Commercial Leases: Due Diligence Considerations Best Practices for - - PowerPoint PPT Presentation

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Commercial Leases: Due Diligence Considerations Best Practices for - - PowerPoint PPT Presentation

May 13, 2023 576 likes •1.02k views

Presenting a live 90-minute webinar with interactive Q&A Commercial Leases: Due Diligence Considerations Best Practices for Landlords and Tenants to Identify and Mitigate Risks THURSDAY, FEBRUARY 9, 2012 1pm Eastern | 12pm Central |

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Commercial Leases: Due Diligence Considerations

Best Practices for Landlords and Tenants to Identify and Mitigate Risks

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

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THURSDAY, FEBRUARY 9, 2012

Presenting a live 90-minute webinar with interactive Q&A

Yolanda Rodriguez,General Counsel, O'Neill Properties Group, King of Prussia, Pa. David S. Houston, Partner, Pillsbury Winthrop Shaw Pittman, McLean, Va. Mario J. Suarez, Partner, Thompson Hine, New York

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Yolanda Rodriguez, Esq. O’Neill Properties Group, L.P. (610) 992-5885 yrodriguez@oneillproperties.com

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Key Market Factors in Lease Negotiations

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February 9, 2012

Pillsbury Winthrop Shaw Pittman LLP

Retail Leases:

Due Diligence Considerations for Landlords & Tenants

David S. Houston 703.770.7544 David.Houston@pillsburylaw.com

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23 | Retail Leases – Due Diligence

Introduction

Deals and parties come in all shapes and sizes. The likelihood of a long-term, profitable landlord-tenant relationship will improve if both parties perform appropriate due diligence before the lease is signed.

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24 | Retail Leases – Due Diligence

Retail vs. Other Leases

There are 4 key factors that distinguish retail leases from other types

  • f commercial leases:

1. The importance to both landlord and tenant of the particular use made by tenant of the leased space 2. The fact that a portion of the rent is usually based upon the tenant’s sales at the premises 3. Most retailing takes place in integrated shopping centers and other types of projects containing substantial common areas and a broad mix of tenants 4. The seasonal nature of retailing

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25 | Retail Leases – Due Diligence

What the Landlord Should Assess Before Marketing the Property and the Premises

  • Market Conditions – Bargaining Position

Demand

Vacancy rate

Income stream

  • Property Condition

Occupancy status

Suitability for a particular use

Utilities and systems review – cost to upgrade

  • Legal Restrictions

Zoning – use, parking, drive-through, signage

Other laws and regulations – alcohol, smoking, accessibility

Title – restrictive covenants, easements

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26 | Retail Leases – Due Diligence

What the Landlord Should Assess Before Marketing the Property and the Premises (cont’d)

  • Existing Leases and Agreements

Exclusives

Prohibited uses

No build areas

  • Impact on the Property

Tenant mix

Parking

Noise, odors, garbage

Environmental

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27 | Retail Leases – Due Diligence

Tenant’s Assessment of the Building or Center

  • Location, Location, Location

Access

Visibility

Parking and loading

Demographics – customers

Labor supply – employees

Safety

  • Tenant Mix

Compatible

Competitive

  • Zoning and Governmental Regulations – use, signage, permitting, expansion

rights

  • Existing Restrictions – covenants, restrictions, exclusives, protected areas

and other site plan issues

  • Title Status – ground lessors, loans, liens, other encumbrances
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28 | Retail Leases – Due Diligence

Tenant’s Assessment Cont’d: Suitability of the Space

  • Current Occupancy Status – timely delivery of possession
  • Size Adequate for the Use – too small, too large, measurement,

possibility to expand or contract

  • Physical Constraints – shape, ceiling height, structural elements,

utility capacity, access

  • Physical Condition – request reports

What needs to be done and at what cost

Existing conditions – soil, hazardous materials, roof, HVAC systems

  • Availability of Utilities
  • History of Increases in CAM and Other Charges
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29 | Retail Leases – Due Diligence

How the Landlord Can Improve the Odds of Choosing the Right Tenant

  • Identify the Tenant Entity

Entity formed

In good standing

Authorized to enter into the lease

  • Financial Statements or Other Information About the Tenant

Credit check

Ability to build out the space – loan, allowance, performance bond, etc.

Ability to operate the business

Ability to pay rent

Franchisee – franchisor’s qualifications

Guarantor availability

Security deposit

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30 | Retail Leases – Due Diligence

How the Landlord Can Improve the Odds of Choosing the Right Tenant (cont’d)

  • Business Plan

Proven concept or fad

Financing in place

Management structure

Promotion and marketing details

  • Business Experience

Number of stores

Success at other locations

Franchisee operation

Training

  • Other Background Analysis

UCC search – secured collateral claims

SEC filings

Court indices – litigation

Patriot Act/OFAC

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31 | Retail Leases – Due Diligence

Tenant: The Premises Are Perfect, But What About the Landlord?

