guerrilla leasing: how to maximize your negotiating ... leasing tactics - 05.14.14.pdf · if you...

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Guerrilla Leasing: How to Maximize Your Negotiating Leverage for the “Smaller”

Office, Retail and Restaurant Tenant Wednesday, May 14, 2014 6:00 PM – 8:00 PM

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Jeffrey A. Margolis

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GUERILLA LEASING TACTICS: HOW TO MAXIMIZE YOUR

NEGOTIATING LEVERAGE FOR THE “SMALLER” OFFICE,

RETAIL AND RESTAURANT TENANT

Prepared in connection with a Continuing Legal Education course presented at New York County Lawyers’ Association, 14 Vesey Street, New York, NY

scheduled for May 14, 2014

Program Co-Sponsor: NYCLA's Real Estate Section

Faculty: Jeffrey A. Margolis, The Margolis Law Firm

This course has been approved in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 2 Transitional and Non-Transitional credit hours; 2 Skills.

This program has been approved by the Board of Continuing Legal education of the Supreme Court of New Jersey for 2 hours of total CLE credits. Of these, 0 qualify as hours of credit for ethics/professionalism, and 0 qualify as hours of credit toward certification in civil trial law, criminal law, workers compensation law and/or matrimonial law.

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Information Regarding CLE Credits and Certification

Guerilla Leasing Tactics: How to Maximize Your Negotiating Leverage for the “Smaller” Office, Retail and Restaurant Tenant

May 14, 2014; 6:00 PM to 8:00 PM

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New York County Lawyers’ Association

Continuing Legal Education Institute 14 Vesey Street, New York, N.Y. 10007 • (212) 267-6646

Guerilla Leasing: How to Maximize Your Negotiating Leverage

for the “Smaller” Office, Retail and Restaurant Tenant

Wednesday, May 14, 2014, 6:00 PM-8:00 PM

Program Co-Sponsor: NYCLA’s Real Estate Section Faculty: Jeffrey A. Margolis, The Margolis Law Firm

AGENDA 5:30 PM – 6:00 PM Registration 6:00 PM – 6:10 PM Introduction and Announcements 6:10 PM – 8:00 PM Presentation and Discussion

Guerilla Leasing Tactics--New York County Lawyers’ Association-CLE presentation-May, 2014

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Suite 1505 11 East 44th Street New York, NY 10017 212-490-0900 + FAX 212-490-0700 >website: www.margolislawfirm.com >e-mail: [email protected]

MARGOLIS THE MARGOLIS LAW FIRM

Memo To: NYCLA-CLE

From: JAMargolis Date: 05/14 Re: COMMERCIAL OFFICE LEASE: A smaller TENANT’s OVERVIEW

REBNY PARA. #

HEADING COMMENTS (“must haves” in BOLD)

(iii) and 15

Landlord and Tenant

• confirm correct entities • T: newco to be formed? corp.? LLC? general/limited

partnership? • take in one name/right to assign to newco

WITNESS-SETH Premises • rentable, leasable, useable, carpetable

• REBNY standards as to measurement; also BOMA, etc • re: description of the demised premises (“DP”)—

attach a diagram • specify square footage • once diagram received, check to make sure that the DP

have been properly outlined WITNESS-SETH

Term • fixed or sliding • REBNY form is fixed—easy • sliding—date T takes occupancy or L completes L’s

Work • if sliding: effect of delays-outside date (“drop dead”

date) for completion of work/delivery of possession • commencement contingent on various approvals and

permits (e.g., C of 0, plans/specs for T's Work, SLA)

mailto:[email protected]


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• rent penalty—2x days rent for each day of delay • provide for commencement date agreement • right to enter prior to rent commencement date for

fixturing/communications work/decorations WITNESS-SETH

Rent • fixed • first months rent due on signing • try to change to pay at completion of L’s Work • as to any “free” rent: no give-backs by reason of

(claimed) T default (none) Escalation

Rent • additional rent • CONFIRM PROPER BASE YEAR (RELATIVE TO

LEASE START DATE) • Confirm T’s proportionate share -- L representation

as to amount and basis of total bldg square footage used in denominator.

CPI • confirm proper base data • use appropriate index

• Fixed % bumps in fixed rent-compunded? better for T if not

• CPI and F%B: advantage: easy to calculate

Operating Expenses • review as to suitability of items included • limit to L’s “actual” expenditures • carve out capital items, amounts reimbursed by other

tenants or included in their rent, items not fully related to operation of the building, e.g., home office management, executives salaries, brokerage commissions, L’s insurance, legal fees for lease enforcement against other tenants-prep of space for tenants’ occupancy, if a “cost saving” device is included, should be only to the extent = a savings—right to inspect L’s books/audit

• “gross-up” expenses in base year • one year deadline for billing • SEE rider Tax Escalation • use fair base year (get full year or close to it) • what is T's proportionate share?


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• L to provide copies of tax bills • give careful review to definition of "taxes" • exclude special assessments, penalties, interest • what is present tax status of building? • special problems re new construction and increase

relating to new construction (actual vs. transitional assessments)

2 Use • "Any lawful use"—looking for flexibility—esp if later

sublease/assignment • cover all aspects of proposed business • L to rep proposed use is covered by C of O and will not

result in increased insurance premiums • eliminate prohibitions such as a use which would

“adversely effect the character and reputation of the Building”—too vague

• general or executive offices • look out for list of “no’s” • add right to use DP for “incidental” uses—also present

use must be interpreted in some flexible way—add use X “as same may change from time to time” (example, toys & book store now wants to carry video tapes, DVD’s)

3 Alterations • T to have right to make non-structural alterations, decorations, or alterations costing less than ($25,000) without L's prior consent

• all installations made by T remain T's property

• right to remove (T to repair the damage) • no obligation to remove at end of term • If L reserves right to change lobbies,

configuration of corridors, etc., add provision re no impairment of egress, ingress, visibility, etc.

