Industry Terms

Some leases specifically grant tenants the right to review the landlord’s accounting records to ensure that the charges billed are correct. Errors are commonplace. Statistics show that close to 90% of tenants receive an invoice with a mistake on it. Sometimes those errors are caught, but many times they are not. This provides you the ability to take a second look at what you are being billed for.

As you approach your negotiations of this clause focus on the following:

• Extending the timeline you have to protest the bills, both in terms of when following the Landlord’s annual reconciliation your protest must be filed AND in terms of how many previous years financials may be reviewed during an audit.
• Allowing whomever you deem necessary to do this work. Many times landlords will craft language to prevent anyone with a “contingency” contract to perform the work. So long as the landlord isn’t paying the bill it shouldn’t matter how your auditor is paid.

An estimate of property value derived by a commercial real estate agent. Generally, these estimates are based on recent sales, pending sales or investment activity.

• When to order a BOV: Making decision to buy/sell property, lease another property
• Price: free to a few thousand dollars
• Time: 1-4 weeks
• Receivable: 3-15 page document, typically includes comments on the market, summary and analysis of the existing property’s position in the market, comparable sales and an estimate of value

This is a fitting transaction for organizations with the following profile:

• Other alternatives to lease/purchase do not exist
• Construction based on operational issues can create efficiencies
• The building will reduce occupancy costs
• Improve operational productivity

Right of First Refusal (ROFR) –

This is a contractual right that gives its holder the option to enter a business transaction with the landlord, according to specified terms, before the owner is entitled to enter into that transaction with a third party. This is especially useful for any contiguous space. This allows the tenant to have the option to expand at favorable terms if the business is doing well.

There are several variations of the ROFR. It is rarely part of the landlord’s boilerplate lease so it is up to the tenant or its’ broker to make sure this is part of the negotiations. Your attorney can help you craft the perfect language for this option.

Right of First Offer (ROFO) –

Rights of First Offer are pro-tenant expansion rights which obligate the landlord to notify the tenant possessing such rights (i.e., the ROFO tenant) that it desires to lease space subject to the ROFO. Although the landlord may or may not have a specific tenant in mind for the space, a ROFO usually requires the landlord to makes a proposal covering the business terms of a proposed lease for the applicable space. These are especially useful with contiguous space the becomes available during the term of your lease.

If the ROFO tenant does not elect to lease the space on the terms offered by the landlord in its notice, the landlord is normally free to try to lease such space to any third party, provided it does so based upon the terms in its notice. In many cases, the landlord must make a deal for the space involved within a certain period of time, or the ROFO will “revive” requiring the landlord to offer the space to the ROFO tenant anew before making a third party deal.

Guarantees, in their many forms, essentially help provide the landlord with an additional level of comfort that the contract will be fulfilled in the event that tenant is not able to make timely payments per its contractual obligations. Remember that you are entering into a financial transaction that may not make the land lord whole until well over half way through your term. So if you feel like there is some hesitation on the part of the owner that is why.

Do your part to make them comfortable with their investment. Start by knowing this: the minute you begin talking about Security Deposit you should also be having a conversation about your company’s financial statements, a declining Letter of Credit, a (Personal) Guarantee and the concessions package. All of these are part of the conversation about financial guarantees.

This is a tricky boilerplate provision that weighs heavy on the Tenant and can be extremely burdensome down the road. The Holdover Clause describes the rent the tenant will pay after the lease expires. Most boilerplate leases have a holdover penalty on 200% of the gross rent if the tenant stays beyond the original term. Couple of ideas, shrink the penalty to 150% or make it apply to only the Net Rent. Alternatively, propose a 3-6 months extension at the current rate with 6 months notice.

This is a fitting transaction for organizations with the following profile:

• Little to no up-front capital
• Need flexibility
• Want little to no management responsibilities
• Lease might be the only option to get into the type of space your business requires (40th floor of a central Business District, for example)
• Capital is made available to invest in business

This clause is critical. Without it, neither the landlord nor the tenant would have; any obligation to maintain or repair the premises during the term of the lease. In order to avoid misunderstandings and potential lawsuits make sure that the landlord’s responsibilities are clearly spelled out.

In multi-tenant buildings the landlord is typically responsible for maintain and repairing the property, the building and the common areas. For example, one provision may state that the landlord shall replace all bulbs and tubes in building standard light fixtures. Another clause would address maintenance and repair of big ticket items like HVAC units and chillers.

This clause gives a tenant the right to extend the term of the lease usually for a stated period of time and at a rent amount provided for in the lease. Typically, the tenant has to give 6-12 months notice to landlord to exercise this option. Negotiating a fixed price renewal eliminates the need to enter into a long negotiations – and it makes it easier to know if you are “in the money” or not. A landlord’s typically position will be to offer a renewal at market rates. The “market rate” renewal is best seen as an insurance policy. In the event, no other space is available in town – you’d have the ability to renew in your space. If you have to go with “market rate” think about adding some language to include market rate concessions (i.e. tenant improvement packages, free rent concessions & brokerage fees).

For privately held firms with common ownership amongst the business and real estate entities ownership can provide tax advantages.

