Facility Planning - What Else to Include in the Proposal
Section 9
In a previous chapter we showed you an example of a typical proposal or "Intent to Lease" that we often see here in Orange County, CA. While it does cover the basic issues, the format creates some intrinsic problems. As a tenant, you should be aware of these shortcomings. After all...it is your money!!!
Why Be More Complete?
There are two reasons for being as complete as you can in writing an offer. First, you don't want to get to lease documents and find yourself arguing over deal points both parties thought were either agreed to or never came up before. Secondly, the attorney who finally reviews the lease and drafts the documents, probably never participated in the negotiations. Things slip through the cracks. In addition, certain comments may not make sense unless you understood the whole picture.
What We Like to See
Consider the form below as a starting point. While it has met our needs, you may find your market area has certain issues that need to be addressed.
ISSUE: ILLUSTRATED EXAMPLE AND CLARIFYING COMMENTS
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1. TENANT AND LANDLORD
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The tenant shall be The Growing Company, LLC, a California limited liability Corporation (The Tenant") represented by Tenant's Broker Real Estate, Inc (the "Tenant's Broker")
The landlord shall be Big Institutional Lender, Inc, a Delaware corporation (the "Landlord") represented by Big Broker Commercial (the "Landlord's Broker")
Be sure to name FULLY the parties. We like to establish whom the brokers represent. In many states, you have to declare whom the brokers represent or if they're acting as duel agents. Often, tenants don't realize "their" broker actually represents the landlord.
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2. PREMISES/PROJECT/LOAD
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A) Suite 300 located on the third floor in a certain office building located at 1111 Any St., Newport Beach, CA 92660 (the "Premises") which is managed on behalf of the Landlord by Best Property Management (the "Property Manager")
B) The Premises shall be approximately 6,000 RSF and is located in an 180,000 RSF project known as Nice Centre. The exact square footage of the Premises shall be verified and mutually agreed prior to execution of the lease documents. Please state the size of the Building and whether other buildings in the Project impact expenses to the Tenant due to common area cost and if so to what extent
C) The Load factor on the Building has been established as12% Please state if different;
"By mutual agreement" can be more specifically defined that the Tenant has the right to have their vendor confirm the measurement. While an offer may state the size of the Building, expenses are often calculated on a percentage of the Project. Flush this out early.
Also, the Load (or Loss) Factor is often left out but it is important in calculating such things as TI allowance, expenses and parking.
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3. USE
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General office use
Be as general as possible. If you say something specific like "Advertising Agency," the landlord may refuse a potential sublease to a non-ad agency. More farfetched, if you become a marketing company, can he throw you out?
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4. TERM
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The proposed Lease term shall be for a period of five (5) years.
Pretty straight forward. Be aware that often when landlord offer “free rent”, they add additional months at the end of the term AND at higher rates.
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5. COMMENCEMENT/OCCUPANCY/ DELAY IN POSSESSION
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Commencement shall be as soon as all agreed upon improvements have been sufficiently completed in order the Tenants may operate their business in a conducive atmosphere but no later than May 15, 1997. Tenants shall have the right to enter the premises ten (10) business days prior to commencement in order to install telecommunication and data wires, trade fixtures, and furnishings provided Tenant indemnifies the Landlord as stated in the Lease and the Tenant does not conduct business in the Premises until commencement. Should the Premises be available to the Tenant for occupancy prior to May 15, 1997, the Tenant, at their sole option, may occupy the Premises at that time. Such period shall be considered early occupancy and free of rent. Should the Landlord not be able to deliver the Premises within 30 days of the estimated commencement date, Tenant may cancel the Lease at their sole option and upon written notice to the Landlord. Upon actual commencement, the parties shall mutually execute an Amendment to Lease noting the actual commencement date.
Occupancy and Commencement ARE different. Often a Certificate of Occupancy cannot be delivered until the Fire Marshall checks the layout of the furniture systems. If you can't occupy the Premises prior to commencement, you will be paying for space you can't work in. Most landlords will give early occupancy to cable and set up systems provided the Tenant doesn't conduct business. Delay in possession usually comes up in lease negotiations but by that time you may be too far committed. The Amendment to Lease form should be an exhibit to the lease, which will document actual commencement dates.
