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Lease Strategies

Product Overview

This LARG contains the following items:

Operational Concerns and Cost Pass Throughs for the Urban High Rise Landlord, and the Lease Clause Critique: High Rise Retail Area Costs and Operations.

Number of Single Spaced Pages: 12





This LARG contains a series of clauses from a pro-landlord urban retail lease form designed for a mixed use project containing retail, office and hotel uses in a single high rise building. Many of the clauses address operational concerns of the landlord, and give the landlord broad control over the everyday operations of the retail tenant. Others focus upon various cost pass throughs for the retail tenant, and rights to make alterations to the premises and install and maintain signage.

Operational Concerns And Cost Pass Throughs For The High Rise Urban Landlord

In suburbia, retailers usually confine themselves to strip centers and sprawling low rise regional shopping centers. In such settings, operational matters are pretty simple. Parking is easy; the customer drives as close to the store he wants to visit, and parks in front if possible. Removal of trash by the tenant is also fairly simple; the tenant hauls rubbish out of the back door and empties it into the dumpster. If the tenant wants to make alterations to its store, getting the landlord's approval usually isn't too tough, and generally there are no complicated HVAC or utility systems to worry about.

That all makes sense for the suburban landlord and retailer. However, in an urban setting, retailers want to be where the action is. In many cases, that means doing deals for space in office buildings, mixed use complexes, and specialty high rise urban malls, with or without anchors. Operational matters become more complicated for both the landlord and the tenant when the premises are located in a high rise building. There is no back door for trash removal. The HVAC, exhaust, escalator and elevator systems are complicated and expensive.

Operating Cost Allocations

In addition, allocations of common area costs and operating expenses in mixed use projects are more complicated to administer. In a mixed use project that contains, say, first class office space, retail space, and hotel space in the same building, all sitting on an underground parking garage, is it fair to just put all the costs in one pot and make the tenants pay their pro-rata share, whether they're office tenants, retail tenants or hotel operators? Not necessarily.

The allocation of operating expenses between tenants in mixed use complexes (i.e., buildings that contain office tenants, retailers and possibly hotel or residential condominiums) must be carefully thought through by the landlord. For instance, if the mixed use development is taxed as a single parcel, how are real estate taxes to be allocated to the various uses? Should the landlord allocate the real estate tax burden on the basis of improvement costs, especially where there may be significant variations in per square foot costs for different uses?

What about allocation of the cost of facilities that benefit one use significantly more than another? For example, what if the configuration of the parking garage serving the office building portion of the development is such that it is difficult for residential condo owners to use? In such a case, how fair is it to include the cost of operating the garage as an operating cost to be paid equally by all uses?

Or what happens when a particular use (e.g., the hotel) insists that the development have amenities that benefit mainly that use (e.g., special security, elevators, valet parking services, etc.)? Most tenants will not go through the financial structure of the mixed use deal and the operating cost allocations like a big 8 auditor, but some will. When that happens, the scheme for allocation of operating expenses had better be fair, or mostly fair.

Is It Defensible?

Obviously, one approach is to allocate percentages of the cost for certain facilities or amenities that do not benefit all uses equally. If the landlord makes weighted allocations among uses for certain facilities or amenities, where does it draw the line on complexity for the allocation formula for operating expenses in a mixed use project? The allocation must not be so complex that it cannot be administered in a reasonable way.

Presumably, the bottom line is that the landlord must have devised a defensible rationale for the allocation of operating costs with adequate detail to be reasonably acceptable to tenants signing the leases and to the other occupants in the complex. That can be difficult since, as a practical matter, larger tenants usually have significant leverage in negotiating the extent of their reimbursement obligations for operating expenses, and smaller tenants may ultimately bear a disproportionate burden as a result. That's the way of the jungle.

In the deal contemplated by the clauses that follow, the retail tenant must pay a retail area charge that is fixed for the first year of the tenancy. If operating costs exceed base year operating costs for future years, the tenant is liable for its proportionate share of those, too. The retail area charge is allocable to certain "special services" provided to tenants in the retail part of the complex. It covers electricity for the tenant's lights and HVAC, water, and trash removal. It also covers the landlord's management and operation of the retail area. The tenant must also pay a stipulated sum as a contribution to the landlord's advertising and public relations program.


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