Commercial Leases, Their Provisions and Pitfalls to Avoid (Series: Real Estate Investing 101)

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Practical and entertaining education for
attorneys, accountants, business owners
and executives, and investors.
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DISCLAIMER
The material in this webinar is for informational purposes only. It
should not be considered legal, financial or other professional advice.
You should consult with an attorney or other appropriate professional
to determine what may be best for your individual needs. While
Financial Poise™ takes reasonable steps to ensure the information it
publishes is accurate, Financial Poise™ makes no guaranty in this
regard.
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Thank You to Our Sponsor
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MEET THE FACULTY
Moderator:
Bill McGuinn – Sugar Felsenthal Grais & Helsinger
Panelists:
Sean Weppler – Weppler Law Group LLC
Tracy Treger – Syndicated Equities
Scott A. Weinstein – Field and Goldberg, LLC
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ABOUT THIS WEBINAR:
Commercial Leases, Their Provisions
and Pitfalls to Avoid
Like any other contract, the provisions of a commercial lease are negotiable. Yet, like so
many contracts, commercial leases can be confusing to anyone who does not negotiate
them for a living. This webinar explains many of the common provisions in a typical
commercial lease (e.g. competition clauses, destruction/condemnation provisions,
enforcement provisions, escalation clauses, purchase and renewal options, subletting and
assignment provisions, use provision- just to name some examples) and discuss what is
“market” with respect to them.
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ABOUT THIS SERIES:
Real Estate Investing – 101
Real estate has always been a popular asset class for investment. After all, as the adage
says, “they’re not making more of it.” More and more investors are turning to real estate as
an investment class.
Investors considering making an investment in real estate have a variety of choices: retail,
office buildings, industrial, raw land, and, of course residential. This Financial Poise
webinar series covers several types of real estate classes that one may choose to invest in,
explaining where to look for opportunities; how to diligence them; possible funding
solutions; and best practice for execution.
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EPISODES IN THIS SERIES
2/14/19 Episode #1:
Investing in Commercial Real Estate
3/14/19 Episode #2:
Commercial Leases, their provisions and pitfalls to avoid
4/18/19 Episode #3:
Investing in Residential & Multi-Family Real Estate
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Dates shown are premiere dates.
All webinars will be available
On Demand approximately 4 weeks
after they premiere.

Episode #2:
Commercial Leases, their provisions
and pitfalls to avoid
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WHAT ARE THE ESSENTIAL GOALS OF A
COMMERCIAL LEASE?
1. Leases are both transfers of possessory interests in land and contracts
2. As such, a lease needs to specify both the precise rights transferred, but
also provide a roadmap for the interactions of the landlord and tenant
(and other interested parties)
3. Unlike residential leases, there is often no statutory law to provide a
framework and the parties are able to fully negotiate all of the terms of
their particular deal

THE SIZE OF THE PREMISES AND HOW IT AND
THE SIZE OF THE BUILDING ARE DETERMINED
1. One thing to consider – is the size of the building AND the premises set and
locked at the beginning of the lease, or does landlord have the right to remeasure
(hint – that remeasurment will not likely benefit tenant). Does tenant have a
right to remeasure?
2. What if the size of the premises cannot be known at lease execution, because
demising walls are not yet constructed?
3. In any case where the size of the building or the premises can either change or
cannot be determined at lease execution, it is important to understand how the
method of measuring.

THE DIFFERENCE BETWEEN USABLE AND
RENTABLE SQUARE FEET
⚫ Usable square feet includes the specific area the tenant will occupy in order to do
business. For a partial-floor lease, this includes all office space plus any storage or
private restrooms. There are no exclusions for columns, recessed entries, or the like,
either – column space is fair game in the calculation of total usable square feet.
⚫ To calculate rentable square feet, landlords use what is called a load factor (also
called a common area factor, or an add-on factor). This number is based on the
percentage of common areas found in the building. If a building has a total square
footage of 100,000, with 90,000 usable square feet (which is to say 10,000 square
feet of common areas), the load factor would equal to the rentable square feet
divided by the usable square feet, or 1.11.

