the tenant of the fixed CAM is reduced if these uncontrollable costs are carved out of the fixed CAM calculation. These costs, however, are not controllable from the landlord's perspective and landlords feel that they should not be required to bear the risk of these items exclusively. If these uncontrollables are excluded from the cap, however, tenants typically will then insist on audit rights for these items. When uncontrollable expenses are carved out, both the landlord's and the tenant's administrative a From the tenant's perspective, other issues with fixed CAM include the inability to verify or adjust the fixed CAM charge based on landlord's actual costs. The tenant is often unable to determine how much of a cushion the landlord has put in the fixed number. If uncontrollable costs are excluded from the cap, many of the disadvantages of a pro rata CAM provision still exist. Finally, if the landlord is not receiving full reimbursement of its operating costs, the landlord may well be forced to reduce the quality or scope of the CAM services. Some tenants require additional language in leases obligating landlords to provide certain services, such as security and advertising. This language will prevent the landlord from cutting back on services previously provided because of budget concerns related to CAM provisions. Landlords, however, do not desire to let their shopping centers deteriorate, nor would it be smart from a business perspective. In addition, if a shopping center is used as collateral for a mortgage loan, it is very likely the loan documents will require the landlord to be in compliance with various laws and loan document maintenance covenants, or risk being in default. Because of the nature of the competitive retail market, the center will need to be kept in excellent condition to continue to attract the most desirable tenants, and language can be added to the lease to that effect

More CAM

CAM expenses are those expenses that directly benefit all of the tenants of a property. These expenses typically include, but are not limited to: janitorial service, janitorial supplies, trash removal, HVAC and elevator maintenance, landscaping, pest control, snow removal, building supplies, building maintenance labor, property management staff, property accounting and management, security services, fire alarm monitoring, electricity, natural gas and water/sewer utilities, insurance and real estate taxes. CAM expenses do not include costs that are directly attributable to ownership such as costs associated with income tax filing, personal owner items, owner distributions, non-capitalized leasing and marketing expenses, and costs of collection from non-paying tenants. Additionally, CAM expenses do not include capitalized expenses such as tenant finish improvements, leasing commissions, and other improvements that add value to the asset such as creating additional parking or putting on a new roof,

COMMON AREA MAINTENANCE

COMMON AREA MAINTENANCE

CAPITAL EXPENDITURES

Capital expenditures are generally objectionable to tenants because they see them as ownership's investment in its property, which should not be recoverable. Capital expenditures generally fall into three categories: • capital improvements (additions or "betterments"), • capital replacements (replacement of existing capital assets), • and capital repairs (significant repairs that rise to the equivalent of capital replacements).

First-Year CAM Cap

Capping the CAM charge for the first year of the lease can assure a tenant that the starting CAM will not exceed the amount discussed during the initial lease negotiations.

Mutual Waiver of Subrogation

Commercial leases often include a waiver of subrogation provision. The waiver is in effect an agreement between the parties to look to their respective insurance carriers in the event of a covered claim against either party. A waiver of subrogation provision is intended to avoid litigation between the landlord and tenant. In the absence of a waiver, if a landlord's negligence causes damage to a leased premises, the tenant's insurer would pay the loss and then be subrogated to the tenant's rights against the landlord, allowing it to pursue a claim for indemnity against landlord. Waiver of subrogation provisions prevent these types of actions, theoretically serving the interests of both the landlord and the tenant. Following is a sample waiver of subrogation clause: Waiver of Subrogation. All insurance policies carried by either party covering the Premises, including but not limited to contents, fire and casualty insurance, shall expressly waive any right on the part of the insurer against the other party. Neither party, nor its agents, employees or guests, shall be liable to the other for loss or damage caused by any risk covered by such insurance, provided such policies shall be obtainable, and the parties waive all rights of subrogation in this regard.

Advantages of owning

Control. Ownership of the property allows for direct decision-making and control, whereas leasing does not. Income. If a portion of the property is leased, the rental stream from other tenants can be used to help pay the mortgage, reinvest, or distribute. Tax Advantages. Ownership enjoys the benefit of interest and depreciation deductions in order to shelter income from taxes. In addition, upon any sale of the property, gains are usually taxed at a lower marginal tax rate than ordinary income. For example, the capital gains tax rate is currently 20% and depreciation recapture is 25%.

Personal Guaranty Clause:

LL wants guarantee that if your business goes under you will still make rental payments. If you sell business and someone else takes over your rent, and then THEY go under, the LL will call YOU up and say that you need to pay them. 99.9% of retail leases want a personal guaranty.

Dates

Execution date = day the lease is signed Occupancy date = day the property is occupied (before Tenant improvements are completed) Commencement date = day they start paying rent

LL incentives

FITOUT Money →Goes towards tenant improvement. In order to get the store to look like a Chick-Fil-A or Subway etc. Passing rent: Rent being paid currently from tenant to LL (look at this when evaluating property) If there is no incentive in a deal, then you have an effective rent.

LL perspective 2

From the LL perspective: CAM clause should cover all of the landlord's costs of • ownership, • management, • maintenance, • repair, • replacement, • inspection, • improvement, • operation, • and insurance of the center • together with any costs allocated to administration and overhead. For the landlord, every cost must be covered to preserve its economic model for ownership. The landlord needs a highly expansive CAM definition to avoid the risk that necessary costs of operation have no corresponding revenue to cover them. Tenant views a lot of these costs as "cost of doing business" and doesn't want to be responsible for many of them.

Gross Lease

Here's your rent, it's just $5000 a month.

Location

How does location affect employee productivity, transaction time, and other operating objectives? How do current locations benefit corporate strategies, technologies, customer and employee access, and other business factors? Questions about the logic of relocation also should be addressed. Why should we move? For lower cost, employee convenience, or better work flow? Can we achieve these aims without moving, by expanding, reorganizing the layout, remodeling, or restructuring leases? If we relocate, will the pay-back and productivity improvements be consistent with strategic initiatives such as product or service introductions and information technology improvements?

