Commercial leasing - Red Herring terms to add value?
We are a small restaurant group and are negotiating a lease with a landlord we already work with on another property. We like this landlord/developer. We want to include terms in the lease that build value to our organization and don’t hamstring the landlord. For example, a term that triggered a payment upon sale of the property. Or, the right of first refusal to purchase property at predetermined price. Happy to answer questions to provide context or take offline.
[{"id": "g5un0ha", "text": "You want the LL to pay the Tenant upon a sale of the building? Unlikely.\n\nIf you want a ROFR, thats more possible, but do you have experience as a landlord? Financing? I am concerned about ROFR if my client loses a legit buyer to go under contract with a tenant who doesn't have the reliability to close the transaction.", "replies": [{"id": "g5upo0d", "text": "Yea, why would a landlord pay the tenant if they sold the building?", "replies": [{"id": "g5uu50a", "text": "I don't know... it was a possibility, listed as an idea. For example, if the LL were to claim that \"I have every intention to hold this property for 15 years\" and the Tenant executed a lease in part based on that... if the LL were to sell the property in less than, I dunno 5 years, they would pay a \"penalty\" of $X to account for the business disruption - were the new owner want to demolish the building.", "replies": [{"id": "g5uw7uy", "text": "Does the lease have an SNDA clause? https://www.alllaw.com/articles/nolo/foreclosure/subordination-non-disturbance-attornment-snda-agreements.html", "replies": [], "depth": 4}, {"id": "g5uznhk", "text": "What @stoweker said. If you have a lease for 15 years, a new landlord can\u2019t just demolish the building after 5 years. In theory, you could negotiate the provision you\u2019re describing but it is next to impossible that a landlord would grant you that. \n\nBut, retail landlords are desperate for leases, so if there was ever a time to request tenant-friendly lease terms, now would be the time. For example: free rent, no rent increases, tenant improvement dollars, lower rents, tenant lease termination options, tenant renewal options, etc.", "replies": [], "depth": 4}, {"id": "g5w2jdk", "text": "No landlord in their right mind would agree to something like this. Like you said you're a small restaurant group, you don't have much bargaining power here.\n\nThe above situation wouldn't happen unless you have a demolition clause. Most leases also contain a clause that the landlord can sell the building.\n\nIf you're looking for something to negotiate that can add value maybe look for a cap on operating cost recoveries, but a tenant rep leasing broker would be able to help you with a situation like this better than reddit.", "replies": [], "depth": 4}, {"id": "g5w2y5u", "text": "Google snda and estoppel", "replies": [], "depth": 4}, {"id": "g60o32c", "text": "LOL.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "g5uvasd", "text": "Have you ever included ROFR in a lease? If so, what terms would you place on the incumbent  tenant so you didn't lose a legit buyer?", "replies": [{"id": "g5we6cg", "text": "First right of refusal should start at matching the offer, but I would try to figure out a way to have a valuation based on a benchmark cap rate to figure out sale price. I have no idea if a LL would go for that though.", "replies": [], "depth": 3}, {"id": "g5x7qmz", "text": "As a retail landlord asset manager for over 25 years, I\u2019ve seen some tenants ask for ROFRs, but the devil is in the details.  They can be expansion rights or purchase rights. As a landlord, I\u2019d only grant one if I absolutely had to. The terms would be something like I receive a bonafide offer, I notify you, and you have 48 hours to exercise or reject your option to match the bonafide offer. You then have to close quickly so I don\u2019t lose the bonafide offer. It\u2019s such a remote possibility that you\u2019ll be able to perform, that there are other concessions you can get from me that actually bring value to you. For example, try to get a long free period for construction, more free rent after lease commencement, a higher T.I. allowance (meaning tenant improvements = your construction costs), a cap on escalations in NNN (CAM, taxes and insurance), a cap on your annual HVAC expense, and others. I lease to over 150 restaurants, mostly small business tenants (i.e. not chain restaurants). In general, restaurants are necessary draws to a shopping center, and they often can be an anchor tenant in a non-grocery strip center, but they come at a cost. Restaurants use more parking, they wear out mechanical equipment (e.g. HVAC units, hoods, etc.), sewer systems, roofs, etc. much more quickly than a \u201cnormal\u201d tenant.  