L’s Work (esp. initial work) • need specific plans and specifications—outside

date for completion • “drop-dead” date (terminate lease) • liaise with T's architect/designer

T’s Work • on initial work, get approval upfront—no charge for L


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review on initial T work. • Construction allowance Specific plans and specifications • must T use contractors approved by L? -Union help? • right of T to contest liens • liaise with L's architect/designer • limit time for L review • If no objection w/i time frame, L deemed to have

approved • decorative –no consent required • T to be allowed to use work allowance $ for any

purpose related to lease all alterations—no obligation to remove at end of term

4 Maintenance

and Repairs • general division T, inside; L, outside and all

building systems • also add that L responsible for elevators • L to make all structural repairs, repairs to HVAC,

utility lines, and such nonstructural repairs as occasioned by L's negligence, etc.

• building to be maintained in attractive, clean, first-class manner

• T not required to make repairs ( i ) covered by warranties of L's contractors, or (ii) covered by insurance carried by either party—try for agreement that L to make all repairs covered by L’s insurance, regardless of whose responsibility under the lease--

• L’s repair work to be performed so as to minimize interference w/ T’s business

• work to be done in good and workmanlike manner • T to get reas advance notice (exc. emergency) • if L fails to make a repair, T right of self-help, at least a

broad indemnity of T • L to rep that at CD, all major systems in good order

and repair 6 Requirement of

Law • generally, to be L's responsibility, at L's expense,

unless caused by T's "manner of use" (compare with mere "use")

• rep that at commencement of term DP will be in compliance with all laws—esp as to asbestos, fire command system, ADA compliant, etc

• L responsible for all environmental matters


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6, 9 Insurance • REBNY form is not specific • waiver of subrogation • review ins requirements with T’s agent • require L to carry typical insurance

7 Subordination • what is present ownership status of fee (land/building) • obtain specifics as the present mortgages and ground

leases, if any • (for larger leases): Non-Disturbance Agreements

(re present and future mortgages, etc.)

4, 8,20, 27,31

Indemnity- Exculpation

• Form (Art. 8) already has “unless caused by L’s negligence” as a carve out—add “willful misconduct or omission”” to “negligence”

• make reciprocal • carve out L’s negligence from Art. 27 (inability to

perform), too 9 Damage

Or Destruction

• under certain circumstances (e.g. total destruction of premises) T to have right to cancel (esp. if event is in last year or two of term)

• full abatement and partial abatement (to run until both L and T restoration work completed)

• requirements re L's repair and restoration (outside dates, etc.)—shorten dates for completion—reduce time for L decision making on rebuilding—“untenantability” to mean T unable to carry on its work in full DP in normal manner

• note that damage to some parts of DP can be more important than others

• L to give adequate notice when DP will be ready for re-occupancy

• be careful as to phrases such as restoration work begins after L’s receipt of the insurance proceeds (could be major delay if as L and carrier slug it out)

• if substantial damage or destruction, explore T's right to reoccupy space in "new building"

• “substantial damage”—work on definition— • L to restore interior of DP to state as of start of

term (i.e, re-do L’s Work)

• • •


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11 Assignment and Sublet

• key word: FLEXIBILITY” • right to assign or sublease to affiliate, subsidiary,

parent or in connection with sale of all assets (successors) without L's consent; release of original tenant and guarantor from liability (provided net worth = or + than original parties

• all other assignment or sublease, consent not to be unreasonably withheld, conditioned or delayed

• right to have clients, customers occupy desk space without consent

• no recapture; if recapture no partial recapture • discuss profit on assignment or sublease (not apply to

“family” transfers—also no recapture) • try for expedited approval process • preliminary term sheet to suffice (not required to go all the

way to signed sublease) • be specific—as to profits—make it just that: “all costs”—

include legal fees, ads, alterations done to prep DP for new occupant

12 Electricity • rent inclusion is typical • check that rate is comparable to other buildings (now in

NYC, $3 per rsf is typical) • if submetered, T not to pay more than direct rate (tariff)

paid by L • L to rep that electric adequate for office purposes. • Specify electrical capacity __amps, broadband

capacity, etc. • L not to discontinue service unless does so as to

majority of tenants by rsf 13 Access • L to use all reas effort not to interfere with

w/conduct of T’s business • give notice of entry (except emergency) • L to clean-up/restore after its work is done

15 C of O • L to rep that proposed use is permitted under C of O 16 Bankruptcy • Bankruptcy law trumps lease provisions

• “ipso facto” clauses (lease terminate on T’s becoming insolvent) are not enforceable

17 Default • notice and opportunity to cure before being held in default, esp as to rent

• T should have right to dispute defaults (include stay of termination pending resolution)

• include "unavoidable delays" clause • note “conditional limitation” language—trump that


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with notice and opportunity to cure • MUST HAVE GRACE PERIOD AFTER NOTICE FOR

