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REAL ESTATE FUNDAMENTALS & SYDICATIONSREAL ESTATE LEASING
PeerRealty
LEASING PROCESS• The leasing process typically begins as soon as the Landlord
knows the date the space will become available – either from the date the current tenant vacates or the date of substantial completion for new construction.
• Leasing, and the leasing process, is fundamental to understanding real estate finance and underwriting.
• The lease process starts with tenants viewing available assets, choosing the one that best suit’s their needs and then negotiation an LOI for the Premises.
1. Gross Leases– Expense Stops/Base Year
Calculations2. Net Leases
– Current modified approach with net rental payment to LL plus a share of the operating expenses/maintenance costs.
3. Modified Gross Leases– Industrial Gross Leases
(Interior Maintenance and Electric)
Who Pays the Expenses?
Landlord -------Tenant
BASIC LEASE TYPES
LEASE EXPENSES• Lease Expenses – We will discuss how to specifically handle and
minimize lease expenses during the Asset Management class. • Taxes• Insurance• Electricity • Maintenance
– CAM– Utilities– Water/Sewer– HVAC– Parking Lot– Roof and Structure– Management Fees (2% - 4% Chargeback)
• Gross Up - An adjustment made to operating expenses to account for the occupancy level in a building. When operating expenses are "grossed up", it means that the building's variable expenses have been adjusted upwards to the level that those expenses would be incurred if the building was fully occupied (typically 95%).
RENTAL ABATEMENTAlso, note that many new leases, especially in this economy and/or leasing environment (tenant market), contain rental abatement. Rental abatement can generally come one of two ways. Either you can reduce the rent over the entire term of the Lease or you can just give X number of free months and extend the term of the lease.
For example, lets say a LL has an industrial building that is 100,000 SF which has a market rental value of $4 SF. If the LL wants to lease the building to Kentco for 48 months, the value of the lease should be $1.6 Million ($400,000 per year for 4 years). If the LL wants to give 6 months free, they can either:
1. Reduce the face rent by $200,000 (6 months rent) to a total of $1.4 Million and charge the Kentco $350,000 per year or $3.50 SF; or
2. Continue to charge Kentco $4 SF for 4 years and extend the term of the lease to 54 months of which for the first six months, no rent is charged, other than operating expenses/maintenance costs.
TENANT ESTOPPEL• Tenant Estoppel’s are common documents in lease administration.• Failure, by the Tenant, to execute the Estoppel should be an event of default
under the Lease. • Usually, the estoppel is sent by the landlord whenever it is selling or refinancing
property. – Sometimes, the estoppel will be sent by the tenant when assigning, subletting or selling
its business. – In any case, the effect of the estoppel is to bind the executing party to certain
statements of fact. – These facts might include the existence of a binding lease, the terms thereof and the
documents that constitute the lease, the status of rent payments and security deposits and any lease defaults.
• Some of the critical issues in negotiating the estoppel language in the Lease are:1. How many times (per year) does the Tenant need to execute an Estoppel statement?2. What is the amount of time that the tenant has from receipt until Estoppel execution?3. What is the required content of the Estoppel? Does the Lease language provide for
“reasonable” requests or is the Estoppel’s content limited to a form which is attached to the Lease as an exhibit?
SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT
(SNDA)• SNDA’s are actually three agreements in one.• REMEMBER – SNDA’S ARE SIGNED BY THE TENANT!• Subordination - The “subordination” portion permits a
lender-mortgagee of the property whose lien is junior or subordinated to the tenant's (usually because the lease was recorded before recording the lien of the mortgage), to become superior to the lien of the lease.
• Non-Distrubance - A non-disturbance agreement permits the lease to stay in force so long as the tenant is not in default. The purpose of the non-distrubance clause is that in the event the lender becomes the landlord (due to a LL default), that the tenant will be permitted to retain occupancy of the Premises.
SNDA’s• Attornment - The attornment agreement creates a
contractual bond between tenant third-party mortgagee, pursuant to which the tenant agrees it will recognize the mortgagee as landlord in the event of a default. – The attornment provisions go hand in hand with the
Non-Distrubance portion of the SNDA.– Essentially, a mutual agreement is created that says
tenant will respect landlord as the landlord and landlord will respect tenant as the tenant if the original tenant/borrower defaults on its obligations.
PROBLEMATIC LEASE CLAUSES• Right of First Offer (ROFO)• Right of First Refusal (ROFR)• Purchase Option• Right to Offset • Assignment vs Sublease• Termination Options• Appropriations Options – Typically in Govt Leases• Short Duration• Use and Continuous Use (Retail) Clauses / Radius Clauses
– Effects on Percentage Rent• Over / Under Market Rents• Flat Leases
– Unless the tenant is the Government Services Admin. or Walgreen’s.
SALE LEASEBACK TRANSACTIONS
• A sale leaseback is where the owner/user of the property, for whatever reason, seeks to sell the real estate (and improvements) and then lease back the building for a stipulated duration.
• Sale leasebacks are usually done as a financing mechanism (100% LTV) for companies in troubled financial condition.– GM Sale Leaseback Offering
COSTS OF LEASING• Rental Abatement?
– For example, currently in Austin TX, the rental abatement is one free month’s rent for every year of lease term.
• Tenant Improvements– Office $10 / $5– Industrial $6 / $3– Retail $20 / $10
• Amortize these costs? • Amounts affected by lease term?
• Leasing Commissions– 6% / 3%
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