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Lease Strategies

Product Overview

This LARG contains the following reference materials:

Checklist entitled Does Your Retail Form Lease Cover All The Bases?

Number of Single Spaced Pages: 12







1. Fixed or Minimum Rent:

(a) Methods for setting rate; subject to negotiation and the market.

(b) Rent commencement date - Often tied to completion of improvements, expiration of fixture period or the date Tenant opens for business; can the Tenant move in over the prior weekend and have access to escalators, elevators, or an enclosed mall?

2. Escalation clauses for the Minimum Rent:

(a) Rent increases based on increases in building maintenance costs or real estate taxes - May not be good index for fixed rental increases and may have unexpected results (e.g., rent under long term lease tied to increases in real estate taxes in California substantially reduced due to Proposition 13).

(b) Rent increases based on increases in cost-of-living indices - Select the particular index and specify; are maximum and/or minimum increases mandated? How often is the rent adjusted? Can the rent decrease if the index decreases? Can the rent exceed the fair market rent if index has outpaces the market?

(c) Rent increases based on appraisal values - Is the number of appraisers specified? Are qualifications for appraisers specified? Who bears the fees and expenses of the appraisers? Are time limits included?

(d) Negotiated rental increases - Can the negotiated rent exceed the fair market rental for the premises if the Landlord has great leverage? Can the Tenant rescind the exercise notice if the negotiated rent is too high? Are time limits included for the determination of the new rent? Can the rental be lower than that for the original term? Is the particular clause definite enough to be enforceable under applicable state law regarding contracts and leases? Is there a method to determine the rent if the parties can't agree?

(e) Frequency of rental adjustments - Range is from annual to every three years to every five years.

(f) Lender's concerns - Rental increases must be adequate to service underlying debt service (including increases) on the project.

3. Percentage rental issues:

(a) Definition of Gross Sales - Should include all sales of goods and services from the premises, whether for cash or on credit; are sales by subtenants and concessionaires expressly included?

(b) Exclusions from Gross Sales - Tenants often ask for exclusions from Gross Sales for items that are provided as a service to employees or for which they make very little money; typical exclusions include alterations, carrying charges or nominal interest revenue from charge accounts, sales to employees (often with dollar limitations), bad debt reserves or write-offs, returns of merchandise, sales taxes and other taxes actually paid to a taxing authority, vending machines sales for the benefit of employees, etc.

(c) Records - Does the clause require the Tenant to keep complete records of its daily Gross Sales, with separate records for subtenants and concessionaires (if any)? Is the Tenant required to submit a certified statement of Gross Sales for each percentage rent period with the Tenant's payment of any percentage rental due? Is the Tenant required to submit to Landlord supporting data for the statements if Landlord requests it? Is the Tenant required to give copies of any audits the Tenant has performed or copies of tax returns to the Landlord for the purpose of verifying Gross Sales? Does the Landlord have the right to audit the Tenant's records concerning Gross Sales? Is the Tenant obligated to pay immediately any amount of percentage rental discovered to be payable by the audit? Is the Tenant required to pay for the cost of the audit if Gross Sales are found to be understated by a certain percentage, e.g., 3%? Is the Tenant required to retain sales records for certain period, e.g., two years, to permit later audit by the Landlord?

(d) Manner of payment - Often percentage rent is paid quarterly, but may be paid monthly; some major tenants bargain for semi-annual or annual payments of percentage rentals. Periodic payments are usually subject to an annual reconciliation.


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