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Letters of Intent in Retail Leasing: What Landlords Need to Know—Part II
Moderated by
Cherie Song Buchalter Nemer 415‐227‐3514
Featured Speakers
Richard Wolf Madison Marquette
323‐602‐5312 [email protected]
Manny Fishman Buchalter Nemer 415‐227‐3504
November 12, 2014
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In our last webinar, we discussed the form of letters of intent, certain terms and provisions that should be contained in letters of intent, and the enforceability of certain provisions. In this webinar, we will focus on a few specific provisions. 1) Permitted Use
a. Office ‐ General office use or executive office use usually sufficient. Note specific exclusions from general office use:
b. Retail – Should be as narrowly drafted as possible. Some tenants want the
ability to do incidental sales of certain items. Incidental sales should be clearly defined, either as a portion of a tenant’s total gross sales or not to exceed a certain square footage dedicated to the display of such items.
c. California Civil Code Section 1997.250: A restriction on use of leased property by
a tenant may require the landlord’s consent for a change in use subject to any express standard or condition for giving or withholding consent, including, but not limited to, either of the following:
(a) The landlord’s consent may not be unreasonably withheld.
(b) The landlord’s consent may be withheld subject to express standards or conditions.
2) Exclusive Use
a. Office – Usually not an issue, but consider banks and ground floor retail. b. Retail – As a tenant, you want to ask for an exclusive right to protect yourself
from competition. As a landlord, you want to avoid giving an exclusive. In today’s market, a tenant may successfully negotiate an exclusive use clause. As a landlord, you want to define terms such as Primary Use, Incidental Use and exceptions to the exclusive (e.g., types of spaces/tenants not subject to the exclusive, such as pads, anchors and tenants and occupants who sell exclusive items on an incidental basis, etc.).
c. Remedies for violations of exclusive clause – 2 types – Landlord caused violations and rogue tenant violations. Usually not addressed in LOI.
3) Assignment and sublease
a. Office i. Usually subject to landlord’s prior approval, plus potential for recapture ii. Carve out for permitted transfers
b. Retail
i. The concept of subleasing does not work in retail leasing
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ii. Transfers to franchisor and/or franchisees
c. Landlord’s sole vs. reasonable discretion – i. California Civil Code Section 1995.250: “A restriction on transfer of a
tenant's interest in a lease may require the landlord's consent for transfer subject to any express standard or condition for giving or withholding consent, including, but not limited to, either of the following: (a) The landlord's consent may not be unreasonably withheld. (b) The landlord's consent may be withheld subject to express
standards or conditions.”
ii. California Civil Code Section 1995.260: “If a restriction on transfer of the tenant's interest in a lease requires the landlord's consent for transfer but provides no standard for giving or withholding consent, the restriction on transfer shall be construed to include an implied standard that the landlord's consent may not be unreasonably withheld. Whether the landlord's consent has been unreasonably withheld in a particular case is a question of fact on which the tenant has the burden of proof. The tenant may satisfy the burden of proof by showing that, in response to the tenant's written request for a statement of reasons for withholding consent, the landlord has failed, within a reasonable time, to state in writing a reasonable objection to the transfer.”
4) Construction
a. What level of detail is required in the LOI? b. Who contracts for the work? Use same contractors or different contractors? c. Definition of building standard d. Disbursement of allowance e. Early access f. Tenant’s deposit for excess costs/construction deposit
5) Operating Expenses a. Landlord’s estimates b. Caps
i. Controllables vs. Non‐Controllables ii. Non‐cumulative vs. cumulative
6) Q & A
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SAMPLE LANGUAGE
[Attached]
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PERMITTED USE:
Office Use: “Tenant shall use the Premises solely for Tenant’s Permitted Use and for no other purpose whatsoever without Landlord’s prior written consent, which may be withheld in Landlord’s reasonable discretion. Without limiting the generality of the foregoing, uses prohibited under this Lease include use of the Premises or any portion thereof for (a) offices of any agency or bureau of the United States, any state or municipality, or any political subdivision thereof; (b) offices or agencies of any foreign government or political subdivision thereof; (c) offices of any health care professionals or health care service organization; (d) schools or other training facilities that are not ancillary to corporate, executive or professional office use; (e) retail or restaurant uses; (f) communications firms such as radio and/or television stations; (g) telemarketing or customer order/reservation services for third parties; or (h) any use that would result in an occupancy density in the Premises that is greater than the average occupancy density of the other tenants of the Building.”