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6. BASE RENTAL RATE/ RENTAL CONCESSIONS
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The initial base rent shall be Two Dollars and twenty-five cents ($2.25) per square foot per month and calculated on a Full Service Gross (FSG) basis which base rent shall include all taxes, maintenance, and insurance to the Premises and Building except as otherwise noted herein. The Base Rental Rate shall increase by five cents ($.05) on each anniversary of the Lease during the Initial Term. Consideration for free rent concessions has been incorporated into the requested Base Rental Rate. Therefore, no additional free rent concessions are requested.
Define lease type especially in the case of NNN and Industrial or Modified Gross leases. Tenants like to see "free rent" but that hasn't really existed since the Dodgers played at Ebbets Field.
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7. SECURITY DEPOSIT
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Upon execution of the Lease, Tenant shall deposit with the Landlord as Security Deposit an amount equal to the last month's base rent ($14,700.00) as noted in Section 6, above. Within thirty days of termination of the Lease, either by expiration or cancellation, and provided the Tenant is not in default of the Lease, the Landlord shall return to the Tenant the full security deposit paid subject to the cost of any repair for damage to the Premises other than normal wear and tear. At the time of termination and following a "walk-through" with the Landlord, Tenant, at his or her sole option and sole cost may choose to repair any portion of the Premises whereas as the damage is mutually determined to be a result of the Tenant's occupancy and beyond that of normal wear and tear or have the Landlord deduct that cost from the security deposit as stated herein. Please address how those funds shall be kept by the Landlord to protect the Tenant from Landlord default or transfer and to assure Tenant, at a minimum, receive benefit from those funds during the period it is held in trust by the Landlord.
Have your lawyer check the codes with regards to the landlord's obligation to return a deposit. For commercial property, you should define a time period. Also, it is important to protect yourself from sale of property. A sale may impact the tax base. Interest on security deposit funds in California is negotiable. Check your state laws.
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8. OPERATING EXPENSES
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The lease shall contain an escalation clause with the Tenant paying increased rental for all real property taxes, utilities and other operating expenses on a pro rata basis (the percentage or ratio of the rentable square feet of the Tenant's Premises to the total rentable area of the Building) to the extent such operating expenses exceed actual operating expenses for base year 1997 in any calendar year beginning with calendar year 1998. In any event, Tenant shall not be subject to any pass throughs during the initial twelve (12) months of its occupancy. All operating expenses shall be based upon the Building being ninety-five percent (95%) occupied and the Building being fully assessed for real estate taxes. Exclusions from Operating Expenses shall be addressed in lease review. Please provide a breakdown of historical, current and projected operating expenses. Please state Tenant's percentage share and the actual building size and, should the Building be part of a Project, how the common area charges are calculated. Should a larger tenant in the building audit the Landlord's annual reconciliation statement and discover an error and a benefit is availed that tenant, the Tenant shall receive their pro-rata share of that same benefit.
This section is REAL IMPORTANT. Be as specific as you can. Demand expense histories. Read the Lease. The Lease should state the size of the Building, Tenant's Percentage, and what relevant calculations regarding the Project are figured into the Tenant's costs.
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9. TENANT IMPROVEMENTS
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Tenant shall accept the premises subject to mutually agreed improvements and clean up which shall be completed at the Landlord's sole cost and expense. Should the Tenant exercise the Option to Renew, the Landlord shall repaint the Premises. All other improvements at that time shall be upon mutual agreement. Said improvements shall include the following:
- Recarpet the Premises where designated by the Tenant, replace flooring in the storage room, repair or replace broken tiles in the entryway.
- Paint the premises and minor restain of wood finishings and doors where so required.
- Repair and replace ceiling tiles where necessary.
- Repair and replace window coverings where necessary
- General professional cleanup including, but not limited to air ducts.
Tenant shall have the right, with Landlord's approval, to improve the Premise following commencement. At the time of approval, Landlord shall notify Tenant whether improvements must remain in the Premise or removed at Tenant's cost upon termination. Tenant or their Agent shall "walk" the Premises prior to commencement to confirm improvements and shall provide the Landlord with a "punch list" of items needed to be completed, if any, within 30 days after commencement.