ALL ALLEGED DEFAULTS—even if only 5 days 18 Remedies • T to get notice

• L to be obligated to use reasonable efforts to mitigate damages (See Kenneth Cole case: commercial L not obligated to re-let, mitigate damages)

• delete references to “threatened” breach 19 Fees and

Expenses • must be reasonable • notice prior to L exercising self-help • make mutual • prevailing party to get legal fees • try for right of offset

20 Rights of L • changes to common areas not to impair T’s access to the DP or restrooms etc—nor visibility of T’s door

21 No Repre-sentations by L

• exclude defects not observable, such as in walls • make “as is” clause subject to other obligations of L for

repairs etc, found elsewhere in lease 22 End of Term • no obligation to remove property/restore DP

• restoration to exclude ordinary wear and tear • T to remove only what it wishes to • alternative is to require that L specify if removal will be

required as part of consent to alteration process 23 Quiet

enjoyment • form says “so long as T not in default”—etc , add:

provided T has rec’d notice and opportunity to cure 24 Failure to

Give Possession

• outside “drop dead” date • L to diligently pursue eviction of any holdover tenant—

contra to Sec 223-a of NY law—says L will deliver possession at beginning of term

• compensate T for any holdover penalty it must pay at its present space

25 No Waiver • make mutual 26 Waiver of

trial by Jury • note: small T probably better off with no jury—

expedites matters—keeps costs down • also look into ADR

27 Inability to Perform

• make reciprocal—rent abatement after x days • force majeur excludes L’s financial condition • T to get business interruption insurance—

28 Bills and • FORM is antiquated


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Notices • use FEDEX , some method where delivery is confirmed with a receipt

• cc attorney for T—avoid inadvertent problems • attorney authorized to give notices

29 Services • make sure all basics are included: HVAC, cleaning, elevator, etc

• 24/7/365 access • overtime AC? Freight elevator? To be billed at L’s cost,

not a profit maker • supplementary AC unit? • Overtime AC charge to be allocated if several offices

benefit • DELETE PROVIDED NOT IN DEFAULT language • no charge for freight car on move in/out • min. interruption of T’s business when making repairs • also if service not available for prolonged periods then

abatement • HVAC specs—HVAC season • cleaning schedule • building security • use standards such as “typical of a first class office

building in midtown Manhattan” 33 Rules/Regs • to be uniformly enforced

• if conflict, lease terms prevail 34 Security

Deposit • trust funds, per NY GOL (Gen’l Obligations Law) • T’s property • ask for interes • after x years, sec dep start burning off • use Letter Of Credit if T can secure one

35 Estoppel Certificate

• “best of knowledge” of T • if conflict with lease terms, lease prevails

-- Directory listings

• include subtenants and permitted co-occupants (clients, customers etc.)

• if electronic, unlimited entries -- Relocation • NO

• if lease must include this clause, then provide that T must approve the new location

• be specific as to equivalent space (size, view, position on floor, visibility from elevator lobby), also L must pay ALL costs, so T is not out of pocket

• L to recreate existing space in all respects • ask for right to terminate (rather than relocate) • no more than 1 move in lease term


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-- Guaranty • various forms—try to limit—good- guy guaranty • try to limit partnership liability • if good guy try to limit to payment, not performance and

payment -- Option to

Expand • right of first offer on contiguous space (ROFO)

-- Option to renew

“Fair Market” Rent • exclude brokerage commissions, buildout, other non-

recurring items • non-material default no bar to exercise • if T assigns lease, renewal option goes to assignee

-- Option to terminate

• fixed $ amount

-- Signage • agree up-front -- Holdover • no penalty rent if in good faith negotiations -- Broker • make rep and indemnity mutual -- Arbitration

ADR • keeps T’s costs down if there is a dispute • more efficient • use expedited arbitration • esp. useful in time sensitive disputes (e.g.,

reasonableness of L withholding consent to a sublease)

-- Tenant Incentives

• L to cooperate (w/o charge) in obtaining govt incentives for T

-- Demolition • NO • If must, then negotiate long notice, demo permit

obtained, good faith, simultaneous termination of all leases

NOTES

Retail and Restaurant Leasing: Tips and (grease) Traps Basic Matrix Overview Type of Premises/tenant

Retail-dry Retail-dry major

Retail-dry Mom- and-pop

Rest. National

Rest. Destination

Rest. local

Shopping center—mall Shopping center—mall—food court

Shopping center-strip Shopping center-- out parcel (pad site)

Shopping center out parcel—big box tenant

Urban—hi-rise office/residential

Urban—low rise office/residential

+landmark status issues

Presented by Jeffrey A. Margolis, Esq. The Margolis Law Firm, New York City Guerilla Leasing Tactics NYCLA--May, 2014

Type of restaurants/ cuisines

Sit-down white table cloth

Popular priced Fast food Ethnic Snack bar

French, Italian Chinese, etc

J. A. Margolis—NYCLA---Guerilla Leasing Tactics—5-14

2

Basic Guide to Special Lease Provisions Applicable to Retail and Restaurant Leasing LL= Landlord T = Tenant Ts = SC Tenants SC= Shopping Center Issue LL

Point of View

T Point of View

Typical compromises/notes

Lease Commencement Date Fixturing & Permitting Period Rent Commencement Date “Drop dead” date

Need lead time to do work, coordinate construction—inventory—staffing –opening promotion and advertising considerations

Opening conditions • satisfaction of co-tenancy requirements • grand opening (all stores to open simultaneously)

considerations • T: black-out dates (don’t want to open off season, or with

insufficient time to max seasonal sales) • “drop dead” date if L cannot deliver premises, as required, by

a date certain, T can cancel.

