Representing the Commercial LandlordREAL ESTATE LAW DUMBED DOWN 2017

Premiere Date: February 2, 2017

This webinar is sponsored by: EisnerAmper

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MODERATOR

Tal Izraeli Levenfeld Pearlstein, Chicago

PANELISTS

Barry Katz Arnstein & Lehr, LLP, Chicago

Michael Weis Williams, Bax & Saltzman, Chicago

Howard Kline Law Office of Howard F. Kline, California

MEET THE FACULTY

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ABOUT THIS WEBINAR

This webinar covers key concepts and sticking points in representing a commercial landlord in the negotiation and documentation of a lease. Some of the concepts covered include preserving the lease form, being cognizant of third party (i.e., lenders, investors and operating expenses) interests, financial certainty and a clear allocation of obligations. This webinar also compares and contrasts the very different concerns and needs of landlords of different real estate asset classes (e.g. office v. retail v. industrial space).

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ABOUT THIS SERIESWhether you are a direct owner or investor in real estate, or a business owner who requires a lease or ownership of a property to house your business, it is a good idea to have some basic knowledge of real estate law. Likewise, if you are general practitioner, you must be able to issue spot and respond to general questions your clients may have. Either way, this webinar series provides important basic knowledge and insight into the most fundamental and common of real estate transactions. Each episode is delivered in Plain English understandable to business owners and executives without much background in these areas. Yet, each episode is proven to be valuable to seasoned professionals.

As with all Financial Poise Webinars, each episode in the series brings you into engaging, sometimes humorous, conversations designed to entertain as it teaches. And, as with all Financial Poise Webinars, each episode in the series is designed to be viewed independently of the other episodes, so that participants will enhance their knowledge of this area whether they attend one, some, or all of the episodes.

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EPISODES IN THIS SERIES

EPISODE #1 Representing the Commercial Landlord 2/2/2017

EPISODE #2 The Landlord/Leasing Relationship 2/13/2017

EPISODE #3 Representing the Commercial Tenant 3/9/2017

EPISODE #4 Representing the Real Estate Developer 4/20/2017

EPISODE #5 Representing Buyers and Sellers of 5/18/2017

Commercial Real Property

Dates shown are premiere dates; all webinars will be available on demand after premiere date

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COMMERCIAL LANDLORD; ASSET CLASSES

There are 4 primary classes of commercial real estate: 1) retail, 2) office and 3) industrial. The other main class of income producing real estate which will not be covered by this panel, is apartment or multi-family. Some unique considerations for the three asset class which we will cover today are as follows:

1) Retail – exclusivity, co-tenancy, percentage rent, going dark; also consider larger tenants often have their own forms of lease, estoppels and sndas which they often have the leverage to impose upon most landlords.

2) Office – relocation provisions are important to allow landlord flexibility (with floorplans); operating expenses, must be sure that all such expenses are covered and uniform.

3) Industrial - permits and use are often necessary and must be addressed; hazardous materials and equipment must also be carefully considered. Hours of operation and access are a couple of other provisions that often require additional attention with industrial leases.

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SINGLE TENANT VS. MULTI –TENANT

• Single Tenant: No demising wall, entire property typically included in lease. Most often the lease is triple net meaning that the tenant is responsible for all expenses of the property, including, property taxes, building insurance, maintenance and repairs, and utilities. Single tenant leases typically have longer terms and include more tenant obligations (i.e., repair and maintenance obligations).

• Multi –Tenant: This is more common, typically tenants each pay their proportionate share of the property taxes, building insurance, maintenance and repairs, and utilities.

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LETTER OF INTENT

• The letter of intent (“LOI”) is typically negotiated directly by the parties and their brokers.

• LOIs are typically non-binding, however, this must be explicitly stated.

• From a landlord’s perspective, the more details in an LOI the better, in particular, the following terms should be included in LOIs:

term of the lease

commencement date and expiration date

Base rent (if net lease) or gross rent (and what it includes if gross lease)

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LETTER OF INTENT, CONT’D

• Terms to include in LOIs, CONT’D

tenant’s proportionate share of expenses and at least a rough list of what is included in the expenses

the permitted use: this should be narrowly drafted for tenant’s specific use.

