NY Continuing Education 7.5 Credit Hours

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1 Successful completion of 22.5 hours of instruction (three 7.5 hour courses), is required for certification. Graduates will receive a Certificate of Completion and be recognized as Commercial and Investment Real Estate Certified (CIREC) agents. Author and Instructor: Edward S. Smith, Jr., CREI, ITI, CIC, GREEN, MICP, CNS NY Continuing Education 7.5 Credit Hours Copyright by Edward S. Smith, Jr. Updated September, 2017

2 7/13/2015 Commercial and Investment Real Estate Certification Program CIRE 101 Working with Office, Retail and Industrial Buildings, Leases and Green Concepts Author and Instructor: Edward S. Smith, Jr. CREI, ITI, CIC, GREEN, MICP, CNS Copyright April, 2015 Edward S. Smith, Jr. Commercial and Investment Real Estate Consultant and Trainer Certified Real Estate Continuing Education Instructor Author of over a dozen Continuing Education courses, six books more than 140 articles on Commercial and Investment Real Estate NY and CT Real Estate Broker Commercial and Investment Real Estate Certified Successful completion of 22.5 hours of instruction (three 7.5 hour courses), is required for certification. Graduates will receive a Certificate of Completion and be recognized as Commercial and Investment Real Estate Certified (CIREC) agents. 1

3 7/13/2015 CIRE 101 What you need to know about Office Buildings Leases Issues Types of Leases Retail Buildings Industrial Properties Working with Other Brokers Green Concepts Primary Types of Commercial Properties Office Retail Industrial Apartments Class A Office Building The Best Available Space Attracts the Highest Quality Tenants Modern Architecture Superior Construction Excellent Location Well Managed Amenities and Services 2

4 7/13/2015 Class B Office Building A Tired Class A Excellent Building but No Longer the Best Available Space Captures not quite A Tenants Less Modern Architecture Medical Office Space Unique Requirements Class C Office Buildings Older Buildings Secondary Market Tenants Approaching Economic Obsolescence Lacks Image Secondary Locations Or Built New -Highly Functional 3

5 7/13/2015 Office Building Considerations Phones and Computers Treatment of Utilities Hours Open Ancillary Services Parking Other Office Space Concerns Floor Plans As Built s Tenant Improvements Workletters BOMA Measuring System Floor Plan 4

6 7/13/2015 As Built Shows existing construction Four offices, one large conference room Tenant Improvement Proposal Only needs two offices but, wants two conference rooms. Atriums 5

7 7/13/2015 Space Terminology in Office Buildings Usable Square Footage a/k/a Net or Net Usable Square Footage Rentable Square Footage a/k/a Gross or Billable Square Footage Space in Multi Tenant Buildings Landlords desire to be paid for every square foot in their building. Tenants will occupy a unit or defined space in a building, but will share with the other tenants the common areas of the building, such as lobby, hallways and restrooms. The tenants pay for the space they occupy plus their proportionate share of the common areas. Usable Square Footage Usable square footage is the area contained within the space that the tenant occupies 6

8 2/12/2016 Rentable Square Footage Rentable Square Footage equals the entire space, including the usable square footage and the tenants pro rata share of the buildings common areas, that the tenant pays for. Loss Factor or Core Factor The difference between the rentable and usable area in commercial building is called the loss factor or core factor. Generally this is a percentage. Lost or Core areas examples Atrium or lobby Hallways Public Restrooms Utility Rooms 1

9 2/12/2016 Office buildings need supplies delivered Common Area Loading Docks Four suites Common Areas L o b b y Rest. His Rest. Hers 2

10 2/12/2016 Net Usable Space Net Usable 1000 SF L o b b y Rest. His Rest. Hers Rentable Square Footage includes proportionate share of Common Areas Rentable (Billable) 1250 SF L o b b y Rest. His Rest. Hers 3

11 7/13/2015 How much space does the tenant have to pay for? Two methods of calculation Add-On Factor Core or Loss Factor Calculation Calculating Rentable (Billable) Space Add-On Factor A tenant can use and occupy 10,000 SF in a building. The building has a Add-On Factor of 15%. How much space is the tenant billed for? To calculate the usable square footage is multiplied by 100% plus the add-on percent. 10,000 X 1.15 = 11,500 The tenant must pay for 11,500 SF of space. Loss or Core Factor The difference between the net and rentable square footage expressed in percentage terms. 10

12 7/13/2015 Problem Landlord gives you a floorprint of the unit. It shows the net square footage. Landlord tells you the buildings core or loss factor is 20%; and expects you to calculate the rentable or gross square footage. Calculating Rentable Square Feet Net SF = Rentable SF 1 Core or Loss Factor Step 1: Determine Denominator (This is the inverse of the core or loss factor) Step 2: Divide Net SF by Denominator 1000 SF Net (usable) SF Core or Loss Factor 20% Net SF = Rentable SF 1 Core or Loss Factor Step 1: Determine Denominator =.8 11