This example is for a simple "carpet and paint." In most cases, some type of work letter would be drafted covering all contingencies including cost over runs, how such payments are made, who has authority to make changes and more. That would be subject to a completely separate discussion. In the case of simply tracking the parties' intent, try to include as much as you can in the paper trail.
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10. OPTIONS
A. RENEWAL
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Provided the Tenant is not in default, Tenant shall have the right to renew the Lease under the same terms and conditions for two additional periods of three (3) years except the rental rate shall be adjusted to reflect ninety-five percent (95%) of the fair market rate at the time of renewal taking into consideration accepted all market concessions or one hundred and three (103%) per cent of the Base Rent over the last year's base rent during initial term, whichever is lower. In addition, the Base Year Expenses shall be adjusted to reflect the year of the extended term. Should Tenant wish to exercise said Option (s), Tenant shall notify the Landlord in writing of their desire to exercise their option no later than 0ne hundred and twenty (120) days prior to termination of the term or renewal period.
Sometimes, particularly in defining "Market Rate" we suggest using the actual language your lawyer wants to be included in the lease or simple state that it will be defined in the lease. Don't' forget the TI's you expect at the time of extension or renewal and that the "Base Year" be changed to the year of the renewal. Amazing how many tenants pay for pass throughs based on a figure from 5-10 years ago.
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B. EXPAND
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Tenant shall have the continuing First Right of Refusal for the contiguous space subject to other rights already afforded other tenants in the Building. Should Tenant require additional or expansion space, and the contiguous space is not available, Landlord shall make reasonable effort to accommodate the additional needs of the Tenant which may include, but not limited to relocation to another premise in the building or within another building controlled by the Landlord, if any.
This is a good place to insert more "lease language" type of verbiage.
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C. DOWNSIZE
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None requested.
If your business is susceptible to sudden increase or decreases in size due to task oriented work, this is a significant deal point
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D. CANCEL
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None requested at this time.
Same issue as above. You have to ask yourself the questions. Nothing like being stuck paying for space you can't use or don't need.
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11. RELOCATION OF PREMISES
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Landlord shall not, without the express consent of the Tenant, have any right to relocate the Tenant to other premises within the Building or Project. However, should the Landlord make such a request and the Tenant agrees to a relocation, Landlord shall pay for all reasonable moving costs including but not limited to actual moving costs, recabling and rewiring of computers, data, and phones, and replacement of all of Tenant's printed material such as cards, invoices, and brochures. In addition, Landlord shall notify Tenant of their desire to relocate the Premises no less than 120 days prior to the anticipated relocation by presenting the Tenant with a description of the new premises. In no way shall the total cost of the new premise be greater than the amount paid by the Tenant during the remainder of the Term. Should the new premises not be satisfactory to the Tenant, then the Tenant at their sole option may elect to remain in the Premise or terminate the Lease within 90 days of notification from the Landlord.
This item must be included particularly if the lease has such a clause. Read the Lease carefully. Relocation may be buried under something like "Building Planning." Again, another item to flush out early especially if you are a smaller tenant
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12. SUBLEASING/ASSIGNMENT
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Throughout the Term of the Lease and any Extension Period, the Tenant shall have the right to sublease all or a portion of the premises subject to the terms of the Lease. Profits may be divided between the Landlord and Tenant after deductions for reasonable cost and expenses to sublet and administer said sublease. Provided the Tenant remains the tenant in a minimum of 60% of the Premises, Tenant may sublease individual offices to affiliated consultants or companies by giving Landlord written notice of such but no other approval shall be necessary.
Again, ask yourself business questions. It's not unusual for tenants to outsource to consultants who they may want to "house" within the Premises. Landlord shouldn't have restrictive consent over that type of use or perceived profits if sublease also includes "Executive Suite" type services. Also, change in ownership such as stock transfer should not be necessarily considered a transfer of the Lease. Read the Lease carefully and again, ask yourself business questions
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13. NON-DISTURBANCE
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Landlord shall provide a non-disturbance clause in the Lease. Please state the name of the lender on the Building if not the Landlord.
