|
As Published in
Michigan Lawyers Weekly on March 17, 2003 COMMERCIAL
PROPERTY LEASES TRANSLATING LANDLORDESE TO
ENGLISH© By LEVI F. SMITH, ESQ. February 2003 Most real property leases are written
with non-legal terms that are not Latin, but read like Greek to the
non-landlord. Microsoft Word often underlines them as misspellings or
grammatically incorrect. This article will give you the tools to understand
basic lease terms and beat the landlord at his/her own game. It is also essential to compare proposals
from different buildings. The premises have 10,000
rentable square feet. Rentable measurement is determined by BOMA Standards,
1996. The load factor is 15%. The rent shall be $20 per sf NNN. Tenant improvement allowance is
$20 per usable square foot, below the deck. Services supplied will be
comparable to other class A office buildings in the area. Renewal shall be at 95% of market rate of
other class A office buildings in the area. Annual increases will be based on
increases in the porter wage or, annual increase shall be 3% of the base rent
or CPI increase, whichever is greater. Operating expenses and real estate
tax increases over the base year will be passed through prorata. Rent shall begin on the
commencement date, not the possession date. These terms were never covered in
law school or the bar exam, but they were created by landlords to make you
feel illiterate in your own country! RENTABLE - You have 8,800 sf
within your walls as determined by BOMA (Defined Below). The landlord adds
15% to charge you a part of the common areas-hallways, bathrooms, lobbies,
telephone rooms etc. LOAD FACTOR - This is the common
area factor added to usable square feet to yield rentable square feet. We
started seeing this term in the 1980’s as a way to subtly increase rental
income to the landlord. It is also
known as the landlord’s “finger on the scale”. BOMA MEASUREMENT - Building Owners
and Managers Association has created definitions of measurement. Demising
walls are measured to the middle of the wall. Corridor walls are measured to
the inside wall of the premises. Exterior walls are measured to the
predominate feature. Predominate
feature means that the window or the wall is more or less than 50% of the
total surface. Here is where BOMA gets risqué –
“No vertical penetrations are included”! This means the area of elevator
shafts, stairwells, and HVAC stacks are excluded from measurement. You can
purchase a copy of BOMA’s 1996 Standard Method for Measuring Floor Area in
Office Buildings for $36.75 by going online to: http://www.boma.org/pubs/floor96.htm. If you are starting to think you need an architect
to verify the landlord’s measurement, you are correct. Measurement mistakes, unintentional and
intentional, are common and usually in the landlord’s favor! Several of our clients have saved over 10%
when we suggested measuring their space. NNN - Triple net charges are added
to base rent for operating expenses and real estate taxes. Charges include
your pro rata share of utilities, insurance, management, repairs and
maintenance, janitorial service, waste removal, security, snow and lawn care.
This should not include capital improvements such as a new roof or new
parking lot. Triple net is an ala
carte menu whereas gross is a complete dinner (see below). GROSS RENT - Opposite of Triple
net (NNN) rent. It includes base rent, operating expenses, real estate taxes,
etc. (see above). USABLE – “Usable square feet” is
the space within your walls that you occupy and use exclusively. ANNUAL ESCALATION - In today’s
soft market, this is not a given. There is no statute that ordains an annual
increase in a lease. Fairness usually means that the landlord be compensated
for increases in operating expenses and taxes which currently approximate
$10/sf in a class A office building. An inflationary increase or pro rata
increase over the base year are fair. Beware of fixed or inflationary
increases that are based on the base rent which not only compensates the
landlord for inflation but increases his/her profit because mortgages are
usually fixed. Query if you get the benefit of
decreases in operating expenses and real estate taxes. This occurred in 1994
with Proposition A property tax rollback in Michigan, but most leases were
silent and landlords received a state sponsored windfall! CPI is consumer price index
increase as defined by the Federal Government. It is used less often because
of difficulty of determination. SUITE ELECTRIC - This is not a
typo or opposite of “bitter electric”. Landlords charge for electricity used
within your suite for lights and wall outlets. Often these are separately
metered. Guess who pays for the meter? Electric for air conditioning is not
included unless a heat pump system is used.