Other Clauses

INDEMNIFICATION LOOK THIS UP LL will not doing anything to hurt the business of its tenant. SECURITY DEPOSIT Normally 1 months rent. If you have a risky tenant with little credit history, you may ask for a few more months. They may get a surety bond, insurance in case they default. Want property to be left in good condition, gives tenant incentive to take care of property towards the end of a lease. DEFAULT If tenant misses payment there is typically a late fee. LL goes after corporate guaranty HOLDING OVER If tenant stays past the end of the lease, they will pay extremely high rent (could be 150% of current months rent). This clause is there so the tenant feels obligated to call you to negotiate a new lease before the lease expires.

INSURANCE

INSURANCE

Use clause

Ice cream shop might pay premium so no other ice cream shops are allowed to open in the same building

Assignment fee/clause:

LL's time and energy invested in processing the transfer request. Sometimes LL will try to rip you off, if you sell property they might get a huge chunk of the money.

Leasing

If a company is convinced that it is in the right building, longer lease terms can be traded off for lower rents. Concessions can be negotiated, including free rent, existing lease buyouts, moving expenses, above-standard build-out allowances, free parking, club memberships, and so on. Base rents and rent escalations, which landlords use to bump up total rents after their initial concessions, can be lowered by assuring a stable, predictable agreement. Operating expenses, which can exceed the base rent over time, may be reduced by establishing percentage formulas or maximum rates that are tied to usage, rent, and other measures, and by clear accountability and billing procedures for each expense category. Incidentally, a lease audit will usually turn up billing errors because lease agreements are often complex and landlords are adept at exploiting the intricate web of definitions and calculations in them

Non disturbance

In exchange for agreeing to subordinate its interest to a lender and recognize any new owner as the landlord (see "The Attornment Clause," below), a tenant should ensure that there is a strong non-disturbance clause in the SNDA. A non-disturbance clause or agreement gives a tenant the right to continue occupying the leased premises as long as the tenant is not in default, even after the property is sold or foreclosed. The non-disturbance clause provides some assurance to the tenant that its rights to the premises will be preserved even if the landlord does not keep up with its mortgage payments and the property is foreclosed. This can be very important to a business tenant since moving its location can lead to unexpected expenses and great inconvenience. Whether the landlord will agree to include a non-disturbance clause in the SNDA depends on the negotiation power of the tenant. Could potentially wipe out or terminate the lease

MODIFIED GROSS

Responsible for electric and cleaning (utilities) LL Pays property taxes/insurance/CAM Modified gross leases are common when multiple tenants occupy an office building. In a building with a single meter where the monthly electric bill is $1,000, the cost would be split evenly between the tenants; if there are currently 10 renters, they each would pay $100. Or, each tenant might pay a proportional share of the electric bill based on the percentage of the building's total square footage that the tenant's unit occupies. Alternatively, if each unit has its own meter, each tenant will pay the exact electrical expenses it incurs, whether $50 or $200. http://homeguides.sfgate.com/difference-between-triple-net-lease-modified-gross-lease-43646.html

Co-Tenancy

Inaccurate co-tenancy summaries can impact income and sell-ability: A co-tenancy is a lease provision that conditions the continued occupancy and/or rental obligations of one tenant upon the occupancy of one or more other tenants. This provision is typically found in a retail center environment and commonly allows a tenant to terminate its lease if an anchor or a specified percentage of other tenants discontinue operation or leave the premises. It is imperative to capture these provisions accurately as the income stream from the property and the ability to sell or refinance can be severely impacted if a co-tenancy provision is triggered and a tenant or tenants exercise the remedies provided. While co-tenancy provisions can be easily identified in a lease, summarizing them in a way that a lender, owner/investor or property manager can easily understand without compromising the full meaning of the provision is a challenge and takes a level of expertise to do well.

Insurance Provision

Indemnify means you protect landlord from liability (i.e. getting sued for someone slipping and falling the property. A standard insurance policy issued to business organizations to protect them against liability claims for bodily injury (BI) and property damage (PD) arising out of premises, operations, products, and completed operations; and advertising and PERSONAL INJURY (PI) liability. The CGL policy was introduced in 1986 and replaced the "comprehensive" general liability policy Commercial General Liability (CGL) insurance protects business owners against claims of liability for bodily injury, property damage, and personal and advertising injury (slander and false advertising). Premises/operations coverage pays for bodily injury or property damage that occurs on your premises or as a result of your business operations. Products/completed operations coverage pays for bodily injury and property damage that occurs away from your business premises and is caused by your products or completed work.

Major Capital Repairs or Replacements

Landlords argue that when an asset is old and needs replacement, it makes no financial sense to continue spending money on maintenance when a replacement would be less costly. Therefore, the argument goes, replacements should be included in CAM because they are less costly than maintenance, which otherwise is includible. A replacement, unlike an improvement, is a substitution of a similar asset for an existing asset. Repairs that are significant enough to constitute replacements are generally treated as capital items for accounting purposes, so landlords are well-advised to provide examples or other standards in leases to clarify the distinction between replacements and improvements. Landlord repair obligations for the roof and structure (whether or not capital in nature) are usually excluded from CAM. Given the disparity between a favorable landlord provision and a favorable major tenant provision, landlords and major tenants must spend substantial time and energy negotiating satisfactory exclusions from CAM.

Right of First refusal

It means that if you sell it, whoever has right of first refusal has the right to buy it at whatever price you are going to sell it for. We fell into that when my grandparents moving to Florida were going to sell their WI lake home to my parents. It was on a peninsula and the old lady on the end of the peninsula (with shared garage) had right of first refusal. Somehow her son ended up getting it for his mistress instead. The property is now worth much more than it was then

Mgmt/Admin Fee

LL Charges admin fee, may also charge mgmt. fee in addition to this if they hire a 3rd party to manage the center. Many tenants feel like this is double dipping, since they feel like these are the same thing.