Options (i.e., extensions, expansion, rights of first refusal, right of first offer, termination)

Tenant inducements (i.e., rent abatement, tenant improvement allowance)

Whether a security deposit or guaranty will be required (or note that such requirement will be based on landlord’s review of tenant financials)

it is very important that the LOI explicitly state that the landlord’s form of lease will be used.

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RENT

• Triple Net Lease – is a form of lease whereby the tenant is responsible for all of the expenses of the property (i.e., including: real estate taxes, property insurance, utilities, maintenance and repairs)

• Gross Lease – is a form of lease where the landlord pays all of the buildings expenses (i.e., including: real estate taxes, property insurance, utilities, maintenance and repairs).

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RENT, CONT’D

• Many leases are modified forms of triple net and/or gross, it is critical that the LOI specify what is intended rather than using terms of art that have different meanings to different people, for example, a “modified gross lease” is a lease where the tenant is required to pay for only some of the building expenses, the LOI should specify which expenses so that there is an agreement between the parties (and not rely on each party’s understanding of what “modified gross lease” means).

• Percentage Rent -typically found in retail leases, percentage rent essentially means that in addition to receiving annual basic rent, landlord will also receive a percentage of the tenant’s gross sales (typically only in effect after gross sales exceeds a certain agreed to amount called a “breakpoint”).

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OPERATING EXPENSES

• “Operating Expenses” are all of the landlord’s expenses incurred in connection with the operation of the property. Typically, this includes: taxes, insurance, maintenance and operating expenses. What is included and excluded in “operating expenses” should be specifically listed in the lease and is typically the subject of much negotiation.

• Both for administrative reasons and economic reasons, an owner of a multi-tenant property should try to maintain the uniformity of the operating expenses in its leases.

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OPERATING EXPENSES, CONT’D

• In order to prevent landlord abuse, most leases will include audit rights for the tenant to review the actual operating expenses of the property. The audit provision should include (i) the specific documentation that landlord must make available to tenant, (ii) the time period for tenant to review and, if necessary, to notify landlord of any errors, (iii) it is a good idea for landlord’s to restrict the type of 3rd party auditors to those who are non-contingency based, and (iv) in the event of an error, the mechanism and timing for correcting the error and if applicable, having the landlord pay for the cost of the audit to the extent that landlord was responsible for any errors.

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OPERATING EXPENSES, CONT’D

• “Gross Up” this provision allows a landlord to calculate the operating expenses for a building that is less than fully occupied to the amount that such expenses would have been had the building been fully occupied (or typically 95% occupied as negotiated). Although this seems at first glance to favor the landlord, it is also for the tenant’s protection. The expenses that are “grossed up” are the variable expense (i.e., janitorial, maintenance and utilities) in a building not the fixed expenses (i.e., property taxes and insurance).

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INSURANCE

• Insurance and indemnity provisions must be reviewed carefully both by landlord and its insurer. Typically the tenant’s insurance must include sufficient coverage for its personal property, commercial general liability insurance (typically in a range of $1 million to $3 million) and all other insurance applicable to the particular use.

• Additional insured vs. named insured

• Policy limits

• Landlord must consult with its insurer to confirm that there are no “gaps” in coverage

• Indemnity and subrogation

• If there is a lender, landlord should always include any of its lender requirements in the insurance provision.

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ASSIGNMENT AND SUBLEASE

• Critical to limit the ability of tenant to assign its interest in the lease or sublease any portion (or all) of the premises.

• Typically this provision includes the right of landlord to approve any and all assignments and subleases.

• Since tenants that are entities may during the term of a lease be part of a re-structuring, merger, buy out or other transaction, it is important to spell out exactly what constitutes an assignment and when landlord approval is required.