THE DIFFERENCE BETWEEN USABLE AND
RENTABLE SQUARE FEET (cont’d)
⚫ Building Rentable Square Feet ÷ Building Usable Square Feet = Load
Factor
⚫ This load factor is then multiplied by individual tenants' usable square feet
to come up with the total rentable square feet. If a company desired to lease
5,000 usable square feet, for example, this number would be multiplied by
the load factor of 1.11 to reach the number of rentable square feet: 5,550.
That’s the number on which tenant would pay rent.

NET LEASES
⚫ Single Net Lease – Lessee pays base rent plus a pro-rata share of the building's
property tax (meaning a portion of the total bill based on the proportion of total
building space leased by the lessee); the landlord covers all other building
expenses. The lessee also pays utilities and janitorial services.
⚫ Double Net Lease – Lessee pays for base rent plus a pro-rata share of property
taxes and property insurance. The lessor covers expenses for structural repairs
and common area maintenance. The lessee is responsible for its janitorial and
utility expenses.

NET LEASES (cont’d)
⚫ Triple Net Lease – This is the most common net lease in the commercial setting.
In this lease the tenant pays property taxes, insurance, and common area
maintenance (CAM) in addition to base monthly rent. Base rents are typically
lower a than with other types of leases and the lessee has transparency regarding
the costs. However, Lessee’s ability to forecast expenses can be challenging given
the possibility of fluctuation. To address this Lessee’s can negotiate caps on the
amounts that can be raised annually. Typically, the caps will be seen on fees that
are controllable by the lessor such as management fees.

ESCALATIONS
⚫ The parties and especially the lessee should have a clear
understanding of how the base rent will escalate over the term of
the lease.

NON-INDEXED
⚫ This is common and is typically based on a % increase year-over-
year for base rent.
⚫ Determine if it is based on percentage of original base rent or prior
year base rent.
⚫ Confirm that rates are in line with the market (often confirmed by
real estate broker).
⚫ If the calculations are within the lease confirm all dates and
calculations.

INDEXED
⚫ Consumer Price Index or other
⚫ Based on calendar year or lease year
⚫ Is % capped by a percentage or dollar amount

FACTORS IN PERMITTED SIGNAGE
⚫ Location – where on the premises and the building (and any pylons,
building directories, etc.) will tenant to be allowed to place signage
⚫ At whose cost will signage be put up
⚫ What size signage will be allowed
⚫ Does landlord represent that permitted signage will be allowed by
applicable code?

FACTORS IN PERMITTED SIGNAGE (cont’d)
⚫ What type of signage is allowed (light up?)
⚫ Who pays to maintain signage
⚫ Ideally, all of these things are very clearly specified in the lease
agreement, but often that is not possible or just not done. In those cases,
a landlord usually has right to approve signage

LANDLORD'S RIGHT TO RELOCATE TENANT
⚫Tenant should push for the following:
➔ Same or higher floor/similar views
➔ If corner office – same corner
➔ Same elevator bank
➔ No increase in rent – even if space is larger/higher

LANDLORD'S RIGHT TO RELOCATE TENANT
(cont’d)
➔ No increase in proportionate share of expenses
➔ Landlord should build out space similar to tenant’s existing space
➔ Landlord should pay moving costs
➔ Landlord should pay for reasonable incidental costs (re-printing
stationary, new signage)

PARKING IN RETAIL LEASES
⚫ With retail leases, parking may be a critical factor in the success of a business.
In those cases, parking rights need to be clearly spelled out and understood.
The lease should cover:
➔ Rates
➔ Total number of spaces in the facility
➔ Total number that will be made available to Tenant, other tenants and the
public
➔ Increases in rates
➔ What if enough parking is not provided

BUILDOUT OF SPACE
⚫If landlord is doing the buildout:
➔ It is critical to spell out in detail exactly what landlord will do.
Need detailed plans
➔ When will the landlord’s work be done?
➔ What if landlord is late on its work? Damages? Right to
cancel?
➔ Procedure for punchlist