Beware! CLASS A OFFICE BUILDINGS - There
is no common accepted definition for this term. It will differ based on city or
suburb, region of the country and if you are talking to an owner, user,
landlord, assessor, buyer or lender. It is one of the most abused terms in
real estate. Having said that, Let’s try to create one. SUBURBAN - full service building
with sit-down restaurant(s), health club/locker room, fiber optics to the
building, some covered parking, bank, on site manager, on site engineer,
janitorial personnel and security guards during the day. Its rent will be in
the upper 10% of the market. Free parking on site may vary by area. A travel
agency used to be included pre-internet. Tenants include large corporate law
firms, Fortune 1000 companies and real estate developers. URBAN – Buildings with rent in the
upper 10% of the market. Starbucks Café, on site manager, on site engineer,
janitorial personnel and security guards during the day, age is less than 35
years old. CLASS B – A building with fewer
amenities than class A. The majority of buildings are class B. CLASS C - Suburban building
containing one and a half story building that has no amenities and is not
meant to impress clients. An urban building pre World War II with transoms,
inadequate HVAC and has low rent in the bottom 25% of the market PORTER WAGE - A New York City term
referring to the wages of a certain labor union to set annual rent increases.
This has not been applied in the Midwest, yet! BASE YEAR - The parties agree to
the calendar year which operating expense and property taxes shall be used to
compare increases or decreases to. It is often the year you move but it is
negotiable and should be the second year of occupancy because the landlord
has already factored current cost increases into your base rent. Beware of
new buildings that have not been fully assessed. Lease language should include
full assessment after substantial occupancy or you may pay substantial
dollars for property tax increase.
Real estate taxes usually increase substantially if the property is
sold, so negotiate fixed annual increases. OPERATING EXPENSES - Defined by
the lease, it generally includes utility charges, property and casualty
insurance, repairs and maintenance expense, janitorial service, waste
removal, management fees, common area maintenance, security, window washing
etc. It should not include legal expenses to collect delinquent rent or to
sell or refinance the building. It should not include real estate broker fees
or tenant improvement work. TI (TENANT IMPROVEMEMT) ALLOWANCE
- Landlord builds into your rent money that he will spend on your behalf to
construct or demolish walls, replace or clean carpet, move or upgrade lights,
replace ceiling tiles etc in your suite. Beware if the improvements are based
on usable not rentable square feet. Also, is the landlord supplying HVAC
equipment or is it coming out of your allowance? If your improvement costs exceed
the allowance, the landlord may amortize the cost over the lease term with
interest so the tenant does not have upfront costs. FREE RENT - There is a free lunch
if the landlord does not increase the rent to recapture the free rent! In a
soft market, landlords will abate rent to entice tenants. Landlords want to
keep base rent high on the face of the lease to maximize financing and value
for sales purposes. This is a good thing for a tenant to have but it is not
tax deductible; you can’t have everything, but always ask! REAL ESTATE BROKER - Licensed person who procures
you for the landlord, represents the landlord, and is compensated by the
landlord unless the parties otherwise agree. He/she has a duty under agency
law and state real estate broker law is to convey your negotiating strategy
to the landlord. Caveat Emptor! TENANT REPRESENTATIVE - Your
licensed real estate broker agent who may be paid by the landlord if all
parties are informed and agree that he is your agent. Also known as a
corporate real estate advocate, a tenant representative does not tell the
landlord your negotiating strategy, but negotiates zealously for you. We have attempted to level or tilt the playing
field for the tenant. Now for your final exam: Which
is a better deal? (a)
$20 per square foot gross rentable “as is” condition (no TI dollars) (b)
$12 per square foot NNN (where NNN = $9 and $2/sf/year TI Allowance) The
answer is “b” because the landlord is paying $2/sf/year for
improvements. Very good!! The
Author: Levi F. Smith, 54, a Michigan native,
lives in West Bloomfield. After
passing the bar in Michigan and California and practicing law for 6 years, he
entered the commercial real estate field.
In 1988, he founded the first corporate real estate firm in Michigan
to exclusively represent tenants and buyers.
Located in Southfield, Michigan, Levi F. Smith Real Estate, Inc. is
the exclusive Michigan member of Alliance of Tenant Representatives. An organization of like-minded companies,
this association provides the ability to service client real estate needs
throughout North America. Mr. Smith
welcomes all feedback on this article and can be e-mailed at lsmith@levismith.com. Levi F. Smith Real Estate, Inc. can be
visited on the web at www.levismith.com. |