Representing the Commercial Tenant

REPRESENTING THE COMMERICAL TENANTREAL ESTATE DUMBED DOWN SERIES

Premier date: February 26, 2016

Premier Date: February 26, 2016

REPRESENTING THE COMMERICAL TENANT

REAL ESTATE DUMBED DOWN SERIES

© 2016 DailyDAC, LLC d/b/a/ Financial Poise®

WE WOULD LIKE TO TAKE THIS OPPORTUNITY TO THANK OUR SPONSORS


Meet the FacultyPANELISTS

ROBERT F. INSELBERG WOODEN MCLAUGHLINMICHAEL MARRION COLLIERSSPENCE MEHL RCS REAL ESTATE ADVISORSLINDA SHORT CRESA

MODERATOR FELIX SHALIT,

SILA CAPITAL, LLC


Practical and entertaining education for business owners and executives,

accredited investors, and their legal and financial advisors. For more information,

visit www.financialpoise.comDISCLAIMER: THE MATERIAL IN THIS PRESENTATION IS FOR INFORMATIONAL PURPOSES ONLY. IT

SHOULD NOT BE CONSIDERED LEGAL ADVICE. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS.


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About This WebinarA commercial tenant, whether big or small, needs the ability to operate freely. This can be hindered greatly if it runs into disputes with its landlord. There are a wide variety of issues that can arise such as a dispute regarding the lease terms or receiving notice of eviction. It is imperative that the commercial tenant’s business operations be understood and that special attention be paid to the different sections of the lease that can critically impact its business. These include permitted use, expansion, parking, maintenance, etc. Good negotiations prior to the signing of the lease may greatly reduce the likelihood of issues arising or escalating to eviction. This webinar will cover what representing the commercial tenant entails.


About This Series

If you are going to enter into (or represent someone in) a commercial real estate transaction you need to understand the legal and business aspects of the deal and you need to understand the local market. This Financial Poise webinar series provides attendees with a solid overview of the issues one needs to consider when doing real estate deals.

As with all Financial Poise webinars, each episode in the series is designed to be viewed independently of the other episodes, and listeners will enhance their knowledge of this area whether they attend one, some, or all of the programs.


Episodes in this Series

EPISODE #1 Representing the Commercial Landlord

January 19, 2016

EPISODE #2 Representing the Commercial Tenant

February 26, 2016

EPISODE #3 Basics of Real Estate Syndication

March 18, 2016

EPISODE #4 Due Diligence in Real Estate Deals

April 29, 2016

EPISODE #5 Real Estate Valuation Basics 101

May 27, 2016

Dates above are premier dates; all webinars also available on demand


Length of LeaseLong-term leases are usually five years or longer. Its benefits include:●Stability

○If you find your dream location, a long-term lease ensures you'll be able to stay there for an extended period of time, even if your building is sold.

●Predictability ○Tenants that sign a long-term lease know how much

their rent will increase from year to year, regardless of market conditions.

●Tenant Improvements/Concessions ○Landlords are often more willing to give tenant

improvement allowances and other concessions like free rent to tenants that sign long-term leases.


Length of Lease (Continued)Short-term leases are typically one to five years in length. Some benefits include:●Flexibility

○Tenants that need to scale up or down, or move to a new location altogether, are easily able to do so with a short-term lease.

●An "Easy Out" ○Short-term leases allow entrepreneurs to cut their

losses and move on if a business venture fails to take off.


Types of Commercial LeasesType of Lease Rent Basis Often Used inPercentage Lease Base Rent + Percent of Monthly Sales Retail Businesses; Malls

Net LeaseIn additional to rent, tenant pays some or all of taxes, insurance, or maintenance.

Any commercial lease; usually favors landlord’s interests

Double Net Lease Tenant pays rent + taxes and insurance

Any commercial lease; usually favors landlord’s interests.

Triple Net Lease

Tenant pays rent + taxes, insurance, and maintenance.

Tenant pays rent + taxes, insurance, and maintenance.

Gross Lease

Landlord directly pays all or most usual costs. These costs are often passed on to tenant in rent as a “Load Factor.”

Office, Some industrial and retail leases.

