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HERE WE ARE AGAIN.

We are pleased to return with another issue of Becker Gurian Property Lines. Your comments and compliments on our first issue were greatly appreciated.  Please continue to let us know your impressions of our efforts as well as any topics of interest that you would like us to explore.  In the meantime, we present this issue to you with the hope that it will be a helpful resource during future lease negotiations.  We've added a new feature to our newsletter: The Bottom Line; famous quotations and words to live by that inspire us in our lives and practice, and, we hope, will inspire you as well.

 

Long-Term, Low-Rent Leases

 

In today's market, landlords are learning that prospective tenants command substantially lower rents than were achieved before the economic downturn.   This is frequently true both for new leases and amendments to existing leases.  In addition to lower rents, tenants are often granted long-term leases, either by virtue of a lengthy initial term or a short initial term together with a series of renewal options. 

 

Although landlords are justifiably eager to lease up their vacant space, they recognize that the combination of lower rents and longer terms can have a negative impact on their property.  While these leases afford landlords current continuous occupancy revenues, they also have a good possibility of reducing the value of their property over time due to their reduced rents.

 

To mitigate the risk of these low-rent, long-term leases, we suggest that landlords endeavor to include the following provisions in those leases: 

  • CPI Increases.  To protect the landlord from the consequences of inflation, landlords should require that the base rent be subject to regular increases based on CPI.
  •  Fair Market Rent.  While landlords may be forced to accept lower rents for the initial lease term, to the extent possible, leases should require that rents be adjusted when lease renewals are exercised to reflect fair market rent. Hopefully, by the time the initial term expires, the economy will have improved and the rents will increase accordingly.  If the initial term is long (more than 5 years, for example), then landlords should try to negotiate periodic rent increases based on fair market rent.
  •  Limitation on Rent Concessions.  Landlords should also require that rent concessions apply only so long as the original tenant is conducting business at the leased premises and is not in breach of the lease. The goal of this requirement is to prevent a tenant who is no longer conducting its business from the premises from using its lease to leverage the value of the property by subleasing or assigning the lease for a higher rent than the rent stated in the lease.  Although leases often require tenants to pay the landlord 100% of the "profits" realized as a result of a subletting or assignment, tenants may attempt to circumvent this provision by creating a mechanism where the profits are not reflected in the base rent amounts.  By limiting rent concessions to the original tenant, this potential problem can be minimized.
  • Right to Recapture.  For reasons similar to those set forth above, in order to avoid the situation where a tenant decides it would be more profitable to be a landlord rather than a business operator, Landlords should insist upon the right to recapture the leased space in the event a tenant attempts to sublease its space or assign its lease (other than in connection with the sale of the tenant's business). 
  • Percentage Rent.  Landlords who own retail properties should negotiate for percentage rent payable after a gross sales break point is reached. The inclusion of percentage rent can help to minimize landlord loss (in real dollars) from the consequences of inflation.

Landlords anxious to achieve full occupancy of their properties face many challenges in the current climate.  The last thing a landlord needs is for a new lease to contribute to the further erosion of the value of its property.  We'll work with you to draft lease provisions to address these concerns.  If you want to learn more, please email us or give us a call.

 

The Bottom Line
"Deep roots are not reached by the frost."

- J.R.R. Tolkien

NOVEMBER 2009

 

 

 

Becker Gurian is a
boutique law firm rich
in experienced, senior- level attorneys that provides skillful economical legal
support services to both entrepreneurial
and institutional commercial, real estate developers,
owners and managers.
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Becker Gurian
513 Central Avenue
Suite 400
Highland Park, Illinois
60035-3264
847-433-2442

 

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This publication is not intended to provide legal advice for a specific situation or to create an attorney-client relationship.  We would be pleased to provide you with legal counsel.  Call us at 847-433-2442 to discuss your specific needs.
 
2009 Becker Gurian, all rights reserved.  Permission is granted to copy and forward all articles and text as long as proper attribution to Becker Gurian is provided.

 

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