13 7/13/2015 Solve for Rentable Billable SF Net SF = Rentable SF 1 Core or Loss Factor Step 2: Divide Net SF by Denominator 1000 Net SF = 1250 Rentable SF.8 (Billable) Summary The building has a 20% core or loss factor. The tenant will occupy 1000 SF. The tenant will pay for 1250 SF. Differences in Methods 1000 SF, Common Area 20% Add-On 1000 SF X 1.20 = 1200 SF Billable Loss/Core Factor Calculation 1000 SF = 1250 SF Billable =.8 What the market will bear Vacancy Rates 12

14 7/13/2015 Ask the Owner What is the net usable space; what is the rentable (gross billable) space. Be careful of your liability in representing space. How Much? What is the real cost of the space? Quote in terms the customer will understand. Disclose Details Money Presenting the Complete Picture Base Per Square Foot (PSF) Additional Rent Common Area Maintenance (CAM) Charges Utilities Expense 13

15 7/13/2015 Common Area Maintenance CAM Charges The landlord enters into contracts with various vendors to provide common services to all the tenants. Then bills the individual tenants proportionately for their share of those expenses. Calculating CAM Charges Rubbish Removal Window Washing Landscaping Snow Removal Cleaning Annual Cost $30,000 Total SF 10,000 = Cost PSF $3.00 Additional Rent charged to tenant. Calculating Cost per Month Step 1: Add together the Base Rent PSF plus any Additional Rent Items. Step 2: Multiply the total cost PSF times the Gross (Billable) SF. This is the annual rent for the space. Step 3: Divide the annual rent by 12 months. This is the monthly cost. Step 4: Quote Monthly Cost and Disclose detailed calculations. 14

16 7/24/2016 Rent per Month Calculation Base Rent $25. PSF Utilities $2. PSF CAM $3. PSF Real Cost $30. PSF Unit Size X 2,000 Gross SF Annual Rent $60,000. Actual Cost 12 months $5,000. Per Month 1

17 Property Checklist Location: Street Address: Town: State: Zip: Closest Cross Street: County: Section/Block/Lot: Owner: Name or Company: Name of Principal if Company Owned: Owners Address: Town: State: Zip: Phone: Fax: Contact to Show: Name: Phone: Fax: Owners Attorney: Name: Firm Name: Address: Town: State: Zip: Phone: Fax: Property: Sale (Y/N) Lease (Y/N) Type: Sale Price: Sale Price per Square Foot: Real Estate Taxes: Real Estate Taxes per SF: Use appropriate Listing Checklist for detailed information on property and lease prices. Brokerage: Sales Commission (%): Lease Commission Rate and payment terms:: THESE FORMS ARE TO GATHER INFORMATION ONLY. A FORMAL LISTING AGREEMENT AND COMMISSION AGREEMENT SHOULD BE EXECUTED. Edward S. Smith, Jr.

18 Listing Checklist Office Buildings and Space Location Street Address: Town: State: Zip: Closest Cross Street: County: Section/Block/Lot: Building Qualities: Class: Total Size (SF): Site Size: # Floors: Year Built: Construction: Elevator (Y/N): Days/Hours Open: Security (Y/N): Parking Total # Spaces: Visitor Parking: Core or Loss Factor (%): Technical Services: On Site Ancillary Services: (Check box) Cleaning Service provided by landlord Restaurant Cafeteria, Full Cafeteria, Vending Machines Health Club Gym Child Care Unit Description: Unit #: Unit Size: Net (useable) SF: Rentable (billable) SF: Base Rent per SF: Additional Rent: Utilities per SF: CAM per SF: Total Rent per SF: Rent per Month: Cleaning Included (Y/N): Tax Escalation (Y/N): Separate Electric Meter (Y/N): NNN Lease (Y/N): ROFR (Y/N): Lease Term: Annual Escalations: Tenant Improvement Allowance: # Assigned Parking: Comments: Attachments: ڤ Survey ڤ Floor Plans ڤ As Built s For Building Sale: Attach Financial Analysis and Asking Price Edward S. Smith, Jr.