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ASSIGNMENT AND SUBLEASE, CONT’D

• It is a good idea to include that the original tenant shall remain liable under the lease notwithstanding any such assignment or sublease (this is often negotiated) and the criteria for landlord’s approval could also be added in the lease form to avoid any questions when this issue arises.

• Since the landlord’s review is often based on the creditworthiness of the assignee (and to a lesser extent the sublessee), the provision in the lease should explicitly require the tenant to deliver all necessary financial information and documentation for landlord to complete its review and include a net worth limitation provision which requires a minimum net worth for any such assignee.

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GUARANTY AND SECURITY DEPOSIT

• It is important to always know exactly which entity is the tenant, i.e., if it is an affiliate of a creditworthy entity that does not have any assets of its own.

• The underwriting for the tenant should be included in the LOI and the possibility that a guaranty or security deposit may be required should also be expressly stated in the LOI.

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DEFAULTS

• The default provision in the lease should not be the subject of too much negotiation.

• The tenant is often concerned with having an opportunity to cure defaults. For this purpose defaults should be divided into 2 categories, monetary and non-monetary. Monetary should be simple, i.e., if payment is not made within 5 days of when due, the lease is in “Default”. Typically, 30 days is given for non-monetary defaults. The lease should also contain a term that the cure period does not apply in the event of more than one “D”efault in a given (i.e., six months or one year) period of time. This is critical because (i) landlord’s want the ability to exercise remedies against chronic defaulters, and (ii) such “D”efault may also cause the landlord to be in default under its loan.

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DEFAULTS, CONT’D

• It is also important that the lease provide that if a default occurs tenant will not have the benefits of any rent abatements or options (i.e., extension, expansion, etc.).

• It is also a good idea to have a notice provision in the lease which allows for the most efficient means of providing notice (i.e., email or fax) so that there is no delay.

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REMEDIES

• Important to know statutory remedies which vary by state, this should be included in the lease.

• Termination of lease and acceleration of rent. Landlord should have the right to both terminate the lease and accelerate all rent in the event of a default.

• Landlord should also have the right to enter and take possession of the premises. This is important to allow the landlord to re-let the premises which may mitigate the damage. All of landlord’s expenses (including, legal, brokerage, tenant improvement, etc.) should also be the responsibility of tenant. Note that having a guaranty or security deposit is obviously of some value in such instances.

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RELOCATION

• The relocation provision allows the landlord to move the tenant to other comparable space in the building.

• This is important to landlords because it gives them flexibility to utilize the rentable space in the building as efficiently as possible.

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SURRENDER

• The surrender provision provides the terms for returning the premises from tenant to landlord at the expiration (or earlier termination) of the lease term.

• It is important to provide that the premises will be returned in the condition it was delivered, subject only to wear and tear. Any permitted alterations should be removed as well.

• Any security deposit or guaranty should include a period past the expiration of the lease term so as to allow for the turnover of the premises.

• From the landlord’s perspective the surrender of the premises should be as efficient as possible to avoid delays with any new leases/tenants.

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HOLDOVER

• This provides the terms and conditions if a tenant fails to surrender the premises at the expiration (or earlier termination) of the lease term.

• In addition to providing that monthly rent shall be (typically) 150%-200% of the monthly rent applicable on the last month of the term, it is important that this provision state that (i) the tenancy shall be a tenancy at sufferance, (ii) that landlord shall be entitled to all damages incurred by landlord as a result of such holdover and (iii) that landlord is entitled to exercise its re-entry rights and all other rights under the lease.

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ESTOPPELS

• Estoppels are critical for property owners. This provision becomes very important particularly during times that either the property is for sale (or being marketed) or is being re-financed. During either of these scenarios, timing is critical and therefore the language in the provision must be carefully considered accordingly.

• This provision must clearly provide for (i) the timing of the estoppel (typically 10 days), (ii) the specific items that the tenant will be certifying in the estoppel, (iii) a form estoppel (typically this is the lender’s form), (iv) what happens if the estoppel is not returned in the given time period (i.e., that tenant is estopped from claiming that there are any defaults under the lease or that the lease is not in full force and effect and that any such non-response is a default under the lease).

