ABSTRACT
Use of the leased premises, generally 120 Transferability of a leasehold 120
Subordination, non-disturbance, and attornment agreements 121 Rent rolls, lease abstracts, and tenant estoppel certificates 121 Commercial space leases 122
Office space leases 122 Gross and net office lease arrangements 124 Base rent 124 Reimbursements for property taxes, operating expenses, and insurance 125
Retail leases 126 Retail rent: base rent and overage “percentage” rent 126 Retail common area maintenance (CAM) charges 128 Retail lease use clauses 128
Industrial sector leases 129 Industrial lease use clauses 130
Ground leases 130 Subleases and assignments 131 Tenant security deposits 133
Renewal options 134 Tenant insurance clauses and proof of coverage 134 Accessibility: the Americans with Disabilities Act (ADA) 135 Commercial tenant improvements (TIs) 137 Tenant default and termination 137
Rent defaults 137 Breach of a substantial lease obligation 138 Nuisance 139 Illegal conduct 140
Overview of evictions 140 Bibliography 143
Rental income is near and dear to the hearts of commercial real estate investors. Monthly rents translate into potential gross income for the property, which, in turn, may be used to pay building operating expenses, cover debt service, and provide cash flow to investors. From the landlord’s perspective, the fundamental role of a lease is to legally obligate the tenant to pay rent promptly each month. But a good lease does far more than maintain a rental income stream. It also transfers to the tenant a variety of legal, economic, and operational risks that can arise over the term of a lease. Due diligence requires investors contemplating the purchase of a rental property to carefully review current leases. The first inquiry is to determine exactly how much rent tenants are required to pay each year under their current leases. That permits the investor to estimate net operating income and return on the investment. Once that is established, leases should undergo additional review and analysis to identify any legal or operational risks posed by the tenancy that are not adequately addressed by the lease. This chapter explains how to analyze current leases for an investment property under consideration. It also provides practical pointers for the negotiation of leases for vacant spaces and properties under development. Throughout, the objective is to use leases to maximize returns and mitigate the risks that may arise from property investment and operations.
