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#2 Negotiating Leases during the Downturn: Creating Value and Avoiding Cost. Moderator: Ken Ashley , CCIM, MCR, SIOR Cushman & Wakefield Speakers: Kitty O’Connell Henry Munsch Hardt Kopf & Harr, P.C. Trex Morris Ernst & Young October 13, 2009. About the Panel Members. - PowerPoint PPT Presentation
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#2 Negotiating Leases during the Downturn:Creating Value and Avoiding Cost
Moderator:
Ken Ashley, CCIM, MCR, SIORCushman & Wakefield
Speakers:
Kitty O’Connell HenryMunsch Hardt Kopf & Harr, P.C.
Trex MorrisErnst & Young
October 13, 2009
About the Panel Members
2
Ken Ashley, CCIM, MCR, SIOR
Senior DirectorCushman & WakefieldAtlanta, GA
(404) [email protected]
Kitty O’Connell Henry
ShareholderMunsch Hardt Kopf & Harr, P.C.Dallas, TX
(214) [email protected]
Trex Morris
Americas Director, Real Estate ServicesErnst & YoungAtlanta, GA
(404) [email protected]
Negotiating Leases During the Downturn:
Creating Value & Avoiding Cost
Overview
3Negotiating Leases During the Downturn:
Creating Value & Avoiding Cost
Overview
4Negotiating Leases During the Downturn
Overview
5Negotiating Leases During the Downturn:
Creating Value & Avoiding Cost
The “marriage” of tenant and landlord
6
First Date Engagement Pre-nup BudgetIssues
Parties to Lease
Letter of Intent / Deal Funding
ExculpationLease / SNDA
OPEX
Tenant Flexibility
Wedding
Self-Help
Hobbies
I love you. You are my
one and only…but
please sign this
document.
Negotiating Leases During the Downturn:
Creating Value & Avoiding Cost
FIRST DATEParties to Lease
7
Is she creditworthy?
Parties must be clearly defined.
Is he married?
Negotiating Leases During the Downturn:
Creating Value & Avoiding Cost
FIRST DATEParties to Lease
8
Who is the Landlord? A multi-billion dollar pension fund…Or a single-asset subsidiary of one?
Creditworthiness is key.Can the Landlord fulfill its promises to pay?
Due Diligence.Do your due diligence before you sign…and maybe even afterwards
Negotiating Leases During the Downturn:
Creating Value & Avoiding Cost
ENGAGEMENTLetter of Intent / Deal Funding
9
Will you be my Tenant?
Landlords “woo” the Tenants throughout the LOI process.
Negotiating Leases During the Downturn:
Creating Value & Avoiding Cost
ENGAGEMENTLetter of Intent / Deal Funding
10
• Now is the time to ask – list the critical information you need from the Landlord (and/or its Lender)
• Insure that Landlord can do what it promises with regard to commissions, allowances, etc.
• Explore confirmation from Lender; parent guaranty; Letter of Credit; escrow account; self-help
Negotiating Leases During the Downturn:
Creating Value & Avoiding Cost
PRE-NUPExculpation
11
Exculpation
I love you. You are my
one and only…but
please sign this
document.
• Landlords’ liability generally capped at its “equity in the property.”
• Equity…? What equity?!
• How can Tenant recover for Landlord default?
• Guaranty; Letter of Credit; negotiated cap on liability; self-help
Negotiating Leases During the Downturn:
Creating Value & Avoiding Cost
WEDDINGLease / SNDA
12
• If you want an SNDA, you need to get it now - to wait until later may mean never!
• Landlord may not be able to guaranty an SNDA from current lenders - should at least make commercially reasonable efforts
• Future subordinations should be conditioned on SNDA.
• Negotiate and attach the SNDA to your lease - don't let it amend your lease.
Speak now or forever hold your peace.
Negotiating Leases During the Downturn:
Creating Value & Avoiding Cost
WEDDINGLease / SNDA
13
Lender not liable for Landlord default.
No recognition of Tenant’s rights under the lease.
Excessive cure periods for Lender.
No obligation to complete tenant improvements.
No obligation to pay commissions or allowances.
No rebuilding obligation after casualty or condemnation.
Not liable for security deposit.
Get Landlord’s signature!
Negotiating Leases During the Downturn:
Creating Value & Avoiding Cost
SELF-HELPIssues
14
As in all relationships, sometimes a promise is broken. What if Landlord doesn’t do what the lease promises?
Consider a “zombie” building – no janitorial, maintenance, repair.
Steps to self-help:
Written notice to landlord - and lender?! Check the lease and SNDA and comply.
Services vs. repairs; Structural vs. non-structural.
Beware of potential liability for shoddy self help work.
Offset... Can you? When? How much?
Negotiating Leases During the Downturn:
Creating Value & Avoiding Cost
BUDGET Operating Expenses
15
OPEX33%
Operating Expenses typically account for one-third of Occupancy Costs.
• In 2009, many Tenants received Opex of as much as 20%-25% or more
• Landlord wants to shift risk of unexpected costs or price increases to Tenant through operating cost pass-throughs
• What is an operating cost? More importantly, what is it not?
• Cap on "controllable" operating costs; but what's controllable?
• Understand the cap - is it cumulative and compounded?
Negotiating Leases During the Downturn:
Creating Value & Avoiding Cost
BUDGET Operating Expenses
16
OPEX33%
Operating Expenses typically account for one-third of Occupancy Costs.
• For Base Year concept, make sure Land-lord fully “grosses-up” cost in Base Year
• Don’t let Landlord profit on operating expenses.
• All expenses should be actual and reasonable.
• Recalculate proportionate share if building size increases
Negotiating Leases During the Downturn:
Creating Value & Avoiding Cost
BUDGET Operating Expenses
17
OPEX33%
Operating Expenses typically account for one-third of Occupancy Costs.
• Reconciliations• When will Landlord deliver annual
statement? Need a drop dead date.
• Require audit right; make sure timing works... what if Landlord never delivers its statement?
Negotiating Leases During the Downturn:
Creating Value & Avoiding Cost
HOBBIESTenant Flexibility
18
To whom can a tenant assign or sublet? Must the landlord consent?
• Third parties:• Landlord should be reasonable in granting
consent
• Beware of "prohibited" transferees - they are often a tenant's best candidates!
• Permitted transfers – what flexibility does tenant need for its overall business plan?
• Affiliate (parent, subsidiary, entity under common control)
• Successor by merger
• Asset Purchaser
• Net worth issues - when do you measure?
• Ancillary rights – make sure you don't affect renewals, ROFRs, etc.
Negotiating Leases During the Downturn:
Creating Value & Avoiding Cost
MARRIAGEAnd They Lived Happily Ever After…
19Negotiating Leases During the Downturn:
Creating Value & Avoiding Cost