LL perspective

LL Perspective: • CAM costs should include the • common areas • all facilities of the shopping center, • and all improvements serving the shopping center. • These include the roof, • structural elements, • adjacent parcels, • and outdoor areas used only by specific tenants or the landlord. Tenants would like to define these areas as narrowly as possible and limit CAM charges to those incurred in relation to the parking and enclosed areas meant for their customers' use.

LL Perspective Cap Improvements

Landlords would argue that not all capital improvements are discretionary and that they should not have to bear the risk of unexpected but necessary capital improvements. For example, they assert that unexpected capital improvement costs incurred as a result of the passage of new laws and ordinances or by new insurance requirements are not factored into the existing rent structure and should be passed on to tenants. Landlords would also argue that tenants have no logical basis for objecting to capital expenditures that have no net effect on CAM costs, such as those that otherwise reduce CAM costs. Examples are • HVAC or other utility equipment upgrades, • replacements, or new equipment that will ultimately reduce utility costs. Tenants generally will concede this point and allow the amortization of these types of capital improvements, at least to the extent of the savings these improvements generate.

Pro Rata Share

Leasable floor area of premise/Leasable floor area of shopping center Does not include unusable space like space dedicated to mechanical stuff Sometimes, the denominator will exclude a department store or anchor store of large size. Especially, if they are on a separate floor from everyone else. (example: Exclusion of major tenants of a predetermined size (for example, all retail premises of at least 50,000 contiguous square feet in the shopping center). Could just be anything over a certain size, not necessarily just a dept. store. Major tenants often do not pay their full pro rata share, primarily because of the strength of their leverage in lease negotiations For community shopping centers, strip centers, and similar projects, typically the denominator is leasable floor area with exclusions for nonselling areas, floor areas occupied by a major store (again, of some predetermined size), any tenants located on a so-called "pad" or "outparcel" in the parking lot, and other tenants that perform their own maintenance

cont.

Lease Aging Profile This snapshot of the square feet, cost, and number of leases committed in existing agreements can help managers identify how and when to restructure occupancy costs. Shearson's occupancy cost history and lease aging profile both revealed that the company's leases had been negotiated five to ten years earlier at high rates, with large amounts of rentable SPACE and generous expansion allowances. Renewing these leases at lower rates for fewer square feet would maximize the impact of occupancy cost reductions on net income. The immediate financial incentive, plus the inherent schedule, were enough to convince the firm's top managers to do more than renegotiate its leases. Shearson decided to explore the underlying factors that drive occupancy costs.

Lease Aging Profile

Lease Aging Profile. This tool reveals the future real estate commitments that a company has already made and the potential scope for change given those agreements. To develop a profile, managers must have access to three facts about each corporate lease: total rent and expenses per year, square feet, and the notice date for renewal or termination. Using a simple spreadsheet analysis, managers can then view the number, value, and size of the company's lease commitments for a specific future period. For example, Shearson projected in early 1991 that its branch-office leases would be reaching their notice dates at an average rate of 75 per year from 1992 to 1996 and that 93% of the total portfolio would come up for action during those five years (see the graph "Lease Aging Profile"). This turnover rate offered a major opportunity to restructure occupancy costs.

Terms to know

Lease is silent Waiver of Subrogation Explain Commercial General Liability Insurance alterations repair assignment and subletting default remedies Exculpation/Indemnification Equity of redemption Right of first refusal/offer Co-Insurance Occurrence based vs. Claims made policy Regarding SDNA http://www.acc.com/legalresources/quickcounsel/tbosnaaa.cfm

Liability Insurance

Liability policies cover bodily injury and property damage to third parties. The industry standard form for leases is known as "Commercial General Liability" Coverage, often referred to as the "CGL". Older lease forms often refer to "Comprehensive General Liability", but the ISO replaced this with CGL in 1986. CGL covers liability claims arising out of: Premises and operations Products and completed operations Advertising and personal injury Contractual liability (assumption of liability under an "insured contract", which includes a lease) CGL generally covers bodily injury and property damage occurring as the result of the negligence of the insured. The contractual liability coverage extends to the indemnity section of the lease and provides coverage for the assumed liability for bodily injury and property damage. It is no longer necessary to require a "contractual liability endorsement," which older lease forms often require.

What is CAM?

This stands for Common Area Maintenance charges and is basically the cost for items such as snowplowing, grass cutting, property mgmt, utilities, parking lot maintenance, security, common area lighting, and any cost that are SHARED among ALL the tenants. Quoted in $ per square foot and are based on rentable square footage. Apart of NNN Charges generally CAM is negotiable, especially if you are an anchor tenant. Or depending on market conditions, if the market is bad and the LL just needs to fill the space, you could have more leverage/negotiating power, could get a cap on their proportionate share.

Disadvantages

More complex negotiations - Commercial leases can be lengthy and complex and negotiating a long term lease that satisfies everyone can be challenging. Increased maintenance and repairs costs - If the property isn't properly cared for during the term of the lease, maintenance and repair costs can be high. Greater risk - A long term lease means paying rent over a longer period. For some businesses, this is a financial burden and risk they can't afford.