19 7/13/2015 Leases 15

20 7/13/2015 Lease Negotiations Contracts between Landlords and Tenants Definition of a Lease An agreement whereby the owner of real property (i.e. landlord) gives the right of possession to another (i.e. tenant) for a specified time (i.e. term) and for a specified consideration (i.e. rent). Quoted from Black s Guide Who s who Landlord a/k/a the Lessor Tenant a/k/a the Lessee 16

21 7/13/2015 A lease should be like a partnership agreement in that it sets out the parameters of a business relationship. Lease Forms The Standard Lease General Considerations How Often Used? Standard Form Lease The Standard Form Lease is the Landlord s wish list. 17

22 7/13/2015 The Challenge The Standard Form Lease is the Landlord s wish list. Who do you represent? The Standard Form Lease is not in the best interest of the tenant! Blumberg Lease Office or Store Standard Lease Note: Extremely Large Font Blumberg Lease Repairs Tenant will take good care of the demised premises make all repairs in and about the same Promptly pay the expense of such repairs 18

23 7/13/2015 Late on Rent If the tenant shall make default in the payment of rent at the expiration of said 10 day period, the landlord may immediately re-enter the demised premises and remove all or any property therefrom Clause 15 - Rules The landlord may prescribe the placing of safes, machinery, quantities of merchandise and other things. The landlord may make such other and further rules and regulations the tenant will observe and conform to all such rules and regulations. Blumberg Standard Lease Clause 22 Tenant will, keep insured in the favor of the Landlord all plate glass. Clause 24 Tenant pays for own water plus will keep the water meter, in repair and pay for all charges 19

24 7/13/2015 Clause 26 Sprinkler System As additional rent hereunder the tenant will pay the landlord, annually in advance, throughout the term $ toward the contract price for sprinkler supervisory service. It really says this! Clause 33 The tenant will keep clean and polished all metal, trim, marble and stonework which are part of the exterior of the premises, using such materials and methods as the Landlord may direct Lease Issues Size of space What is important to various types of customers? 20

25 7/13/2015 Tenants Requirements Guide Tenants in analyzing their Square Footage Requirements Space Requirements RETAIL Sales Area Storage Area Delivery Req. Office/Counter Check Out Restrooms OFFICE Manager 10 x 15 2 Sales 10 x 10 4 Clerical 8 x 8 Conference Room File Cabinets 40 SF Copiers Reception Lease Issues Permitted Use of Space Hours of Operation 21

26 7/13/2015 Other Dollar Issues Security Deposit Insurance Requirements Rent Increases Escalations Tax Escalation Clause Tax Escalation Clause Who pays the real estate taxes? Pass through percentage Tax Escalation Base taxes on lease signing paid by landlord Tax increases thereafter, tenant pays proportionate share More Lease Issues Workletter Buildout Tenant Improvement Allowance Repairs and Maintenance 22

27 7/13/2015 Lease Terms Commencement Date of Lease Occupancy Date Abatement Period Concessions Commencement Date of Rent Payments Signage Directory Assigned Parking Guarantees Guarantees Personal Guarantees Negotiating Personal Guarantees What is a Personal Guarantee? Two basic business situations Guaranteeing a loan (payments on a loan) Guaranteeing a lease (payments due as rent) 23

28 7/13/2015 Personal Guarantee for a Lease A personal guarantee for a lease is required in many cases by the landlord. It may be secured by personal assets, like the owner's home equity. The guarantee requires the borrower to promise to make good on the loan, even if the business cannot repay. Why guarantees on leases? When a business enters into a lease, usually the lease is signed by any officer on behalf of the corporation, LLC or other business entity. If the business fails and defaults on the lease, the landlord is out of luck, unless there is a personal guarantee. Franchises Landlords often assume when a National Franchise is suggested as a tenant the National Company will sign the lease, or at least guarantee the lease. In fact, typically the Franchisee signs the lease and the parent company will not guarantee it. What is the financial strength of the franchisee? 24

29 7/13/2015 Landlords need protection Today landlords require personal guarantees plus a complete financial check on the business owner s assets to ensure the owner(s) has the finances to back up the guarantee. If the business fails the burden of paying the rent falls on the business owner(s) to personally pay the rent. Guarantor A party, called the guarantor, who agrees to sign a lease guarantee document, guarantees payment for another party (individual or corporate entity). Essentially, this type of situation creates a cosigner arrangement in which a person agrees to pay the money that is owed in the event that the person (or business entity) who signed the lease defaults. Potential Cost of Guarantee It is a 5 year lease, rent is $25,000 a year (without escalations). The Personal Guarantee required of the owner is over $125,000! It is a 10 year lease, rent is $50,000 a year (without escalations). The Personal Guarantee required of the owner(s) is over $500,000! 25

30 7/13/2015 Bankruptcy If the business fails we will just go bankrupt. The business goes bankrupt, but the guarantor still is responsible for the debt. The guarantor goes bankrupt, the guarantor is relieved of the liability for the debt. But the business is still responsible. Complications All four of the corporate officers are responsible for Personal Guarantees of the lease. What is the amount each is responsible for 25% of the liability? Probably not. What does the language of the personal Guarantee say? Joint and Several Liability Most boilerplate lease guarantees impose joint and several liability on the tenants and the guarantors. This means that the landlord has the right to collect all of its damages from any one of the guarantors. The guarantor who gets stuck with the bill has the burden of seeking contributions from his fellow guarantors. 26

