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LEASING The Letter of Intent. Presented by: Sean P. Callan. The Letter of Intent. Non-binding outline of fundamental economic terms of lease Varying degrees of detail for varying business reasons Important to us because they are the basis for drafting the lease. The Letter of Intent.

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leasing the letter of intent
LEASINGThe Letter of Intent

Presented by:

Sean P. Callan

the letter of intent
The Letter of Intent
  • Non-binding outline of fundamental economic terms of lease
  • Varying degrees of detail for varying business reasons
  • Important to us because they are the basis for drafting the lease.
the letter of intent1
The Letter of Intent
  • Rent, term, space, renewals …..
  • Some items not discussed – may be intentional or unintentional
  • Thoughts ….. Not directions but things to think about when drafting LOI
agenda
AGENDA
  • Continuous Use/Operating Covenant
  • Passthroughs

3. Early Termination

4. Use, Exclusives and Radius

5. Assignment and Subletting

  • Construction and Commencement
  • Co-tenancy
continuous use operating covenant
Continuous Use/Operating Covenant

How critical is it?

Retail

Office

Industrial

continuous use operating covenant1
Continuous Use/Operating Covenant

If not mentioned in the LOI, is the Tenant required to continuously operate?

Landlord – of course – part of standard lease form!!!

Tenant – of course not – its not in the LOI!!!

continuous use operating covenant2
Continuous Use/Operating Covenant
  • The “one day” compromise
  • Exceptions – legal holidays, remodeling, closures due to casualty/condemnation and inventory
  • Remedies
      • With covenant – standard lease remedies
      • With no covenant – must be negotiated – recapture in shortest time possible
      • On recapture – tenant may demand unamortized improvements and expenses
passthroughs1
PASSTHROUGHS

Common Issues

  • GLA/GLOA
  • Audit
  • Cap
    • Cumulative – add 5% every year
    • Non-cumulative – 5% over actual
  • Carve-outs
  • Anchors – cannot be included in denominator
  • Outlots
  • Base year/gross up
early termination
Early Termination

When the lease ends prior to natural expiration of term …

Huge issue for Landlord

- changes pro-forma cash flow

Huge issue for Landlord lenders

- lenders limit early termination rights

early termination1
Early Termination

Typical early termination scenarios

  • Gross sales kickout (repay unamortized TI)
  • Negotiated buy-out
  • No operating covenant
  • Landlord breach of special covenant
      • Exclusive
      • Co-tenancy
use permitted
Landlord

Specific

Narrow – at least restrict to national operations

Trade name

No change without consent

Tenant

Broad

Any lawful use

No specific trade name

Free to change use or trade name

Free right to change within corp. umbrella

USE - Permitted
use exclusives
USE – Exclusives

Landlord Concerns

  • Narrowly defined – more focused than permitted use
  • Restricted to tenant’s core business
  • Permit incidental sale of restricted items
  • Geographically limited – to building or center at most; bookstores/groceries
use exclusives1
USE - Exclusives

Tenant Concerns

  • Wants broadest definition possible, including ancillary goods
  • Largest geographic reach possible – 2 miles?
  • Real remedy for violation
use exclusives2
USE - Exclusives

Carve-outs

  • Anchors
  • Existing tenants – but may bind LL where LL has consent rights over change in use
  • Incidental uses
  • Anticipated tenants – problematic, and can be remedied with later waiver
use exclusives3
USE – Exclusives

Termination of Right

Protection intended for tenant’s core business; need for protection may go away

  • Assignment/Sublease
  • Change in use
  • Failure to continuously operate
  • Default
use exclusives4
USE – Exclusives

Remedies

Cure period

After some period of time, substitute rent – 5% gross; ½ minimum rent

After further period - termination

use exclusives5
USE – Exclusives

Landlord Concerns – Remedies

  • Longest cure period possible
  • Longest alternative rent period possible
  • tie remedies to demonstrated harm; i.e., decrease in sales
  • No remedy if another tenant violates its lease
  • Restraint of trade/antitrust – ask for tenant indemnification
use radius
USE - Radius

Landlord protection

Flip side of exclusive

Prohibits tenant from competing with landlord’s center

5 miles – negotiate down – have seen 10 miles

Remedy – add in Gross Sales

assignment and subletting
Assignment and Subletting

Assignment of Lease

An assignment (i.e., the transfer of rights or property) in which a lessee transfers the entire unexpired remainder of the lease term

or

All of the space for the rest of the term

assignment and subletting1
Assignment and Subletting

Sublease

Where a lessee transfers a part of its premises for the whole remaining term, or the whole premises for a part of the remaining term

or

Some of the space for the whole term, or all of the space for less than term

assignment and subletting2
Assignment and Subletting
  • Assignment – new tenant primarily liable to LL; old tenant a guarantor
  • Sublease – LL has no relationship to subtenant – original tenant wholly liable to LL
  • Each are permitted unless lease says otherwise
  • “not to be unreasonable withheld” vs. LL’s “sole discretion”
assignment and subletting3
Assignment and Subletting

Common scenarios

  • In connection with sale or merger
    • Involves x number of stores
    • X$ net worth, or exceeds T’s net worth at time of lease and time of assignment
construction and commencement
Construction and Commencement

Work Letter

  • Allocates responsibility for build-out – should be as clear as possible; should be reviewed/approved by construction manager
    • Pad delivery – outlots – Landlord provides buildable pad and utility stubs to lease line of pad
    • Cold dark shell – Landlord provides structure, utility stubs and pad; all other work is tenant’s including strorefront and slab
    • White box – space is drywall taped, sanded and ready to paint; tenant finish
    • Turnkey – Landlord does all work
construction and commencement1
Construction and Commencement

Tenant Finish

Installed in a good and workmanlike manner

In accordance with applicable law

Design should reflect tenant’s prototypical store

In accordance with plans and specs reviewed and approved by Landlord

Design, plans and specs need to be finalized as soon as possible in the build-out process – Critical point! Cost & timing implications

construction and commencement2
Construction and Commencement

Commencement

  • Tied to delivery – give tenant time to complete finish
      • Pad delivery – 180 – 240 days
      • Cold dark shell – 90 – 150 days
      • White Box – 30 – 60 days
      • Turnkey – no more than 30 days
construction and commencement3
Construction and Commencement

Commencement – When does the clock start?

  • Landlord plan approval
  • Tenant failure to draw good plans
    • Do not comply with law
    • Not proto-typical store/office
    • Special needs
    • Do not comply with preliminary plans
  • Permits
    • Tenant should apply by date certain and diligently pursue
    • Same with liquor and business licenses
construction and commencement4
Construction and Commencement

Commencement – late delivery

  • Potentially huge issue for tenant
  • Penalties
  • Termination if not delivered by outside date
  • Force majeure
  • Tenant delays
co tenancy
Co-tenancy

Tenant’s obligations under lease are conditioned upon the continued presence and operation of another entity at a certain location

  • Retail – other tenants in shopping center
    • Named tenants – reasonable replacements
    • Percentage of center – what about anchors and premises?
    • Shadow anchors
  • Office/industrial – tied to presence of client or customer
co tenancy1
Co-tenancy

Remedies for violation

  • Cure period
  • Alternative rent for some period of time
  • Termination
  • Repayment of out-of-pockets?