For publicly held firms acquisitions are usually strategic in nature or support a unique long-term capital investment in the real estate; such as, clean room or manufacturing.

Generally, we recommend acquisitions to firms with the following characteristics:

• Steady business
• Good access to capital
• Return on investment in real estate is the same or better than investment in business

A landlord may offer a tenant rent concessions, in order to secure their tenancy. While rental abatement is one form of a concession, there are many others such as increased tenant improvement allowance, signage, lower market rental rates and moving allowances. What is “fair” to ask for depends on your market. If you have hired a broker they are the best source of information. A local broker should have “market comps” at their fingertips and be able to send you them.

In some markets, it is fairly common to see one or more months of free rent for every year of term leased. Another rent concession is smaller rent bumps. For years they were $0.50/year. In recent months we have seen more $0.25/year bumps or flat rates of 2% and 3% annual increases. We anticipate rates will fall but they generally lag the bad economic news by 12 to 18 months. We are still waiting for further rent face rate concessions.

Remember that part of “negotiations” or getting the best deal is vetting the options. In a market like we have today the landlord profile makes a huge difference. In little time, through the RFP process and after a round or two of negotiations. you will know who has the ability to make a deal and who does not. Depending on how many layers of approvals are needed, how much debt is layered on the property, part of your ability to get a great deal will be simply selecting the right landlord. Do not waste your breath explaining what the market is, make a deal with the landlord that has the ability and appetite to make a “market” deal.

This is a structured finance transaction that involves two transactions that happen simultaneously. Typically, it involves the owner occupant of the real estate selling the property to an investor and then leasing the space from the investor.

The sale price is based on a number of factors including: rental rate, tenant’s credit rating, length of lease, capitalization on rates, availability of funds and other lease terms.

This is a popular transaction when the business is performing extremely well and cash is needed to reinvest in the business. A sale leaseback can be helpful with the following:

• Maximize the sale price
• Eliminating debt from balance sheet (pre-FASB lease accounting changes)
• Possibly shifting management responsibilities
• Reducing occupancy costs
• Reducing exposure to market fluctuations

This is a fitting transaction for organizations with the following profile:

• Startup business
• Location does not matter
• Economics are a major concern
• Need furniture and phone system
• The “glove” either fits or it does not
• Depending on the size of the space they are often available on short term basis

This is the name given to an arrangement in which the tenant assigns the rights within its’ lease to a third party.

Subleasing is a challenging process, made more complicated by restrictive lease language. Make sure you maximize your organization’s ability to get out from a lease liability by eliminating or at least minimizing your landlord’s ability to block the transaction.

When negotiating sublease rights focus on:

1. Minimizing Landlord’s Time to Approve: Typically a tenant is required to notify the landlord in writing, asking for prior approval of a sublease or an assignment. At a minimum you should add language that reduces Landlord’s approval time.
2. Minimizing Landlord’s Abilities to Veto your Transaction: The most common reason a landlord vetoes a sublease is they do not like the subtenant’s finances or Find ways to minimize their ability to reject the sublease and have it in writing.
3. Extending the Subtenant the Same Rights: Additionally, you want to make sure that any options and rights that you have, including rights to expand, renew and extend are able to be transferred to the Landlords like to restrict those rights as pertaining only to the original tenant. Failure to clarify the transfer rights can significantly reduce the value of the sublease.

Improvements made to the leased premises by or for a Tenant. Generally, part of the negotiation will include the improvements to be made in the leased premises by the landlord. The Tenant Improvement Allowance (Tl Allowance or TIA) defines the fixed amount of money contributed by the landlord toward tenant improvements. The tenant and landlord negotiate who pays for any costs that exceed the TIA.

Tenant Improvements could be considered a concession. Generally they are far and away the largest concession. Here are some things to consider or keep in mind when negotiating the Tl package.

Do your homework. Get a space plan. Price the plan and negotiate from there. Negotiate the ability to use a percentage of the allowance for “other” things. Generally, a Landlord is willing to give you some money for moving, cabling and set up but often times it does not specify that it can be used for a construction manager or project manager. Unless you have staff, make sure that you have at least negotiated the flexibility to fund an outside staff person to coordinate the move, the drawings and the construction process and timeline, if necessary.

Finally, negotiate the ability to get a credit for any unused allowance or negotiate the ability to use the total package for an extended period of time. For instance, you might propose that up to 25% of the allowance may be used up to three years following the lease commencement date.

This is an extremely powerful option – perhaps the most powerful. Whether the company is growing extremely fast, contracting, or simply needs the ability to restructure their lease, a termination option is a must.

A typical termination clause will allow you to cancel the lease with 6 to 18 months written notice and provide a payment for the unamortized transaction costs. These costs include tenant improvement allowances, project management fees, legal fees, free rent and brokerage commissions. The tenant’s objective in this discussion is to reduce the amount of notice required and to reduce the potential penalty fees.

When negotiating a termination option remember that the first priority is simply to have this option The penalty payment is really a distant second because although it may seem like a large number, when it is compared to the next best option (paying rent for the remainder of the term or subleasing) it often presents a compelling business argument. If your firm is fortunate enough to have to exercise the option to accommodate its’ growth often times the penalty can be off-set by concessions in the next deal.