31 7/13/2015 Multiple Corporate Officers or Partnerships What if one of them leaves the business or are bought out by the others? Is there lease liability is released? Assumed by the others? Needs to be addressed Tenant retains the right to substitute a guarantor at any time. Sale of Building The Personal Guarantee is between the tenant and this building owner. Negotiate the removal of the guarantee if the building or your lease is sold. Negotiating Personal Guarantees 27

32 7/13/2015 The Risk Every tenant today must realize (unless you are a Fortune 500 Company) the Landlord will require Personal Guarantees. The liability is tremendous! Alternatives Increase the Security Deposit These funds come from the business without additional risk to the business owner(s). Letter of Credit An established business with good financial resources may be able to get a Letter of Credit to guarantee the lease. This is based on the resources of the business with no additional liability to the business owner(s). 28

33 7/13/2015 New Businesses Most businesses, if they fail, do so within the first two years of business. Agree to a personal guarantee but limit it to two years. Review my sales after two years and if my business has increased remove the guarantee. Establish a Time Limit Landlords want to see a record of payments that establish credibility. It is a five year lease; ask the Landlord, if we make all our rent payments on time for three years will you remove the guarantee. Cap the Guarantee Agree that if the tenant terminates the lease the landlord should be able to find a replacement tenant within 6 months. Tenant agrees to pay rent for up to 6 months after lease termination (or until another tenant commences rent payments, which ever period is shorter) 29

34 7/13/2015 Tenant Improvements Landlords are concerned in recovering the cost of tenant improvements or the cost of removing the improvements in the event the tenant fails. Equate the tenant improvements to the cost of the guarantee. Or a reducing scale over a number of years Early Termination Guarantee Tenant agrees if they terminate the lease early they guarantee payment of an additional 6 12 months rent. Liquidated Damages Clause Tenant agrees to a preset and mutually agreed amount of money to settle any default. 30

35 7/13/2015 Loss Mitigation Personal Guarantee Language Require Landlord must mitigate their loss. Depending on local law Generally before a landlord can go after the guarantor they must: Take and use all security deposit Actually market the space Only after a replacement tenant is found; determine the amount of loss Loss Mitigation Landlord calculates # of months not receiving rent Marketing costs Legal costs Renovation expense Commissions Determines total loss mitigation 31

36 7/13/2015 Other Issues Assignment Subletting Sub-Lease Landlord Tenant Direct relationship Landlord (Master) Tenant Sub-Tenant No direct relationship between landlord and sub-tenant Assignment of Lease Tenant is permitted to assign the lease to another party Requires landlords approval Direct relationship is created between the landlord and the assignee 32

37 7/13/2015 Liability for non-payment of rent In sub-lease original tenant is always responsible for rent to landlord In assignment, if the assignee does not pay the landlord the original tenant is responsible for rent Release of Liability Clause Lease Termination Clauses Bail Out Early Termination Good Guy Lease Buy Out Bail Out or Early Termination Clause National Retailers Five year lease with four five year options Early termination after three years Substantial financial penalty 33

38 7/13/2015 True Good Guy Clause In the event the tenant has to break the lease, the tenant will notify the landlord, and provided there is no damage to the premises, pay their rent up until the date they vacate the space and return the keys. Usually requires days notice Modified Good Guy Clauses Sometimes the landlord agrees to release the tenant provided all the rent is paid up to date and there is no damage to the premises, however they also impose a financial penalty for doing so. Modified Good Guy Clause The landlord may agree to release a tenant if the tenant can find a replacement tenant willing to pay equal or greater rent than they are paying. The landlord will need to approve this new tenant, their concern being that the new tenants financial strength or credit worthiness is equal to or greater than the current tenant. (continued) 34

39 7/24/2016 Modified Good Guy (continued) This puts the burden on the current tenant to find a replacement. In this case the tenant may employ a Real Estate Broker to help find a new tenant, and the tenant would be responsible to pay the real estate commission. Lease Buyout s Buying out of an obligation based upon a discount rate; considered to be what similar investments are yielding at that time. Solving for Present Value of Money. Time Value of Money. Time Value of Money The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. For example, assuming a 5% interest rate, $100 invested today will be worth $105 in one year ($100 multiplied by 1.05). Conversely, $100 received one year from now is only worth $95.24 today ($100 divided by 1.05), assuming a 5% 1

40 7/24/2016 Lease Buyout 16 months left on lease Rent payment are $5,500 per month Outstanding Obligation $88,000 Similar investments yield 10% What is the maximum that should be paid to buyout this lease? CCIM Institute Certified Commercial Investment Member 2

