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Lease Language

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Gobears81

Senior Member
Joined
Nov 7, 2013
Professional Status
Certified General Appraiser
State
Illinois
Guys

When looking at leases to corporate entities, what are some of the key items to look for that would be particularly tenant-friendly? I know that not all leases are created equal, but outside of outright cancellation clause or bankruptcy language, is there anything to look at in particular that would somehow allow a tenant largely off the hook for future payments if they wanted to vacate?

Also, I know that when the tenant has no limitations on their repair responsibilities, many of you simply divide the NNN rent payments by a cap rate (and understandably so), rather than deduct items that an owner might actually incur as a result of owning a property, such as additional tax preparation expenses, etc. But what are your thoughts on recognizing reserves in cases where the repairs are not limited to non-bone structure items such as roof, exterior walls, etc.? Obviously, one would need to adjust the cap rate if reserves are being recognized, but I am seeing both sides. In particular, most tenants aren't going to spend $200,000 to replace a roof if they have 5-years remaining on the lease-they might do the minimum, so if and when it becomes vacant, the owner will be responsible for those items. On the other hand, if we are recognizing stabilized NOI based on lease language that is not limiting tenant repair responsibilities to only floor coverings, etc., that would imply reserves (and other operating expenses) would only be incurred in the fraction of the time that it is vacant, so projecting a typical reserves expense based on perpetual LL responsibilities for these items would potentially overstate this amount. Thoughts?
 

PL1957

Senior Member
Joined
Jul 19, 2004
Professional Status
Certified General Appraiser
State
Illinois
Guys

When looking at leases to corporate entities, what are some of the key items to look for that would be particularly tenant-friendly? I know that not all leases are created equal, but outside of outright cancellation clause or bankruptcy language, is there anything to look at in particular that would somehow allow a tenant largely off the hook for future payments if they wanted to vacate?
The first thing that comes to mind, especially with retail tenants, is a co-tenancy clause which lets a tenant either walk or reduce their rental rate if an anchor vacates. I've also seen retail leases that have certain sales/square foot hurdles.

Also, I know that when the tenant has no limitations on their repair responsibilities, many of you simply divide the NNN rent payments by a cap rate (and understandably so), rather than deduct items that an owner might actually incur as a result of owning a property, such as additional tax preparation expenses, etc. But what are your thoughts on recognizing reserves in cases where the repairs are not limited to non-bone structure items such as roof, exterior walls, etc.? Obviously, one would need to adjust the cap rate if reserves are being recognized, but I am seeing both sides. In particular, most tenants aren't going to spend $200,000 to replace a roof if they have 5-years remaining on the lease-they might do the minimum, so if and when it becomes vacant, the owner will be responsible for those items. On the other hand, if we are recognizing stabilized NOI based on lease language that is not limiting tenant repair responsibilities to only floor coverings, etc., that would imply reserves (and other operating expenses) would only be incurred in the fraction of the time that it is vacant, so projecting a typical reserves expense based on perpetual LL responsibilities for these items would potentially overstate this amount. Thoughts?
Reserves need to modeled the way market participants look at them, making sure you are being consistent with the way they're treated in the comps.
 

hastalavista

Elite Member
Joined
May 16, 2005
Professional Status
Certified General Appraiser
State
California
I ran across one in an assignment I had. One of the large fortune 100 companies (tech related) in their lease had the following regarding their option-renewal rental rate: The requirement was to have a market rent survey done by an MAI, and then this tenant would pay 5% below the market rate.
 
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