— By Bob Kane, director with Franklin Street —
In the 15 years I have represented national, regional and local retail and restaurant groups expanding throughout Georgia and Alabama, I have gained valuable insights into important deal terms that are often overlooked. Here is my top five list of critical protections every tenant should be aware of during the Letter of Intent (LOI) and lease negotiation process.
Require the Landlord’s Lender to sign a Subordination, Non-Disturbance and Attornment Agreement (SNDA) – A SNDA agreement protects the tenant if the landlord defaults on the mortgage. If an SNDA is signed by the Lender, then the lender does not have the right to cancel the lease if the landlord defaults on the mortgage. Many tenants discovered during the 2008 economic crisis that they did not have this protection in place. Most landlords and lenders comply with the request for a SNDA agreement.
CAP the year to year increase on CAM/Insurance/Taxes passthrough cost – It is important that the tenant negotiate a cap on the year to year increase of CAM/Insurance/Tax charge specified in the lease. If the property is sold or the tenant signing the lease adds a substantial increase in the value of the property, a tax reassessment can be very expensive. Without a cap on these expenses, the tenant can get hit with a hefty and unexpected added expense in the amount of CAM/Insurance/Taxes they pay through the remainder of the lease.
Protect yourself against unexpected permitting delays – The Rent Commencement Date is the date that the tenant is required to start paying rent per the terms of the lease agreement. Once the tenant signs the lease, they must hire consultants to design the space, submit the plans to the governmental authority and obtain all necessary inspections and permits to open for business. Although the tenant can do everything in their power to obtain their permits as quickly as possible, there are still conditions out of their control. Adjusted governmental holiday schedules, re-review of plans, and existing space conditions (power, unexpected roof leaks, etc..) are all examples of items that can cause delays in permitting. When negotiating the Rent Commencement Date for the tenants I represent, my initial LOI includes a build-out period timeframe that does not start until the tenant receives their permits. This period doesn’t start until the permits are received and protects against the tenant having to pay rent before they open for business.
Set up payment installments for your Tenant Improvement Allowance (TI) Payments from the Landlord – Most tenants will only focus on the amount of tenant improvement dollars they are given by the landlord to complete their build-out. When working with large TI amounts, it is critical that the tenant broker negotiate for the tenant a payment structure that will allow the tenant access to the TI funds during the design and build-out process. I have had success negotiating quarterly payments, so the tenants can “draw” down the total TI amount and have access to the funds to pay consultants and contractors during the process. Most LOIs do not address this, so the tenant is stuck having to fund out-of-pocket a large TI amount during the build-out process.
Limit your Lease Guarantee – Most landlords require the tenant to sign a Lease Guarantee, guaranteeing the initial term of the lease. It is the tenant broker’s job to limit the Lease Guarantee as much as possible during negotiations. Offering limited guarantees for just a portion of the initial term is one option that covers any TI given and provides a timeframe for the landlord to release the space.
— Bob Kane is a director with Franklin Street’s retail tenant leasing team in Atlanta, offering program roll-out strategies, site selection, market analysis and lease/purchase negotiations for national and regional retailers and restaurant groups expanding throughout the Southeast. During his career, Mr. Kane has provided brokerage, development and consulting services to some of the nation’s largest retailers including: Home Depot, Kohl’s, Longhorn Steakhouse, McDonald’s, Aldi, Lowe’s and more. He can be reached at Bob.Kane@FranklinSt.com.