Fixed Rent

When does rent commence?

• Conditions precedent: LL has completed LL’s work, T work


3

Issue LL Point of View

T Point of View


completed • free rent periods • co-tenancy requirements

Percentage rent— “gross sales” defined

Broad definition of gross sales, on and off premises

Limit—add exceptions and exclusions

Shopping centers context T pays a % of sales above a certain amount (called the “break-point”) calculation of “natural” break-point: divide fixed rent by an agreed %, T then pays that % of sales above the breakpoint $ amount

• Example: base rent = $100,000 % = 3% “natural breakpoint is $100,000 divided by 3% = $3,333,333 so T will pay 3% of gross sales above $3,333,333 typical % rents: retail 3-6% food court 8-10% fine dining 6-8% theater: 12-15% exclusions

• wide ranging list: comps (customer returns), credit card fees, taxes, refunds and similar

See Sample Tenant Rider A, ATTACHED


4


T Point of View


Use Limit –highly define—draft with specificity “…and for no other purpose”

Open-flexible-allow for evolution of concept-change

Common law principle allows T to do anything it wants, provided legal

• lease language must define and restrict this common law right • provide for evolution of T’s retail or rest. concept—ancillary

(incidental) uses such as sale of merchandise • also, allow for later flexibility if T seeks to assign/sublet • allow T to operate “substantially as other T stores are

operating from time to time” Exclusives (T will have the exclusive right to sell certain lines and or items, in the SC)

Resists Insist Focus on categories, rather than specific products • note issue of what land is burdened by the exclusive: entire

shopping center? Adjacent land owned by same or related entities

• Practice Pointer: cover portions of the property that may be later sold by LL, add provision re covenants in deed acknowledging exclusive or record memorandum of lease

Continuous Operations (mandatory days and hours that T is required to be open, fully stocked and operating its premises)

T must operate, not simply pay rent and go dark —a “dark” store diminishes foot traffic in the mall and is bad PR—also means no % rent—try to keep all the Ts in line

Major T: will not agree to a continuous operation clause

Relates to other clauses such as exclusives granted to T • if T not operating , then T should not have benefit of the

exclusive • right to “go dark” under certain circumstances—see below


5


T Point of View


Go-dark (T has right to stop operating under defined circumstances)

No Yes If co-tenancy covenants are not being met , or location is not working for T: go dark—or continue operating and pay % rent only

• tie in with assignment and subletting and % rent (clearly if T not operating, LL receives no % rent)

• right to close (go dark) for repairs, renovations, inventory (not deemed to violate use or continuous operation clauses)

Kick-out (T has right to terminate lease under defined circumstances)

No Need if biz is failing

Use meaureable parameters such as % decrease in sales • if T rolls out many stores in street locations, T may want to

cheery pick as to which underperforming stores to close (e.g. a Starbucks that saturates an urban commercial district)

Co-tenancy (T’s obligations are subject to the opening/ operating of other Ts in the SC)

Resist Landlord will say no penalty for co-tenancy “default” as in “don’t blame me, I’m trying my best to keep this Center fully leased. If there’s a closing, it’s not my fault.”

Needed to assure flow of customers—also relate to opening requirements T: I need anchor X to be open and operating, or a remedy if less than a specified % of in line Ts are open and operating

LL may also insist on a sales % decline test, with T getting relief only if it can objectively establish a loss

• allow T to pay % rent only


6


T Point of View


Radius restrictions (T is prohibited from operating other stores within a defined geographic area)

Yes—limit competing venues

Resist-- Involves uses which are “similar or competing” with proposed T use • Narrow geographically • limit to the shopping center or a few miles • more important where you have a destination restaurant (rare

in urban leasing setting)

CAM charges (reimbursement to LL of “expenses” incurred in Common Area Maintenance)

Broadly defined “any and all costs and expenses of any kind incurred by LL in connection with the management and operation of the SC’s ‘common areas’ ” --as to audits limit time frame, scope --also disqualify any auditor whose fee are on a contingent basis

Important carve-outs T: carve out capital costs T: audit rights as to LL’s books and records L to pay cost of T’s audit if discrepancy of x% or more

Try to avoid certain overreaching by LL Examples

• leasing agent’s office party and entertaining prospective Ts! Definition of “pro-rata” share

• GLA of T space over GLA of entire shopping center • Use “leaseable” not “leased” as denominator • circumscribe what is included in the “common areas” • T: deduct: repairs under warranty, work, brokerage, legal fees,

incurred for other T spaces • Also deduct leasing costs, lease enforcement costs, cost of new

buildings and costs reimbursed by insurance See Sample Tenant Rider B, ATTACHED


7


T Point of View


Signage LL wants approval rights

Vital to T’s visibility

Get LL approval in advance of lease signing • make sure signage rights are assignable to transferee

Access LL to conduct repairs etc during non-business hours Alterations No LL consent required for non-structural repairs—

try for a certain $ amount that will not require LL consent--& amount should increase per CPI to account for inflation

Promotional Fund (SC Ts contribute to fund for seasonal and state holiday promotions)

Already spending substantial sums in its own advertising, marketing and promotion programs