N

N Responsible for Taxes (LL responsible for insurance, CAM)

NN

NN: Responsible for Taxes and Insurance Responsible for everything except roof & structure or CAM charges Typical for a multitenant building Service Charge = Sum total of OpEx

NNN

NNN = Tenant responsible for: • Operating & Maintenance • RE Taxes • Electric • Cleaning • Utilities • Insurance • Roof & Structure Typical in retail context, especially if it's a single tenant building Look up NNN in regards to Roof/Structure The triple net or NNN lease is considered a "turnkey" investment since the landlord is not responsible for paying any operating expenses. With that said, in order to fully understand the NNN lease you must first understand the spectrum of commercial real estate leases. LOOK UP "TURNKEY"

Net/Gross

Net and gross are different ways of quoting rent. A gross lease means that the stated rental rate includes the major expenses from real estate taxes, property insurance and common area maintenance, and that no additional rent for those items is required to be paid. In an absolute gross or full service lease, the quoted rate will include basic utilities such as electricity, gas, water and sewer. A triple net or NNN lease is one where the rent is quoted as a base rent net of, or not including, the expenses for real estate taxes, building insurance and common area maintenance. These three expenses, as well as the utilities, are an extra charge over and above the base rent. Under a NNN lease, the tenant will also be responsible for utilities in addition to the NNN expenses. In between a gross rental and a NNN rental is a gross plus utilities rental where the quoted rent covers the taxes, insurance and maintenance expenses but does not include utility charges for the leased premises such as gas, electricity, sewer and water. Typically, a tenant will pay for its own telephone and internet services under any of these lease types

Occupancy Cost History

Occupancy Cost History. A cost history compares the growth rates of occupancy costs with those of revenue, income, staffing, and other operating expenses. It also compares the cost per square foot in any given facility with the square feet per employee in various business functions over a 10-to 20-year period. These calculations raise management's awareness of the relationships over time between occupancy costs and other financial measures. Managers also can use cost histories to benchmark their cost ratios against their competitors'. An occupancy cost history may not reveal the root of a problem, but it can show that a problem exists, as it clearly did for Shearson.

Occupancy Loss Analysis

Occupancy loss measures the difference between the current cost level and ratios that reflect different eras in a company's past. It is a sensitive barometer of managers' decisions over time. To calculate occupancy loss, the occupancy cost history should highlight years in which managers agree that a satisfactory occupancy cost-to-revenue ratio (OCR) was achieved. The latest or lowest of these provides the benchmark for a target OCR. Multiplying the target ratio by revenue in each year and then subtracting the current annual occupancy cost from the target results in the occupancy loss. For example, a company with $1 billion in revenues and $50 million in occupancy costs has a current 5% OCR. If management concludes that an OCR of 3% achieved in the early 1980s is a reasonable target, the difference between the target and current OCRs is 2% of current revenue, or a $20 million occupancy loss. This is significant in two ways. If the company earns, say, 8% on revenues, the occupancy loss impact is 25% ($20 million loss divided by $80 million earnings), equivalent to a revenue increase of $150 million ($20 million divided by 8%). Furthermore, if the company's price/earnings ratio is, say, 12%, the occupancy loss erodes pretax shareholder value by $167 million ($20 million divided by 12%).

Termination

Overlooking tenant termination rights could be a deal killer: Tenant termination rights are the most important part of a lease abstract. Termination rights usually involve the tenant's ability to end the lease for a variety of reasons, including if the (retail) tenant fails to achieve a gross sales amount for a certain period or if the landlord rents space to a tenant which violates the tenant's exclusive right, among others. On the due diligence side, it is essential for these termination rights to be identified during the underwriting process, since these can lead the lender to restructure the deal or kill the contract altogether. If the tenant exercises one or more of the termination rights, the cash flow of the property would decrease, thereby impacting the borrower's ability to pay the debt service on the loan. For owner/investors and managers, missing a termination right can have negative consequences for many years. For example, if an owner/manager is unaware of a termination right in an exclusive use provision because an abstract fails to capture it, he/she may unwittingly enter into a lease with a tenant whose business use is prohibited by this clause. This can cause the tenant with the exclusive to exercise its termination remedy, causing a loss of cash flow and potentially affecting the ability to sell the property. Because tenant termination rights are not always highlighted in a lease, an inexperienced abstractor may miss one. These provisions are often included, many times intentionally, in an unexpected section of the lease. Experienced abstractors know to be on the lookout for these rights anywhere in the lease and understand what keywords to look for so as not to miss them.

Proposition 13

Prop 13 provisions vary from state to state: Proposition 13 (Prop 13) is a provision that governs whether the landlord is able to pass through the cost of any increase in real estate taxes on the property due to a change in ownership. It is extremely important for an abstractor to capture if the landlord is unable to pass through this cost, as this will decrease the landlord's total recovery from the tenant. It is not unusual for a lease to prohibit the pass-through of increased property taxes, or alternatively, to limit the frequency of such pass-throughs during the term of a lease. While many CRE professionals are familiar with Prop 13 as a key provision to capture in California leases, the challenge lies in being aware that leases in other states may contain similar language, but it might not be easily identifiable as the Prop 13 language. CRE Lease specialists are aware of these provisions and can decipher very quickly whether these increased costs can be passed along to the landlord. Not accurately capturing Prop 13 provisions can lead to the same issues for lenders, owner/investors and managers as outlined above regarding reimbursements

Good insurance Link

Property and Liability Insurance http://www.bradley.com/the-basics-of-insurance-in-leases-11-01-2000/#.Vxz3DWQrK2x

Property Insurance

Property insurance generally covers loss arising from damage to real or personal property owned by the insured. The typical example would be a fire, where the building owner's property insurance policy would pay to repair the damage. Basic/Broad/Special Form Endorsements Full Replacement Cost

Know about endorsements for insurance

Property insurance policies cover direct physical loss. However, a casualty that disables a property and thus disrupts business operations will create broader losses. Certain endorsements to the property policy can PROTECT against these ancillary losses

CLGI cont.

Public liability insurance policies are either "claims made" or "occurrence based". A claims-made policy is type of public liability insurance policy that responds only to claims for injury or damage that are brought (to the insurer) during the policy period (or during a designated extended reporting period beyond expiration). This development was in response to 'long tail' claims, such as those related to asbestosis injury, carrying over many years and multiple layers of coverage limits. However, most public liability policies are written on an 'occurrence' basis, covering injury or damage occurring during the policy period even if a claim is brought months or even years later.