Retail Use: For the primary use of selling prepared on‐Premises and off‐Premises fruit and vegetable juices, blended drinks primarily containing whole fruits and vegetables or their juices (including, but not limited to, smoothies, whether hot or cold) (collectively, the “Primary Items”) and the incidental sale of non‐gourmet, non‐branded coffee, tea, and coffee and/or tea based drinks (blended and non‐blended), and other beverages, soups, baked goods (excluding pizzas and flatbreads), sandwiches, wraps, salads, snacks, health products (including, but not limited to, health oriented books and nutritional products), juice‐related equipment and supplies, and promotional items bearing the “X” trademark (including, but not limited to, apparel, headwear, books, drink ware, and activity items) and incidental items as are directly related to Tenant’s business (collectively, the “Incidental Items”), and for no other purpose. As used herein, (i) “primary use” shall mean Tenant’s annual Gross Sales derived from the sale of the Primary Items shall exceed sixty percent (60%), and (ii) “incidental sale” shall mean (a) Tenant’s annual Gross Sales derived from the sale of any one Incidental Item shall not exceed ten percent (10%) of Tenant’s total annual Gross Sales at the Premises and/or (b) Tenant’s annual Gross Sales derived
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from the sale of any combination of Incidental Items shall not exceed twenty five percent (25%) in the aggregate of Tenant’s total annual Gross Sales at the Premises.
EXCLUSIVE USE:
Provided (i) there is no continuing and uncured default by Tenant under this Lease; (ii) Tenant has not assigned this Lease or sublet all or any portion of the Premises; (iii) after the initial opening of the Premises for business, the Premises are being used solely for the permitted use set forth in the Basic Lease Provisions, and (iv) after the initial opening of the Premises for business, the Premises are continuously open for business to the public, no portion of the Shopping Center, other than the Premises, shall be leased by Landlord, and Landlord shall not consent to the use of any portion of the Shopping Center, other than the Premises, for purposes of operating a coffee/espresso bar and café serving non‐branded coffee/espresso and a Mediterranean restaurant and café with Italian influences whose primary menu item is [_______________] (each, an “Exclusive Item”). Notwithstanding the foregoing, Tenant’s exclusive right shall not prohibit Landlord from leasing to any tenant or occupant of the Shopping Center (i) engaged in the sale of any Exclusive Item so long as the Gross Sales derived from any Exclusive Item does not exceed thirty percent (30%) of its total Gross Sales from its premises, (ii) who is an anchor tenant (occupying in excess of ____ gross leasable area of space) [possible language] , or (iii) whose primary business is the sale of branded coffee/espresso and related products (e.g., Starbucks, Coffee Bean & Tea Leaf, Peet’s, etc.). Additional sample exclusion: This exclusive shall not apply to uses associated with (i) existing tenants in the Shopping Center who have the right to sell such products and/or provide such services pursuant to their respective leases, (ii) any national retail tenants in excess of 10,000 sq. ft. that sell the goods and/or provide the services covered by Tenant’s Protected Uses as part of their normal business operation but not as their primary use,
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OPERATING EXPENSES/CAM
Tenant will pay a pro rata share of real property taxes, insurance, and reasonable expenses of operating, maintaining and repairing the Common Area, including an administrative fee not to exceed five percent (5%) of such Common Area Costs. Such administrative fee will not be charged on insurance costs, real property taxes, security, snow and ice removal, or common area utilities. Tenant's pro rata share will be calculated based on the ratio of the gross floor area of the Premises to the total gross floor area of all improvements in the Shopping Center (but in no event shall the gross floor area of the Shopping Center be deemed to be less than the Minimum GFA for purposes of calculating Tenant’s pro rata share). Permitted Capital Improvements: (i) the costs of capital improvements undertaken in (or capital assets acquired for) the Project or any portion thereof during or after the Base Year, to the extent such capital items (A) are reasonably anticipated by Landlord to effect economies in the operation or maintenance of the Project, or any portion thereof; (B) are undertaken for the purpose of enhancing the general energy conservation, environmentally sustainable practices and/or security, health, safety and welfare of occupants of the Project; or (C) are incurred for purposes of compliance with or because required under any applicable Law, other than where a notice of violation has been served on Landlord as of the Commencement Date; and (ii) the cost of any capital improvements made to or capital assets acquired for the Building during or after the Base Year to the extent that the cost of any such improvement or asset is less than ten thousand dollars ($10,000) or has a useful life of five (5) years or less.