Limit to proven marketing and advertising programs • try for an annual cap

Trade name T must operate under Trade name

Right to change if changing name of other stores in chain

Provide for right to use different name esp if lease is assigned or there is a sublet

Option to renew Better to have a five year term with two options • some insurance if business is failing • if the lease has a shell corp. T, then T will want to max. years

on initial term and option


8

Special considerations—applicable to Restaurant Leasing Issue LL POV

T POV Typical compromises/notes

Description of premises Legal descriptions, esp in a multilevel complex must be carefully thought out

• Use diagrams (3D can be helpful) • Detail basement space for example • Are patios included? Impact on rent/sales—also

check zoning codes as to permitted outdoor area seating permits

• roof as to signage, satellite and cable TV installations

• exterior walls as to advertising signage • define exactly what’s included

Use Type of restaurant—menu limits-- liquor as limited % of sales tie Rest use to items on menu attached as an exhibit to lease

Try to be descriptive, rather than specific— types of food rather than specific menu items flexibility

Use--zoning-liquor license In Manhattan, for example, LL: no contingency for liquor license unless inherent problem with the premises/building

Esp. as to premises being “licensable” for liquor, beer, wine sales

• the key to Rest. profitability • ties in with numerous other clauses esp. rent

commencement date (very costly to be required to operate without liquor license in place)


9

Issue LL POV


Use—incidental purposes limit flexibility Sale of merchandise • ancillary sales of novelties and wearables

Exclusive SC can only support so many pizza parlors and taco stands (distinguish from retail clothiers)

Rent Commencement Date Permitting Period

Rent starts at some earliest possible date (x days after Landlord has completed any LL’s work, for example)

No rent unless Rest. is fully operational-including liquor license avoid fixed dates need to cover contingencies

Sliding date to account for domino effect of certain key tenants not opening and consequences thereof

• with long Rest. construction schedules, free rent period will end prior to completion of construction

Urban LLs may not give liquor license contingency clause

Initial Construction Alterations

Much more extensive for a restaurant than a retail T • many more issues • greater investment/lead time • special issues where space is in a landmarked

building Lease Commencement Date— Fixturing permitting period Rent Commencement Date

If urban/street location: all on T’s shoulders

Construction issues • possibility of LL delay • time for T to obtain licenses required • also co-tenancy opening /rent commencement

date issues • a restaurant lease might provide no required

opening until adjacent movie theater has opened

Utilities Electric Sewer

Host of special issues for Rest. T

In shopping center context • LL usually provides • investigate adequacy (engineer can develop


10

Issue LL POV


Water Gas sprinkler

specs as to min capacity required for restaurant’s operations; also architect can perform field inspection to determine exactly what capacity/availability exists)

• location, availability, quantity • separate meters preferable • Venting—getting to the roof • can be major headache/expense, esp in

multilevel SC or hi rise Trade fixtures All become LL’s

property Valuable improvements paid for by T T should have right to sell or remove

Define broadly, include all kitchen equipment • note no LL’s lien in NY, but contra other

jurisdictions • provide for right of T to finance trade fixtures,

with LL to cooperate with financing arrangement

Signage Restaurant signage on wall of SC • pylon type signs • make sure rights are transferable

Assignment/sublet Limit consent Flexible on consent Typically: consent not to be unreasonably withheld or delayed, with numerous LL carve outs limiting T’s ability to transfer

• at minimum, make sure right to assign/sublet in connection with mergers, acquisitions, affiliated entities or to franchisee without LL’s consent—also provide LL to agree to give franchisor notice of default, etc.

• in urban leasing scenario, the more desirable the location, the more LL has the negotiating edge


11

Issue LL POV


SEE detailed discussion in accompanying article, “The Savvy Restaurant Lawyer…”

Continuous operation-special operating hours

Special hours need flexibility -no breakfast or a 24 hour restaurant if multistore chain, T wants all to have same days and hours of operation

If multi-store chain—T wants to make sure LL agrees to keep parking areas lit during restaurant’s special hours—also adjacent common areas

Trash removal

Main issue is storage pending removal (location of storage facility)

• proper containerization of wet trash, etc. • refrigerated garbage storage to stop odors

Odors/venting Major issue for urban (hi-rise commercial building) LL

Venting • getting to the roof • can be major headache/expense, esp in

multilevel SC or hi rise Grease traps/waterproof floor membranes

Yes Yes Specs as to installation and cleaning


12

Issue LL POV


Ingress/egress/deliveries Concern about appearances esp in a hi end mall, or office building— unsightly to have food deliveries/removal – esthetics--

Frequent, daily, odd hours don’t restrict timing/frequency

Different rules for Rest. with street level access and for Rest. with access only from interior of building

Alterations Liberal In light of potential concept change—min consent not to be unreasonably withheld or delayed

Ownership of improvements

Becomes LL’s property upon installation

T retains ownership T will need to retain ownership if it hopes to sell rest business

• make sure trade fixtures are clearly carved out Co-tenancy As to Anchors

• Open? • What if an anchor closes? As to % of other in

line Ts—need min % of same open and operating

• Some special emphasis for restaurant T where, for example, having movie theater open and operating is essential to T’s biz

• if co-tenancy criteria not met, T remedies: convert over to % rent only-- go dark-- terminate lease


13

Issue LL POV


Parking In free standing suburban location (pad), need rep from LL that parking allocations meet municipal codes

Never too much • successful restaurant is a parking hog • typical SC ratios are inadequate and there will

be spill-over parking issues to deal with, for ex. after-regular mall hours lighting issues