41 2/8/2017 Another Example The tenant has a long time left on the lease. This tenant is paying rent of $70,000 a year. They signed a ten year lease three years ago. Their business is failing and they want to get out of their lease obligation. Just to keep it simple, with no escalations, the overall obligation to the landlord for the next seven years is $490,000 (7years X $70,000 annual rent). If this landlord agreed to the buyout, and discounted the obligation using a discount rate of 8%, the present value of the obligation would be reduced to $364,446. Lease Buyouts Why should a landlord release the tenant? Cash flow = replace + bonus penalty Higher rents now Reality 50% - 75% of obligation Verses sub-lease of space 1

42 2/8/2017 Defaults Tenant Non-Payment of Rent Eviction Bankruptcy - Termination of lease depends on language in lease. If none Trustee in Bankruptcy determines if lease will be treated as asset or a default. Foreclosure In a foreclosure any lease may be cancelled, unless the lease has a non-disturbance clause. The non-disturbance clause states that the landlord s lender and future owners of the building cannot terminate the lease as long as the tenant fulfills their lease obligations. 1

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44 Lease Issues to be Negotiated Space Desired: If Office Space: Net Useable Square Footage Loss Factor or Add- On Factor Rentable (Billable) Square Footage If Retail or Industrial: Gross Square Footage Use of Space: Business usage Certificate of Occupancy Permits or Licenses Lease Term: Define the initial term (length) of the lease Renewal, Extension or Expansion Options Rent: Base monthly rent or Rent per Square Foot (SF). What is included in Base Rent? Base rent to include? (i.e. Heat, air conditioning, utilities, cleaning) Additional Rent: Are there any additional charges to the tenant? (i.e. Common Area Maintenance (CAM), Insurance, Utilities, Taxes or Tax Escalations or other? Utilities: Who pays? Taxes: Who pays? Rent Escalations (Increases) Condition of Space: As is Broom clean Alterations or Tenant Improvements: Landlord shall allow tenant to, at tenant s expense. Or construction requested to be paid for by Landlord, work letter. (Attach details) Concession Period: if requested Occupancy Date Commence of Rent Payments Date

45 Security Deposit Guarantees: Personal Corporate Good Guy Sign Requirements Parking Requirements for Employees Building Access: Hours Open Overtime Use of Services Maintenance and Repair: Who is responsible for what? Environmental Assignment and Sub-Leasing Liability Insurance Termination Options Defaults: Late Payment of Rent Disputes: Mediated or Arbitrated Purchase Option: if desired Right of First Refusal: if desired ADA Americans with Disabilities Act Compliance Building Regulations: Green Buildings Brokers Commission: Fee to be paid, typically by the Landlord When Payable Other issues unique to this situation.

46 7/15/2015 CIRE 101 Afternoon Session How many different types of leases are there? Types of Leases Flat or Straight Lease Graduated or Step-up Lease Gross Lease Modified Gross Triple Net Lease NNN Net Lease Operating Stop or Expense Stop Percentage Lease Ground or Land Lease Turnkey Lease Build-to-suit Sale/Leaseback Sandwich Leasehold Sub-Lease Assigned Lease Green Lease 1

47 7/15/2015 Flat or Straight Lease No rent increases Short term Considered a Month-to-Month lease Must be in writing Graduated or Step-up Lease Allows business to develop customers Need to establish customer base to support full rent Rent $2,000 Month First three months $1,000; second three months $1,500; after six months full rent commences. Alternative to rent concession Gross Lease Landlord collects high rent and pays all the buildings operating expenses out of it Modified Gross Lease In addition to base rent per square foot landlord passes through additional expenses to the tenants 2

48 7/15/2015 Triple Net Lease (NNN) A very bad name The tenant pays all the operating expenses of the property Common in buildings with single or few tenants Net Lease A hybrid between the Gross Lease and Triple Net Lease The landlord will pay some of the operating expenses and the tenant will pay some of the operating expenses The lease defines who is responsible for what and who pays for what Operating Stop or Expense Stop An Operating Stop or Expense Stop is the prescribed dollar-per-square-foot amount in annual property operating expenses that is the landlord s responsibility to cover If the operating expenses exceed this amount the tenant is responsible to pay the increases as additional rent 3

49 7/15/2015 Percentage Lease Only applicable to Retail The tenant pays rent or a reduced rent and in addition pays the landlord a percentage of the stores sales There may be a natural breakeven point of sales before the percentage is applied Natural Breakeven The natural breakeven is the point in sales that the retailer must reach before a percentage of sales must be paid to the landlord as additional rent Annual Rent Percentage of Sales = Natural Breakeven $ Natural Breakeven Annual Rent Percentage of Sales = Natural Breakeven $ $60,000 = $1,200,000 5% (.05) The tenant will have to pay as additional rent 5% of all sales over $1,200,000 4