  • Background Research of the Landlord

reputation in the community and industry

length of ownership

publicly traded

  • ther properties

litigation history

  • Future Expansion or Redevelopment Plans
  • Historical Details - are they good managers
  • Lease Approval Process – additional consents required
  • Landlord’s Title – liens and lenders
  • SNDA
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32 | Retail Leases – Due Diligence

When All Else Fails… Lease Provisions to Mitigate Risk

  • Exclusive Use Protections and Prohibition of Certain Uses

Competitors

Incompatible uses

Parking intensive uses

  • Co-tenancy Protections – named tenants, percentage of tenants
  • Assignment and Subletting Rights – Release
  • Fixed or Capped Increases in Operating Expenses/CAM
  • Radius Restrictions – percentage rent
  • Continuous Operation vs. “Going Dark”
  • Changing the Permitted Use
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33 | Retail Leases – Due Diligence

When All Else Fails …(cont’d)

  • Tenant Termination Rights

Co-tenancy failure (in not termination, significant rent reduction)

Poor performance – low sales (if not termination, rent solely based on sales)

Violation of exclusive

Failure to deliver possession

Failure to obtain permits – building, liquor license

Failure to obtain financing

  • Landlord Termination Rights

Poor performance

Failure to open and continuously operate

Traditional defaults

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34 | Retail Leases – Due Diligence

When All Else Fails…(cont’d)

  • Representations and Warranties a Tenant Should Seek

Clean title to the property

Free of claims from previous tenant

Compliance with laws – original construction, zoning, environmental, accessibility

Authority to enter into the transaction

  • Representations and Warranties a Landlord Should Seek

Authority to enter the transaction

Entity formed and authorized to do business

Compliance with laws – buildout, labor agreements, business operation, future changes

Financial information accurate

Continuous operation

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ATLANTA | CINCINNATI | CLEVELAND | COLUMBUS | DAYTON | NEW YORK | WASHINGTON, D.C.

Lease Due Diligence in Major Office Leases

Due Diligence & Major Office Leases

Mario J. Suarez, Esq. 212.908.3930 Mario.Suarez@ThompsonHine.com

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Assembling the Lease Diligence Team

 Lawyer  Inside  Outside  Broker  Leasing consultant or investment banker  Client facilities director  Relocation consultant/owner’s rep  Architect/designer  Engineer  MEP  Structural  Contractor or construction manager  Experience with owner  Approval by owner  Special consultants  Environmental and environmental

diligence

 Communications  Roof space  Telecom  Other  Elevator  Specifications  Programming  Signage  Coordinating with landlord;

competing tenant signage

 Identity signage

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Legal Lease Due Diligence

 Title review  Deed/ground lease  Encumbrances and mortgages  Certificate of occupancy  Zoning due diligence  Principal use  Ancillary use/user permits  Tax lots and status  One or more lots  Abatements and incentives  Local assessment practice  Recorded covenants  Master declaration  REAs  PILOT agreements  Development rights agreements/

zoning lot mergers

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Legal Lease Due Diligence

 Filed plans/permits  Filed plans review by A/E  Existing conditions survey by A/E  Permits  Violations and administrative actions  Impact of existing violations  Impact of administrative actions  Litigation  Injunctions  Ownership disputes  Foreclosure and bankruptcy  Google/blogs  News  Blog searches  Data compilers  Google Earth (virtual visit)  Local Web resources

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Building Analysis & Diligence

 Tenant programming and goals  Building comparison  Floor plate size  Efficiency  Rentable/usable loss and add-on

factors

 Location  Proximity to transportation  Employee needs  Status/visibility  Working systems  Stacking plan and options  Expansion  Extension  Purchase  Building cost analysis  Taxes  Operating expenses  Overtime charges  Gross and net deals  Parking

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Engineering Lease Due Diligence

 Structure  Floor loads  Reinforcement  Slab cuts and placement of stairs  Mechanical  Cooling requirements  Available chilled and condenser water

and cost

 Cooling towers  Electrical  Status of power  Dedicated risers  Generators  UPS  Plumbing  Private lavatories  Shower rooms  Environmental  Phase I  ACM  Mold/ducts  ADA and local barrier acts  Life safety  Security systems and personnel  Sustainability/green building issues  Status  Goals and timetable  Unique tenant concerns

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Ownership-Related Lease Due Diligence

 Owner history and reputation  Management history and reputation  Management  Cleaning contractor and opting out  Owner “credit issues”  Work allowance  Work letter  Completion of phases  Completion of amenities  Ground lessor and senior debt SNDAs  Litigation

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Lease Due Diligence – New Building Issues

 Status of construction  Core and shell  Lobby and sidewalks  Availability of building systems  Commencement date and triggers  Substantial completion of work  Completion of lobby  Available elevators  HVAC prior to CD  Access to floors for construction  Competing lease deals and available

facilities

 Reservation of elevator cabs  Hoists/tie-backs  Tax and operating expense base years  Gross-ups  Status of project amenities and project

phases