Insurance T to cover any increase in premiums due to its occupancy

Rest. is special—acknowledge that

Typically a live kitchen operation presents an increased risk of fire and water hazards

Radius Really necessary? Typically only needed if Rest. is a “destination” Rest. —who cares if another Chick-Fil-A opens in the food court in a nearby SC

Roof rights Starbucks et al providing wi-fi • rest Ts, esp sports bar concept, need TV

antenna/dish on roof End of term Bar, vents, hoods, partitions,etc.

major installations—bottom line: it’s very expensive to remove everything including the kitchen sink


14

Should you wish to discuss any of the above—or anything else of interest--feel free to call. Jeff Margolis The Margolis Law Firm 11 East 44th Street New York, NY 10017 212-490-0900 212-490-0700 (fax) [email protected] www.margolislawfirm.com Thanks for attending the seminar, and Good Luck!

mailto:[email protected]

http://www.margolislawfirm.com/


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SAMPLE Tenant Riders A. Gross sales There shall be excluded from “gross sales”

1. intercompany transfers of merchandise 2. miscellaneous sales such as cigarettes, candy 3. returns to shippers or manufacturers 4. sales of trade fixtures which are not a part of Tenant's stock-in-trade and not sold in the regular course of Tenant's business 5. cash or credit refunds or credit sales not collected, on transactions included in Gross Sales previously reported by Tenant, but not exceeding

the selling price of merchandise returned by or credited to the purchaser and accepted by Tenant 6. the amount of any City, County, State or Federal sales tax, luxury tax, or excise tax on sales, if the tax is added to the selling price and separately

stated and actually paid to the taxing authority by Tenant, provided, however, that no franchise or capital stock tax and no income or similar tax based upon income, profits, or Gross Sales as such shall be deducted from Gross Sales in any event

7. uncollectible accounts, but if later collected, said accounts shall be included in Gross Sales 8. meals served to employees 9. meals provided by way of promotions 10. the costs to Tenant for the use of credit cards 11. cigar, cigarette, tobacco, candy, gum or other miscellaneous sales and/or sales from vending or service machines 12. (for restaurants) sales from apparel 13. (for restaurants) proceeds from video or similar games


16

B. Common Area Maintenance--CAM Exclusions

The following shall not be included in the calculation of common area maintenance (CAM): 1. Costs attributable to repair or replacement of items under warranty 2. Costs of alterations, decorations and the like performed in individuals tenant’s spaces 3. Cost of any new buildings 4. Cost of removal or remediation of hazardous substances 5. Cost of repair for which landlord is reimbursed by insurance 6. Reserves 7. Any item of repair or replacement which by standard accounting practice is required to be capitalized 8. Any expense for which landlord receives condemnation proceeds 9. Structural repairs of roof and others 10. Mortgage principal and interest payments. 11. Financing costs 12. Ground rent and related costs 13. Costs reimbursed by tenants 14. Costs reimbursed by insurance 15. Costs reimbursed by government authorities such as in the case of condemnation 16. Special services billed to specific tenants. 17. Legal fees related to leasing or enforcing other tenant's leases 18. Artwork in, or on any part of, the building 19. Off-site management personnel and overhead 20. Operation of any services or amenities for which landlord collects a fee or charge 21. Any remedy of construction defects 22. Costs incurred in leasing tenants’ space and retaining existing tenants, including brokerage commissions 23. Fines or penalties incurred due to violations by landlord of any governmental laws and regulations 24. Costs incurred due to violations by landlord of any of the terms of any leases or other agreements affecting the shopping center 25. Salary and benefits of personnel above level of shopping center manager 26. Management fees in excess of three percent of gross receipts 27. Depreciation and amortization of the entire building and any equipment used in connection therewith 28. Cost of complying with government regulations, including, but not limited to, any environmental mandates, e.g., costs of correcting any code violations existing as of the date of lease 29. Interest or penalties resulting from late payments by landlord 30. Advertising costs


17

31. Brokerage leasing commissions 32. Tenant alterations and alterations made to leasable space 33. Capital improvements other than those primarily for the purpose of reducing operating costs

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DIRT LAW

You’re a “Good Guy”… What Does That Mean and What’s It Going to Cost You?BY JEFFREY MARGOLIS 10/15/13 2:00PM

“…and, of course, we’ll need the “‘standard’ good guy’ from the CEO”

A few years ago, I wrote a piece speculating that while the term was ubiquitous in our leasing community, no one knew what a standard good-guy guarantee looked like. That didn’t surprise me as I concluded there was no such animal. It all depends. In this column, I’d like to revisit that question and see if my answer is any different.

As a refresher, traditionally landlords sought to secure a tenant’s financial obligations with a security deposit (cash or LC), and for most companies the owner’s personal guaranty: an unlimited personal guarantee covering every single aspect of tenant’s lease obligations.

It was serendipity that as those company owners grew more and more wary of leaving their entire net worth on the leasing table, landlords narrowed their focus to who the real enemy was: the ultimate Blue Meanie tenant who simply stopped paying rent and started playing the “go-ahead-and-evict-me-but-you-know-its-gonna-take-six-months-or-more-and-meanwhile-I’m-living-the-rent-free-good-life-at-your-expense” game.

Enter, stage left, the “good guy,” the financially responsible individual (typically the owner of the company) who said while my company may be floundering and in arrears, I’ll sign on personally to take care of any rent shortfall to the date we vacate. Voila! The good guy becomes a limited guarantor. Landlord gets its money, and the premises were available for re-renting.

