Negotiating a Commercial Lease

Transcription

1 SCORE Chapter One Washington DC Metro Area washingtondc.score.org SCORE Services SCORE, a national, non-profit Association with over 13,000 volunteers in 364 chapters, is a resource partner of the US SBA. SCORE Chapter One has 50 Mentors, with diverse business and industry backgrounds, across the D.C. Area. SCORE offers the following services: Low-cost workshops - washingtondc.score.org Individual free one-on-one counseling/mentoring Online workshops, tools, and more at SCORE teams provide counseling to assist you to: Increase the value of your business Identify and solve operating problems Recognize and capitalize on new business opportunities Develop business plans Find sources and qualify for financing 1

2 Richard Rose SCORE Mentor 40+ Years in Retail Home Furnishings President & CEO - Town House Contemporary Furniture Leather Plus 30+ Years as a Commercial Landlord B.S. University of Maryland SCORE Certified Mentor for 9 Years Workshop Objectives Develop an understanding of the important issuesin a commercial lease and how they impact your business. Develop an understanding of the processinvolved in obtaining a commercial lease. Develop an understanding of how to negotiatethe terms of a commercial lease to benefit your business and mitigate risk. 2

3 Understanding the Terms Types of Commercial Rent: - Full Service or All-In - Industrial Gross - Triple Net Rent NNN Base Rent Real Estate Taxes Common Area Maintenance CAM Landlord s Insurance Utilities Gas, Electric, Water Understanding the Terms Triple Net Rent is the Net of: Real Estate Taxes Landlord s Insurance Common Area Maintenance - CAM Triple Net Rent is quoted per square foot... per year. Therefore.... $50 Triple Net for a 2,400 sq ft space = $50 X 2,400 = $120,000 per year = $10,000 per mo 3

4 Understanding the Terms What is a Triple Net Lease? In a Triple Net (NNN) Lease: The Tenant Pays Triple Net Rent Plus His or Her Pro-Rata Share of: Real Estate Taxes Landlord s Insurance Common Area Maintenance - CAM An Example Rachel s Bakery Rachel is planning to open a bakery. She s looking at a 1,200 sq ft space in a 32,000 sq ft building. She s been quoted $40 Triple Net. (NNN) Real Estate Taxes are estimated at $4.00 per sq ft per year. CAM and Insurance is estimated at $7.50 per sq ft per year. What is Rachel s estimated Taxes, Cam & Insurance? What is Rachel s estimated Total Rent? 4

5 Doing the Numbers Triple Net Rent: $40 per square foot X 1,200 sq ft = $48,000 per year or $4,000 per month Real Estate Taxes: $4.00 estimated per square foot X 1,200 sq ft = $4,800 per year or $400 per month Insurance and CAM Charges: $7.50 estimated per square foot X 1,200 sq ft = $9,000 per year or $750 per month Estimated Total Rent = $61,800 per year or $5,150 per month What s Rachel s Total Risk? Rachel s Total Risk For a 5 year lease, Rachel has $309,000 at Risk. For a 10 year lease, she has $618,000 at Risk. In addition, Rachel has build-out costs, leasehold improvements, and start-up costs that will likely put another $200,000 at Risk. Conclusion... Executing a Lease is a Big Deal. There will be serious consequencesif you fail. You Must Understand the Risk. 5

6 Understanding Pro-Rata Share The Landlord has been estimating Real Estate Taxes, Insurance & CAM. Real Estate Taxes: $4.00 estimatedper square foot X 1,200 sq ft= $4,800 per year or $400 per month Insurance and CAM Charges: $7.50 estimatedper square foot X 1,200 sq ft= $9,000 per year or $750 per month The Exact Amount will be Based on a Pro-Rata Share. Understanding Pro-Rata Share Calculating Pro-Rata Share Pro-Rata Share = the Tenant s premises in square feet divided by the total square feet in the Building. 6

7 Rachel s Pro-Rata Share Rachel is looking at a 1,200 sq ft space in a 32,000 sq ft shopping center. 1,200 32, Rachel s Pro-Rata Share = 3.75% Understanding Taxes & CAM - Will the Tenant see the actual Real Estate Tax Bill? - Will the Tenant understand what s included in CAM? - Can the Tenant hold the Landlord accountable? - Will the Landlord Negotiate these charges? 7

8 * * * * * * * * * * * * * * * Let s Look at Rachel s Taxes and CAM Clarendon Real Estate Investment Trust Year: 2015 Tenant: Rachel's Bakery Common Area Maintenance (CAM) Pro-rata Share = 3.75% Expenses: Management Fees 8, Electricity 4, Water/Sewer General Payroll 19, CAM and Cleaning Payroll 28, Contract Cleaning 1, Supplies Miscellaneous Service Contracts 1, Trash Removal Contract 10, Trash Removal - Other Snow Removal Supplies 1, Snow Removal - Services 19, Repairs and Maintenance Tools Landscaping Contract 11, Landscaping - Other 1, Roof and Structural Repair Plumbing Repair 4.22 Electrical Repair Parking Lot Sweeping 2, Parking Lot Repairs and Striping 7, Parking Lot Lighting Vehicle Maintenance 2, Signs Fire Prevention 1, Communications 4, Depreciation - Capital Expenses 16, Insurance 42, Total Actual Common Area Expenses: 187, Administrative Fee 15% 28, Total CAM with Administration Fee 215, Pro-Rata Share - Rachel's Bakery 3.75% 8, Less Estimate Previously Billed at $750 per month (9,000.00) Total Amount Overpaid - Take Credit Against Next Rent Payment $ (910.38) 8

