Presenting a live 90-minute webinar with interactive Q&A Commercial Leases: Due Diligence Considerations Best Practices for Landlords and Tenants to Identify and Mitigate Risks THURSDAY, FEBRUARY 9, 2012 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Yolanda Rodriguez,General Counsel, O'Neill Properties Group , King of Prussia, Pa. David S. Houston, Partner, Pillsbury Winthrop Shaw Pittman , McLean, Va. Mario J. Suarez, Partner, Thompson Hine , New York The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Yolanda Rodriguez, Esq. O’Neill Properties Group, L.P. (610) 992-5885 yrodriguez@oneillproperties.com
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Retail Leases: Due Diligence Considerations for Landlords & Tenants David S. Houston 703.770.7544 David.Houston@pillsburylaw.com February 9, 2012 Pillsbury Winthrop Shaw Pittman LLP
Introduction Deals and parties come in all shapes and sizes. The likelihood of a long-term, profitable landlord-tenant relationship will improve if both parties perform appropriate due diligence before the lease is signed. 23 | Retail Leases – Due Diligence
Retail vs. Other Leases There are 4 key factors that distinguish retail leases from other types of commercial leases: 1. The importance to both landlord and tenant of the particular use made by tenant of the leased space The fact that a portion of the rent is usually based upon the tenant’s 2. sales at the premises 3. Most retailing takes place in integrated shopping centers and other types of projects containing substantial common areas and a broad mix of tenants 4. The seasonal nature of retailing 24 | Retail Leases – Due Diligence
What the Landlord Should Assess Before Marketing the Property and the Premises Market Conditions – Bargaining Position Demand Vacancy rate Income stream Property Condition Occupancy status Suitability for a particular use Utilities and systems review – cost to upgrade Legal Restrictions Zoning – use, parking, drive-through, signage Other laws and regulations – alcohol, smoking, accessibility Title – restrictive covenants, easements 25 | Retail Leases – Due Diligence
What the Landlord Should Assess Before Marketing the Property and the Premises (cont’d) Existing Leases and Agreements Exclusives Prohibited uses No build areas Impact on the Property Tenant mix Parking Noise, odors, garbage Environmental 26 | Retail Leases – Due Diligence
Tenant’s Assessment of the Building or Center Location, Location, Location Access Visibility Parking and loading Demographics – customers Labor supply – employees Safety Tenant Mix Compatible Competitive Zoning and Governmental Regulations – use, signage, permitting, expansion rights Existing Restrictions – covenants, restrictions, exclusives, protected areas and other site plan issues Title Status – ground lessors, loans, liens, other encumbrances 27 | Retail Leases – Due Diligence
Tenant’s Assessment Cont’d: Suitability of the Space Current Occupancy Status – timely delivery of possession Size Adequate for the Use – too small, too large, measurement, possibility to expand or contract Physical Constraints – shape, ceiling height, structural elements, utility capacity, access Physical Condition – request reports What needs to be done and at what cost Existing conditions – soil, hazardous materials, roof, HVAC systems Availability of Utilities History of Increases in CAM and Other Charges 28 | Retail Leases – Due Diligence
How the Landlord Can Improve the Odds of Choosing the Right Tenant Identify the Tenant Entity Entity formed In good standing Authorized to enter into the lease Financial Statements or Other Information About the Tenant Credit check Ability to build out the space – loan, allowance, performance bond, etc. Ability to operate the business Ability to pay rent Franchisee – franchisor’s qualifications Guarantor availability Security deposit 29 | Retail Leases – Due Diligence
How the Landlord Can Improve the Odds of Choosing the Right Tenant (cont’d) Business Plan Proven concept or fad Financing in place Management structure Promotion and marketing details Business Experience Number of stores Success at other locations Franchisee operation Training Other Background Analysis UCC search – secured collateral claims SEC filings Court indices – litigation Patriot Act/OFAC 30 | Retail Leases – Due Diligence
Tenant: The Premises Are Perfect, But What About the Landlord? Background Research of the Landlord reputation in the community and industry length of ownership publicly traded other properties litigation history Future Expansion or Redevelopment Plans Historical Details - are they good managers Lease Approval Process – additional consents required Landlord’s Title – liens and lenders SNDA 31 | Retail Leases – Due Diligence
When All Else Fails… Lease Provisions to Mitigate Risk Exclusive Use Protections and Prohibition of Certain Uses Competitors Incompatible uses Parking intensive uses Co-tenancy Protections – named tenants, percentage of tenants Assignment and Subletting Rights – Release Fixed or Capped Increases in Operating Expenses/CAM Radius Restrictions – percentage rent Continuous Operation vs. “Going Dark” Changing the Permitted Use 32 | Retail Leases – Due Diligence
When All Else Fails …(cont’d) Tenant Termination Rights Co-tenancy failure (in not termination, significant rent reduction) Poor performance – low sales (if not termination, rent solely based on sales) Violation of exclusive Failure to deliver possession Failure to obtain permits – building, liquor license Failure to obtain financing Landlord Termination Rights Poor performance Failure to open and continuously operate Traditional defaults 33 | Retail Leases – Due Diligence
When All Else Fails…(cont’d) Representations and Warranties a Tenant Should Seek Clean title to the property Free of claims from previous tenant Compliance with laws – original construction, zoning, environmental, accessibility Authority to enter into the transaction Representations and Warranties a Landlord Should Seek Authority to enter the transaction Entity formed and authorized to do business Compliance with laws – buildout, labor agreements, business operation, future changes Financial information accurate Continuous operation 34 | Retail Leases – Due Diligence
Lease Due Diligence in Major Office Leases Due Diligence & Major Office Leases Mario J. Suarez, Esq. 212.908.3930 Mario.Suarez@ThompsonHine.com ATLANTA | CINCINNATI | CLEVELAND | COLUMBUS | DAYTON | NEW YORK | WASHINGTON, D.C.
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