CIP Blog

Back to our section by section review of leases.

 Assignment and subleasing. 

 This can sometimes be a contentious issue (but then again what isn’t in commercial leases?).

Here are the basics…a tenant has a lease at a certain piece of property.  The tenant wants to move out, shrink their space, or bring in another business to the property.  They can do this for any number of reasons: maybe they need someone to help cover their cost; maybe they have out grown their space and need to expand; or maybe they are going out of business and want to find another tenant for the landlord.

In general, a sublease is a legal agreement where tenants transfer their interest in the leased premises to a subtenant.

If you are tenant, read your lease. A tenant’s right to enter into a sublease may be expressly prohibited or restricted by the landlord. These restraints are usually clearly expressed in the lease/rental agreement or the courts will not enforce them. Landlords usually require written consent to subletting. 

If you are landlord, I would suggest getting this language inserted in your lease. You need to protect yourself.

A sublease is a contractual relationship between the tenant and the subtenant. The relationship between a tenant and a subtenant is essentially the same as the relationship between the landlord and the tenant. In general, the liabilities of the parties to each other are governed by the same rules that apply to the lease. From the time the subtenant takes possession of the leased premises, he/she becomes a tenant of the original tenant (I know, it’s confusing).

A tenant who subleases his interest in a leased premises to a third party (the subtenant) is not released from the obligations under the lease/rental agreement. The tenant is still liable to the landlord for rent and all other provisions contained in the lease.

There is no direct contractual relationship between the landlord and the subtenant. Therefore, the subtenant has no direct rights against the landlord under the terms of the original lease/rental agreement. This also means that a subtenant is not liable to the landlord for rent or for breach of any terms in the original lease agreement. However, the subtenant may be liable to the landlord if he/she expressly assumed the terms of the original lease/rental agreement.

In many ways an assignment is similar to a sublease except an assignment means you are transferring the total rights and responsibilities over the lease to another business. 

 Subleasing/Assignment Issues:

• Excess rent:  Some tenants will sublease their space at a rate higher than what they are paying and try to pocket the profits.  A landlord’s lease needs language to make sure the proceeds from any sublease are retained by the landlord, not the tenant.  If needed this can be a negotiating point later.

•  Use:  This is one of the reasons a landlord needs the ability in a lease to reject a sublease.  If a shopping center has a pizza restaurant (with the exclusive right to operate in the center) and a burger joint wants to sublease to a competitor of the pizza restaurant the landlord has to have the ability to reject this sublease.  If the landlord does not have this ability they could be sued for breach of lease with the original pizza restaurant.

• Liability:  The landlord needs to be protected in the event that the tenant tries to assign a lease to a tenant with poor credit.  You don’t want a Fortune 500 what may be in one of your office buildings to assign their lease to a shell holding company that can easily go bankrupt at any minute.  In many cases language is inserted in a lease that states the tenant can assign the lease so long as the new tenant (assignee) has a net worth greater than or equal to the first tenant (assignor) at the time the original lease is executed.

 Lots of details but very important ones.  As always, feel free to contact me if you have any questions. jcazana@ciprop.com or 865-584-3967.

 Sincerely,

 Justin Cazana, CCIM

Knoxville, Tennessee

We take a reprieve from looking at the details of a lease to look at the market update for Knoxville. 

Since our last market update (a month ago), I am happy to say that things have certainly improved in the prospect area.   The phone is ringing more often, retailers are starting to talk about expansion and corporate users are looking for office space.

Retail Growth

Retail:   We manage/broker four different retail properties in Knoxville and the activity at all the centers has picked up.  CIP has done about 11,000sft of retail leasing in the last six weeks (our first retail leases of the year).   Other retailers are moving into the area.  West Town is getting the tea boutique Teavana and a Tommy Hilfiger.  There is a new Brazilian restaurant moving into the former Amerigo’s and the former Boater’s World location across from the mall will soon be home to Nicola’s Fine Furniture and Aspen Dental.   And lets not forget that Sullivan’s will open another west Knoxville location in the old Italian Market at Franklin Square.

Office space is starting to move again

On the office side activity has increased although not many deals have been closed.  Most of the leases are for tenants relocating, not necessarily expanding.  From the deals CIP is working on you can notice that most of the tenants looking to move are corporate groups.  Most locally owned companies are staying put. 

The big office news is still technically a rumor.    Shopper-News reported earlier this month that Powell-based medical products manufacturer DeRoyal Industries is negotiating to buy the JCPenney Building, on Gay Street, as a possible new corporate HQ. 

The story gave few details and company president Bill Pittman this morning said that “We have no plans to move downtown.”

Knoxville Industrial vacancy has risen 3% in the last two years.

The negative news is on the industrial side.  According to an MPC report, the vacancy rate grew from 11.1 percent in the fourth quarter of 2007 to 14.1 percent in the fourth quarter of 2009.  That is a pretty significant jump.

Four notable industrial properties were vacated since 2007 adding a combined 1,137,825 square feet to the market and making up 33 percent of the area’s vacant space.  That does not include an additional 102,000sft that has gone vacant since this report was completed. Vacancies also continued to grow at the national level, with the national vacancy rate registering 13.2 percent availability in the fourth quarter of 2009. 

Reading real estate is like reading tea leaves…tough to do and can leave a bitter taste in your mouth.  Things do look better as a whole but the market is still volatile. 

