Articles Posted in Commercial Leasing

One of the retail sectors that is currently experiencing significant upheaval is the mattress industry.  Mattress Firm, the largest mattress retailer in the country, is closing hundreds of stores and scrambling to bolster its digital business as a result of significant sales declines.  Bed-in-a-box e-commerce mattress companies are sprouting up and beginning to expand to brick-and-mortar locations, but they are expected to continue to focus primarily on growing their online sales.

Analysts say overexpansion is at the heart of the industry’s troubles.  They point to the fact that there are now more mattress stores than McDonald’s restaurants in the U.S.  The end result is that the industry is in contraction, which comes at a difficult time for struggling malls and shopping centers while many other retailers are also flailing.

As landlords begin to receive rent reduction and concession requests from mattress store operators, they need to carefully consider and weigh their options.  This should begin with a thorough financial analysis of the value of the new lease rates that are being proposed, the long-term impact of the reduced lease payments on the property, the likelihood of leasing the space to a new tenant at comparable rates, and the costs and challenges that would stem from suing a tenant that may end up filing for bankruptcy. mat-store-300x200 This type of analysis can be very difficult to process, as it entails a clear-eyed look at the state of the market, the current vacancy and lease rates, and the marketing and commission costs that would be associated with securing a new tenant.

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Have you ever heard of this? If you are familiar with leases in the New York City area, you probably have.  But if you are not, you might be a bit surprised by it.  Like many legal issues that begin in either New York or California, the Good Guy Guaranty is now spreading beyond those borders, and if you are in the business of leasing space, you should become aware of it.

In essence, a Good Guy Guaranty is a pre-negotiated kick-out with the financial backing of a credit-worthy guarantor.  The guaranty is in place while the tenant is in possession, but if the tenant gives the landlord sufficient notice that it intends to vacate the premises and subsequently leaves the premises in good condition and as otherwise required by the lease, the tenant and the guarantor are both released.

shops-225x300The landlord benefits from it because it has a guarantor that backs the tenant and a tenant that surrenders possession when they vacate, thereby avoiding the need for the landlord to undertake eviction or abandonment litigation. The tenant benefits in that if it gives the landlord advance notice of its intent to vacate (usually anywhere from six to nine months) and is otherwise in compliance with the lease, it can close, be relieved of future liability and not be sued for damages.  And, the guarantor benefits in that if they make sure the tenant complies with the lease, the guarantor is never called upon to pay.

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Much has been written about the retail apocalypse, which began in 2010 and appears to have no end in sight with the recent bankruptcy filings by Sears and Toys R Us.  As the retail industry searches for ways to stem the tide of declining revenue, and online shopping continues to take its toll on traditional brick-and-mortar stores, one trend has emerged to bring mall owners a modicum of relief:  coworking in retail.

In shopping centers across the country, stores that have been left vacant by retailers are being converted into shared office space.  Coworking space inside of both enclosed and open-air malls is predicted to grow by an annual rate of 25 percent through 2023, according to a recent report from commercial real estate service provider Jones Lang LaSalle (JLL).  Shared office space is expected to reach approximately 3.4 million square feet of retail space by then, concluded JLL.

cowrk-in-mall-300x217Part of the attraction of these coworking spaces for mall owners is that such spaces often serve as incubators for new retail and even service companies that could eventually mature to operate their own stores in the future.  Mall and shopping center operators also like the fact that these coworking tenants bring added foot traffic to the property.  The business owners and employees who work in these spaces represent ideal target customers and prospects for all of the other stores, boutiques and restaurants at the property.

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The creation of a viable tenant mix is a critical component for practically every shopping center, so retail leases often have a defined “use” clause that limits a tenant’s use of the premises.  In certain cases, they also contain “exclusives” giving one tenant the exclusive right to their particular use or to sell certain items, and prohibiting all other tenants from that use or from selling those items in the center.

These “exclusive use clauses” many times have carve-outs to allow another tenant to sell some of the product lines covered by the competitor’s exclusive.  This is very common in restaurant exclusive use clauses where, for example, a steakhouse might have an exclusive on “steakhouses” in the center, but its lease contains a carve-out allowing other restaurants to have a steak plate on their menu.  The idea here is that most people who want to have steak are going to go to the steakhouse as opposed to the Italian restaurant at the same center that happens to have one steak item on its menu of pastas, pizzas and salads.

shopping-center-2-300x200The remedies for violations of exclusives are generally rather severe.  The tenant whose exclusive is being violated may sue or pay a reduced rent, and oftentimes they will resort to cancelling their lease and vacating the space.  As a result, these clauses are always heavily negotiated and must be carefully drafted.

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ETroesche-srhl-law-200x300ORivera2014By:  Oscar R. Rivera and Emily Troesch

For commercial real estate landlords, guaranty agreements requiring the principal owners of small businesses to personally guaranty the obligations of the corporate tenant are standard operating procedure. In addition, commercial landlords oftentimes also require the corporate guaranty of a parent or other affiliated company, if the creditworthiness of a corporate tenant or franchisee is questionable.  One question that is often posed is whether waivers of defenses by guarantors in such guaranty agreements are enforceable?  Fortunately, for property owners in Florida, if the waivers are properly drafted, the answer is yes.

The waiver of defenses paragraph helps property owners avoid costly and disruptive litigation if legal action becomes necessary to enforce a guaranty.  Guaranty agreements containing language that clearly and unambiguously waives defenses to the enforcement of the guaranty have been strictly construed and enforced by Florida courts.