Estimates:
Sample language: “The foregoing is an estimate for Tenant’s informational purposes only and is not a representation or warranty of Tenant’s actual Proportionate Share of Common Area Maintenance Costs (and Tenant acknowledges it is not relying on the estimate in signing this letter of intent), and the estimate is subject to change at any time.”
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CONSTRUCTION:
A period of 150 days from the later to occur of (i) the Premises Delivery Date; (ii) Tenant’s receipt of all permits and approvals for Tenant’s Work in the Premises; (iii) the date Tenant receives written approval from Landlord of Tenant’s Final Plans; or (iv) the date the Lease is fully executed and delivered to Landlord and Tenant. Tenant will submit for its permits within seven business days after Tenant receives Landlord’s approval of Tenant’s plans. If Tenant is unable to obtain its permits (after diligently pursuing same) within 180 days following submittal, then Landlord may terminate the Lease upon 30 days written notice. Landlord will deliver the premises to Tenant in As‐Is condition. Landlord will deliver the Demised Premises in the following condition: (1) The Demised Premises and the building in which the Demised Premises is located are structurally sound and the Demised Premises has a smooth level concrete slab, set at one elevation and level throughout with a maximum deviation of ¼: within any 10’0” direction. (2) The roof of the Demised Premises and the building in which the Demised Premises is located is free of any leaks (Landlord shall reimburse Tenant for any cost in restoring Tenant’s build‐out if damaged by roof leaks that occur within 360 days of the Delivery Date). (3) Demising walls constructed with 6” metal studs minimum 20 gauge from top of slab to the structure above. Demising walls shall have 2 layers of 5/8 type gypsum board on both sides of studs that is taped, spackled and fire‐safe/caulked to meet all State, Federal and local codes. (4) Space to be fully demolished, inclusive of all partitions, fixtures, and all materials not deemed to be reused by Tenant. All flooring materials and adhesive must be removed down to the original slab. All abandoned strapping, etc., to be removed from deck and trusses, remove all penetrations and rooftop curbs not to be reused and patch as required; (5) Landlord to provide at the center electrical room a meter socket, bus bar and extend to within the rear of the leased premises located per Tenant’s plans a minimum of 3 ½” conduit with service wire for either a 200 amp 277/480 volt service or a 400 amp 120/208 volt service delivered live to a Landlord provided disconnect switch within the rear of the premises. (6) 1” telephone conduit with pull string, ¾” domestic water line, 4” sanitary sewer line located per Tenant’s plans, 4” vent line, and fire sprinkler main – all stubbed to the rear of premises per Tenant’s specifications and location. (7) Landlord to provide and install HVAC equipment designed to serve one single location at one ton per 300 square feet of space. If existing units are to be reused, the age of the current unit(s) may not exceed five (5) years.
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ASSIGNMENT
Landlord shall have the right to base its consent to any assignment or sublease hereunder upon such factors and considerations as Landlord reasonably deems relevant or material to the proposed assignment or sublease transaction and the best interest of the Shopping Center operations. Without limiting the generality of the foregoing, Tenant acknowledges that it shall be reasonable for Landlord to withhold its consent to any assignment or sublease transaction hereunder if Tenant has not demonstrated that: (i) the proposed assignee or sublessee is financially responsible, with sufficient net worth and net current assets, to properly and successfully operate its business in the Premises and meet the financial and other obligations of this Lease; (ii) the proposed assignee or sublessee possesses sound and good business judgment, reputation and experience, and proven management skills in the operation of a business or businesses substantially similar to the uses permitted in the Premises under Section Error! Reference source not found.; and (iii) Landlord has no reasonable basis for disapproving the use to be made of the Premises by the proposed assignee or subtenant and/or the trade name of the proposed assignee or subtenant under Section Error! Reference source not found. above (and that the use to be made of the Premises by the proposed assignee or subtenant conforms with the use limitations and requirements specified in Section Error! Reference source not found. above) . Consider recapture. Consider Franchisor assumption and transfer
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DELIVERABLES IN CONNECTION WITH LOI:
Landlord requires the following for presentation purposes prior to execution of the Lease
Current site plan showing proposed installations.