So the basic understanding was that the principal, the good guy, would guarantee that all rent would be paid through the date that tenant surrendered the premises, vacant, in reasonably satisfactory condition with the keys turned over to landlord’s agent. At the point where all those conditions were satisfied, the guarantor (not the tenant) (we’ll get back to that) was released from all further lease liability. Rather neat and simple right? (No. Stay tuned.)

The old full-blown personal guarantor was delighted with this new arrangement (after all, who wanted to be called a bad guy?) and the landlord, seeking a modus vivendi, also agreed. They say the devil is in the details, so there were a few items to be ironed out, including whether to guarantee one payment only? Payment and performance? If payment, what was to be guaranteed? Just basic rent? So-called additional rent (taxes and operating)? Additional rent based on the landlord converting a performance obligation (i.e., a repair item) into a dollar obligation?

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Accelerated default rent? What about end-of term obligations to restore the premises? Then, of course, landlords had to consider free-rent periods that had not yet been amortized—same as to TI work and construction allowances. O.K., might as well throw in substantial yet unamortized brokerage commissions and legal fees. And what about back-door liabilities and concerns from the guarantor’s point of view, including anywhere from two to six months prior notice being required, and how to get some protection in the sublease or sale of business scenarios. Ouch, almost forgot, where does all this leave the hapless tenant, with its security deposit now history and no rent relief available? Whew.

Well, I think I’ll stop this exhausting (yet, stimulating) recitation of good-guy questions and ask you kind readers to stayed tuned for next week’s column when—a la that jam-packed final episode of Breaking Bad—all will be revealed and sewn up in a (not so tidy) package.

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DIRT LAW

What Does It Mean to Be a ‘Good Guy’ and What’s It Really Going to Cost?BY JEFFREY MARGOLIS 10/23/13 7:00AM

Last week, we took a look at the evolution of lease guaranties from full-blown general personal guaranties to the limited, now favored “good guy” guaranty. In a nutshell, a good guy guarantor stepped up to the plate to assure the landlord that the space would not be milked for rent, and the quid pro quo was that the guarantor could unilaterally control the end date of his obligations by taking care of tenants’ financial obligations through a new end date—an end date based on completion (at a minimum) of the following checklist: physical surrender of the premises, vacant and in reasonably satisfactory condition with the keys turned over to the landlord’s agent.

We then dug deeper and found a whole slew of issues in need of negotiating. Categorically, these were money items and performance items. Money items include base rent, escalation charges (taxes and operating), accelerated rent, unamortized expenses such as TI, free rent and brokerage charges, and advance-notice requirements, all of which translate into dollars and cents.

Meanwhile, performance items include obligations such as repairs, maintenance, compliance with laws, removing personal property and end-of-term obligations to restore the premises.

O.K., so landlords had put the good guy on steroids, and now the deal makers and counsel have the unenviable task of sorting out what’s fair. Having a so-called standard New York lease and being of that certain age where I can say I was a midwife at the birth of the good guy guaranty, allow me to take a shot.

Starting with the landlord’s perspective, the base rent is paid to the date the tenant vacates. As to advance notice, yes, the landlord needs some notice to get geared up for re-rental, but I’ve seen as much as six months or more—and that’s excessive. Suggest one or two months.

Accelerated (lump sum) rent? No. Broom clean—well that’s enough to assure the premises won’t be trashed and the trash left in place. Fair. Yes, of course, vacant and free of any subtenancies. Performance? Not in the gene pool if you look at this guaranty’s DNA: to disincentivize a tenant from remaining in possession without paying rent.

But obviously, basic repairs should be included. And looking ahead to a sale-of-the-business-assignment or subletting, the cautious good guy guarantor will ask for (and should get) some release mechanism based on substitution of someone of equal financial wherewithal.

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I think this topic merits some spirited leasing community debate, so please sound off.

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The Commercial Observer

• • •

LEGAL EASE The Dirt Dictionary, Part I

How to talk the talk of shopping centers By Jeffrey Margolis | 08/11/11 8:50am

SHOPPING CENTER: A group of retail and other commercial establishments that is planned, developed, owned and managed as a single property. On-site parking is provided. The center’s size and orientation are generally determined by the market characteristics of the trade area served by the center. The two main configurations of shopping centers are malls and open-air strip centers.” – from the I.C.S.C. website The hallmark of the shopping center lease is the interdependence of various tenants on one another and the special relationship between landlord and tenant, with each looking to the other to promote the “product.” The shopping center lease has many unique aspects and, in fact, a different vocabulary from the office or urban retail lease. “G.L.A.,” “CAM charges,” “go dark,” “exclusives” and the like pepper the deal-making dialogue.

While the shopping-center world is sometimes thought of as indeed from another planet, the savvy broker or his counsel should have at least a passing familiarity with the nomenclature employed in this specialized area of leasing.

So, here goes.

Anchor stores: Typically the department stores (in regional enters) and supermarkets (in community centers) that figuratively anchor a shopping center. Usually located at the ends or corners of the center, Macy’s, Sears, Belk’s and the like are the main draws and thus the economic anchors of shopping centers.

Big-box stores: Large stand-alone stores, featuring a single line of products, with varying market niches. Examples include pet stores (Petco), toy stores (Toys“R”Us), office supply stores (Staples) and no-frills discount stores that sell in volume (Target). See “category killer.”

