COMMERCIAL PROPERTY LEASES
TRANSLATING "LANDLORDESE" TO ENGLISH
- Part II -
By Levi F. Smith, Esq.
As Published in Michigan Lawyers Weekly
March 17, 2003
Continued from Part I
CLASS A OFFICE BUILDINGS - There is no common accepted definition for this term. It will differ based on city or suburb, region of the country and if you are talking to an owner, user, landlord, assessor, buyer or lender. It is one of the most abused terms in real estate. Having said that, Let’s try to create one.
SUBURBAN - full service building with sit-down restaurant(s), health club/locker room, fiber optics to the building, some covered parking, bank, on site manager, on site engineer, janitorial personnel and security guards during the day. Its rent will be in the upper 10% of the market. Free parking on site may vary by area. A travel agency used to be included pre-internet. Tenants include large corporate law firms, Fortune 1000 companies and real estate developers.
URBAN – Buildings with rent in the upper 10% of the market. Starbucks Café, on site manager, on site engineer, janitorial personnel and security guards during the day, age is less than 35 years old.
CLASS B – A building with fewer amenities than class A. The majority of buildings are class B.
CLASS C - Suburban building containing one and a half story building that has no amenities and is not meant to impress clients. An urban building pre World War II with transoms, inadequate HVAC and has low rent in the bottom 25% of the market
PORTER WAGE - A New York City term referring to the wages of a certain labor union to set annual rent increases. This has not been applied in the Midwest, yet!
BASE YEAR - The parties agree to the calendar year which operating expense and property taxes shall be used to compare increases or decreases to. It is often the year you move but it is negotiable and should be the second year of occupancy because the landlord has already factored current cost increases into your base rent. Beware of new buildings that have not been fully assessed. Lease language should include full assessment after substantial occupancy or you may pay substantial dollars for property tax increase. Real estate taxes usually increase substantially if the property is sold, so negotiate fixed annual increases.
OPERATING EXPENSES - Defined by the lease, it generally includes utility charges, property and casualty insurance, repairs and maintenance expense, janitorial service, waste removal, management fees, common area maintenance, security, window washing etc. It should not include legal expenses to collect delinquent rent or to sell or refinance the building. It should not include real estate broker fees or tenant improvement work.
TI (TENANT IMPROVEMEMT) ALLOWANCE - Landlord builds into your rent money that he will spend on your behalf to construct or demolish walls, replace or clean carpet, move or upgrade lights, replace ceiling tiles etc in your suite. Beware if the improvements are based on usable not rentable square feet. Also, is the landlord supplying HVAC equipment or is it coming out of your allowance?
If your improvement costs exceed the allowance, the landlord may amortize the cost over the lease term with interest so the tenant does not have upfront costs.
FREE RENT - There is a free lunch if the landlord does not increase the rent to recapture the free rent! In a soft market, landlords will abate rent to entice tenants. Landlords want to keep base rent high on the face of the lease to maximize financing and value for sales purposes. This is a good thing for a tenant to have but it is not tax deductible; you can’t have everything, but always ask!
REAL ESTATE BROKER - Licensed person who procures you for the landlord, represents the landlord, and is compensated by the landlord unless the parties otherwise agree. He/she has a duty under agency law and state real estate broker law is to convey your negotiating strategy to the landlord. Caveat Emptor!
TENANT REPRESENTATIVE - Your licensed real estate broker agent who may be paid by the landlord if all parties are informed and agree that he is your agent. Also known as a corporate real estate advocate, a tenant representative does not tell the landlord your negotiating strategy, but negotiates zealously for you.
We have attempted to level or tilt the playing field for the tenant.
Now for your final exam:
Which is a better deal?
(a) $20 per square foot gross rentable “as is” condition (no TI dollars)
(b) $12 per square foot NNN (where NNN = $9 and $2/sf/year TI Allowance)
The answer is “b” because the landlord is paying $2/sf/year for improvements. Very good!!
BIO: Levi F. Smith, a native Michigander, lives in West Bloomfield.
After passing the bar in Michigan and California and practicing law for 6
years, he entered the commercial real estate field. In 1988 he founded the first corporate real estate firm,
Levi F.
Smith Real Estate, Inc. in Michigan to exclusively represent tenants and buyers. For
more information, visit
http://www.michigan-commercial-real-estate-properties.com
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Smith Real Estate, Inc.
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