Front elevations renderings for the building and Shopping Center.
Accurate pylon renderings with Charming Charlie space clearly defined.
All existing CAD files for the Demised Premises
Tenant:
1. Tenant’s construction management & design contact: 2. Tenant’s leasing contact: 3. Legal Contact:
Landlord:
1. Landlord’s construction coordinator:
2. Leasing Contact: 3. Legal Contact:
4. Property Manager:
Manuel Fishman San Francisco, California
Shareholder
P (415) 2273504
F (415) 9043114
Manuel Fishman is a Shareholder in the firm’s Real Estate Practice Group in San Francisco. Mr. Fishman
focuses his practice on representing real estate developers, owners and secured lenders in the
acquisition, sale and financing of commercial properties. In addition, he has an active leasing practice
representing owners of several major office buildings in San Francisco, including the Transamerica
Pyramid, as well as tenants in lease and sublease transactions. His expertise includes letters of intent,
tenant improvement work agreements, security deposits/letters of credit, signage rights, expansion and
contraction rights, permitted transfers, operating expense audits and lender and master landlord
recognition agreements. Mr. Fishman maintains close relationships with the real estate brokerage
community and utilizes these relationships to provide clients with market based information important
to their existing and prospective real estate requirements. Mr. Fishman also has extensive experience in
the area of ground leasing and retail leasing and is recognized as a leading attorney in the area of
landline and wireless communications and Internetbased services in commercial properties and rooftop
installations.
Mr. Fishman represents clients in equity structuring for, and the acquisition of, distressed properties and
real property secured debt, including the formation of single purpose entities and joint ventures. The
clients he represents invest regionally with various joint venture partners in a variety of property types,
and these transactions present unique structuring and project management issues. Mr. Fishman has
negotiated numerous construction management, project development and property management
agreements relative to ground up development projects, as well as all types of easements and other
adjoining owner agreements.
Recent Publications & Presentations
� “Estoppel Certificates: Achieving Certainty,” Commercial Property Executive, October 15, 2014
� “Office Leasing and Airline Reservations,” Commercial Property Executive, August 20, 2014
� “Prepare for Q4 in the Summer,” Commercial Property Executive, July 16, 2014
� “Is It a Bubble Yet? Reflections on the Current State of CRE,” Commercial Property Executive, May 21,
2014
� Commentary, “Environmental Friendliness More Than a Perk For CRE,” Law360, May 20,2014
� Commentary, “3 Tips For Doing Real Estate Deals With Foreign Investors,” Law360, March 31, 2014
� “Beware of Estimates in Letters of Intent,” GlobeSt.com, February 6, 2014
� “Estimates in Letters of Intent Can Come Back to Bite,” Buchalter Nemer Client Alert, January 2014
� “San Francisco’s Real Estate Office Market: A 2013 Update,” Jewsih Community Federation’s Business
Leadership Council, November 19, 2013, San Francisco, CA
� Interview, "Rainmaker Q&A: Buchalter Nemer's Manny Fishman," Law360, August 29, 2013
� "Legal Update: How to Incorporate the New Disability Access Disclosure Requirements in Commercial
Leases and What to Consider in Determining Whether to Perform a CASp Inspection,” Calbar.org Real Property Law Section EBulletin, June 2013
� “The San Francisco Gross Receipts Tax Challenges & Opportunities for Commercial Property Owners,
Brokers and Service Providers,” Reubin Junius & Rose Real Estate Roundtable, San Francisco, CA, May
9, 2013
www.buchalter.com
� “New Laws Affecting Real Estate Receiverships,” California Receivers Forum, San Francisco, CA, May
9, 2013
� “Corporate Governance and Practice,” Stanford University School of Law, March 6, 2013
� “California SB 1186 – Revisions to California Statutory Scheme for Disability Access,” CBRE, Cassidy
Turley and Cushman & Wakefield brokers, January and February 2013
� “San Francisco Gross Receipts Tax – Opportunities and Challenges Ahead,” CBRE, BOMA Membership,
February 2013
� “Not All Taxes Are Created Equal,” BOMA membership article on implementation of San Francisco
Gross Receipts Tax, November 2012
� "The World is Going Mobile What About Your Building?" BOMA Views, Summer 2012; National Real Estate Investor, August 15, 2012
Mr. Fishman is the Building Owners and Managers Association (BOMA) of San Francisco's representative
to the BOMA California Board of Directors, the statewide umbrella association representing commercial
building owners and managers in California. He served on BOMA San Francisco’s Board of Directors from
2003–2006, and was the recipient of the 2006 Associate Member of the Year from BOMA San Francisco.