• It is important to also provide that, if applicable, that tenant will also cause any guarantor to also affirm its obligations under the guaranty in the estoppel.

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SUBORDINATION AND SNDAS

• It is important to include in most leases (usually larger tenants or tenants with more leverage do not agree to this) a provision that the lease is automatically subordinate to both mortgage financing existing at the time of the lease and to any future mortgage financing. This provision should be self-operative without the need for any further documentation unless required by landlord or its lender.

• A subordination, non-disturbance and attornment agreement should only be included for tenants with more leverage (or as required by lender). However, in the event that this requirement is negotiated into the lease, it is important to include a form that is agreed upon by tenant, landlord and its existing lender at the time.

• What you want to avoid is entering into extended negotiations about the form of SNDA. Since there are three parties involved and each has its own priorities, it is often a sticking point that causes both additional cost (landlord typically pays both its own cost and that of its lender) and time .

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REPAIR AND MAINTENANCE

• In most leases the general principal is that landlord is responsible for capital repairs and repairs to the common areas of a building while tenants are responsible for ordinary repairs and maintenance within their premises.

• To avoid future confusion and possible disputes, the more specific the repair and maintenance provision in a lease the better.

• There is also a connection between landlord’s repair and maintenance obligations and the operating expenses it can collect from tenants.

• If the lease is a single tenant lease or has a longer term, often the obligations of tenant with regard to repair and maintenance are expanded accordingly.

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TENANT IMPROVEMENTS

• The tenant improvements provision contains the terms and conditions under which tenant may make any improvements to the premises during the term of the lease.

• Typically, this should specify the process for landlord approval of such tenant improvements. Often tenants are allowed to make improvements which are less than a certain dollar amount without landlord approval however they should always notify landlord and it is imperative that the provision contain requirements which protect the landlord and the building, i.e., prohibition on mechanics liens, all contractors must be fully insured and approved and use high quality materials, work must only be completed during specified hours and noise and waste must be minimized and controlled as well.

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TENANT CONCESSIONS

• These are negotiated based on the leverage of the specific tenant and the market. It is recommended that all concessions be specifically described in the LOI.

• Rent abatement – it is a good idea to try and spread this out through the term of the lease so landlord does not have such a large up front risk. The provision should also specify that the abatement is only for base rent and not for operating costs and that in the event of a “D”efault, tenant must pay back any abatement and the provision is otherwise void.

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TENANT CONCESSIONS CONT’D

• Tenant improvement allowances – another common concession is for landlord to provide tenant with an allowance (typically tied to the square footage of the premises) for improvements to the premises. As a general principal, landlord should require (i) that the allowance only be used for actual improvements to the premises, (ii) that prior to commencing any work, landlord must approve all aspects of the tenant improvements (including plans and specifications and contractors), (iii) the timing for disbursement of the allowance and completion of the work and (iv) that specific requirements for disbursement of the allowance (including, retainage, possible construction escrow with title updates and requirements for disbursements to be made). To the extent applicable, the tenant improvements and disbursement of the allowance should also be coordinated with the lender and requirements in the loan documents.

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THIRD PARTY CONSIDERATIONS • Although the lease is between tenant and landlord, consideration must be

given by landlord to the interests of (i) its lender(s), (ii) if applicable, other parties to declarations or CC&Rs which apply to the property, and (iii) in particular with regard to retail properties, the rights of other tenants in the property (i.e., exclusives, co-tenancy and use restrictions).

• With respect to landlord’s lender, special attention must be given to the following provisions (i) payment of rent (i.e., lockbox, timing of debt service payments, payment of taxes), (ii) default (including notice and cure), (iii) insurance (lender requirements must be incorporated into provision), (iv) estoppels and SNDAs, and (v) subordination.

• To the extent there are restrictions contained in any declarations or CC&Rsthat are recorded against the property, the lease must be consistent and contain any applicable terms including, typically, that the lease is subject and subordinate to such documents.