CGLI

Public liability insurance, also known as commercial general liability insurance or "CGL" insurance, provides coverage for bodily injury and property damage due to alleged negligence of the insured and includes the following elements:

Fixed Cam Cap

Since the early 1990s, the industry has moved toward the so-called "fixed CAM." By adopting fixed CAM, tenants achieve predictability in their costs, making it easier for them to budget and administer their leases. Landlords also benefit because the fixed CAM reduces the time and expense of negotiating the CAM charge and related provisions, computing the CAM charge for each tenant (that is, for various tenants with different CAM limitations and exclusions in their leases), and dealing with tenant audits.

LT leases tenant perspective Advantages

Stability - For tenants wanting to firmly establish themselves in a specific location, long term leases are ideal. Ensuring tenure for an extended period, they provide protection from having to move if the premises are sold or if renewal options aren't offered. Certainty - Long term leases allow for long term financial planning. Depending on the rent review terms of the lease, a long term lease allows you to calculate your rental expenses over the long term. Even if the rent review occurs under a market rent review, a long term lease still offers an opportunity for long term financial planning that's not available under a short term lease. Flexibility - Tenants may find landlords offering long term leases are more willing to compromise on other lease terms. This may include a rent free period, opportunities to improve or modify the space and exclusivity clauses. Sublease options may also be available, enabling you to cut your long term rental costs. Although these concessions aren't closed to short term lessees, they may be more difficult to negotiate.

TI

Tenant improvements are the improvements or remodeling tasks that need to be completed before the tenant can use the leased premises as intended. This can be a moot issue if the space is move in ready, or can involve construction of an addition to a building or a significant structural change to the building

Modified gross

Tenant pays: 1. quoted base rent 2. Janitorial service 3. Minor Interior maintenance (Lightbulb replacement) 4. Utilities LL pays 5. Property Tax 6. Property Insurance 7. CAM (restrooms, elevators, lobby) For NNN Tenant pays 1-4, and pro-rata share of 5-7. NNN base rent is lower

Official CAM section

The CAM clause found in most modern retail leases obligates the tenant to pay a specified share of certain defined costs of operating the center, although such definitions vary widely from lease to lease. Tenants often negotiate limits or caps on these obligations and often insist on the right to audit the landlord's records to verify that their particular charges are valid. Because of the unpredictability of CAM obligations and the burdens CAM audits have placed on both landlords and tenants, some landlords and tenants use a fixed, negotiated CAM charge in lieu of passing through a share of actual costs. Costs includible in CAM generally depend on two main variables: the parts of the center for which the tenant must pay a share of expenditures, and the nature of the expenditures included in the tenant's obligations.

The Each Occurrence Limit

The Each Occurrence Limit is the amount that the policy will pay for any one covered lawsuit. Additional limits of coverage can be obtained by purchasing an Umbrella or Excess Liability policy.

• General Aggregate Limit:

The General Aggregate Limit is a cap that the policy will pay for multiple premises liability and operations liability lawsuits that occur within a 12 month policy period. For example, if your Each Occurrence Limit is $1,000,000 and your General Aggregate Limit is $2,000,000, the policy will pay for two $1,000,000 lawsuits or four $500,000 lawsuits that occur within the same policy period. The General Aggregate Applies to premises liability and operations liability types of lawsuits that arise out of a hazard in your premises (ex: slip and fall resulting from wet spot) or a dangerous condition in your operations that results in injury to a third party

Basic Form

The ISO "Basic Form" covers the following specified causes of loss: Fire Lightning Explosion Smoke Windstorm Hail Riot Civil Commotion Aircraft Vehicles Vandalism Sprinkler Leakage Sinkhole Collapse Volcano Eruption Leases that call for "fire and extended coverage," policies refer to this type of coverage. If the loss is caused by a peril that does not appear on the foregoing list, the policy does not cover the loss. Fire and extended coverage insurance is not as comprehensive as the other types of coverage discussed below, and is not currently industry standard for leases.

Broad Form

The ISO "Broad Form" policy covers five causes of loss in addition to the perils insured under the Basic Form: glass breakage, falling objects, weight of snow, ice, or sleet, water damage (for sudden leaks but not seepage), and collapse from certain, specified causes. This form is also not industry standard for leases.

SNDA

The Subordination Clause By signing off on a subordination clause in an SNDA, a tenant agrees to allow its interest in the property to become junior to the interest of a third-party lender. The landlord will want the flexibility to seek financing secured by the commercial property after entering into the lease with the tenant, and most lenders will require that any tenants occupying the property subordinate, or make junior, their leasehold interests to the lender's mortgage interest.

Nationwide, building insurance explained

https://www.nationwide.com/commercial-property-insurance.jsp

Artificial break point percentage rent

is simply a dollar amount of sales both parties agree on. For example, a landlord might negotiate that 5% of gross sales over $800,000 should be paid in percentage rent. If the gross sales are $1,000,000, then the renter pays 5% of $200,000, or $10,000 in extra rent.

Initial CAM Cap

The most heavily negotiated issue in a fixed CAM clause is the amount of the initial CAM charge. Unlike a CAM cap, the initial fixed amount represents the actual amount the tenant will pay for the first year and provides the base amount for all future increases. Although a tenant typically wants the initial amount to reflect the amount it would have otherwise paid under a pro rata CAM clause, the landlord seeks to include a cushion to protect it from unanticipated, overlooked, or underestimated costs. If the fixed CAM amount exceeds the actual expenses, the tenant will likely have an inflated charge for year one of the term. Conversely, a low estimate can cause the landlord to subsidize the tenant's share of CAM over the life of the lease Although tenants might feel that they will benefit if the landlord misjudges the actual CAM cost by providing a low initial fixed number, this is not always the case. If a landlord cannot recoup its costs, it will be motivated to find ways to cut expenses. The landlord and tenant are then likely to find themselves in a disagreement over whether or not the landlord has satisfied the required standard of maintenance for the shopping center. One solution to this problem is to reset periodically the fixed CAM amount based on actual costs. Resetting the number requires that the parties still negotiate the CAM inclusions and exclusions in the lease; however, the numbers will likely only be reviewed periodically. For example, a 10-year lease with fixed CAM could be reset every five years. Thus, the parties are exposed for a shorter period against inaccurately estimated increases.

