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LEASING, PART II

Understanding the different types of Leases

 

As a follow up to our last column, we mentioned there is no such thing as a "green lease," rather clauses are added to leases where the landlord and tenant agree to conserve energy and do things to help the environment. As I had mentioned, these clauses are becoming more common. As a prospective tenant, if you are pursuing a lease agreement with a landlord, and being in a "green" building is important to you, then there are a series of questions you will need to ask the landlord.

  • Is the building LEED or Energy Star Certified? LEED refers to Leadership in Energy and Environmental Design. The U.S. Green Building Council (USGBC) issues energy certificates to buildings based on several factors, including: water efficiency, energy and atmosphere, the types of materials and resources, indoor environmental air quality and innovative design.
  • What is the age and efficiency of the HVAC system?
  • Are spaces separately metered?
  • What kind of lighting fixtures?
  • Are there water efficient fixtures?
  • Is there a rain collection system?
  • Is there public transportation within a 1/4 mile?
  • Are there bike racks or storage areas?
  • Do alternative cars receive preferred parking?
  • Are green cleaning supplies used?

 

Objectives of lease agreement

When assessing the objectives of a lease agreement, consideration needs to be given to the 1) tenant, 2) landlord, 3) lender and 4) broker.

 

The tenant's objectives include:

  • Low rent, and a fair method of calculation, if the tenant prefers to be located in a Class B or Class C building.
  • Higher rent, if it is important for the tenant to be located in a Class A building, that projects the image of the company.
  • Maximum amount of services, given the class of the building.
  • Predictable and fair operating costs.
  • Expandability of space for future needs.
  • Maximum improvements - fitness for use.
  • Tenant paid improvements - tax recovery, in the form of depreciation.
  • Maximum grace periods, i.e., for payment of rents or CAM (common area maintenance).

 

The landlord's objectives include:

  • The ability to finance construction, if required by the tenant.
  • Protection against income erosion.
  • Ability to regain possession.
  • Improvement and maintenance obligations of the tenant.
  • Protection in case of property loss.
  • Protection of property.

 

The lender's objectives include:

  • Are the rents sufficient to cover the costs of financing and taxes?
  • Is the tenant capable of paying for increases?
  • Is the rent being paid on time?
  • Does the lender have the right to approve tenants, the type of tenant "mix" and tenant's use?
  • Is the lease subordinated to the mortgage? In other words, does the mortgage have priority to the lease in the event of default?
  • Does the lender have final approval of the lease?

 

The broker's objectives include:

  • Accurate completion of the transaction.
  • Assuring a binding document between the parties
  • Financial health of all parties.

 

Broker's role in the transaction

  • Representation.
  • Search for properties.
  • Negotiator.
  • Problem solver.

 

Negotiating Elements

  • Defining the client's wish list and why they are asking for those items?
  • Research choices and options for different properties.
  • What are the other parties' needs and desires?

 

Lease Issues

  • Size of the space.
  • What is important to different clients?

 

Measuring Space

  • Landlords wish to be paid for every square foot in the building.
  • Tenants will occupy a unit or defined space in a building, but will share with the other tenants, the common areas of the building, such as a lobby, hallways and restrooms.
  • The tenants pay for the space they occupy and their proportionate share of those common areas.

 

"Space" Terms:

There are different methods of calculating space:

  • Net (useable) square footage.
  • Rentable (gross or billable) square footage.
  • Loss factor or "Core" factor.
  • Add-on factor.
  • Core or Loss Factor formula.

 

"Lost" Factor Areas include:

  • An atrium or lobby.
  • Hallways.
  • Elevators.
  • Staircases.
  • Public restrooms.
  • Utility rooms.

 

In our next column, we will discuss in further detail the core or loss factor formula to see how landlords come up with rentable (gross or billable) square feet vs. useable square feet.

George Bakes is a commercial real estate broker in the Del Mar office of Coldwell Banker, 2651 Via De La Valle, Del Mar, CA 92014, (858) 602-2799, george.bakes@coldwellbanker.com; www.georgebakes.com

This post is contributed by a community member. The views expressed in this blog are those of the author and do not necessarily reflect those of Patch Media Corporation. Everyone is welcome to submit a post to Patch. If you'd like to post a blog, go here to get started.

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