Restaurants always want long-term leases, especially for first-generation spaces, because they usually have a construction loan they need to amortize. Lastly, restaurants fail at a higher rate than other tenants. I say all that because while my business needs restaurants, we understand them, and we keep them on a short leash. Like others have suggested, I can\u2019t see why I would actually grant tenant a ROFR to purchase a property. It would make more sense with a free-standing, single-tenant building where you would be leasing an entire building from me, and you might be able to negotiate one from me in that case if I really wanted you. If you (or your broker) demanded a ROFR, I\u2019d try to give you a ROFO (Right of First Offer) instead, which means you get first bite to make a bonafide offer (verified by an appraiser) if an adjacent space becomes available or if I decide to put the building on there market.  That way, I get your interests out of the way before I spend time marketing a building/property.", "replies": [{"id": "g6v2bbn", "text": "Does this, \"...try to get a long free period for construction...\" mean not paying rent during construction? If so, how do account for when constructions technically (so it can be codified) begins and officially ends?", "replies": [{"id": "g6x9n5f", "text": "Often, in retail leases, the tenant is going to handle it\u2019s own build out (aka it\u2019s interior construction aka it\u2019s \u201cimprovements\u201d). You can negotiate with landlords to get a period of time free of rent, aka \u201cpre-commencement term,\u201d for the period you\u2019re constructing your improvements. Typically, the lease may say something like, \u201cThe Commencement Date will be the earlier of (a)120 days after Landlord has delivered the Demised Premises to Tenant, or (b) the day tenant opens for business within the Demised Premises.\u201d  I left some out for brevity, but that\u2019s the basic point. You can also negotiate \u201cfree rent\u201d from the landlord that would start after the pre-commencement term.  So, for example, you might be able to get 120 days for construction plus another three months after the lease commences. Just to note, I\u2019ve seen a tenant get open before the pre-commencement term expires maybe three or four times out of a 1,000. Usually, they\u2019re still under construction when the lease commences (i.e. after 120 days in the example above), which makes the free rent important unless you want to pay rent before you open for business.", "replies": [{"id": "gq3isvw", "text": "What would define as the observable or definitive end to construction. That way tying the lease commencement to an agreed upon event versus a period of time.", "replies": [{"id": "gq54sj4", "text": "I would avoid tying commencement to an event, when the tenant is running construction. Every time I\u2019ve agreed to this, it\u2019s been a problem.  There are always unforeseen issues with construction that delay completion, so you\u2019ll just get stuck with commencement getting delayed. I always try to get something like, \u201cthe earlier of (x) days or the date Tenant opens for business in the Demised Premises.\u201d  I can\u2019t remember a time when a tenant completed construction and got open before the allotted time, so that (x) days is what will trigger commencement.", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}, {"id": "gjby60l", "text": "&gt;r ROFRs,\n\nWhat is ROFR? Tried to google", "replies": [{"id": "gjcatjc", "text": "Right of First Refusal", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "g5zi9uq", "text": "The problem for the landlord isnt just losing a buyer.  It also puts then at a really bad negotiation spot with the rofr holder.  It is normal to ask primary tenants if theyd like to buy when you sell, they are obvious buyers.  If there is no rofr they have to make an acceptable offer or they will lose out.  With a rofr they can lowball the shit out of you because they know worst case they just match a real market offer.  Now your ass loses a motivated buyer you could have done a good deal with, or even over market, because there is no pressure on them and you have to find a buyer, negotiate a deal etc just to get the first deal done.", "replies": [], "depth": 3}], "depth": 2}, {"id": "g5x86hz", "text": "I\u2019ve negotiated 100+ leases as the developer.  I always said no to ROFR.  you want to buy it, buy it.", "replies": [], "depth": 2}, {"id": "g6v1use", "text": "That's legitimate concern for LL. My assumptions is that the lease could have provisions written in that set a finite timeframe the tenant has to respond. Or, require a deposit help in escrow to compensate LL if tenants attempts a purchase and fails. Or, to your last point, establish some progression - process steps (i.e. obtain bank loan approval) and/or timelines that must be achieved. I can probably come up with many possible solutions to minimize the LL \"pain.