50 7/15/2015 Percentage Lease May also be a straight percentage of sales from dollar one Ground or Land Lease Renting the dirt Tenant is responsible for constructing the building at there expense Long term today 49 years Escalations every 5 years At end of lease all improvements revert to landlord Build-to-Suit Developer buys land Seeks National client Enters into long term lease Builds per clients plans and specifications Store is open Package is marketed to investors 5

51 7/15/2015 Turn Key Lease Similar to build-to-suit Beyond basic construction Fixtures, furnishings, etc. On occupancy, tenant turns key and goes to work Sale/Leaseback Owner of building and business No debt service Wants money to open another location Offers building to investors with desire to stay in the building now as a tenant Typically a NNN long term lease Definitive ROI to investor Sandwich Leasehold Funny name for a sublease Original tenant is sandwiched between the landlord and the sub-tenant 6

52 7/15/2015 Letter of Intent (LOI) May be used as a negotiation tool Issues Checklist Agreed Letter of Intent Signed by both sides Address ALL business issues May be subject to buildouts or new construction costs Is not a contract or lease 7

53 Company Name Address Phone Letters of Intent (LOI) may be created by the Tenant on their letterhead in which case a cover letter should be included on your Companies stationary. Or you may assist the Tenant by submitting an LOI on their behalf, below is a sample format. Any Letter of Intent must be subject to your commission which may be stated in the letter or referred to as an additional document. Sample format for creating a Letter of Intent on behalf of a Tenant: Date: To: Owner of Property and Mailing Address Re: Letter of Intent Dear Mr./Mrs. Owner I have been authorized to make the following proposal for the lease of the space in the below captioned building on behalf of our prospective Tenant Mr./Mrs. Edward Smith, XYZ Corporation. Property Address: 123 Main Street, Anytown, NY Legal Description: Town of Smithtown, District 000, Section 000, Block 000, Lot(s) 000, 001 Demised Space: Unit 201 6,500 Gross Square Foot Loss Factor: 20% Tenants Use: Base Rent: Shoe Store $27.00 PSF Annual Increases: 3% Security Deposit: Lease Term: Two Months Rent 5 Years with 5 Year Option to Renew Lease Effective Date: Rent Commencement Date: Page 1 of 3

54 Lease Proposal: 123 Main Street, Anytown, NY Page 2 of 3 Buildout or Work Letter: Work Tenant desires Landlord to do to improve space to Tenants use. Some landlords offer a Tenant Improvement Allowance, or a tenant may request a dollar amount as an improvement allowance for the work they need done. In leases many other terms and conditions may need to be negotiated. As Brokers and Agents if we do not discuss and negotiate all issues we will lose control of the transaction; another party will negotiate missing items. Some other issues are listed below, many may be being requested by the landlord and in the LOI the Tenant is effectively responding to those requests. Common Area Maintenance (CAM) Charges: Pass thoughts of Utility Costs: Real Estate Taxes: Who pays? Real Estate Tax Escalation Clause: Renewal Options: Expansion Options: Rent Concessions: Parking: Assigned? Signage: Assignment/Subletting: Building Hours/Access: Commission: Commission due ABC Brokerage per attached agreement. This should include a Commission Fee Agreement and a schedule showing the landlord the rent to be collected each year and the commission rate and calculated fees for each year. This gives perspective to our commission fee by showing the landlord how much money they will collect in total during the entire lease term.

55 Lease Proposal: 123 Main Street, Anytown, NY Page 3 of 3 All commissions are negotiable; all are usually due and payable on lease signing. A Letter of Intent is not a binding contract and should say so. It does however form the basis for a lease and should cover all issues. It is usual to ask for an acceptance of the proposal subject to drafting of a formal lease This proposal is not intended to create a legally binding obligation; such obligation will only be created upon execution of a formal lease. Please sign below indicating your acceptance of this proposal. Thank you. Submitted by: John/Mary Agent Licensed Sales Associate ABC Brokerage Proposal Accepted by: Date: The primary concern of the Landlord is the ability of the Tenant to fulfill its financial obligations created in the lease and keep the premises in good condition. The credibility of the Tenant needs to be established in order to have a proposal accepted or even negotiated further. Submitting financial information about the Tenant or their company with the lease proposal is often helpful.