Never saw a landlord offer this in their proposal but you wouldn't want to be forced out due to a transfer or bankruptcy.
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14. BUILDING SERVICES/HVAC/ AMENITIES
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Landlord shall, at a minimum, provide full building services Monday through Friday from 8:00 a.m. to 6:00 p.m. and Saturdays from 9:00 a.m. to 1:00 p.m. which are hours provided by other comparable buildings in the market place. Please state if there is any charge to Tenant for after hour HVAC. If such exists, should multiple tenants be utilizing after hours HVAC simultaneously, then said after hours HVAC cost shall be split proportionately amongst the number of tenants utilizing the afterhours HVAC. After hours lighting and normal power usage shall be at no cost to Tenant. Please state how the HVAC is controlled to the Premises. Please describe additional services and amenities in your response. Landlord, as part of Operating Expenses, shall provide janitorial services to the Premises five days per week.
Get this in writing. It's amazing how these questions are not asked and how multiple tenants on a floor engage HVAC and all pay the full rate at the same time. While the landlord may reserve the right to change the services, if there is one particular service that is provided that drew you to that building, you may want to assure at least that service continues. (One landlord provided free airport shuttle. When they tried to cancel it, the tenants went wild.) You might even want to define "National Holidays" One OC landlord tried to close the building on President's Day and charge tenants $75.00 per hour for HVAC!!!
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15. TOXIC WASTE/AMERICANS WITH DISABILITIES ACT
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Landlord shall guarantee the building and Tenant's improvements will meet ADA standards at the time of construction completion and occupancy. Landlord shall have the express responsibility to advise Tenant of any toxic materials that are located in or about the Premises, parking areas, storage area or other parts of the property. It shall be the responsibility of Landlord at its sole cost and expense, to remove any toxic materials prior to the commencement of tenant improvement construction and to indemnify and hold Tenant harmless from any future action which might occur as a result of the presence of toxic materials(s).
We're all waiting for the ADA Police to show up. But when they do....
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16. STRUCTURAL/LATENT DEFECTS
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Landlord, at Landlord's sole cost and expense shall be one hundred percent (100%) responsible for repair of any and all structural and/or latent defects in the Building and/or mechanical systems over the term of the Lease and the Extension Period, if Tenant exercises its Option to Extend.
Protection against damages from latent defect is often overlooked. Landlord may claim they can't see EVERYTHING and the Building is twenty years old. Protect yourself.
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17. M.P.O.E
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If applicable, please state with whom the building maintains a telephone maintenance contract pursuant to PUC A 8.4. Landlord warrants the building has the capacity to bring telecommunication signal to the phone room on the floor appropriate to the Tenant's use and shall provide the necessary signal to that point per PUC A 8.4 if such is required.
This may only be applicable in California. Most property managers don't even know about this one. If your phones go down and the problem is in the risers, who repairs them? Does the Building have the capabilities to support your phone usage? Call your phone company for a great brochure on the subject.
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18. PARKING
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Landlord shall provide a minimum ratio of four parking spaces per thousand square feet for the Tenant's use in the parking lot free and in common with other tenants in the project and two (2) reserved spaces exclusively for the Tenant's use during the Initial Term and any option periods. The cost of maintaining the parking area shall be derived from parking fees and shall not be included in the general expenses to the Building.
Can you say Double Dip? Also, check to make sure your cost for parking is fixed for the term. We've seen landlords try to raise prices in the middle of the term without warning.
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19. SIGNAGE
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Tenants shall have the right to place their name on the Building Directory and on the wall next to the suite, the cost of which shall be included in the tenant improvement allowance. Please state if any monument signage may be available in the front of the Building or if any signage on the Building is available and if a "locator" sign may be placed opposite the elevator on the floor.
If you don't ask, surely you won't get
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20. BUILDING SECURITY AND ACCESS
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Please state what security is provided for the Tenants and whether Tenant may, at their sole cost, install a separate security system to the Premises. Tenant requires 24-hour access to the Building and Premises. Please state how such access is made.
This sometimes never makes it to the Lease. What if you went to the building because of its security environment and then the Landlord decided to cancel the guards?
