Cirrus Commercial has negotiated hundreds of leases, from large to small. In my experience, the time it takes to negotiate a lease varies from a week or two to several months, depending on the complexity of the terms and conditions, build out negotiations, and the depth of the Tenant or Landlord’s legal department.

For an average lease of a typical  office space, the process usually goes like this:

•        Tenant sets criteria and desired location.

•        Broker prepares anvailability study.

•        Tenant narrows the selection to a few properties and tour them.

•        Broker prepares a letter of intent to lease (LOI) on the desired space.

•        Tenant signs LOI and broker submits to listing broker or owner.

•        Owner responds and agrees or modifies the LOI.

•        After agreement by both parties, owner prepares a lease for Tenant’s review.

•        The process of hammering out the terms and conditions can take a week or two to several months.

•        Upon agreement, both parties sign the lease.

•        If any, the improvements to the space (build out) commence.

•        Tenant takes possession of the space.

Virtually every aspect of a lease is negotiable and is a potential concession. Whether you are an owner or the tenant, you will need to understand the negotiating points of view of all parties and the significance of each clause and/or concession.

•        Obtaining a reasonable, fairly calculated rent.

•        Receiving maximum services for good value.

•        Predictable and fair operating costs.

•        Expandability of space for future needs.          

•        Fitness or adaptability for tenant’s use.

•        Lease clauses that provide maximum flexibility concerning renewals or ability to assign or sublease.

     

•        Attracting and keeping high-quality tenants.

•        Ability to finance construction (if necessary) .

•        Protection of property improvements.

•        Shifting or balancing risks.

•        Ability to regain possession.

•        An accurate completion of the transaction

•        A binding, clearly-worded lease document

•        Financial health of all parties

 

·         Base (contract) rent: This is a face, quoted, contract dollar amount of periodic rent. The annual base rate is the amount upon which escalations are calculated.

·         Total effective rent: This is the base rent adjusted downward for concessions and allowances and upward for costs that are the responsibility of the user (such as operating expense pass-throughs). Total effective rent is the total of all cash flows over the term of the lease.

·         Average annual effective rent: This is the total effective rent divided by the lease term.

·         Average annual effective rate: This is the average annual effective rent divided by the square footage.

·         Discounted effective rent: This is the cash flows over the term of the lease, discounted to the present value.

 

For a given level of rent owners prefer to pass on as much responsibility for operating expenses to tenants as possible. However, the extent to which owners and tenants share the payment of operating expenses depends on what currently is standard in the market in which the property is located, and on the relative bargaining power of the two parties in negotiation.

Below is common expense terminology in leases, which identifies who is responsible for the payment of operating expenses.

 

·         Gross Lease: The owner pays all expenses associated with operating and maintaining the property. The tenant pays the owner a gross amount for rent. From this amount the owner then pays the operating expenses (property taxes, insurance, maintenance, utilities, janitorial, and security costs).  

·         Triple-Net Lease or NNN:   The tenant pays all or some of the operating expenses. However, the lease terms should be examined carefully, as the definition of net leases varies from market to market.

·         The first net usually obligates the tenant to pay annual property taxes.

·         In a net-net lease, the tenant pays both properly taxes and hazard/fire insurance.

·         In a triple-net lease, the tenant is responsible for all its proportionate share of operating expenses. However, the lease terms should be examined carefully, as the definition of net leases varies from market to market.

·         Absolute net lease:   The tenant pays all expenses related to operating and maintaining the entire leasehold Interest.

 

 The requirements of valid leases are similar to the requirements for valid contracts. If the required elements appear in the lease, then it is valid. The length of most residential leases does not exceed two or three pages. Many commercial leases, however, exceed 50 pages in length. Despite the wide variation in the length and complexity of commercial leases, valid and enforceable leases usually contain the following elements:

•        Names of owners and tenants: All parties to the lease should sign the document.

•        Description of property: Acceptable descriptions include street addresses and recorded plats in urban areas and government rectangular survey system and metes and bounds in rural areas.

•        Consideration: This requirement usually is met by the tenant’s promise to pay rent and the owner’s inability to occupy the property during the lease term.

•        Legality of objective: T he objective of the lease must not violate any federal, state, or local law.

•        Offer and acceptance: Statements to the effect that the owners agree to lease the property for a specified period of time and that the tenants agree to pay a certain amount of rent periodically to occupy the property.

•        Written form:  In most states, leases for longer than one year must be in writing to be valid and enforceable.