A typical waiver provision reads as follows:

“Guarantor hereby expressly waives (a) notice of acceptance of this Guaranty; (b) presentment and demand for payment of any of the Liabilities of Tenant; (c) protest and notice of nonpayment, nonperformance, nonobservance or default to Guarantor or to any other party with respect to any of the Liabilities of Tenant; (d) all other notices to which Guarantor might otherwise be entitled; (e) any demand for payment under this Guaranty; and (f) any and all defenses relating to Landlord’s failure to perfect a security interest in Tenant’s property and/or seize or attach any other collateral.”

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For many businesses, finding the right location at the best possible lease rates and with the best terms is among their most pressing and impactful challenges for the future of the enterprise.  The business location and the costs of leasing the space can often be among the foremost determining factors in a company’s long-term success.  As such, the negotiation of the terms of commercial leases is typically of the upmost importance.

For tenants, the best way to start is for the principals to gather information on the neighborhoods and locations that hold the most promise.  In addition to turning to highly experienced and qualified commercial real estate brokers for guidance, they should do their own research and become educated.  Prior to any meetings with prospective landlords and their representatives, they should take the time to conduct a thorough SWOT analysis to identify the strengths,cre2-300x237 weaknesses, opportunities and threats related to every prospective property.

This exercise, which is also beneficial for landlords to employ when assessing their lease offers, will help to enable businesses and organizations to develop a list of the priorities that they seek for each and every location.  Both landlords and tenants can use this form of analysis to create an agenda for their discussions.

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Co-tenancy clauses allow key retail tenants a reduction in rent if other key tenants or a certain number of other tenants leave a center.  While not common for smaller retailers, they are more common for anchor tenants.  Anchor stores and other key tenants draw significant traffic to centers, and they are often among the primary reasons other tenants select their location.

With all of the challenges plaguing some retailers, including store closings by such major national retailers as Macy’s, K-Mart, Sears, Sports Authority, Kohls and Toys-R-Us, landlords could face significant losses when their remaining tenants demand rent reductions based on their co-tenancy clauses.

leasesign2Typical ongoing co-tenancy clause requirements state that if one or more specified co-tenants are no longer open and operating, the landlord has a set timeframe (typically 90 to 180 days) during which it must secure one or more comparable replacement tenants.  If it fails to do so, the remaining tenants with ongoing co-tenancy clauses will pay alternate rent amounts until replacement tenants are operating.  Ultimately, if no replacements are found for periods typically ranging from 12 to 18 months, the remaining tenants may have the right to terminate their leases.

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The recent news from KLX Aerospace Solutions, the world’s leading distributor and service provider of aerospace fasteners and consumables, of its build-to-suit lease for its new global headquarters and distribution hub totaling more than 500,000 square-feet in Medley drew a great deal of attention in the aviation and real estate industries.

The lease represents the relocation and expansion of the company’s local facilities, and it helps to solidify South Florida’s stature as one of the world’s fastest-growing logistics, trade and air transport hubs.

klx1The company will add 100 jobs to its existing 600 as it expands from its existing Doral headquarters (see photo) to the newly built facility.  The building will be located at the intersection of NW 107 Street and 97 Avenue between Florida’s Turnpike and I-75 in Countyline Corporate Park.  It will include two floors of office space with the ability to expand as well as a state-of-the-art storage and distribution area.  KLX is one of many major players in the aviation industry with a presence in the Miami and Doral area, including Lockheed Martin and World Fuel Services.

Our firm’s other real estate attorneys and I congratulate KLX and all of the professionals who played a role in making this major aviation sector real estate deal come to fruition.  Click here to read the company’s press release on the new lease.

I am proud to be participating in the International Council of Shopping Centers (ICSC) RECon event, which will be taking place at the Las Vegas Convention Center & Westgate Hotel May 22-25, 2016.  This four-day educational program is the largest retail real estate exhibition and conference in the world, with more than 36,000 industry executives, retailers, financial companies, and product and service suppliers in attendance each year.

On Tuesday, May 24, I will be presenting the session titled “The Economics of a Lease: Developers and Retailers Perspectives,” which will cover the strategies and tactics of negotiating monetary provisions, including minimum and percentage rent clauses, security deposits, operating costs, real estate taxes and T/I payments.  icsclogo2015Participants will be led through an analysis of key elements of each of the lease provisions.  The session is scheduled to take place from 9 to 10:30 a.m.  Click here for additional program details.

Founded in 1957, ICSC is the global trade association of the shopping center industry with more than 60,000 members in the U.S., Canada and over 90 other countries.

 

I am proud to be participating in the International Council of Shopping Centers (ICSC) University of Shopping Centers event, which will be taking place on the campus of the Wharton School at the University of Pennsylvania on March 7-9, 2016.  This three-day educational program will enable attendees to gain a higher level of knowledge of the retail real estate industry by learning directly from experienced professionals.

On Tuesday, March 8, I will lead the course titled “Economics of a Lease: Developers and Retailers Perspectives,” which will cover the strategies and tactics of negotiating monetary provisions, including minimum and percentage rent clauses, security deposits, operating costs, real estate taxes and merchants/marketing fund payments. The course is scheduled to take place from 2 to 5 p.m. Please click here for additional program details.icsclogo2015

Founded in 1957, ICSC is the global trade association of the shopping center industry with more than 60,000 members in the U.S., Canada and over 90 other countries.