SDNA.........

The purpose of a Subordination clause in a lease is to give priority to any other previous and future rights in the property. In other words, if the Landlord has a mortgage on the premises, or takes out a mortgage during the lease period, then the present lease would be subject to that mortgage. These clauses also typically include a non-disturbance section, which gives the Tenant the right to continue the lease so long as it meet certain standards. Subordination clauses determine 1. What other rights in the premises the lease is subordinate to. 2. The Tenant's obligations in any transfer in rights of the premises. 3. Both parties' rights to continue the lease agreement.

Component Cost Analysis

This cost analysis focuses on the minuscule fraction of building components that are critical to a user's perception of value. Of the 30,000 components that comprise a first-class, high-rise building, about 2,000 are used in an office build-out. Most of these are unseen, but they can be costly. Major systems like heating and ventilation, wiring, plumbing, and safety consume 30% of the build-out cost, or $200,000 for a 20,000 square foot office. Only 50 or so of these components are visible to the occupant, however, and 30 of those are cost drivers because they increase layout complexity or finishing quality (conference rooms that require specialized fixtures, for instance). The most intractable problems arise in about 20 components that provoke heated debates over function and taste, such as carpets, wallcoverings, glass panels, and wood trim. At Shearson, component cost analysis in 1991 revealed that office build-outs, finishes, and furnishings ranged from 75% to 300% above market standards for professional offices. When senior managers learned this, they imposed new unit cost standards to curtail high-cost but low-impact components.

Products / Completed Operations Aggregate Limit:

This is a special aggregate limit that applies to the product liability types of lawsuits that occur after the product or service has been sold. For example, a distributor sells a piece of sporting goods equipment that is defective and results in injury to a baseball player. Product liability is a critical coverage component.

Disadvantages of owning

Time Frame. Because of the transactional costs associated with the acquisition and disposition the property, these cost can offset or even eliminate the benefits of appreciation over a short-term hold. Inflexibility. Because the property is owned by the business (or a related party) any decision to relocate for business purposes may be more difficult, as a then vacant property would need to be relet or sold. This process can take months, or even years to accomplish. Capital Requirements. In most cases, commercial property requires a down payment of at least 20%, if not to 30 percent. This equity requirement consumes capital which could otherwise be invested in a user's underlying business. Management. Commercial property management issues are complex and cover areas such as legal compliance, health and safety issues, contractor management which can be both distracting and costly. Financing. The sources and availability of debt may be limited in times of economic recession or depression, and rising interest rates may make refinancing difficult or impossible. Debt Covenants & Restrictions. In most cases, commercial real estate loans require personal or corporate guarantees, along with some type of liquidity requirement (e.g minimum deposit balance with the lender). Alternatively, non-recourse fixed-rate financing often comes with other stipulations. One of the most common examples is having to pay yield maintenance or a break up fee, should the loan be retired early. Downside Risks. As with every investment, there are numerous risks related to ownership. These include the value of the property declining because of the economy or market, financing risks, and unanticipated expenditures for repairs and maintenance.

• Personal / Advertising Injury Limit:

Typical Personal Injury offenses that may be covered include certain types of slander, libel, false imprisonment, and invasion of property. Advertising Injury occurs when your business unintentionally disparages or makes a misstatement about a competitor in your advertising materials. In addition, certain types of intellectual property violations may be covered on a very limited basis

Special Form

Unlike Basic Form and Broad Form policies, which only cover specific perils, the ISO "Special Form" policy takes a different approach, covering losses from all causes unless they are specifically excluded. Most appropriately referred to as "Causes of Loss-Special Form" this is the standard property insurance landlords and tenants should expect. When a lease refers to "all risk" coverage, it is using an outdated term for this type of coverage. The specified exclusions from Special Form coverage are the following perils: Ordinance or Law Earth Movement Governmental Action Nuclear Hazard Utility Services War and Military Action Water (flood, surface water, waves, tides, mudslide or mudflow, sewer, drain or sump backup, underground water) Boiler and Machinery Failure Wear and Tear or Lack of Maintenance Continuous Seepage or Leakage Dishonest Acts Pollutants Faculty Design or Workmanship Many of these perils can be covered by supplemental policies, such as ordinance or law coverage (which covers extra costs incurred to meet current codes), earthquake, flood, boiler and machinery, and environmental insurance policies.

YEAR OVER BASE COMPOUNDED CAP

Unlike caps based on cumulative increases, which are always calculated as a percentage of the base year, caps based on compounded increases are calculated as a percentage of the prior year's cap. This difference causes the cap to rise slightly faster (allowing more expenses). The following language provides for a compounded increase: "The annual increase in expenses is limited to 5% of the prior year's capped amount on a compounded basis." Continuing with the prior example, if the cap is 5%, the first year's maximum is $105,000 (5% over the $100,000). Because this amount is now compounded, the next year's cap is 5% over the first year's 5%, resulting in a maximum expense amount of $110,250, which is 10.25% more than the initial $100,000 amount. Each subsequent year's cap is calculated as a percentage of its respective prior year's cap, making the caps in this example 15.7625% greater than the initial $100,000 amount, 21.551% greater than the initial amount, and so on. This results in slightly higher annual CAM expense limits than the cumulative caps, at $110,250 (as opposed to $110,000), $115,763 (as opposed to $115,000), $121,551 (as opposed to $120,000), and so on. Because a compounded cap rises at a slightly higher rate than a cumulative or simple cap, more expenses can be passed through to tenants. Of the four caps discussed, compounded year-over-base caps are the least restrictive and most favorable to landlords. The annual maximums are known to the parties; the compounding just allows for slightly higher increases.

Utilities

Water, sewer, gas, electric, light, heat, telephone

SDNA continued....