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Black Friday: The shopping day after Thanksgiving in the United States when retail stores generate their highest sales. Black refers to the accounting term as a business moves from loses in red ink to gains in black.

Brick and mortar: Traditional retail establishments as distinguished from online stores. CAM: Common Area Maintenance.

CAM charges: Reimbursement to a landlord of expenses incurred in Common Area Maintenance. Examples include electricity, insurance, security and maintenance of the parking lots.

Category killer: A large national chain store specializing in one line of products, such as home improvements, office supplies or toys, that can overwhelm both smaller and more diverse competitors because of its size, variety of merchandise and prices. See also “big-box stores.”

Common areas: The areas of a shopping center shared by some or all of the co-tenants, such as walkways.

Continuous operations: Mandatory days and hours that a tenant is required to be open, fully stocked and operating. Notes: (1) Landlord: Tenant must operate, not simply pay rent and go dark; a “dark” store diminishes foot traffic in the mall and is bad P.R.—also means no percentage rent; landlords try to keep all tenants in line; (2) a “major” tenant will not agree to a continuous-operations clause; (3) relates to other clauses such as exclusives granted to tenant; (4) if a tenant is not operating, that tenant should not have benefit of the exclusive; (5) right to “go dark” under certain circumstances—see below; (6) tenant wants to make sure landlord agrees to keep parking areas lighted during restaurant’s special hours—also adjacent common areas (esp. for restaurants).

Co-tenancy: Tenant’s obligations (especially rent) are subject to the opening/operating of other tenants in the shopping center; lease stipulates that a reduced rent or no rent be paid until an agreed-upon percentage of the center is occupied. Notes: (1) Landlord will say no penalty for co-tenancy “default” as in “Don’t blame me, I’m trying my best to keep this center fully leased. If there’s a closing, it’s not my fault.” (2) Tenant: Needed to assure flow of customers—also relate to opening requirements; tenant: I need anchor X to be open and operating, or a remedy if less than a specified

percentage of in-line tenants are open and operating; (3) landlord may also insist on a sales percentage decline test, with tenant getting relief only if it can objectively establish a loss; (4) compromise: allow tenant to pay percentage rent only; (5) a restaurant lease might provide no required opening until adjacent movie theater has opened; (6) as to anchors: Open? What if an anchor closes? As to percentage of other inline tenants—need minimum percentage of same open and operating; some special emphasis for restaurant tenant where, for example, having movie theater open and operating is essential to tenant’s business; (7) if co-tenancy criteria not met, tenant remedies: convert over to percentage rent only, go dark, terminate lease.

Exclusives: Tenant granted the exclusive right to sell certain merchandise lines and or items in the shopping center.

Notes: (1) Focus on categories, rather than specific products; (2) issue of what land is burdened by the exclusive: entire shopping center? Adjacent land owned by same or related entities; (3) restaurant context: shopping center can support only so many pizza parlors and taco stands (distinguish from retail clothiers).

PICTURED: Jeffrey A. Margolis, Esq., Founder

THE MARGOLIS LAW FIRM

Real Estate Law – Commercial and Residential

When Jeff Margolis represents a real estate client, he brings to the table more than thirty years experience in the field. Margolis is proud to call himself a “dirt” lawyer: a specialist in property transactions: buying, selling, developing, leasing and financing.

Jeff is well versed in the laws and regulations governing commercial and residential real estate transactions. Practicing commercial real estate law successfully requires a strong command of the processes involved in purchase, sale and lease of office, industrial, residential and retail properties. Also, Jeff often represents the foreign business community. (This is a natural as his firm’s other specialty is business-related immigration law.)

The Margolis Law Firm has guided leading developers, investors, owners, and tenants of all types through the intricacies of commercial real estate law. Specific areas of representation include purchase, sale and leasing of office, industrial and retail properties. All cases are personally supervised by Mr. Margolis, a nationally recognized real estate lawyer who has often lectured and written on this highly specialized area of law.

On the residential side, we represent buyers and sellers of high-end single family homes, co-ops, condominiums and townhouses. We distinguish this practice by offering aggressive “New York style” representation and personal service. As seller’s counsel we look to cover all those loopholes and contingencies which create uncertainty and sometimes disappointment. As purchaser’s counsel, we seek to maximize seller disclosures and representations and work hard to assure that our client gets all that has been bargained for..with no unpleasant surprises!

Jeff Margolis is a graduate of Brooklyn Law School where he was a member of the Law Review. Over the years he has lectured on commercial real estate at New York University’s Real Estate Institute and Fordham Law School. Jeff has also served as seminar leader on cutting-edge real estate topics at the ICSC (International Council of Shopping Centers) Law Conference and for NACORE (the National Association of Commercial Real Estate Executives). Further, as a member of the Committee on Real Property Law of the Association of the Bar of the City of New York, Margolis was a co-draftsman of what became a “standard” New York form of sales contract. Currently, he is Law Columnist for The Commercial Observer, a frequent contributor to Brownstone Publications’ Commercial Lease Law Insider and lecturer at seminars for attorneys and leasing professionals at both national and international forums, particularly on urban and shopping center retail and restaurant lease issues.

By keeping the practice lean, the Margolis Law Firm is able to offer quality services at rates that are typically substantially less than those charged by Jeff’s colleagues in larger firms. Also there is an emphasis on fast-turnaround of documents and his personal attention to each matter.

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