56 7/15/2015 Retail Free Standing Stores Strip Centers Shopping Centers Costs: Base Rent and Storefronts Base Rent Real Estate Taxes Own Utilities CAM if Parking Area, Landscaping, Snow Removal, etc. 8

57 7/15/2015 Neighborhood Shopping Center Anchor Store Base Rent + RE taxes + CAM Parking Lot, Sweeping, Plowing, Repairs, Lighting Landscaping Community Centers Big Box Anchored Rent + RE taxes + CAM Parking Lot, Sweeping, Plowing, Repairs, Lighting Landscaping Regional Mall Base Rent + RE Taxes + CAM $20-$30 Parking Lot, Security, Lighting, Landscaping, Repairs, Sprinklers, Marketing Fund = $100 PSF 9

58 7/15/2015 Add a Food Court Base Rent Mall CAM Food Court CAM Real Estate Taxes Marketing Fund Special Events + $150 PSF Sales to Support This Rent Danbury Fair Mall 1,292,176 SF averages $636 PSF Roosevelt Field 2,247,000 SF averages $900 PSF Americana Mall Manhasset, NY 220,000 SF sales average $1,800 PSF National average for Regional Malls is $341 PSF Retail Measurements Free Standing Building (FSB) When there is a free standing building, with a single tenant, the gross space of the buildings is used to determine how much square footage the tenant must pay for. The gross space will include the interior square footage plus the thickness of the exterior walls. 10

59 7/15/2015 Measuring Space Retail Measurements Multi Tenant Buildings Retail buildings that contain multiple tenants will add to the interior square footage the thickness of any exterior walls of the unit. Plus, if there are common or demising walls shared with another tenant 50% of the thickness of those walls. That total square footage is what they will pay for. Measuring Space 11

60 7/15/2015 Retail Back to Main Street In Line Stores End Cap Tenant Mix Demographics Rings Population Income Ages 12

61 7/15/2015 Detailed Information about the Center and Available Space 13

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63 Listing Checklist Retail Property Location Street Address: Town: State: Zip: Closest Cross Street: County: Section/Block/Lot: Building Qualities: Type: Total Size (SF): Site Size: Freestanding (Y/N): Year Built: Construction: Days/Hours Open: Parking Total # Spaces: Zoning: Restricted Uses: Building for Sale (Y/N): Price: Store For Lease End Cap (Y/N): Anchors (Who): Store Description: Unit #: Store Size: Square Footage: Base Rent per SF: Additional Rent: Utilities per SF: CAM per SF: Total Rent per SF: Rent per Month: Lease Term: Annual Escalations: Tax Escalation (Y/N): Percentage Lease (Y/N): Separate Electric Meter (Y/N): NNN Lease (Y/N): ROFR (Y/N): Tenant Mix: List other tenants in this building or surrounding area on back of this page. Comments: Attachments: ڤ Survey ڤ Floor Plans ڤ As Built s ڤ Traffic Counts ڤ Demographics For Building Sale: Attach Financial Analysis Edward S. Smith, Jr.

64 7/15/2015 What should they be paying in rent? Industry - Rent to Revenue Ratio Establishing I-RRR (Private Companies) - FREE Financial Tools and Business Statistics - Detailed Financial Information for a Fee 15

65 7/15/2015 Rank Industry RRR % Rank Industry RRR % 1 Depository Institutions Railroad Transportation Transportation by Air Home Furniture, Furnishings and Equipment Stores Personal Services Health Services Apparel and Accessory Stores Local, Suburban Transit & Inter urban Passenger Transport Eating and Drinking Places Miscellaneous Retail Hotels and Other Lodging Places Water Transportation Educational Services Social Services Motion Pictures Business Services Agricultural Production Crops Engineering, Accounting, Research & Management Agricultural Production Livestock Security & Commodity Brokers, Dealers, Exchanges Services Amusement and Recreation Services Miscellaneous Repair Services Real Estate Construction Special Trade Contractors Automotive Repair, Services and Parking Apparel Motor Freight Transportation Mining and Quarrying of Nonmetallic Minerals, Except Fuels Legal Services Heavy Construction, except Building Construction Contractors 2.08 Rank Industry RRR % Rank Industry RRR % 31 Food Stores Coal Mining Communications Miscellaneous Manufacturing Industries Building Materials Hardware Garden Supply Holding and Other Investment Offices Printing, Publishing and Allied Industries Transportation Services Stone, Clay, Glass, and Concrete Products Automotive Dealers and Gasoline Service Stations Furniture and Fixtures Lumber and Wood Products, except Furniture Agricultural Services Paper and Allied Products Fishing, Hunting and Trapping Electronic, Electrical Equipment & Components except Computers General Merchandise Stores Industrial and Commercial Machinery and Computer Equipment Textile Mill Products Wholesale Trade Durable Goods Rubber and Miscellaneous Plastic Products Measuring, Analyzing and Control Instruments Leather and Leather Products Insurance Carriers Fabricated Metal Products, Except Machinery Oil and Gas Extraction Forestry Museums, Art Galleries and Botanical and Zoological Gardens Insurance Agents, Brokers and Service Membership Organizations

