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

Opening new retail in these economic conditions is a 50/50 proposition.  Most importantly, the unsteadiness of the economy has many people worried but there are opportunities to get great deals on retail space for lease.

Finding the ideal space in the ideal location

I will let individual business owners make thier own decsions about the economy, but there is a plethora of retail space available all over Knoxville.

Almost every center from Strawberry Plains to Turkey Creek has some type of space available.  Some property owners are in more dire situations than others.  A older center may not have the debt service of new construction so the owners may not be as motivated to deal.  But some centers that were once asking $28.00 per square foot in popular location are down below $20.00.  Those are pretty serious concession.

Even if you are getting a “deal” there are many details to consider before choosing a location.

1.   Of course, Location, Location, Location: Walk in traffic is the best way for a new retailer to be discovered. Spend time in the neighborhood, learn the flow of traffic, the demographic, etc.

2.    Type of space: What side of the street is the space on? Do you get afternoon sunlight? Is the space deep and dark? Is there a lot of wasted square footage in the space? Notice as much as you can on the first tour and make sure to come back several times at different times of day.

3.    Neighbors/competitors: What businesses are located in the area?  Will their customers see value in your merchandise or service? Ask other merchants about the pros and cons of the area.

4.    Crime:  Being in a neighborhood that is gentrifying or potentially has some crime issues is fine for a restaurant or office, but potentially disastrous for a retail outlet. Your most valuable asset is your inventory and although insurance will help make up for losses, it is a major distraction from your business. Do a little research and see how many police reports have been filed within a mile of your potential location.

5.    Parking: How far away is the nearest parking lot? Do your customers need parking or will most of them be walking to your location?  The ability to have your customers park close by and affordably is extremely important.

6.    Signage: How big of a sign do you need to attract attention? What are the regulations of the landlord or the city as it relates to signage? Make sure to check out the neighbors and ask them how they got through the system if the regulations limit what you are hoping to do.

7.    Foot traffic: How busy is the street during the daytime? How busy is the street during evening hours? What types of people seem to be walking around? Is their a bus stop or school nearby. Take note of who walks by and what percentage of people seem to be window shopping because the more people looking the higher likelihood you’ll find a new customer.

8.    Brokers: Most shopping centers will have a broker to negotiate the deal…you should too.  They are experts in finding you the proper space, picking out the details and getting you the lease you need.

What works best for you may not be ideal for others

Potential hidden cost:  NNN Pass thrus.  We have discussed these before.  Shopping centers are not trying to hide these numbers from potential tenants but they are calculated differently than rent.  They are CAM (common area maintenance), taxes and insurance; also know as pass-throughs or NNN charges.  They are different at every center.  Some NNN charges are as low as $2.50psf in older centers or neighborhoods.  NNN charges in lifestyle centers such as Turkey Creek can be between $5 and $8 per square foot!  In many cases these charges are passed through directly from the property owner to the tenant without mark up.  But they can still add a considerable amount to your monthly rent check so pay attention to these.

Basically, if the time isn’t right don’t force the issue.  Find a good broker who is experienced in the field to guide you along and make the decsion when all the pieces fit properly. 

Commercial & Investment Properties manages and leases more than 350,000sft of retail space in the Knoxville market.  If we can be of assistance please let me know so you business has the proper headstart. 

www.ciprop.com   //  865-584-3967   //  jcazana@ciprop.com

Justin Cazana, CCIM

Let’s cut to the chase…when should you start looking for a new office?  Most brokers will tell you at least one year before your current lease is set to expire.

While all situations are different and factors regarding location, cost, size and type of space will play a factor, one year out is a good time to start.

It seems like a long time, but it can go by quickly.  Let’s put together a timeline for Joe’s Insurance.  Joe is looking for 6,000 square feet for his business.  He would like to be downtown or west Knoxville, in nice space.  It doesn’t have to be Class-A space, but pretty close.

Step 1-Find a broker, of course.  Depending on how much time Joe has to devote to the process this could take a day or a month.

Step 2-Joe sits down with his broker.  He needs to know what part of town Joe needs to be in? How much can Joe spend per month?  Does Joe need a space with a lot of offices or can an open floor plan work?  Other details include; parking requirements, hours of operation, length of lease etc…

Step 3-Property Search:  The broker performs a search through the commercial MLS , talks to other brokers, and relies on their basic knowledge about what is available.  This will provide an initial list for Joe to review.  Some properties will be deleted, others may be added, all based on cost, location and the type of building.  This will allow Joe to tour the spaces he is interested in without wasting vast amounts of  time.  Hopefully after the tour Joe will have narrowed his list to 2 or 3 spaces.  This entire process can take a week or three months.  It all depends on how quickly of a move is required and what is available.

Step 4-Here is where is gets tricky…determining where Joe really wants to go.  Some times it is easy, there is one place you want to go, everything is perfect.  More often than not there are multiple locations that would work.  In a situation like this an Request for Proposal (RFP) or Letter of Intent (LOI) is effective in determining exactly what you expect from the Landlord and what he expects from the tenant.  Typically an LOI or RFP will spell out the length of the term, the lease rate, and tenant improvements that the landlord will provide.  They can also get VERY detailed.  I’ve had LOI’s that are 1 page long and I’ve had LOI’s that are 35 pages long.  This process can take anywhere from 1 week to 2 months depending on how firm either party wants to stand on a specific issue.  With the LOI/RFP in place you can determine what is best for an office based on actual comparisons of rates, tenant improvements etc…   If you would like more information about LOI’s/RFP’s let me know jcazana@ciprop.com.

Step 5-Lease Review.  Once Joe has made his decision on the space he wants the landlord will (typically) provide a lease for the space.   The lease should include all the information that was negotiated in the LOI/RFP as well as MUCH more.  You will become familiar with words like default, estoppel, force majeure and many others.  While brokers can provide basic insight in the lease it is imperative that an attorney review this document.  Leases are legally binding and if you don’t understand the details it can get you in a lot of trouble if you default on the lease.  How long will lease review take?  One week to a year!  It just depends.  My favorite story about negotiating a lease was just a few months ago.  On my first conference call with the tenant’s attorney she told me she had just found out she was pregnant.  At the time of our last conference call to seal the deal her baby was 4 weeks old!  That is an extreme but it happens (especially with corporations).

There are many other details that are some times worked in to the process. 

• Space Planning: If a tenant is moving into brand new space (which has never been built out), or a significant amount of construction is required to prepare the space for occupancy, a space plan from an architect should be considered.  This will allow the tenant to determine how much space they really need.  How many offices fit in the space, the most efficient use of cubicle space, where the conference room should go etc…This takes anywhere from a week to a month depending on the size of the space.
• Construction Estimates:  The space plan will allow the tenant or landlord to determine how much construction will cost.  The last thing you want to have happen is to budget construction costs at $10,000 and it ends up being $50,000.  I’ve seen it happen.  This should take less than 10 days.
• Construction:  Again, depending on the size of the of the office and what is involved construction typically takes between 60-90 days.  That includes construction documents, permitting and actual construction.

So there you go, a “looking for space timeline” in a nutshell.   If you need to find space in 2010 its time to start looking.

You can reach Commercial & Investment Properties if you have any questions about property searches.  865-584-3967 or jcazana@ciprop.com