\"", "replies": [], "depth": 2}], "depth": 1}, {"id": "g5upty6", "text": "Commercial leasing is inherently zero sum between landlord and tenant. But, if you want some provisions that could help:\n\n1. If it\u2019s NNN, you could have expense increases capped at a certain expense.\n2. Get as flexible language as possible as it relates to subleasing a space. We are a landlord whose tenant went to sublease space they don\u2019t require. We have a clause that we get to approve the sublease at a fair rate. Needless to say, we haven\u2019t approved any of their subleases because they are worse credit quality than the initial tenant. The tenant is therefore paying tons of rent for a space they aren\u2019t using.", "replies": [{"id": "g5uv22s", "text": "\\#1 nice - is there an industry standard? That is, with a NNN lease, is it always that the tenant agrees to pay 100% of the property expenses? Do NNN leases typically have lower rent because the tenant assumes more of the ongoing expenses?", "replies": [{"id": "g5uz1gr", "text": "I\u2019ll answer your latter question first. Yes, NNN leases have a lower rent. For example, if a full service gross rent is $2.50 PSF and the nets to the landlord is $0.50 PSF, a realistic NNN rent would be $2.00 PSF ($2.50 a $0.50). To your first question, it\u2019s a fairly rare provision with NNN leases but it does happen. \n\nDo you have a tenant representative helping you with this?", "replies": [{"id": "g5vpjq7", "text": "I disagree.  I feel like I see expense caps more often than not.  Rarely do I see them at 3% or lower though.", "replies": [{"id": "g5vyp68", "text": "I develop across different product types and am admittedly not an expert in retail leases. Haven\u2019t done a ton of them. Certainly defer to your experience.", "replies": [{"id": "g5zx744", "text": "Not a leasing guy and my experience is solely industrial.  My experience comes from the thousands of leases that I\u2019ve seen while purchasing buildings.", "replies": [], "depth": 6}], "depth": 5}, {"id": "g5yq9ci", "text": "Agreed.  Caps on controllable expenses is standard.", "replies": [], "depth": 5}, {"id": "g5zf2xb", "text": "Expense caps are more common with certain asset types and typically high credit tenants. But they may not apply here.\n\nOP mentioned they are in the restaurant business, but I suspect they're not a QSR. Most QSR lease renewals would go through a guided corporate process.\n\nWhen I've been a landlord of Independent restaurant owners, I've not been inclined to allow expense caps. The income credit and understanding of how the tenant operates is not as good compared to a billion dollar restaurant chain.\n\nIt is SOP to include lease language on landlord's responsibility to act in good faith when completing maintenance or repairs, and a provision for curing if tenant suspects landlord is being intentionally inefficient.", "replies": [], "depth": 5}, {"id": "g606vzm", "text": "Every landlord and broker I've ever dealt with as a tenant is highly against them, but with higher percentages they can certainly happen.", "replies": [], "depth": 5}], "depth": 4}, {"id": "gcezj7k", "text": "&gt;Yes, NNN leases have a lower rent. For example, if a full service gross rent is $2.50 PSF and the nets to the landlord is $0.50 PSF, a realistic NNN rent would be $2.00 PSF ($2.50 a $0.50). To your first question, it\u2019s a fairly rare provision with NNN leases but it does happen.\n\nNo. Not yet. I had a RE lawyer assisting with previous Lease to own. That fell through. Current opportunity is with landlord we have relationship with on another property. Wanted to put together a LOI with regard to new location to see if we were in the same ballpark, so to speak.", "replies": [], "depth": 4}], "depth": 3}, {"id": "g5xajwu", "text": "I tell my people that every property is different, every space is different, every tenant is different, and every lease is different. In general, NNN leases can mean several different things in different markets.  Typically, NNN leases mean the tenant reimburses the landlord for CAM, taxes and insurance. Depending on whether you\u2019re leasing a single building from a landlord or you\u2019re in a multi- tenant property, there could be other expenses that are carved out as the landlord \u2018s direct expense, like the roof, the structure and the foundation. By the way, landlords didn\u2019t create the NNN lease, big retail tenants did. The idea is that you pay only what the actual expenses are and not the grossed up estimates that would be in a \u201cgross\u201d lease.  So, with a gross lease (and it\u2019s many iterations) you pay a single rent number (maybe more with derivatives like the modified gross lease, but ignore that for now).  However, wIth a typical NNN lease format, the total you pay monthly is broken down between base rent (sometimes called \u201cMinimum Guaranteed Rent\u201d when there is a percentage rent clause) plus your pro rata share of CAM, taxes and insurance.  