Meeting Minutes:
Friday, June 10, 2005
Volume 12; Issue 19

  

Table of Contents

Committee Reports

Membership Report
 (Click here to go to the Membership page)

David Lathrop knows the owner of a small payroll service company.  He is interested in joining the group.  He has had his own business for 3 years.  Dave has known him personally for 10 years.  He will get an application completed soon.

Social Report
 (Click here to go to the Social Event page)

None.

Speaker Coordinator Report
(Click here to go to the Speaker Schedule)

Main Speaker

  • 06/17/05     Dave Spiess
  • 06/24/05     Steve Chilton

Spotlight Speaker

Treasurer Report

Quarterly dues have been mailed out.  Please get yours paid before the end of the month.

Leads Report

37-38, 37-13, 32-17, 12-11, 26-13, 21-13, 31-41, 40-19, 40-51, 25-13 (x2), 48-23.

This week's leads focus...

Business Spotlight

None.

Notable Mentions

If you are new and need a name tag, please see Dave Spiess or Mike Whalen.

Are interest only loans good or bad?  Both Joe Hesch and Bob Becker offered opinions on this matter.  Whether a loan is good or not depends on your particular situation.  How long will you own the property?  Is it an investment property?  What is your risk tolerance?  Do you need to keep your monthly payments low?  The answers to these questions and more will help determine what loan type is best for you.  As always, speak with a professional that you trust to guide you.

Main Speaker 

Commercial Leases
Panel Discussion: James Bache and Bob Becker

COMMERCIAL LEASE DO'S AND DON'TS
 Prepared by:  James Bache

  1. Do review the Lease and all attachments before signing (including attached Rules and Regulations, Parking Regulations, TI specifications, Guarantees, Estoppel Forms).
     

  2. Don't assume you must accept Landlord's form of lease as is. Do negotiate for appropriate modifications to lease terms.
     

  3. Don't assume the leasing agent will review the Lease for you. His only obligation/objective is to put the parties together.
     

  4. Do measure premises. Floor space is generally measured from the center of the inside of interior demising walls and the interior surface of exterior walls. Correct Lease as appropriate.
     

  5. Don't sign Lease individually. Always have only your business entity named as Tenant.
     

  6. Do avoid signing personal guarantees whenever possible. (This will depend upon Landlord's sophistication and market conditions.)
     

  7. Don't bind for excessively long term. Do negotiate a shorter Lease term with options to renew.
     

  8. Don't ignore the Center's other tenants or prospective tenants and how their use of their premises and the common areas (parking area) may affect you and your customers.
     

  9. Do negotiate reserved parking.
     

  10. Don't ignore the anti-subletting or assignment provisions of Lease as they impact your ability to take on a partner or sell the business.
     

  11. Do consider the Center's age and condition and how the cost of resurfacing parking lot, re-roofing, and repair of A/C units will impact you if Lease provides for CAM pass-throughs. Try to negotiate a flat rental rate and strike CAM provisions of the Lease.
     

  12. Don't ignore the likely increase in property taxes for newly built Centers and the increase in your rent due to likely "triple net" terms of the Lease. Try to negotiate a flat rental rate and strike pass-through provisions. Alternatively, negotiate expense "stops" or other expense sharing provisions which limit the amount of the pass-throughs paid by you.
     

  13. Do scrutinize retail lease percentage rent provisions and understand how the percentage rate will be computed and how it impacts off-site (internet) sales.
     

  14. Don't agree to CPI indexed rent increases in triple net leases with CAM pass-throughs. The triple net and CAM provisions already pass-through the Landlord's inflation increased costs.
     

  15. Do approach Landlord in mid-term to renegotiate Lease when times are tough. Be prepared to show them the books and agree to an extension of the Lease with built-in rent increases over time. Generally, negotiate Lease extensions well before end of term or you won't have as much bargaining power.
     

WHAT IS INVOLVED IN A LEASE REVIEW

  1. Look for and correct ambiguities.

  2. Look for lack of mutuality and suggest modifications. For example, if premises are damaged by fire or flood, Leases often provide Landlord the option to terminate the Lease, but Tenant does not have that same option.

  3. Look for and strike overreaching provisions. For example, Leases sometimes include depreciation, a paper expense, as a CAM expense. The CAM provision also provides for the pass-through of the actual cost of the repair or replacement of the depreciated item. Thus, the Tenant effectively pays twice.

  4. Look for and suggest modifications to potentially harmful lease provisions. For example, many Leases allow Landlords to move a Tenant from one space to another within the Center. This can be particularly harmful to the Tenant, so Lease should be modified and allow the Tenant the option in such case to terminate the Lease.

  5. Look for and strike redundancies.

  6. Look for and strike paragraphs the need for which the Landlord's agent can't explain.

  7. Provide strategies for negotiating modifications. Best strategy is to identify both the Landlord's and Tenant's concerns and then develop and present new text which addresses both parties' concerns.
     

KEEP IN MIND:

  1. Landlord's general objective is to obtain sufficient rent to cover his expenses and make a profit. In accomplishing this, the Landlord:
     
    1. Knows how much capital he has committed and what a reasonable return on the capital would be
      (his profit);
       
    2. Knows how much it costs to pay the monthly principal and interest expense on the debt incurred to purchase and build Center (fixed costs); and
       
    3. Can only estimate the costs of maintaining and operating the property (variable costs). Triple net provisions and CAM pass-throughs are designed to shift the risk of these variable expenses increasing over the life of the lease to the Tenant in order to preserve the Landlord's profit.
       
  2. In light of the above, the Landlord is most concerned with receiving the rent payment timely. Thus, the Landlord will likely not be willing to modify those provisions of the Lease which ensure/motivate the timely payment and receipt of the monthly rent. The Landlord is more likely to modify nonmonetary provisions.
     
  3. Landlord's only duty to Tenant is, generally, to place the Tenant in possession.
     
  4. Tenant's general objectives may include securing a "great" location and negotiating a rental rate which doesn't break the budget so Tenant can make a profit. In accomplishing this, the Tenant:
     
    1. Can only estimate revenue and expenses;
       
    2. Can only guess what the traffic flow and clientele base of the Center will be; and
       
    3. Has no control over the triple net expenses and CAM pass-throughs which are potential budget busters and profit killers.
       
  5. In light of the above financial risks to the Tenant, he should temper his enthusiasm for the location and secure the location with a short-term lease and options to renew and then negotiate for a flat rent, expense stops or loss provisions to reduce the risk of the Landlord's attempt to shift the risk of the Center's variable expenses increasing over the life of the Lease to the Tenant.
     
  6. Landlord's ability to agree to a short-term Lease will be hampered if the TI's are being advanced by Landlord as he must recover them as part of his fixed costs over the life of the Lease. TI's advanced by the Landlord also affects the amount of a negotiated buy-out should you desire to terminate the Lease early.
     
  7. Bargaining power is a function of market conditions, the Center's location, whether the Center is fully leased, and the amount of space being leased.

The above document covered most questions asked by members during the meeting.  If you still have questions regarding commercial leases please feel free to contact Jim and James.

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