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21. NOTICES
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All notices to the Tenant shall be in writing and delivered by US Mail or delivered to Tenant personally at the Premises. Other than normal monthly statements, copies of notices shall be sent to:
Tenant's Broker Real Estate, Inc. 1234 Level Field St. Ste 100 This Town, CA 92612
Failure to do so on the part of the Landlord shall not, however, constitute a material default on the part of the Landlord.
This may seem unusual but you will be thankful later. Since the broker is a real estate person, they should understand the notices and advise you from a real estate perspective (and most likely do it as a courtesy). It's amazing how many business/tenancy issues come up after the lease is signed and the broker is nowhere to be found. If the issue becomes a legal question, your attorney can be brought in.
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22. FINANCIALS
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Full financials can be made available upon request.
Always good to put this in. Landlord may be able to get information from D&B or annual report. Don't offer until you know the landlord is willing to seriously discuss leasing. Approval of the financials should be the ONLY approval contingency. We have seen brokers provide a written offer, which the tenant accepts only to have the broker say they now have to go back to their institutional lender/owner for approval. Isn't the broker representing a principal?
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23. LEASE
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Please include a boilerplate copy of your latest lease form along with your response. If possible, please forward same by way of the internet to this office at broker@iinternet.com.
Having this in hand, you can respond to the offer with actual lease modifications. Makes the next step a lot easier.
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24. COMMISSION
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Tenant's Broker Real Estate, Inc shall be recognized as procuring cause and shall be paid a standard full commission based on the advertised schedule set forth by the Landlord and Big Broker Commercial as their agent. Tenant's Broker Real Estate is the exclusive representative for the Tenant and is therefore neither an agent of the Landlord nor a sub-agent of any present or potential listing broker. However, any response must include a full market commission or comparable payment in an alternate form acceptable to both the Landlord and to Tenant's Broker Real Estate as noted above. Please include a copy of the commission agreement with your response. No response shall be accepted without inclusion of such agreement.
Amazing how many deals are completed in Orange County without ANY written agreement. This section may be the only reliance the broker, particularly one representing the tenant, may have to claim a commission. The broker may even include a clause stating that should the Landlord not pay the agreed upon commission within a specific time period, the Tenant could divert rental payments to the broker in the amount equal to the commission due. Of course the legislature may finally pass AB 468 to be in line with many other states.
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25. WARRANTY
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Landlord warrants that there are no currently pending operating cost, tax, utility or service accruals or escalations which have not been disclosed which could impact on the total occupancy beyond average historical increases and there is not, at this time, a pending sale of the property.
"Oh, you mean I was supposed to tell you about those repairs I was planning?" Always love surprises. There goes the expense pass throughs.
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26. EXPIRATION
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This Intent to Lease shall remain in effect through 5:00 P.M. on Wednesday, April 23, 1997. Tenants will be available to discuss improvements in detail at Landlord's request. TIME IS OF THE ESSENCE.
Always include a drop-dead date.
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27. LEGAL EFFECT
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TENANT AND LANDLORD ACKNOWLEDGE THAT THIS LETTER IS NOT A LEASE, PROPOSED LEASE, OR OFFER, BUT ONLY AN EXPRESSION OF INTENT. This letter will not be binding on either party but will be the basis for the preparation of lease by the Landlord. The proposed Lease would constitute a Lease for the premises only after approval, execution, and delivery by the Parties. No representation is made by Tenant’s Broker Real Estate as to the legal sufficiency, legal effect, or tax consequences of this expression of intent, which will be governed by the laws of the State of California. It is recommended by Tenant's Broker Real Estate that the Tenants have all documents reviewed by an attorney or should the Tenant be an attorney, reviewed by an outside attorney.
Typical broker indemnification language. While the question comes up regarding the Intent of the Parties, that's why we have discussions about the validity of Intents to Lease.
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DON'T BE AFRAID TO ASK YOUR BROKER TO INCLUDE AS MUCH AS HE CAN IN THE INTENT TO LEASE. If your Intent is complete, you'll save time, money, and eliminate potential confusion when you try to finalize the deal.
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