Those three expenses are reconciled annually, so you never pay more than the actual expenses. You may also pay percentage rental depending on the lease/deal structure. Additionally, you may see special monthly assessments to restaurants for trash removal and water since they use much more of those expenses than their pro rata share.", "replies": [], "depth": 3}], "depth": 2}, {"id": "g5vi8tu", "text": "This\n\nLandlords and tenants often have the same blindspots for headline rent versus the minutiae which you should use to your advantage.  Triple net &amp; triple net sans roof and foundation isn't much different month in and month out until there is a big bill.  CAM audits, CAM caps, excluding management fees, tenant improvement dollars... the list of items, expenses, and clauses that can be combined to make a lease more or less favorable to either party is almost incalculable", "replies": [], "depth": 2}, {"id": "g604w7x", "text": "But with a sublease you still have the original, better quality credit tenant on the hook too and it strengthens the original tenant's finances since they have the sublease money coming in.  So I'm not sure I see why you wouldn't allow that unless the sublease tenant devalues the property in any other way?", "replies": [{"id": "g609bwp", "text": "Sure, the credit is the same but a inferior credit could hurt the asset value when considering whether that sublease tenant would renew the lease and the impact to credit if they do.", "replies": [], "depth": 3}], "depth": 2}, {"id": "g6v2ojo", "text": "Are you referring to getting flexible subleasing language that benefits you  (LL) or me (tenant)? Can you stipulate specific sublease tenant criteria like credit scores or length of time in business, etc...?", "replies": [], "depth": 2}], "depth": 1}, {"id": "g5vpajv", "text": "ROFRs can impact the bankability and marketability of the building.  Ask for a ROFO", "replies": [{"id": "g6a1d6f", "text": "Good answer... that's as close to neutral as I can think of (though not entirely so) OP's other suggestions are to LL's detriment, just in ways that OP isn't fully aware of (although many others have stated them)", "replies": [], "depth": 2}], "depth": 1}, {"id": "g5waj6h", "text": "Lease w/ an option to purchase is what you are looking for.  Maybe even a seller financed purchase w/ favorable terms.  Not a bad idea if you are planning to get into recently dark, single tenant restaurant locations.  If you\u2019re trying to do like 20+ of these over the next year lmk and I might talk to you more about it.", "replies": [{"id": "g6v49q4", "text": "Spot on. That's exactly what I proposed. It is a multi-use building. Approximately 8 rental units and and commercial space on 1st floor. We were constructing a lease with a ROFR (30 days) and set purchase price within a specific timeframe (e.g. 48 mos). We're not a single location, have 3 and a wholesale business. We want to eventually sell the biz to employees (via some Co-Op, ESOP, etc... model) and trying to add to the value of the entity by owning RE (in combination with revenue, brand, etc...) as opposed to leasing.", "replies": [{"id": "g6v5wai", "text": "Building is worth less vacant than occupied.  You add value just by leasing it.  If the landlord is good with the structure it\u2019s an easy win win.  I don\u2019t like ROFR, though.  I think you should agree to an acquisition price, construct acquisition terms that involve seller financing, and enter into a purchase contract not a leasehold.  I\u2019m really into the concept of employee owned businesses too.", "replies": [{"id": "gcf0eqs", "text": "20 might be a bit much too take on in the next twelve months...but given the volume of assets, equipment and talent becoming available as a result of the recession and affiliated societal issues, we see it as an opportunity to grow our concept faster than originally planned.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "g5yuu6u", "text": "Other than a foreclosure whereby a bank takes the property, you would have an enforceable lease. They cannot just cancel it unless there is specific language allowing for it.  If you are important enough to the LL, you could require that their mortgage become secondary to your lease. Given you are already there, I doubt the mortgage company will agree to this but it could be used in negotiating a new lease prior to taking new space. That is something, for instance, that an anchor grocery store might require of a retail developer.  By placing the mortgage second in priority, even if a bank forecloses, you keep your lease because you are first.  \n\nA First Right of Refusal is not accomplished at a pre-determined price. If the LL lands a legit new tenant, they have to first allow you to decide if you want it or not at the prevailing price the new tenant is willing to pay.  You could obtain a option whereby you pay consideration to the LL for the option to purchase their property in the future. The agreement must have a provision to end the option period either by you deciding to not purchase or a time period lapses.