Source: http://abt.cm/1ecDd9k© 2016 DailyDAC, LLC d/b/a/ Financial Poise®

Operating Expense RentOperating Expense Rent or Common Area Maintenance (CAM) rent is defined in the lease. The lease clauses dealing with CAM expense spell out in detail what building expenses the owner is allowed to “pass through” or “escalate” to the tenants.● CAM expenses - expenses that directly benefit all of the

tenants of a property. They typically include, but are not limited to: ○ janitorial service○ janitorial supplies, ○ trash removal○ HVAC and elevator

maintenance○ landscaping○ pest control○ snow removal

○ building supplies, ○ building

maintenance labor○ on-site management

staff○ property accounting

and management○ security services○ fire alarm monitoring○ electricity

○ natural gas and water/sewer utilities

○ insurance ○ real estate taxes


Operating Expense Rent (Continued)

● Base year - In full service or modified gross leases, the landlord agrees to cover a tenant’s share of the annual operating expenses, but limits their annual exposure to an amount equal to the expenses incurred in the first year, or “Base Year.” ○ The base year is the actual operating expenses incurred by the

building, usually in the first calendar year of a lease. ○ Once established, this figure becomes the benchmark for future

years to determine the tenant’s share of excess operating expenses, also referred to as “pass throughs” in many leases.

○ If during the base year the landlord’s operating expenses for a property are $175,000 but in following years the operating expenses rise above that amount, the tenants will be required to pay the difference. © 2016 DailyDAC, LLC d/b/a/ Financial Poise®

Expense OverchargesOften, tenants cannot tell what is or is not included in their operating expense statement or whether the charges follow the previously negotiated lease agreements. Some common lease expense overcharges include:

●Capital costs incorrectly allocated as repairs●Parking garage expenses not offset by the parking

revenue●Costs specifically excluded by the lease but lumped

into “miscellaneous” expenses●Tax abatements, rebates, or refunds not passed

through or credited to tenantsSource:www.americanbar.org/content/dam/aba/publishing/probate_property_magazine/rppt_mo_premium_rp_publications_magazine_2006_ja_Friedman.authcheckdam.pdf


Expense Overcharges (Continued)●Double billings for utility service paid by an individual

tenant but also included in a general utilities category●Accountants’ fees for preparing the landlord’s tax

returns●Failure to pass through expense reductions as credits●Build-out expenses for a specific tenant


Co-TenancyMany retailers rely on other stores traffic to drive sales and request that co-tenancy clauses be used to ensure the tenant-mix remains beneficial for them.

A co-tenancy provision allows a tenant to exercise specified remedies if certain conditions regarding the presence and operation of other tenants in the shopping center are not met.

While this clause provides the tenant with protection, landlords do not like such provisions because they can severely impact a center’s income and viability for reasons that are outside of the landlord’s control.


Co-Tenancy (Continued)There are two types of co-tenancy requirements: ● Opening co-tenancy - allows a tenant to delay its initial

opening and payment of rent, pay alternate rent, and/or terminate its lease if certain tenants, a certain threshold number of stores, and/or a certain amount of the leased area of the shopping center do not open by a specified date.

● Ongoing co-tenancy provides that a tenant, once open, must only stay open at full rent if a certain number of anchor tenants and a certain percentage of the remaining gross leasable area of the shopping center are also open. If the agreed-upon threshold is not met, tenants typically have the right to reduced rent and, eventually, termination.


Tenant ImprovementsWhen negotiating the lease, landlord and tenant will discuss tenant improvements. In some cases but definitely not always, the Landlord may offer a tenant improvement (TI) allowance as an incentives to prospective tenants● TI allowance - the amount a landlord is willing to spend so

that the tenant can retrofit or renovate the office space● How much the landlord is willing pay depends on the

tightness of the market, the value of the tenant, and the extent to which the build-out improves the property


Renewal OptionLandlords often grant renewal options reluctantly because it limits their flexibility to market the space to prospective tenants who may be willing to pay a higher rate.

For a tenant, the option to renew can protect their rights and negotiation leverage in market conditions or a situation that is slanted in the landlord’s favor.

When negotiating a lease, it is difficult to predict market conditions 5-10 years in advance. A non-existent or poorly structured renewal option could be very costly.


Tenant RemediesMany commercial leases cause the tenant, by accepting the terms of the lease, to waive a host of remedies provided by the law. Other leases fail to mention tenant remedies entirely.● Tenant Remedies

○ If included in the lease, this clause determines what remedies are available to the tenant in the event of a default on the part of the landlord.

● Abatement Rights○ Allows the tenant to abate, in proportion to the area of the

premises affected, the amount of rent it pays if the landlord fails to remedy items for which it is responsible that interfere with the tenant’s use of or access to the leased premises.