IF LANDLORD PROVES A T.I. ALLOWANCE
⚫ Need to have procedure describing how landlord approves plans, reasons for objecting
and time limits, beyond which plans are deemed approved.
⚫ What is the procedure for draws on the allowance money? Does it synch with the
construction contract? Will the landlord pay the contractor directly, or does tenant
need to pay and get reimbursed
⚫ Can any unused portion of the TI allowance be used for:
➔ Moving costs
➔ Soft costs (architect’s fees, etc.)
➔ Furniture, Fixtures and Equipment
➔ Rent

ASSIGNMENT AND SUBLETTING
⚫ Leases generally prohibit the assignment or sublease of the lease
without Landlord’s consent. Landlord will want to make sure the
assignment prohibition includes certain corporate change in control
transactions. Tenant will want to make sure Landlord cannot
unreasonably withhold, condition or delay its consent.

PRE-APPROVED SUBTENANTS / ASSIGNEES
⚫ A tenant may have certain anticipated subleases and assignments. The lease
can be structured so that Landlord consent is not required for these (notice to
Landlord is still usually required):
➔ Affiliates
➔ 3rd
parties occupying less than x% of the Premises
➔ Clients/customers, or specific anticipated uses (i.e. a juice bar in a health
club)

LANDLORD'S RECAPTURE RIGHTS ON ASSIGNMENT
⚫ Landlord may want the right to recapture the Premises and terminate the lease if
Tenant tries to sublease or assign.
➔ Beneficial in a rising market or when Landlord has large existing tenants that
may want to expand into the Premises
⚫ If Landlord has recapture rights, Tenant will want to:
➔ Make sure that those rights aren’t triggered with permitted assignees
➔ Make sure the rights only apply to the portion of the Premises Tenant is looking
to sublease
➔ Make sure that Tenant is release from all obligations under the lease to the extent
of Landlord’s recapture

INSURANCE REQUIREMENTS
⚫ Insuring the risk allocated to a party must be carefully reviewed and
understood. Insurance provisions place insurance requirements on
the parties which through the indemnification and subrogation
party’s risk.

TENANT REQUIREMENTS
⚫ Always advise the tenant client to have their insurance provider review the
insurance obligations prior to signing the lease.
➔ Common Types:
✓ Liability
✓ Worker’s Compensation
✓ Property
✓ Business Interruption
✓ Plat glass

TENANT REQUIREMENTS (cont’d)
➔ Are limits specified and reasonable?
➔ Deductible obligations
➔ Policy Terms (Notice of cancellation)
➔ Is tenant self-insurance an option?
➔ Is there a requirement for minimum rating with insurance
company?

GUARANTEES
⚫ Tenant will want to try to negotiate a cap or a burnoff.
➔ Cap – the lease guaranty is capped at $x or some set number of
months of rent
➔ Burn off – this rewards a tenant who has not defaulted over
some number of years. The guaranty may start at some capped
number or the full amount due under the lease, but then with
each year of the lease without a default, the amount of the
guaranty is reduced.

OPTION TO EXPAND (ROFR AND ROFO)
⚫ Notice
⚫ Terms of Exercise of Option
⚫ Scope
⚫ Triggering Event

OPTION TO TERMINATE
⚫ Breach by Landlord?
⚫ Event frustrating the purpose of the lease? (i.e. destruction of
property).
⚫ Straight Option
➔ Notice
➔ Terms of Exercise of Option (usually a payment)
➔ Scope