Mr. Fishman is also a member of the International Council of Shopping Centers and the Real Property
Sections of the American Bar Association and the State Bar of California.
Most recently, Mr. Fishman has been recognized as a 2015 Best Lawyer in America™ in Real Estate Law,
an honor he has received since 2007, and recognized as a 2014 Top Rated Lawyer by American Lawyer
Media in conjunction with Martindale Hubbell. He has also been recognized as a Northern California
Super Lawyer from 20122013 and as one of Bay Area Magazine’s “Top Lawyers in the Bay Area.”
He lectures frequently on office and shopping center leasing matters.
Mr. Fishman earned his J.D., magna cum laude, at Santa Clara University School of Law in 1982 and his
B.A. at the State University of New York at Purchase in 1975.
Areas of Practice
Real Estate
Real Estate Purchase and Sale
Real Estate Secured Transactions
Leasing
Solar & Renewable Energy
Telecommunications License Agreements
Riser and Rooftop Management
Bar Admissions
California
Court Admissions
U.S. District Court for the Northern District of California
U.S. District Court for the Eastern District of California
U.S. Court of Appeals for the Ninth Circuit
Cherie SongAssociate
San Francisco: P (415) 227‐3514 F (415) 904‐3101
Los Angeles: P (213) 891‐5414 F (213) 896‐0400
Cherie Song is an Associate in Buchalter Nemer’s Real Estate Practice Group. Ms. Song represents buyers, sellers, developers, landlords and tenants in connection with the purchase, sale, financing, leasing and licensing of commercial real estate and telecommunications assets. Professional Expertise Ms. Song has extensive experience negotiating and drafting agreements relating to the acquisition, disposition, financing, leasing and licensing of commercial real estate. She has represented buyers and sellers in all phases of development from due diligence to post‐closing lease negotiations, including title, survey and environmental assessments and the negotiation of letters of intent, option and purchase and sale agreements, financing and loan documents, indemnity agreements, CC&Rs, easements and reciprocal easement agreements, SNDAs, estoppel certificates, third party contracts and leases. In the realm of commercial leasing, she has negotiated and drafted hundreds of office, retail, industrial, build‐to‐suit and shopping center leases, termination agreements, tenant improvement work agreements, extension and expansion agreements, blend‐and‐extends, sublease and licenses, master lease agreements, landlord and lender consents, assignment and assumption agreements relating to transfer of real and personal property rights, property management agreements, SNDAs, and estoppel certificates. Ms. Song also has significant experience negotiating telecommunications agreements, including rooftop, building and ground leases and licenses, collocation agreements, build‐to‐suit agreements, easements and reciprocal easement agreements, amendments, security agreements, SNDAs and estoppel certificates. In connection with the foregoing transactions, Ms. Song has conducted title, survey and environmental due diligence and risk assessment. She also has experience negotiating and drafting corporate documents, including bylaws, operating agreements, partnership agreements, private placement memoranda, subscription agreements, corporate resolutions and stock purchase and transfer agreements. Representative Transactions
Represent buyer in the acquisition of a 33‐acre vineyard in Napa County and the negotiation of related water rights
Represent international developer in the acquisition and development of a multi‐million dollar mixed use property in Downtown Los Angeles
Represent developer in the acquisition of a mixed‐use property in Downtown Los Angeles
Represent developers and investors in the disposition and acquisition of multi‐million dollar commercial properties in Northern California
Represent $23.4 billion international real estate investment, development and property management firm in commercial lease transactions
Represent $5 billion real estate asset management company in the negotiation of office, retail and industrial lease transactions
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Represent the largest teachers’ pension fund in the U.S. in the negotiation of various commercial lease transactions