As always, if you have any questions please feel free to contact me at 865-584-3967 or jcazana@ciprop.com

Justin Cazana, CCIM

As we continue our tour through a basic lease the topic today can be a big subject when it comes to cost savings but it can be covered pretty quickly.

UTILITIES!

Utilities are handled one of two ways (typically).  One, the utility bill is part of the rent.  The landlord pays bill when it comes in every month.  This is part of a full-service lease.  Two, the tenant contracts separately with the utility provider and pays their own bill.  This is typical most retail leases and some office leases.

There is no better or worse way to do it.  Some tenants prefer to control their own utilities; others would rather just right one check every month instead of having to pay a separate utility bill.

Depending on the tenant and the type of HVAC systems, a considerable amount of saving can take place with full service utilities.

Utility systems are often set up because of the style of building.  For example, at the

Admiral Pointe-Medical Office Building in Farragut

Atrium, Admiral Pointe, Century Park I & III tenants are pay their own utility bills.  These buildings are two and three stories, respectively.  Over our 40 years of development we have found that tenants like having the ability to control their own systems and own hours.  It allows them to keep the utility bills down by instituting set-backs for non-work hours.  Most of they time these tenants are served by split-system, roof-top units. If a someone comes in to work on the weekend all they have to do is turn on the system in their section of the office.  This saves money in the long run.  However, it is very difficult to use a split-system on anything over three stories.

New, larger buildings have highly efficient HVAC systems

Larger (or taller) buildings are typically serviced by water source systems, cooling loops, chillers or VAV systems.  These highly efficient systems can cool large buildings at a rate 15-20% cheaper than a split-system.  They do have a draw back however; each system services a large area, therefore if a tenant has multiple shifts or does weekend work they have to cool the entire floor (or more) of the building and that can get expensive.

In many large buildings, with full service leases, tenants are charged an “after hours utility charge” of about $40 per hour if they use the systems after standard building hours.

Regarding water; in most building water is “commonly metered” meaning it is paid for by the landlord.  If there is a tenant that uses more than standard amounts of water (like a restaurant) they can be separately metered or have an increased rate to cover the increased usage.

Next week will be a market update…lots has been going on in Knoxville and commercial real estate in general lately.

As always, you can contact me at 865-584-3967 or jcazana@ciprop.com for questions or for more information.

Justin Cazana, CCIM

Comparing apples to apples; that is what you want to do when you are making a decision on the location of your new office or store.  To do this you need to make sure the services the landlords provide are all equally matched.  This includes items like electrical service; janitorial service and today’s topic…build out allowance & construction.

As is the case in most of lease s, there are  many different terms to consider.  Most popular are phrases like:  Cold dark box, warm box and plain vanilla shell.  While the last of these sounds like part of a nice dessert the differences can cost a tenant or landlord thousands of dollars.

Quick definitions:

Cold Dark Box-Usually reserved for new retail.  This would mean a tenant is moving into a space that has no lights or HVAC.  No restrooms.  Sometimes there is a store front (often not) and the floor is gravel.  It is the tenant’s responsibility for all construction to ready the space for occupancy.

Warm Box-Similar to cold dark box, only there is HVAC in place and power to the premises.  Usually a store front is already in place.

Plain Vanilla Box-Sheet-rocked walls (ready for paint), restrooms in place, and concrete slab ready for flooring. Drop ceiling with lights installed.

There are a hundred different variations of these conditions but these are the most popular.

While you have to compare the different conditions of the space you also have to compare the construction allowance that the landlord may, or may not, be providing.   This is where there is a lot of confusion. 

Every developer or landlord has a different formula for the way they provide their building and allowance.  These days for new (often called “first generation”) space Commercial & Investment Properties provides an allowance of $25psf.  So if you lease 10,000sft you get $250,000 for construction.  Some developers will provide allowances up to $35psf (more in larger markets).  But the difference is in what else the developer is providing.

In new office space, CIP provides all standard HVAC units, ducts, diffusers, mini blinds and turn down of sprinkler heads.   Total cost of these items is typically around $10-$12psf.   If another developer is giving a $35psf allowance but is providing only a cold, dark box the tenant will have added cost of purchasing HVAC units, providing engineers to make sure they are properly zone etc…These items can add up quickly so you have to make sure that you are truly comparing apples to apples when deciding on office space.  

Before the lease is signed you also need to determine who will handle construction.  Is it the complete responsibility of the tenant or will the building owner be involved?  In multi-tenant office buildings, many times the landlord will request the building contractor do the work.  This can save time and money since the GC is already familiar with the building.  In many retail leases the tenant is solely responsible for all aspects of construction.

Additional factors…

• What if you spend more than your allowance?  Most office leases require the tenant to reimburse the landlord for any overages with in 30 days of construction completion.
• What if the tenant can’t afford the overages?  Depending on the financial condition of the tenant and landlord, sometimes the landlord can agree to amortize the additional cost over the term of the lease.  There will be a higher interest rate but this is done very often.  This cost is added into the rent and paid back monthly.
• What if construction is not completed on time?  This depends on who is handling the construction.  If it is the tenant’s responsibility, or the tenant has caused a delay, rent will typically start as it is stated in the lease.  If the delay is caused by the landlord rent can often (but not always) be abated until all the work is complete and the space ready for occupancy.  It all depends on the language in the lease.

As always, it is important that the section of the lease regarding construction be reviewed thoroughly prior to execution.

If you have any questions or need additional information please feel free to contact me at 865-584-3967 or jcazana@ciprop.com

Justin Cazana, CCIM