ABOUT THE FACULTY
BILL MCGUINN – wmcguinn@sfgh.com
Bill’s real estate practice extends to the acquisition, development, sale, leasing and financing of commercial,
office,residential and retail properties. In his affordable housing practice, Bill has represented owners and
developers of thousands of housing units in numerous states with multi-layered financing including taxable
and tax exempt bonds, low income housing tax credits, HOPE VI, Community Development Block Grants,
Neighborhood Stabilization Program funds, Tax Credit Assistance Program and Tax Credit Exchange Program.
Bill has also represented developers of conventionally financed projects, both residential and commercial. He
also guides buyers and sellers, landlords and tenants through all aspects of their respective transactions.
Aside from real estate matters, Bill has worked with numerous closely held businesses on a variety of matters
including representing business in obtaining credit facilities, structuring start-up organizations and the
purchase and sale of a number of business entities.
Bill is an avid sailor and participates annually in the Chicago Yacht Club Race to Mackinac. Bill has also
competed in the Transpac, racing from Long Beach, California to Honolulu, Hawaii.
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ABOUT THE FACULTY
SEAN WEPPLER – attorney@wepplaw.com
Mr. Weppler graduated from Western Michigan University Cooley School of Law in 2009. He
graduated from Western Illinois University, where he earned a Bachelor of Business with a
concentration in Economics.
Mr. Weppler worked at the Lake County State’s Attorney’s Office before joining his father, Terry
Weppler and rebranding the firm to what is now known as Weppler Law Group, LLC.
Mr. Weppler is a longtime resident of Libertyville and co-founder of the Libertyville office of Weppler
Law Group. His practice focuses on residential and commercial real estate. The firm represents clients
in residential and commercial mortgage transactions, sales, and purchases. Mr. Weppler also has
handled leasing and assignments of commercial and residential real estate properties, zoning issues
and family law issues on a case by case situation.
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ABOUT THE FACULTY
TRACY TREGER – ttreger@syneq.com
Tracy Treger is Principal at Syndicated Equities. Tracy helps high net worth individuals and family offices to
profitably invest in real estate. She also assists investors in identifying appropriate replacement property to
complete tax-deferred exchanges under Section 1031 of the Internal Revenue Code. Drawing upon her 20 years
of legal experience in the areas of real estate, bankruptcy and corporate restructuring, finance, and commercial
law, Tracy seeks out opportunities to improve the relationship between Syndicated Equities and its investors,
to cultivate new investors, and to identify new investment opportunities and align them with investors’ goals.
Tracy joined the Syndicated Equities team in 2013 after serving as vice president and assistant general counsel
for a private REIT, where she handled all legal aspects of the company’s daily operations and its joint venture
relationships in the U.S. and Mexico. Prior to working with the REIT, she was a partner in two large Chicago-
based law firms with national and international practices. Tracy holds a B.A. in Psychology and an M.S. in
Psychological Services from the University of Pennsylvania, and a J.D. from Chicago Kent College of Law. She
is a committee chair for CREW Chicago, and actively serves on the Global Advisory Committee, Foundation
board, and regional board of the Anti-Defamation League (ADL).
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ABOUT THE FACULTY
SCOTT WEINSTEIN – SWeinstein@fieldandgoldberg.com
Scott A. Weinstein comes to the Field and Goldberg, LLC having developed a broad-based background in commercial
real estate. Mr. Weinstein’s experience includes working with a fortune 500 company where he handled transaction
financing and deal structures. Having served as president, counsel and co-owner of a successful real estate title
company, Mr. Weinstein brings a unique perspective and understanding of the daily and ongoing business issues
clients face and is able to provide practical and proactive counsel.
Mr. Weinstein regularly represents commercial real estate clients in all aspects of commercial transactions including
lease negotiations for landlords and tenants (including franchisees) nationwide on retail, office and industrial leases;
acquisitions and sales of office, industrial and multi-family apartment buildings, and shopping centers; financing;
and condominium deconversions.
Admitted to practice in the State of Illinois and the U.S. District, Northern District of Illinois, Florida and New York,
Mr. Weinstein received his Juris Doctor degree from Temple University Beasley School of Law and his Bachelor’s
degree from the University of Maryland at College Park.
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IMPORTANT NOTE: The material in this presentation is for general educational purposes only. It has been prepared primarily
for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education.
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