crc section three 9 9-14
TRANSCRIPT
![Page 1: Crc section three 9 9-14](https://reader033.vdocuments.us/reader033/viewer/2022051520/58f0747c1a28ab8a048b45f1/html5/thumbnails/1.jpg)
Commercial Real Estate
Section ThreeLeases
![Page 2: Crc section three 9 9-14](https://reader033.vdocuments.us/reader033/viewer/2022051520/58f0747c1a28ab8a048b45f1/html5/thumbnails/2.jpg)
1. Parties to the Lease
a. Lessor – Landlord or building owner
b. Lessee – Tenant
c. Lessor and lessee want each other to be healthy
![Page 3: Crc section three 9 9-14](https://reader033.vdocuments.us/reader033/viewer/2022051520/58f0747c1a28ab8a048b45f1/html5/thumbnails/3.jpg)
2. Why lease – why not own?
a. Flexibility – tenant may outgrow
b. Capital restraints – it costs money
c. Business focus – it is complicated to build
![Page 4: Crc section three 9 9-14](https://reader033.vdocuments.us/reader033/viewer/2022051520/58f0747c1a28ab8a048b45f1/html5/thumbnails/4.jpg)
3. Types of Leasesa. Full Service Gross Lease/ Full Service Lease – Tenant
pays only a lump sum rent. Landlord pays everything (tax, insurance, utilities, maintenance) – i.e. Executive Suites (exceptions can be phones/janitorial).
b. Modified Gross Lease – Tenant pays their utilities and janitorial but no taxes, insurance, or common area expenses.
c. Industrial Gross – Tenant pays own utilities, janitorial, and common area (maybe not common area maintenance). Landlord pays taxes and insurance.
![Page 5: Crc section three 9 9-14](https://reader033.vdocuments.us/reader033/viewer/2022051520/58f0747c1a28ab8a048b45f1/html5/thumbnails/5.jpg)
3. Types of Leasesd. Net Leases
“N” - Tenant pays their own utilities and some maintenance (usually inside the unit). Landlord pays everything else
“NN” – Tenants pays utilities, taxes and insurance and some maintenance (landlord often pays “roof” and “structure” - “structure “ can include pipes and wires to/from building). Some NN landlords pay all common area expenses.
“NNN” – Tenant pays everything – with a few legal defenses: If building is destroyed by fire, taken in eminent domain proceeding in which case tenant may not be obliged to pay.
“TRUE NNN – BOND Lease” – Tenant responsible for everything no matter what (often tenant holds a ground lease). Building burns down tenant still has to pay.
![Page 6: Crc section three 9 9-14](https://reader033.vdocuments.us/reader033/viewer/2022051520/58f0747c1a28ab8a048b45f1/html5/thumbnails/6.jpg)
3. Types of Leasese. Hybrid Lease – A little of everything
f. Ground Lease – Only the dirt!
Real, true NNN (Bond Lease)
Tenant usually gets the depreciation!
Be careful! Be sure you understand if the site is a Ground Lease
(ask if it is “fee simple”)
g. Build-to-Suit – usually vacant land, but can be a building
CAPRE
6
![Page 7: Crc section three 9 9-14](https://reader033.vdocuments.us/reader033/viewer/2022051520/58f0747c1a28ab8a048b45f1/html5/thumbnails/7.jpg)
4. Lease Clausesa. Rents - Usually quoted in $ / square foot /
year
b. Percentage Clause – All or part of rent based on percentage of tenant’s business.
Usually includes a fixed minimum rent plus a percentage of tenant’s sales
Often there are thresholds
Can be in any type of lease (NN, NNN, etc.)
![Page 8: Crc section three 9 9-14](https://reader033.vdocuments.us/reader033/viewer/2022051520/58f0747c1a28ab8a048b45f1/html5/thumbnails/8.jpg)
4. Lease Clauses
c. CAM Fees – “Common Area Maintenance”
▫ Usually for maintenance and utilities for common areas. May include “management” and/or advertising
▫How is it computed?
▫Estimate paid monthly – adjusted annually
![Page 9: Crc section three 9 9-14](https://reader033.vdocuments.us/reader033/viewer/2022051520/58f0747c1a28ab8a048b45f1/html5/thumbnails/9.jpg)
4. Lease Clausesd. Lease Increases
Base Year – Usually (not always) beginning year of lease. All things measured from this year
CPI – Which index?
Fixed Rate Increase – flat % or dollar amount
Market Value – often for option periods
Computed yearly or “blocks” of years
Leases are said to be “Flat” if there are no rent increases
![Page 10: Crc section three 9 9-14](https://reader033.vdocuments.us/reader033/viewer/2022051520/58f0747c1a28ab8a048b45f1/html5/thumbnails/10.jpg)
4. Lease Clausese. Insurance
Casualty (fire or flood)
Building structure
Contents (almost always tenant’s responsibility)
Terrorism? Tornado? Earthquake?
Tell client to talk to their commercial insurance advisor and/or legal counsel. Don’t try to interpret insurance policies!
![Page 11: Crc section three 9 9-14](https://reader033.vdocuments.us/reader033/viewer/2022051520/58f0747c1a28ab8a048b45f1/html5/thumbnails/11.jpg)
4. Lease Clausese. Insurance
Liability – Usually both landlord and tenant carry (recommend it!).