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ABOUT THE FACULTY:

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TAL IZRAELItizraeli@lplegal.com

Tal Izraeli is a member of Levenfeld Pearlstein's Real Estate Group. Tal represents investors, developers, borrowers, and lenders in connection with commercial real estate matters, including acquisitions, dispositions, leasing, real estate financing and mezzanine financing. Tal regularly represents clients in connection with drafting and negotiating purchase and sale agreements, loan documents, leases, investment entity structuring, and the sellers and buyers of distressed real estate loans.

Tal also has extensive leasing experience on a national level and has represented both landlords and tenants in lease negotiations for office, industrial and retail space, due diligence and lease amendment and termination. He has represented large national retailers in the negotiation of retail and warehouse leases around the country. In addition, Tal has represented corporate clients in connection with the negotiation and preparation of service agreements and related corporate matters.

ABOUT THE FACULTY:

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BARRY KATZbrkatz@arnstein.com

Barry R. Katz is a partner in the Business and Real Estate practice groups of Arnstein & Lehr in Chicago. Focusing in the areas of real estate and corporate law areas, he represents entrepreneurs, developers, owners, Fortune 500 companies, national lenders, condominium associations, receivers, and management companies located both in the Chicago area and nationwide with respect to the acquisition, sale, financing, syndication, operation and management of real estate. Mr. Katz has been involved in numerous multimillion dollar transactions involving the purchase and sale or financing of real estate, and has represented many lenders in multimillion dollar transactions secured by liens upon real estate, equipment and inventory. He has extensive experience representing landlords and tenants in the leasing of a wide variety of retail, commercial and industrial properties. Mr. Katz also has been involved in the merger and acquisition of businesses and the financing of such transactions, including the representation of lenders extending credit facilities and the representation of the buyer or seller of the business.In the corporate law area, Mr. Katz represents companies ranging from small privately held corporations to publicly held Fortune 500 companies. He also represents several not for profit corporations.

ABOUT THE FACULTY:

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HOWARD KLINEhfk@hfkesq.com

Howard has been involved in commercial real estate for over 39 years now as both an attorney, broker, arbitrator and now radio show host and founder of CRE Radio & TV, since December 2010.Over the years, Howard has worked in-house as General Counsel and Director of Real Estate for a national user of office, R &D and retail space, utilizing both my legal and brokerage licenses, General Counsel for a major regional supermarket chain that owned its own shopping centers. As an attorney, he has also practiced law as outside counsel to many major commercial landlords doing lease transactional work and lease litigation, including unlawful detainers and rent collections. As a real estate salesperson, he has served as a tenant rep in New York City and as a broker for numerous lease transactions throughout the United States.

While Howard continues to practice law on behalf of commercial landlords and tenants, his passion has become the radio show. It is incredibly fulfilling to inspire others to improve themselves and reach for the stars.

ABOUT THE FACULTY:

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MICHAEL WEISweis@wbs-law.com

Mr. Weis is a partner at Williuams, Bax & Saltzman, PC in Chicago where he chairs the Business and Transactional practice. Mr. Weis focuses his practice on general corporate representation, commercial real estate and finance, and taxation for mid-size privately and publicly held entities. He has represented clients in a myriad of industries including manufacturing, distribution, real estate, health care, food and beverage, technology and professional services. Mr. Weis has been involved in the negotiation, structure, documentation and closing of hundreds of complex corporate, commercial real estate and finance transactions in the United States and abroad. Mr. Weis was named a Leading Lawyer in the practice areas of Commercial Real Estate and Corporate Law.

Mr. Weis is a graduate of the University of Illinois Urbana-Champaign College of Commerce and Business Administration (B.S. in Accountancy with High Honors) and is a cum laude graduate of the University Of Illinois Urbana-Champaign College Of Law. He has been a Certified Public Accountant since 1985. He is a member of the Chicago Bar Association and Illinois CPA Society, actively serving as a member of conference task forces in the corporate, tax and real estate arenas for several years. He volunteers his time extensively to the American Heart Association.

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