● Termination Rights○ Gives the tenant the option, under the defined circumstances,

to vacate the entire premises without further obligation.© 2016 DailyDAC, LLC d/b/a/ Financial Poise®

TerminationThe language of a commercial lease determines the procedures for terminating the lease agreement between a landlord and tenant. ● Break Clause

○ A clause permitting the tenant to terminate the lease without being obligated to pay the remaining rent balance under the lease agreement.

○ Certain conditions must be met before the tenant may exercise his rights to terminate the contract before the end of the lease term.

○ The tenant must provide timely notice of his intent to terminate the contract early.

○ Most break clauses stipulate that the tenant has the right to terminate the contract early during a specific timeframe.

● Termination Clause○ At any time after the commencement of the lease, the landlord and tenant

may agree in writing to terminate the lease before the expiration of the lease term. © 2016 DailyDAC, LLC d/b/a/ Financial Poise®

Termination (Continued)○ The tenant relinquishes the property, and the landlord agrees to release the

tenant from further obligations under the contract. ○ The landlord may maintain the right to sue for damages for early

termination or charge a fee for early termination.● Assignment of Lease

○ Unless prohibited by the lease agreement, a commercial tenant may attempt to avoid the payment obligations of the lease by assigning the lease to a new tenant and transferring the rights under the contract.

○ The original tenant remains liable for the lease agreement if the new tenant defaults on the rent obligations.


Exclusive Use ClauseExclusive use clauses generally favor the tenant by requiring that the landlord may not lease space within the same business center, shopping mall, or strip mall, to tenants who conduct a similar type of business, carry a similar product line, and/or would attract the same category of customer. When including an exclusive use clause, be sure to consider key components:● Scope

○ The goal of both landlord and tenant should be to come up with a clearly defined exclusive that leaves little to no room for interpretation.

● Enforcement ○ Any exclusive use clause needs to also be clear on whether there is a

cure period, rent abatement, and ability to terminate the lease in the event of a violation of the exclusive use clause.

○ The lease should be clear on the notice process, time periods and remedies if violations are not cured.


Exclusive Use Clause (Continued)● Notice of Exclusives.

○ Be aware of any existing exclusives. ○ Be sure that the intended use is a permissible one. ○ If there’s any chance a tenant may later expand the business, be sure

that any expansion doesn’t violate any exclusives already in place.


Landlord BankruptcyIn the event that the landlord files bankruptcy, commercial tenants need to monitor what happens. Being prepared in advance can allow them to protect their rights and even remedy problems with the landlords' performance. Three questions are key:● Assume or Reject?

○ If bankruptcy is declared under Chapter 11 Section 365 of the Bankruptcy Code, the landlord gets to choose whether it will assume the existing lease, or reject it.

○ If the landlord assumes the lease, all rights and obligations remain in place.

○ Before the lease can be assumed, any defaults by either landlord or tenant must be cured (payment of rent due, reimbursement for overpayments, etc.).

○ Tenants may be able force the landlord to take care of any lingering issues by having all breaches and their cost to you itemized for the bankruptcy court before assumption of the lease is approved.

Source:blogs.findlaw.com/free_enterprise/2009/04/landlord-bankruptcy-what-happens-to-commercial-leases.htm© 2016 DailyDAC, LLC d/b/a/ Financial Poise®

Landlord Bankruptcy (Continued)● Continue or Terminate?

○ If the landlord chooses to reject the lease, under Section 365 the tenant can choose whether to continue or terminate the lease.

○ If the tenant continues the lease, it retains the right to occupy the property under the terms in the lease.

○ If the tenant continues, a landlord who has rejected the lease is released from its obligations.

○ Losses to the tenant from the landlord's nonperformance can be deducted from rent.


Landlord Bankruptcy (Continued)● What if the landlord sells?

○ Section 363 of the bankruptcy code allows bankruptcy trustees to sell the properties of Chapter 11 landlords free and clear of any interests in the properties, subject to certain conditions.

○ Because sale to a new owner could threaten the existence of the lease, it is vital that the tenant object to sale of the property if it wishes to remain there.

○ Courts have held that tenant failure to object is considered "consent" to the sale of their bankrupt landlord's property.