What other rights in the premises the lease is subordinate to. If the Landlord has a lease on the premises themselves or takes a mortgage out on the premises this clause gives them priority over the lease being signed. This allows the landlord to use the premises to take out loans and gives them more flexibility financially to use the premises as an asset. Tenant's obligations in any transfer in rights of the premises. If any mortgage is foreclosed on the premises and ownership is taken away from the Landlord, this clause preserves the new owner's rights as the Landlord in the lease agreement. It also requires the Tenant to recognize any new owners as the Landlord defined in the lease agreement. This helps prevent any premature attempts to terminate the lease due to a change in ownership. The point of this clause is to ensure that the lease agreement continues. Both parties' rights to continue the lease agreement. As discussed above these clauses typically include a non-disturbance clause, where the Tenant can continue on with the lease as long as they haven't defaulted at all on the lease. The Tenant also needs to recognize the new owners as the Landlord. This is typically known as Attornment. As long as these are met then the lease continues. Subordination clauses don't have to include a non-disturbance clause, but that would make getting the Tenant to sign the lease much more difficult, as without the clause the lease could be terminated with no wrong-doing by Tenant

Year-over-Year Compounded.

Year over-year compounded caps are unusual and are restrictive to landlords in a manner similar to year-over-year cumulative caps. They do, however, permit slightly larger pass-throughs. These caps allow the increase to compound each year, but such increase is applied to the prior year's expenses. Lease language would read: "The annual increase in expenses is limited to 5% of the prior year's expenses, calculated on a compounded basis." In the example, the 5% cap is compounded each year so that the 5% cap itself grows with inflation. Thus, the 5% that would apply in the first year grows to 5.25% the second year, 5.512% the third year, 5.788% the fourth, and so on. As with cumulative year-over-year caps, if expenses do not reach the cap, the next year's cap is calculated based on the actual expenses. This percentage, however, is always applied to the lower of the prior year's expenses or the capped amount. The philosophy behind these caps is unclear, other than to maximize the landlord's return. If the cap is intended to limit increases to a certain agreed percentage, it seems that the percentage itself should remain static.

YEAR OVER BASE CUMULATIVE CAP

Year-over-Base Cumulative. Year-over base cumulative caps are negotiated by those parties that want a known maximum expense exposure for each year of the lease term. Year-over-base cumulative caps limit expense increases to a fixed amount each year, determined as a percentage of the expenses at the beginning of the lease term. These caps are simple in that they are constant every year. They often read: "The annual increase in expenses is limited to 5% over the base year expenses on a cumulative basis." As an example, if the starting base amount is $100,000 and the cap is 5% per annum, the cap for year one is 5% of base year expenses. ($105,000) and later rises to 10% of base year expense ($110,000), to 15% of base year expenses ($115,000), to 20% of such expenses ($120,000), and so on. This cap is not affected by the actual expenses (unlike year-over-year caps, discussed below). For example, if the expenses in year two, when the cap is $105,000, drop to $90,000, year three's cap is unaffected and will still be $110,000. The landlord is not pressured to keep expenses down and has the latitude to permit them to increase by

continued

Yearover-year caps are different from yearover-base caps in that they are calculated by applying the cap percentage to the prior year's expenses, not to the original starting expenses and not to the prior year's cap. They are generally very simple in concept. Typical language would be: "The annual increase in expenses is limited to 5% of the prior year's expenses." If the expenses do not reach the cap, the next year's cap is the allowable percentage increase over the prior year's actual expenses. On the other hand, if the expenses exceed the cap and are limited to the capped amount, the subsequent increase is calculated over the lower capped amount. Returning to our example, if expenses during the initial year of the term are $100,000, the cap for year two becomes $105,000. If actual expenses for that year are only $102,000, the cap does not apply. Unlike the year-over-base compounded cap, the third year's cap becomes 5% over $102,000 ($107,100) as opposed to 5% over the second year's cap of $105,000 ($110,250). This type of calculation repeats each time the actual expenses fall below the cap. In each year in which the expense amount is less than the cap, the trajectory of the cap is affected for all future periods, because the cap is thereafter calculated based on the prior year's lower actual costs. Because they reduce allowable expenses to a lower trajectory for the balance of the lease term whenever actual expenses dip below the cap, year over-year caps are the most restrictive to landlords and the most favorable to tenants. Although for budgeting purposes the annual maximum is unknown, tenants may want to accept the uncertainty because over the lease term their total expense liability could be lower

Occupancy Costs https://hbr.org/1993/05/uncovering-your-hidden-occupancy-costs https://www.cpexecutive.com/post/the-art-of-abstracting-due-diligence-ownershipinvestment-and-management-through-accurate-lease-abstracting/

[Square Feet x Rate/SQFT] + Real Estate Overhead = Total Occupancy Costs Rentable SQFT x Gross Effective Rent/RSF = Gross Effective Rent + Total Overhead = Total Occupancy Cost Workspace (Individual/Team) + Support Space (Operations/Convenience) + Storage Space + Circulation = Usable SQFT + Core Factor = Rentable SQFT Base Rent (Building expenses, Property Taxes, Tenant Improvements Broker Fees) = Gross Rent/RSF - Concessions (Free Rent, Building Expenses, Moving Cost) = Gross Effective Rent/RSF Staff (Internal, Consultant Expenses) + Transactions (Attorney Expenses) + Amortized FFE + Insurance = Total Overhead

Insurance Links

http://site.jeffreyobrienesq.com/uploads/Insurance_Clauses_in_Commercial_Leases.pdf http://www.seyfarth.com/dir_docs/news_item/38109356-dcc6-4dd6-9dac-2c6d2a0a8e19_documentupload.pdf

Waiver of Subrogation....

http://www.investopedia.com/ask/answers/031615/waiver-subrogation-clause-better-tenant-or-landlord.asp BEST WOS LINK When someone is owed a debt, he generally has a right to use acceptable, legal measures to collect payment. Subrogation is a term which refers to the right of a creditor to allow someone else to acquire and collect a debt. A waiver of subrogation is a clause, usually in a contract, in which a person or company gives up the right to take legal action against someone to recover damages. A waiver of subrogation clause is often found in many real estate leases. This is a clause in which both tenant and landlord agree to not sue each other for claims which are covered by the building's insurance policy. The lease may also require both parties to purchase hazard insurance in which the insurance company signs a waiver giving up its rights to sue either party for claims caused by negligence. If this clause does not exist, then a tenant could find himself paying for damage caused by the negligence of his employees or agents. It is important, however, to make certain that such a provision in a lease does not violate any clause in the insurance policies. ----------------------------------------------------------------------- What that means is, if someone ELSE is responsible for the damage, you agree to not sue them for it.

