Business & Investment

Beware of hidden economic issues in commercial leasing

Steve to Hill

Certain economic aspects of commercial leasing are often ignored in intent letters and help both landlords and tenants reduce transaction costs and accelerate the contract negotiation process.

Many landlords and tenants engage in commercial rental transactions based on mutual understanding limited to the most basic economic aspects of the transaction: lease term, base rent, general pass-through of operating costs, and landlords. Amount to be funded Tenant improvement allowance and / or other monetary concessions.

Address certain standard risks and costs that may arise during the lease term (although they are often “hidden” conditions in relation to a basic understanding of the parties’ financial terms). By including them in the preliminary lease discussion, both landlord tenants can limit the risk of not considering them in the initial agreement.

Here are some of the “hidden” economic issues that commercial leasing parties need to consider and analyze:— —Along with its basic economic terms— —To avoid surprises during the lease.

Hidden economic problems in leasing form

Parties to commercial leasing transactions often use relatively standard leasing forms, such as those created by AIR CRE (formerly AIR Commercial Real Estate Association). These forms are updated regularly and generally provide a good starting point for the lease review and negotiation process, but these forms should be considered along with the basic financial terms of the statement of intent. I have a problem.

For example, one of the key issues that parties should consider is the allocation of costs to maintain a building or building in accordance with existing legislation. The AIR form provides the landlord’s warranty and agreement to correct the breach within a specified period of time, but the standard warranty pertains only to the landlord’s knowledge of the breach at the time of lease execution.

Therefore, if the landlord does not have knowledge of existing compliance issues at the time the lease is executed, the form lease bears the cost of modifying the state of the tenant.

Landlord concerns

Identifying all the “hidden” risks that landlords consider is beyond the scope of this article, but one good example of how to avoid such “hidden” risks is when real estate costs go to tenants. The range to be passed. ..

From the landlord’s point of view, operating cost ambiguity has a basic level of protection and is defined as “including, but not limited to,” a broad list of cost items. However, the parties basically agree on an economic understanding of how to allocate certain items, such as capital improvements, additions, and exchanges, between the parties, or which costs to exclude from the pass-through of operating costs. If not, the basic economic terms of their statement of intent are incorrect.

Revision of these basic economic terms during contract negotiations is far more costly and time consuming than documenting a correct understanding of the parties’ expectations in a letter of intent.

Tenant concerns

Allocation of operating expenses is equally important to tenants as a “hidden” risk addressed as part of the basic economic conditions of a commercial rental transaction.

For example, passing property taxes to tenants may seem indisputable, but tenants for the additional cost of increased valuation based on a “split roll” of commercial real estate or a change of ownership. Responsibility is out of the control of the tenant and it is often very controversial to realize that there is no benefit from incurring the additional cost of a tax increase.

Another important issue for tenants is related to the landlord’s agreement to provide tenant improvement allowances to build space.

Important issues to consider as part of the parties’ financial understanding of the correct amount of money the landlord will fund— —That’s exactly what constitutes a basic building and system that needs to be improved with a margin to solidify tenant expectations for building construction costs. Otherwise, a significant portion of the allowance dollar may be spent on what the tenant considers to be an improvement on an existing building.

Similarly, as mentioned earlier, the value of landlord’s allowance can be significantly reduced by the “hidden” risk of tenant costs, such as fixing code violations and complying with access requirements under the Americans with Disabilities Act. ..

The ultimate goal of the landlord and tenant in the commercial lease negotiations and final decision is to understand and fairly distribute the risks between the parties, and to allocate these risks to either the landlord or the tenant in an unexpected and significant economic allocation. Is to avoid the possibility of doing.

Steve Toohill is a partner Solomon Ward Seidenwurm & Smith LLP..

Beware of hidden economic issues in commercial leasing Beware of hidden economic issues in commercial leasing

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