9 Clarendon Real Estate Investment Trust 2875 Wilson Boulevard, Arlington, VA Year: 2015 Tenant: Rachel's Bakery Real Estate Taxes: Pro-rata Share = 3.75% Real Estate Taxes 142, Legal - Tax Appeals Refunds: 2014 (735.60) Total Real Estate Tax Expenses 141, Pro-Rata Share - Rachel's Bakery 3.75% 5, Less Estimate Previously Billed at $400 per month (4,800.00) Total Amount Due - Net 30 Days $ The Leasing Process Follow the Right Process 1. You will save money. 2. You will avoid mistakes. 3. You will have less stress. 4. You will get a better deal. 9

10 Step 1 - Prepare Yourself Retain a SCORE Mentor and/or other advisors to help. Prepare a high-quality Business Plan with Financial Projections. Write the Business Plan yourself. Clearly identify your value proposition, differentiation, goals and projections. Explain the assumptions and actions you will take to reach your goals & projections. Include a detailed schedule of start-up costs. Prepare a Personal Financial Statement Balance Sheet. Identify Your Source of Funds. Remember: You won t get a second chance to make a first impression! Step 2 Retain a Leasing Agent - Your Leasing Agent will review your criteria and assist in finding a space that meets your needs. What kind of business are you planning? How large a space do you need? How much rent can you afford to pay? What kind of location do you want? Are there any zoning issues? Are there any special requirements? - Your Leasing Agent will present your idea and offer to the Landlord. - He will arrange for you to visit and inspect potential locations. - He will negotiate the deal on your behalf. - His fees or commissions will be paid by the Landlord. 10

11 Step 3 Negotiate the Deal - A (LOI) or Term Sheet will spell out the basic terms of the deal in writing. It is typically a 2-3 page document. - The LOI may be initiated by the landlord or the tenant. It will then be negotiated by both parties. - The LOI includes the economic terms of the deal plus any other issues important to the landlord or tenant. - Your Leasing Agent will negotiate the LOI on your behalf. - The LOI is a non-binding agreement for all parties. Step 4 Retain an Architect & General Contractor Before or during the LOI process, you need to consult with an Architect and/or a General Contractor. You should prepare a preliminary plan drawing. The General Contractor should check out existing systems and provide you with an estimate for build-out costs. Be sure you understand the process and time line for obtaining Building Permits and the Occupancy Permit. 11

12 Step 5 - Engage a Lawyer Engage an attorney to review the Lease and represent your interests. The terms of the LOI will be incorporated into the Lease. The Lease Agreement will be 30 to 50 pages, binding on all parties. It will be prepared by the Landlord s attorney in favor of the Landlord. As a Tenant, your responsibility is to read the Lease completely and understand what it says. Your attorney will assist you and then ask for modifications to the Lease that will favor you. You must prepare for Success and Failure. * * * * * * * * * * * * * * Let s Look at Rachel s 12

13 1. The Tenant 2. The Size of the Premises 3. The Use of the Premises 4. The Non-Compete Clause 5. The Lease Term 13

14 6. Base Rent 7. Lease Commencement 8. Rent Commencement 9. Rent Increases What is the Impact? Year Annual NNN Rent Monthly 1 48,000 4, ,440 4, ,923 4, ,451 4, ,024 4, ,645 4, ,315 4, ,034 4, ,805 5, ,629 5,219 14

15 10. Percentage Rent. How is it calculated? 6% applied to sales above a Normal Break Point. Monthly Rent divided by 6% = $4,000/.06 = $66,667 in Sales This is the Normal Monthly Break Point Rachel pays 6% of sales in excess of $66,667 each month. Rachel s Monthly Percentage Rent Rachel s 2016 Total Sales % Rent with $66,667 Break January 25,000 February 25,000 March 25,000 April 25,000 May 25,000 June 166,667 $6,000 July 25,000 August 25,000 September 25,000 October 25,000 November 25,000 December 166,667 $6,000 Total Sales $583,334 Monthly Percentage Rent Total $12,000 15

16 Understanding Percentage Rent What if we calculate the Normal Break Point Annually? Annual Rent divided by 6% - $48,000 /.06 = $800,000 in Sales The Annual Break Point Rachel now pays 6% of sales in excess of $800,000 per year. Rachel s Annual Percentage Rent Rachel s 2016 Total Sales January 25,000 February 25,000 March 25,000 April 25,000 May 25,000 June 166,667 July 25,000 August 25,000 September 25,000 October 25,000 November 25,000 December 166,667 Total Sales $583,334 Annual Break $800,000 Annual Percentage Rent $0 16

17 11. Real Estate Taxes & CAM 12. Option to Extend 13. Utilities 14. The Condition of the Premises 15. Tenant s Work 16. Tenant Improvement Allowance 17

18 17. The Signage 18. The Initial Deposit 19. The Security Deposit 20. The Personal Guaranty 21. Radius Restriction 22. The Lease 18

19 23. Brokerage Important: The LOI is a Non-Binding Agreement only when it includes a Disclaimer. Additional Terms & Definitions Industrial Gross Rent Tennant s Insurance Cold Dark Shell Rent Escalation Business Interruption Ins Vanilla Box or Shell Full Service Lease Continuous Operation Marketing Fee Rent Abatement Hours of Operation Mechanic s Lien Assignment Clause Rules & Regulations Radius Clause Sub-Lease Clause Demolition Clause Sales Reporting Clause Defaults & Remedies Holding Over Letter of Credit Late Charges Option to Termination Kick-Out Clause Attornment Clause Estoppel Certificate Subordination Agreement 19

20 QUESTIONS? Resource Listing Richard Rose, SCORE Mentor Score National: Score Local: SBA: