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|From Abe Schear: Leasing Thoughts – April 2021|
I was walking through the mostly empty Gateway project in Salt Lake City on the way to the winter market (replete with a wonderful array of local products, mostly food but also other products of interest) and found myself discussing with our son Adam what was going to fill this intown project. It still has Dave and Busters and a Comedy Club and a theater but, sadly, it will take some creative invention to enliven the facility. This is, of course, the dilemma faced by many projects.
We saw a store that was going to open that specialized in yoga but it seemed way too big and perhaps way too temporary. We discussed how much healthcare could fit properly into the project, what sort of office users might find the open space to be enticing, what other users might choose to take space. And I, of course, thought about an LOI that might be negotiated to rent the space.
The LOI in fact is very much the starting point on so many deals and LOIs are getting longer and more detailed. I am working on a space, about 1000 sf, where the LOI has more than 30 points and each is quite detailed. The document is 5 pages in length and no doubt the landlord is happy to have an interested tenant, but clearly there is a needed balance between Tenant demands and Landlord needs. How can one negotiate a lease that can be 20 years in length (if options are exercised) and adequately address caps on charges, co-tenancy, redevelopment, signage and parking to name just a few items.
Does anyone think that parking will be the same in the future? I recently saw an LOI that agreed to 5:1000 parking for the term of the lease. And it said that the landlord would not materially alter parking but where, I might ask, are the charging stations for EV’s? Does a tenant want them to be close or far away? What happens if local ordinances require parking chargers? I have more than questions than I have answers.
And co tenancy? Again, a recent LOI noted that the landlord needed to have at least 5 of the named retail tenants, but does anyone know what retailers will be in business in 10 years or longer? Should the lease be modified so that co-tenancy is not applicable in the option periods? What if there is a violation at the time a tenant exercises the option? What tenants can be used as substitutes? Should there be a modification that reflects that co-tenancy does not apply unless sales are below an agreed to number? So many questions.
And does anyone worry about inflation. If there is an annual increase in a CAM charge that is below the inflation rate, should there be a reset in the options periods? A partial reset? How can one do lengthy deals which may turn out to be under water on charges?
And probably most vexing is how to redevelop vacant department stores as well as develop underutilized parking. How can the landlord integrate office space, hotel space, medical uses, experiential space effectively without violating other leases? I am currently working on a 30000 sf surgical facility on the second floor of a mall.
Has the landlord thought of all of the issues? Does the lease effectively address all of the issues? What do we do re ambulances? Regarding insurance? Regarding operating hours? What have I missed?
The point here is that we always need to be thoughtful when negotiating leases, but rarely more than today. I often think that houses being built today have significantly different amenities than older houses - so why are we using leases and LOI’s that have not been rethought in many years.
Longer leases and different uses should require all parties to think long term in order to avoid serious issues, economic and otherwise. The failure to think forward will predictably result in future problems.