LEASE AGREEMENT REFERENCE GUIDE 360: STRATEGIES FOR PARKING LOT LEASES $24.95
The Ins And Outs Of Parking Lot Leases
This article focuses upon the negotiation of parking lot leases. Developers in central business districts often find themselves to be substantial players in the parking business. This results from their assemblies of particular parcels in downtown areas for development. As the developer acquires individual sites that do not contain buildings, he is anxious to generate revenue from parking fees to partially offset his holding costs for the property.
Parking lot leases with longer terms (e.g., five years) frequently contain a landlord termination right with a relatively short fuse (e.g., thirty or sixty days). This permits the landlord to commit the tenant to a longer term arrangement, but get the property back quickly if his plans for the site change, or if he wants to sell the property to a third party free of the lease.
A great many parking lot leases are percentage rent deals. Often the percentage increases over the term (e.g., 40% of revenue in the first year, then 50% in the second year, etc.). Leases for parking garages tend to be somewhat more complicated than leases for parking lots, since they frequently contemplate a higher level of operations then that needed for a parking lot, and since they usually start from a full blown office lease or retail lease form. In addition, they tend to have heavily negotiated maintenance and repair clauses, covering responsibility for elevators, special ducting, traffic regulation equipment, and the like.
PARKING LOT LEASE
THIS PARKING LOT LEASE (the “Lease”) is made and entered into on ____________ by and between ABC Group, a limited partnership (“Landlord”), and XYZ, Inc., a corporation (“Tenant”), collectively called the “Parties.”
1.1 Landlord is the Owner of the following described real property located in the City of ______________, State of _____________:
1.2 Tenant desires to lease the above-described real property (“Premises”), and Landlord desires to let unto the Tenant the Premises on the following terms and conditions.
NOW, THEREFORE, in consideration of the foregoing recitals and the covenants and agreements of the Parties herein contained, the Parties hereby agree as follows:
GRANT OF DEMISED PREMISES
2.1 Landlord does hereby demise and let unto Tenant, and Tenant does hereby lease and hire from Landlord the following described Premises , together with all improvements thereon, located in the City of _______________, State of ________________, for the term and upon the rental and the covenants and agreements of the respective parties herein set forth:
3.1 The term of this Lease shall commence at 12:01 A.M. on ___________, and shall end, if not sooner terminated hereunder, at 12:01 A.M. on ____________ (“Term”).
Comment: Landlords characteristically keep the lease term for parking lot leases short. This permits remerchandising of the site and construction of major office buildings or retail developments when the market timing is right. It also means that the tenant doesn't have adequate length of lease term to amortize construction of elaborate facilities. This makes for minimal improvements located upon the parking lot (e.g., a parking shed, perimeter poles and cables, signage, money collection boxes, concrete parking barriers, and the actual paving of the lot itself, with striping).
4.1 In consideration of the said demise, and commencing when the "Improvements" (as defined below in Section 5.1 hereof) have been completed, Tenant covenants and agrees to pay to Landlord as rent for the Premises:
(a) the sum of Two Thousand Five Hundred Dollars ($2,500.00), payable in advance on the first day of each month, partial months, if any, being prorated, at the office of Landlord as set forth below; plus
(b) Fifty percent (50%) of the amount, if any, by which the gross annual revenues from the operation of Tenant's business on the Premises exceeds Forty Two Thousand Dollars ($42,000.00).
Tenant agrees to use due diligence to complete the Improvements as soon as is reasonably practicable.
4.2 Commencing with the first rent installment due after completion of the Improvements, the Tenant shall be allowed as a rent credit Two Thousand Five Hundred Dollars ($2,500.00) per month until the total rent credit equals the cost of the Improvements, which cost shall not exceed Twenty Thousand Dollars ($20,000.00). Tenant shall furnish Landlord copies of invoices evidencing the cost of the Improvements. If the Lease is terminated before the total cost of the Improvements have been reimbursed to Tenant through rent credits, Landlord shall pay the unreimbursed amount to Tenant before the effective date of the termination.
4.3 Tenant will submit to Landlord monthly statements of gross revenues, and within twenty (20) days following each anniversary of the commencement of the Term, Tenant will submit to Landlord a statement showing the gross revenues, together with payment of percentage rent, if any, then due.
4.4 Tenant will maintain normal business records concerning its business operations on the Premises, and will preserve the same for one (1) year, and will allow Landlord, or its authorized agents, to examine the same, at Landlord's expense, at all reasonable times during such record preservation period.
Comment: Section 4.1 above provides that the minimum rental for the deal (i.e., $2,500 per month) does not commence until the tenant improvements found in Section 5 below are completed. This gives the landlord no assurance as to when the rental will actually commence, and the landlord should insist upon an outside date upon which the rent would commence whether or not the improvements are complete. The clause does provide, as small comfort to the landlord, that the tenant will use due diligence in completing the improvements “as soon as reasonably practicable. Section 4.2 (b) provides that the tenant will pay the landlord fifty percent of the gross annual revenues from the operation in excess of $42,000.
Section 4.2 sets up a recapture whereby the tenant is allowed to offset the cost of its improvements to the site at a rate not to exceed $2,500 per month and not to exceed $20,000 in total. That clause also provides that if the lease is terminated before the total cost of the improvements has been recaptured by the tenant that the landlord will pay the unreimbursed amount out of its pocket before the effective date of the termination of the lease.
Although the clause requires that the tenant furnish receipts for the work performed, there is no definition of the items that qualify for recapture. Landlords in such arrangements are often surprised to find items such as offsite administrative overhead, administrative mark up on labor and materials for job supervision, etc., included in the amount submitted for recapture when there is no careful definition of items that qualify as actual costs of the “Improvements.”
Section 4.3 of the parking lease obligates the tenant to submit monthly statements of gross revenues within twenty days following the anniversary date of the term. Many landlords insist upon monthly statements of revenues together with monthly payment of percentage rentals due in retail deals. Payment of percentage rental on an annual basis does not allow the landlord to monitor monthly sales as the term elapses. This means that the landlord will have difficulty spotting irregular patterns of revenue under the lease, and manipulation of percentage rental statements.
Finally, there is no “hours of operation” language in the lease that requires the tenant to operate minimum hours of the day or minimum days of the week. Without such language, the landlord has to rely on his sixty day termination right, if he is not satisfied with the tenant's hours of operation.
5.1 Tenant shall, at Tenant's cost and expense, in a good and workmanlike manner, make specific improvements to the Premises as Tenant may require for the conduct of its business (the "Improvements"). The Improvements shall only include demolition of the existing building, surface repairs, paving, repair of sidewalk, striping and the installation of wheel stops, posts, and cables.
Comment: Section 5.1 dealing with improvements is quite brief with respect to the improvements to be made to the premises. Ordinarily, landlords insist that a plan showing the improvements be submitted to the landlord for its prior written consent. In view of the limited scope of the improvements contemplated for the premises, this may not be necessary in this sort of a deal.