Tuesday, August 7, 2007

Checklist considers lease negotiations from a landlord's perspective.

"The checklist is intended for major commercial space leases.


Off-Site Costs
Avoid limiting "operating costs" to those incurred physically within the particular building. The landlord may incur off-site operating costs, such as in a multi-use project (e.g. holiday decorations in a central plaza) or for off-site equipment, installations, traffic improvements, shuttle bus services, or the like to benefit the building.


CAM
Avoid the term CAM because operating cost escalations far more than common area maintenance.


Major Repairs
Do not necessarily limit multi-year amortization of large repair costs to capital items. Particularly if leases limit escalations or if the landlord is concerned about base years for new leases, the landlord may want the ability to spread major noncapital repair costs over multiple years.


Condition for Audit
The tenant may audit operating costs only if those costs increase more than a specified percentage over a specified prior year or base year.


Auditors
Prohibit contingent fee auditors. If the landlord agrees to reimburse audit costs (such as if the tenant's audit reveals a certain level of mistakes), then negate any reimbursement to contingent fee auditors.
Consider requiring a national CPA firm. Insist that such firm agree to notify the landlord of any undercharges or errors in the tenant's favor that the audit discloses.


Costs of Audit
Ask the tenant to pay for the landlord's out-of-pocket costs in connection with any audit of operating costs (e.g. photocopying, staff time, document retrieval, accountants' time spent answering inquiries).


Confidentiality
Require the tenant to sign a confidentiality agreement satisfactory to the landlord for any audit and its results before disclosing any records or information to the tenant or to a lease auditor. The agreement should, among other things, prohibit the tenant and its advisors from disclosing the existence of any audit or any of its results, particularly to other tenants in the building. Breach should be an incurable default under the lease.


Threshold for Payment
If overcharges (net of undercharges) total 3% or less of total annual operating costs (a general definition of materiality), then the tenant should not be entitled to any correction or any reimbursement of its audit costs. Define carefully the factor to which the 3% is applied. Use as large a number as possible. For example, refer to 3% of gross annual operating costs rather than 3% of the tenant's escalation payment.


Liability for Refunds
The landlord's liability for any refund of overpaid escalations should terminate after a specified number of years (and automatically upon any sale of the building?) to prevent open-ended obligations or issues upon a sale of the building.


Survival; Timing
Limit the time during which the tenant may challenge any escalation. Be careful – the tenant may try to make this reciprocal for the landlord's billings. All the tenant's obligations regarding escalations should survive the expiration or sooner termination of the lease." for additional information see: www.houstonrealtyadvisors.net or www.houstonrealtyadvisor.com