\n\nIt sounds like you are endeavoring to insert some tricky language into a lease asserting non-customary rights.  If you exceed the bounds of standard contract law, a court will likely rule against you.", "replies": [{"id": "g6v4lll", "text": "Not consciously trying to insert tricky language. If we cannot purchase a location, I'm trying to construct a lease that if upon sale of our business the acquirer see he lease as an asset... versus something they're \"stuck with.\"", "replies": [], "depth": 2}], "depth": 1}, {"id": "g5zctpp", "text": "Here's one I used in a renewal with a NNN tenant (LL manages property).\n\nIf landlord's CAM is less than a predefined benchmark (calculated a three year average), landlord keeps 50% of savings at reconciliation so long as all management requirements per the lease were met.\n\nThe clause is meant to incentivize a landlord to operate the property more efficiently. We've been successful in doing so, which has saved money for our tenant and added unexpected income to our pocket. This has improved the value of our property as we can show several years of extra income to a bank/buyer. It has improved our relationship with the tenant. The tenant can see on paper we've save them a nice sum over the past few years. The tenant has been more willing to work with us on scheduled CAM so we both can keep costs down. We've been more willing to put TIs into the space knowing there's been an extra income caused by the tenants cooperation.", "replies": [{"id": "g60778i", "text": "I would laugh at that as a tenant.  50% back to the landlord??  Oh hell no.", "replies": [{"id": "g613y7p", "text": "It's probably hard to imagine. Most landlords and tenants see their relationship as a zero sum game. In this case, it's a good and long relationship. As landlord, we passed on 25% of our upside onto our property management group to maintain alignment. The result have been great for the tenant ($), and more steak dinners between us and the tenants corporate real estate group. \n\nThe truth is, the benchmark limits how much upside I can get as LL. It's a 20 year lease, and the benchmark does not inflation adjust.", "replies": [{"id": "g61cnuz", "text": "RE management should already be actively keeping costs down.  That's part of what tenants already pay for via management fees embedded in NNN.  Paying the landlord 50% of such \"savings\" seems ludicrous in my view.  I'm now paying for nonexistent NNN costs?  Perhaps if you cap NNN to 0% in the process.\n\nI suppose it's largely an issue of perception though because you could easily raise rent on renewal since my total monthly bill is now lower than anticipated, so I suppose in that regard it makes a bit of sense as this automates the \"rent\" increase (particularly on a 20 year lease).  But I would still want a significant (as in 0-2%) NNN cap in place.  Of course it depends on everything else in the lease too... lots of give and take across the entire lease.", "replies": [{"id": "g61j12t", "text": "Give and take is the name of the game. The tenant has two ten year renewals with predefined increases. So they are set.\n\nBe careful because cost efficient RE MGMT groups are rare or temporary. They may start off ok, but five years into a lease can allow things to become too comfortable. Fees will start to creep everything into every line item. Landlord have to keep on top of them, which becomes hard when they have a large portfolio across several states and, LL knows the tenant will be picking up the costs anyway. \n\nWe proposed this to the tenant because they felt they had (and probably did) overpaid on CAM recs to other LLs. They set our CAM benchmark based on what they felt was reasonable. We're constantly beating their standards.  They're happy and feel in control. We get a bonus. \n\nThis is the kind of win win OP was looking for. If you want to see your landlord as an enemy, this won't work for you. If you see you landlord as an enemy, they won't work for you.\n\nThe smartest tenants realize they are the boss, and act like it. If your want to be a customer, be prepared to accept the bill at the end of the year. If you want to be the boss, set the rules.", "replies": [{"id": "g62atma", "text": "That's not acting like a boss.  That's giving up to an overly greedy landlord before the lease even starts... at least that's the impression of such a contract.  Contracts need to be balanced and fair.\n\nI never treat landlords like an enemy (unless they become one, which happens), but I am firm, honest and fair, as an actual boss should be.  ;)\n\nOh yea... NNN needs to be followed up on for sure.  I learned my lesson the hard way after the first year when NNN came in 3x what it was estimated to be (new development, but then they sold the property for a lot more than it cost them).", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}]