Waiver of Subrogation

https://answers.yahoo.com/question/index?qid=20110217064936AAevs4f http://www.investopedia.com/ask/answers/033015/can-you-ask-your-landlord-remove-waiver-subrogation-clause-your-lease.asp Prior to asking the landlord to strike the clause, however, you should ask yourself why you want it to be removed. Essentially, a waiver of subrogation prevents an insurance company from trying to get restitution from a third party who causes a loss to the insured party. For example, in a rental agreement, the waiver might state that the landlord will not hold the tenant liable for any type of damage to the rental unit, and that, conversely, the tenant will not hold the landlord liable for any type of damage to personal possessions. Waivers of subrogation can be written in many different ways. Often, it is a mutual agreement intended to PROTECT both parties in case of a loss such as fire damage. It might be in your best interests to leave it in. However, some of them only protect one of the parties, often the landlord. You might not want to agree to that type of provision

natural breakpoint

you simply divide the base rent by the established percentage. In the above example, that would mean dividing $45,000 by 5%, which equals $900,000 in gross sales as the natural breakpoint. The logic behind the natural breakpoint is that a retailer should only pay the percentage rent on sales over and above what is required to pay the minimum rent. In other words, taking 5% of $900,000 in sales would equal the minimum rent payment of $45,000, so it makes sense that the percentage rent requirement would only kick in after this minimum rent breakpoint is achieved.

GROSS/FULL SERVICE

• Tenant not responsible for anything other than rent • Rent typically higher • Might include clause where tenant reimburse LL for things like Operating/Maintenance, RE Taxes, Electric for amounts in excess of the base year amount. This will show up as a "service charge" on a pro-forma.

Fire or Casualty Insurance (All Risk) There are two types of commercial property insurance. "Named perils" policies cover only those perils that are listed, and "all risk" policies which cover all perils except those which are specifically excluded. Common exclusions under an "all risk" property insurance policy include the following:

• War and nuclear; • Earth movement; • Water damage; flood, mudslide, seepage and sewer backup; • Governmental seizure or destruction of property; • Off-premises utility service interruption; • Building ordinance; • Delay, loss of use and loss of market; • Smoke, vapor or gas from agricultural or industrial operations; • Wear and tear; rust, corrosion, fungus, decay, deterioration, hidden or latent defect smog; settling, cracking, shrinking, or expansion; nesting, infestation or release of secretions by insects, birds, rodents or animals; • Mechanical breakdown; • Theft of building materials and supplies not yet attached to buildings; • Pollution; • Rain, snow, ice or sleet damage to personal property in the open; • Dampness, dryness, changes or extremes of temperature, and marring or scratching, all with respect to personal property only; • Boiler explosion; • Loss to steam and hot water equipment from any condition within the equipment; • Seepage or leakage of water over a period of 14 or more days; • Employee dishonesty; • Theft by trickery; voluntary parting with property and unauthorized transfer of property; • Weight of snow, ice or sleet on gutters and downspouts; • Damage to building interiors by rain, snow, sleet, ice, sand, or dust unless the roof or walls are first damaged - except damage by thawing of snow, ice or sleet; and • Missing property when the only evidence of loss is inventory shortage.

Use the Lease Subordination Agreement document if:

• You're a landlord leasing mortgaged property and you want to help ensure that a tenant can remain on the property even if you no longer own it. • You've rented mortgaged property and want to be protected if the landlord no longer owns the property. A Lease Subordination Agreement can help protect the interests of a tenant, so that if there is a transfer of ownership of the property, they can continue to pay the rent and accept the new owner as his or her new landlord. If you're a landlord, by using a Lease Subordination Agreement you can reassure potential tenants that they can stay in the property for the duration of their lease, so as to limit concerns over signing a lease with you. Lender knows it will have tenant paying Essentially, this clause states that the lease is subordinate to any existing or future mortgages on the property. Thus, if you default on your mortgage and the lender forecloses, the lender has the right to terminate the lease and evict the tenant, even if the tenant has fulfilled all of its responsibilities under the lease. From the lender's perspective, the desire for subordination clauses makes sense. It gives the lender the option, in the event of foreclosure, to eliminate tenants that are paying below-market rent or are otherwise undesirable. But these clauses can be damaging to a tenant's business. Most tenants make a substantial investment in their offices, retail space, manufacturing plants, or other commercial facilities. A subordination clause puts them at risk of losing their business location - which can be critical to their operations and customer relationships - through no fault of their own. In addition, they risk losing any investments in leasehold improvements. Nevertheless, many existing lenders will agree to grant non-disturbance protection to a subsequent tenant because they want the security of knowing that, upon foreclosure, they will have rent-paying tenants ready to attorn to them, thereby maintaining the property's income stream

Capital improvements include items such as

• new structures, • equipment, • or other improvements. Of the three types of capital expenditures, capital improvements are most ownership-like and therefore most likely to be objectionable to tenants. Tenants assert that they should not be at risk of landlords freely making such investments at the tenant's expense. Indeed, without strict controls on capital improvement expenditures (requiring prior tenant approval, for example), the tenant is exposed to significant risk controlled only by the landlord's discretion