More About The FacultyD

FELIX SHALITSila Capital is a real estate investment company dedicated to acquiring, redeveloping, and stabilizing distressed or failed commercial properties. Felix Shalit, Founder, has more than 15 years of real estate industry experience. His experience includes all of the various disciplines that are central to successful investment in real estate: acquisitions, transaction structuring, capital markets, asset and portfolio management, redevelopment and dispositions. Sila focuses on office, industrial, and retail assets and portfolios. Target assets are properties that can succeed through proactive leasing efforts, physical improvement or repositioning, entitlement changes, or realization of adaptive re-use strategies.

[email protected]



ROBERT F. [email protected]

Robert F. Inselberg is a partner with Wooden McLaughlin concentrating his practice primarily in various aspects of real estate, finance and corporate law. His experience includes representing clients of many sizes in a variety of real estate acquisitions, dispositions and development projects and involvement in sophisticated transactions.

Rob also focuses a significant amount of his practice on leasing transactions and has represented landlords, tenants, property managers and brokers in a variety of retail, restaurant, medical, office, industrial and mixed-use projects.


mailto:[email protected]



MICHAEL [email protected] Marrion is currently a Vice President at Colliers International in Chicago.

Over his career, he has gained extensive knowledge of the tenant representation process. Prior to joining Colliers, Michael was with Transwestern in Chicago. There he concentrated on tenant representation services in the Chicago metropolitan market. Previously, he spent four years in the airline industry where he was involved in the development of executive air carrier, Indigo, and then lead sales strategy efforts at United Airlines.Michael began his career at Insignia/ESG in Washington D.C. While there, he represented more than 5.5 million square feet of office space on behalf of property owners. He transferred to the Chicago office in 1998 where he focused on representing tenants including Freeborn & Peters, Weaver Boos Consultants and FreightCar America.PROFESSIONAL AFFILIATIONS/RECOGNITION

● PAWS Chicago Development Board● Union League Club of Chicago

○ Communications and Membership Committees● Notre Dame Club of Chicago, Board of Governors

EDUCATIONMichael earned a BBA from the University of Notre Dame.


http://[email protected]

http://[email protected]


SPENCE [email protected] Mehl is a Senior Vice President at RCS Real Estate Advisors. Since joining

the team in 1995, he has worked successfully with some of the company’s largest and most well-known national clients, developing close relationships with them through his widely recognized skills as an effective negotiator and expert in property dispositions. His demonstrated abilities in all facets of the business draw from his previous experience as general counsel and real estate director for a national retail chain. In that role, he held principal responsibility for all aspects of retail asset management and development, from strategic planning, site selection and construction through lease negotiations, property dispositions and other elements of asset portfolio optimization. Following that tenure, he honed his skills as a negotiator through direct involvement in some of the most prominent and large-scale retail bankruptcy proceedings on record.Earlier in his career, Mr. Mehl practiced law in New York, focusing on transactional real estate litigation. He holds a JD degree from St. John's University School of Law, as well as a BA from Tulane University.





LINDA [email protected]

Linda Short is a Vice President at Cresa, the world’s largest tenant-only real estate firm. Linda also holds SIOR and CCIM designations and has been involved in various disciplines within commercial real estate throughout her 22 year career. These disciplines include Property Management, Construction Project Management, Landlord Representation, and Tenant Representation. Linda provides a well-rounded approach to her clients through her experience representing both Tenants and Landlords with different types of transactions including; office leasing and sales; land acquisition, consulting and representation in multi-market transactions for the acquisition and disposition of owned and leased properties. Her diverse commercial real estate experience allows her clients to maximize their leverage in attaining real estate goals by understanding the owner’s perspective in every transaction. Linda is the Co-Lead of the Association & Non-Profit Practice for Cresa Chicago and is an active member of the Association Forum of Chicagoland. Prior to joining Cresa, Linda worked for Duke Realty Corporation, a full service real estate investment trust, as a Senior Leasing Representative for the leasing of an office portfolio consisting of 4 million SF of Class A properties and new development.Linda’s focus is to help clients determine the best strategy for their real estate, which may include a single location or to address their national portfolio needs. Linda is a 2016-2017 CREW Chicago Board Member.



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Important Notes• THE MATERIAL IN THIS PRESENTATION IS FOR

GENERAL EDUCATIONAL PURPOSES ONLY.

• IT SHOULD NOT BE CONSIDERED LEGAL, INVESTMENT, FINANCIAL, OR ANY OTHER TYPE OF ADVICE ON WHICH YOU SHOULD RELY.

• YOU SHOULD CONSULT WITH AN APPROPRIATE PROFESSIONAL ADVISOR TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS.