• “Umbrella” can be added to some Homeowner’s policies
“Self” insurance – big companies
What happens if there’s major damage to the building?
• Can buy “rent” insurance – some lenders require it
![Page 12: Crc section three 9 9-14](https://reader033.vdocuments.us/reader033/viewer/2022051520/58f0747c1a28ab8a048b45f1/html5/thumbnails/12.jpg)
4. Lease Clausesf. Tenant Improvements (“TI”)
Initial - often paid by landlord and amortized into the lease (consider the “present value” of money)
Subsequent - requires landlords consent
Lenders often require reserves (escrow account) for TI – especially if lease terms are less than the mortgage term
![Page 13: Crc section three 9 9-14](https://reader033.vdocuments.us/reader033/viewer/2022051520/58f0747c1a28ab8a048b45f1/html5/thumbnails/13.jpg)
4. Lease Clausesg. Repairs and Maintenance
Inside the suite
Outside the suite
Common areas
Can be landlord for first year then tenant (new buildings)
h. Term – Usually 1 to 10 years. Longer if Landlord did TIs
99 years is the limit
![Page 14: Crc section three 9 9-14](https://reader033.vdocuments.us/reader033/viewer/2022051520/58f0747c1a28ab8a048b45f1/html5/thumbnails/14.jpg)
4. Lease Clausesi. Options to Renew
Options are almost always a benefit to the tenant
Rents usually increase during option periods
j. Restrictions on use by tenant / sublessees
▫
![Page 15: Crc section three 9 9-14](https://reader033.vdocuments.us/reader033/viewer/2022051520/58f0747c1a28ab8a048b45f1/html5/thumbnails/15.jpg)
4. Lease Clausesk. Restriction on Landlord
Cannot lease to competing business
Cannot build competing center within xx miles
l. Taxes and Insurance increases
Even in a NNN lease the Tenant may not be responsible for an increase in taxes that result from the sale of the property (Prop 13)
There may be a limit on the times it can increase as the result of a sale of the property
May be capped to not increase more than X% in a given year
![Page 16: Crc section three 9 9-14](https://reader033.vdocuments.us/reader033/viewer/2022051520/58f0747c1a28ab8a048b45f1/html5/thumbnails/16.jpg)
4. Lease Clausesm. Landlord’s right to enter the property
May need access for appraisals, work to complete Phase III etc.
n.Sublease Rights - Usually restricted
Does 1st tenant stay liable?
![Page 17: Crc section three 9 9-14](https://reader033.vdocuments.us/reader033/viewer/2022051520/58f0747c1a28ab8a048b45f1/html5/thumbnails/17.jpg)
4. Lease Clauseso. “Exit” Provisions – Tenant may cancel/reduce rent or
CAM if something happens:
The tenant’s business performance does not meet thresholds (not enough sales) in a given period of time
Other tenants (anchor) leave
Business becomes illegal (check cashing companies)
![Page 18: Crc section three 9 9-14](https://reader033.vdocuments.us/reader033/viewer/2022051520/58f0747c1a28ab8a048b45f1/html5/thumbnails/18.jpg)
4. Lease Clausesp. Estoppels / Subordination and Attornment (SNDA)
I will respect your interests if you respect mine
Required by almost all lenders
Form is often part of the lease (better to say “per lender”)
Can be a big issue for some lenders and some tenants
Can take 30+ days to get. May be limits on how many per year.
May be a fee (who pays?)
![Page 19: Crc section three 9 9-14](https://reader033.vdocuments.us/reader033/viewer/2022051520/58f0747c1a28ab8a048b45f1/html5/thumbnails/19.jpg)
4. Lease Clausesq. Environmental Guarantees – Bigger tenants demand
them
r. Right of First Refusal – They can buy if an offer is received – they must act in a certain time.
What if the price is reduced later?
![Page 20: Crc section three 9 9-14](https://reader033.vdocuments.us/reader033/viewer/2022051520/58f0747c1a28ab8a048b45f1/html5/thumbnails/20.jpg)
4. Lease Clausess. Inclusions to Leases
REA – Reciprocal Easement Agreement
Phase I and/or Phase II – So tenant is aware of any problem
Title Reports / ALTA Survey
Site Plans
Building Construction Plans – at least descriptions
Certificate of Occupancy
![Page 21: Crc section three 9 9-14](https://reader033.vdocuments.us/reader033/viewer/2022051520/58f0747c1a28ab8a048b45f1/html5/thumbnails/21.jpg)
4. Lease Clausess. Inclusions to Leases
• Certificate of Delivery Date
• “Statement of Lease” – which may be recorded (lease is usually not recorded)
• “Statement of Acceptance” – commencement date (new construction). Sets date rent begins. (Often hard to find)
t. Amendment(s) to Lease – often includes “Statement of Acceptance” or any of the above inclusions to lease.
Watch for referenced amendments in the Estoppel – do you have those amendments?
![Page 22: Crc section three 9 9-14](https://reader033.vdocuments.us/reader033/viewer/2022051520/58f0747c1a28ab8a048b45f1/html5/thumbnails/22.jpg)
4. Lease Clausesu. Lease Forms
CAR – not too good
AIR – Better – you can edit it
Attorney Written – Most common
Big tenants write their own
Little tenants get stuck with landlords version