Chapter 9 provided instruction on how to negotiate your lease. Various challenges associated with negotiating the lease were explored. Different types of leases were defined. The importance of holding the landlord accountable through penalties was addressed. A number of items that are recommended to have in your lease were addressed, including the provision of signage in the lease. The terms CAM and TIA were defined, as well as the estopple. We then discussed issues related to your local government. The negotiability of the lease was discussed, and how to manage dispute resolutions. We addressed the importance of reading all documents, particularly the one’s you sign. Finally, we explored methods for approaching a negotiation. The following exercises will help reinforce the concepts presented in the textbook.
Key Terms
TIA - Tenant Improvement Allowance
In a commercial lease negotiation, a TIA is an agreement from the landlord to compensate the tenant for all or a portion of the funds required to construct or renovate the commercial space to be leased.
CAMs: Common Area Maintenance charges
one of the net charges billed to tenants in a commercial triple net (NNN) lease, and are paid by tenants to the landlord of a commercial property. CAMs cover miscellaneous expenses such as trash removal, building maintenance, and landscaping, among other expenses.
Single Net Lease
a form of pass through lease in which taxes associated with the property become the responsibility of the tenant instead of the landlord. The landlord is responsible for the other operating expenses involved with running the property.
Double Net Lease
A lease agreement in which the tenant is responsible for both property taxes and premiums for insuring the building. Unlike a single net lease, which only requires the tenant to pay property taxes, a double net lease passes more expenses along in the form of insurance payments.
Triple Net Lease (aka NNN)
A lease agreement on a property whereby the tenant or lessee promises to pay all the expenses of the property including real estate taxes, building insurance, and maintenance.
Modified Net Lease
A compromise between the gross lease and the triple net. The landlord and tenant usually set up a split of maintenance expenses, while the tenant agrees to pay taxes and insurance. Utilities would likely also be negotiated in the modified net lease.
Percentage Lease
A type of lease where the tenant pays a base rent plus a percentage of any revenue earned while doing business on the rental
premises. It is a term used in commercial real estate.
Escalations
allowable increases in rent due to inflation and taxes.
Litigation
The act, process, or practice of settling a dispute through a court of law
Arbitration
A private process where disputing parties agree that one or
several individuals can make a decision about the dispute after receiving
evidence and hearing arguments. Arbitration is different from mediation
because the neutral arbitrator has the authority to make a judgment about
the dispute.
Mediation
A process wherein the parties meet with a mutually selected
impartial and neutral person who assists them in the negotiation of their
differences.
CAMs cap
A cap on CAM charges limits the amount by which CAM charges can rise each year, and are presented as a percentage. Again, as with the CAM charges themselves, caps are also negotiated between the tenant and landlord, and thus vary from lease to lease.
CAMs floor
A minimum increase budgeted into the CAM charges, with the expectation that it will lessen a more significant increase in the future.
CAMs recoveries
(aka CAM Recovery Lifecycle) – refer to the shared
expenses that a landlord passes on to its tenants, and subsequently recovers by generating an invoice to the tenant for their pro-rata share. Recoveries are also referred to as outgoings or Common Area Maintenance (CAM)
charges. These shared expenses can include utilities, services, repairs,
maintenance, property taxes, insurance and other additional expenses. The recovered CAM expenses are agreed upon in the lease for circumstances
involving lease termination or early lease dismissal.
Estoppel
The principle, which precludes a person from asserting something contrary to what is implied by a previous action or statement of that person or by a previous pertinent judicial determination.
Expected Outcomes
Understand the importance of negotiating the lease and the challenges that come with it.
Know the different lease types
Recognize the importance of imposing penalties to the landlord for not having commitments met
Recognize the importance of signage in the lease
Understand CAMs
Understand TIAs
Understand estopples
Know issues related to your local government
Understand the negotiability of the lease
Know the different types of dispute resolution
Understand the importance of reading all documents
Recognize the importance of how you approach negotiations
Key Concepts
Everyone’s nice until something goes wrong. The lease is the only document that protects you from unforeseen problems.
The main types of leases include single, double, triple, and modified net leases.
Escalations are allowable increases in rent due to inflation and taxes.
The business world is unscrupulous, be on guard.
Ensure there are numerous provisions in the lease for contractors,right of first refusal, subleasing, co-tenancy, HVAC responsibility, municipality regulation responsibility, renewal, termination, and penalties, parking, and security, among other things.
Be clear on who is responsible for signage and what signage is allowed.
The CAMs are known as Common Area Maintenance charges. These are monthly charges in addition to the base rent. Be clear on what services are included in the CAMs
The TIA, or Tenant Improvement Allowance, is the amount a landlord is willing to spend so that the tenant can retrofit or renovate the office space. Be clear on what renovations are needed, then consider what renovations you would also like to have.
The estoppel is a judicial device in common law legal systems whereby a court may prevent, or “estop” a person from making assertions or from going back on his or her word.
Be sure any renovations are in compliance with local government.Secure permits where needed.
Be aware of the reputation you build within the community.
Everything is negotiable. Being prepared for negotiations and being willing to compromise will make for a more effective process.
Types of dispute are litigation, arbitration, and mediation.
Read all documents carefully. Be aware of what you are signing.
Have the right attitude during negotiations.Assertiveness and a command presence will prevent you from being manipulated or dismissed as intractable.
Chapter Slogans
Everyone’s nice until something goes wrong.
Know what you don’t know; anticipate what you can’t anticipate.
People are horrible.
Read everything!
THINGS TO CONSIDER
The landlord is going to try to lease to someone who is more pliable and complicit. You want to fight for yourself, but if you are too aggressive or make unreasonable demands, the landlord will just find someone else. Life is balance. Be mindful of that when entering into negotiations.
Consider what you feel the office space needs to meet a standard for yourself and make a professional impression on your customers.Determine if they improve the value of the building. You can consult your broker to help confirm if this is true. Then estimate how much you would need to make those renovations or improvements. If there are any objections as to whether the changes improve the value of the building or not, the landlord will make it at the lease negotiations.
When deciding on renovations and improvements, always ask yourself, does this need to get done, or do I want it to get done?
POUND THE PAVEMENT
1. Have your general contractor come and see the space with you and give you an estimate. Most landlords will want some documentation that shows the estimated cost of renovation. This is less for the landlord him/herself as it will be something the landlord will need to provide to the bank. Also, the contractor can give you a better sense of whether something is worth the cost and effort to renovate. Renovating some flooring that has a crack in it for $20,000 may not be worth it if you can just cover it with an area rug or a piece of furniture. 2. Speak with other business tenants and ask about their experiences when they signed their leases, and what they wished they would have done differently and have had included in the lease.