66 9/28/2017 Using I-RRR to Determine Base Rent Year Annual Gross Revenue $5,000,000 Law Firm I-RRR X 4.6% Projected Base Rent $230,000 Gross Revenue 7% Annual Growth I - RRR Base Rent 2017 $5,000, % $230, $5,350, % $246, $5,724, % $263, $6,125, % $281, $6,553, % $301,483 1

67 7/15/2015 Subjective and Economic 1. Subjective Considerations Location Building Age Amenities 2. Economic Considerations Client s Business Model Rent to Revenue Ratio s Dollars to Occupy Ratio Dollars to Occupy Ratio I-RRR (Industry Rent to Revenue Ratio) Industries Average Revenue Dedicated to Rent DTOR (Dollars to Occupy Ratio) I-RRR +/- Other Expenses +/- Market Conditions Calculating Dollars to Occupy Ratio I-RRR 4.60% + Other Operating Expenses 1.00% + Market Conditions.10% Dollars to Occupy Ratio 5.70% Budget for rent: $5,000,000 Revenue X 5.70% DOR = $285,000 Desire 10,0000 SF Space; Rent $ PSF 18

68 6/6/2017 What can be paid in Base Rent? Rent Budget $285,000 annual $28.50 PSF Year Base Rent Additional Rent Market Conditions Dollars PSF Total Dollars 2017 $23.50 $5.00 $28.50 $285, $24.44 $5.13 $.50 $30.07 $300, $25.42 $5.25 $.51 $31.18 $311, $26.43 $5.38 $.53 $32.34 $323, $27.49 $5.52 $.54 $33.55 $335,500 Annual Rent Escalation 4% Other Expenses and Market +2.5% annually What is Available Building A Base Rent $25.00 PSF Year Base Rent Addl. Rent Market Cond. Dollars PSF Total Dollars Budget 2017 $25.00 $2.75 $27.75 $277,500 $285, $26.25 $2.82 $.50 $29.57 $295,700 $300, $27.56 $2.89 $.51 $30.96 $ $311, $28.94 $2.96 $.53 $32.43 $324,300 $323, $30.39 $3.04 $.54 $33.97 $339,700 $335,500 Annual Rent Escalation 5% Other Expenses and Market +2.5% annually What is Available Building B Base Rent $29.00 PSF Gross Year Base Rent Addl. Rent Market Cond. Dollars PSF Total Dollars Budget 2017 $29.00 $0 $29.00 $290,000 $285, $30.16 $0 $.50 $30.56 $305,600 $300, $31.37 $0 $.51 $31.88 $318,800 $311, $32.62 $0 $.53 $33.15 $331,500 $323, $33.93 $0 $.54 $34.47 $344,700 $335,500 Annual Rent Escalation 4% No Other Expenses; Market +2.5% annually 1

69 6/6/2017 What is Available Building B Base Rent $28.00 PSF Gross Year Base Rent Addl. Rent Market Cond. Dollars PSF Total Dollars Budget 2017 $28.00 $0 $28.00 $280,000 $285, $29.12 $0 $.50 $29.62 $296,200 $300, $30.28 $0 $.51 $30.79 $307,900 $311, $31.50 $0 $.53 $32.03 $320,300 $323, $32.76 $0 $.54 $33.30 $333,000 $335,500 Annual Rent Escalation 4% No Other Expenses; Market +2.5% annually Guide Clients to Maximum Profitability How much should they be paying in rent? Industry Rent to Revenue Ratio (I RRR) Adjusted for Other Related Expenses and Local Market Conditions Dollars to Occupy Ratio (DOR) Creates a Realistic Rent Budget Extend out to 5 years for Comparison Retail Directions Where are you buying products online or in stores? 2015 Retail Customer Experience survey ranks retailers in four categories: Customer Service Online Experience Value and Price Overall Customer Experience Winner in all four categories! Amazon 2

70 6/6/2017 Retailers are responding to the market s #1 request: Customer Service 2017 Top 10 Best Retail Experience Ratings Ace Hardware: 81% BJ's Wholesale Club: 81% QVC: 81% Sam's Club: 80% O'Reilly Auto Parts: 79% True Value: 79% Amazon.com: 78% Dollar Tree: 78% Barnes & Noble: 77% Advance Auto Parts: 76% Todays Shopper The Millennium generation controls 70% of the spending power in U.S. They have smart phones since childhood. How does a retailer get them into their store? Online sales have created a decline in store traffic. Current trend in downsizing retail stores. 1

71 7/15/2015 Retail Changes Beacon technology Experience Retail Entertainment Centers Entertainment in Stores We want a movie theater in our mall Danbury Fair Mall, CT Industrial Properties Industrial Buildings Warehouses Distribution Centers Factories Manufacturing Plants R & D Research and Development Flex Buildings 21