Represent national restaurant and fashion clients in the negotiation of retail leases, related documents and lease buyouts
Represent the largest telecommunications company in the U.S. in the negotiation of leases and licenses and various other agreements
Represent the largest retailer of photographic equipment in the negotiation of retail lease transactions
Represent large developer in the purchase of multiple shopping centers in Southern California
Represent the largest independent music publishing company in the negotiation of office lease transaction
Represented institutional landlords in lease transactions with national businesses and retailers Publications
“Wireless Site Applications: It's My Party (the FCC) and I'll Decide How I Want To," Buchalter Nemer Client Alert, July 2013
Speaking Engagements
Panelist, ACRE Southern California Association of Commercial Real Estate, July 15, 2014. Ms. Song was recognized as a “Rising Star” by Southern California Super Lawyers, Law & Politics in 2009 and 2010. She is a past member of the Board of Directors of OUTFEST. Ms. Song earned her J.D. at Northwestern University in 2005 and her B.A., cum laude, at Columbia University in 2000. While in law school, Ms. Song served as Notes & Comments Editor of Journal of Technology and Intellectual Property. She was also a law clerk with the American Federation of Television and Radio Artists (AFTRA) and recipient of the Peggy Browning Fund Fellowship. Ms. Song is a member of the Building Owners and Managers Association (BOMA), the International Council of Shopping Centers (ICSC) and Asian Real Estate Association of America – Greater Los Angeles Chapter. Areas of Prac ce
Leasing
Real Estate Development
Real Estate Purchases & Sales
Real Estate Transactions
Telecommunications License Agreements
Acquisitions and Dispositions
Entertainment
Bar Admissions
California
Richard Wolf, SCLS
Senior Vice President
Richard Wolf has over 38 years of experience in retail real estate and has an in‐depth understanding of the industry, having worked for developers such as Macerich, Kravco, Homart and Enterprise Development Co. As senior vice president of leasing, Richard is responsible for the leasing activity throughout the Western Region, and coordinates anchor tenant relationships. Richard also participates in our portfolio leasing activities and certain fund properties on the East Coast.
Richard is a graduate of the University of Maryland and holds a degree in speech communications. He has also completed graduate level coursework at the University of Miami and the Peabody Conservatory of Music. Richard is a licensed real estate broker in the state of California and the state of Washington and is the broker of record for Madison Marquette Retail Services in those states.
In 2005 Richard formed Wolf Retail Leasing, a Los Angeles, CA ‐based firm providing small developers with strategic leasing services. Richard was solely responsible for developing and executing the merchandising plan for Anaheim Garden Walk, a 440,000 square‐foot lifestyle center located directly across the street from Disneyland and the Anaheim Convention Center. Currently, Richard is involved in the leasing of Centers in Orange Co, West Hollywood, Seattle, Washington and Washington DC.
Richard holds a senior certified leasing specialist designation with the International Council of Shopping Centers and has served on the leasing faculty for over 15 years. Richard is also on the executive committee for ICSC’s CLS committee, a member for the National Retail Tenants Association and serves on the Advisory Board for Shopping Center Business. Richard currently is a guest speaker and lecturer at The University of Southern California. Richard has recently achieved Emirates status on the CLS Executive Committee having served for many years. Richard is currently leading a group of ICSC certified executive learning series courses in redeveloping subpar centers. The first of which will done at Eagle Rock Plaza in Southern California and the Wharton School of the University of Pennsylvania for the ICSC University of Shopping Centers Executive Education Track.
To contact Richard, please email him at [email protected]
