| Who Pays When Operating Expenses Increase?
Expense escalations are relevant when the landlord is paying a base level of expenses and when the tenant is paying expenses. With a typical gross lease, the landlord pays all expenses and the tenant pays expenses in excess of a base level. (Gross leases are atypical for retail.) The base level is typically the operating expenses for the year the lease is signed. The "expense escalations", would be expenses in excess of this base level which the tenant is responsible for paying.
Caps on Increases?
Some leases also provide a cap on increases in expenses. To provide more certainty for the tenant's cost of occupancy, the tenant may request that property tax increases do not exceed 5% in any year. Property tax increases can be enormous in some states. For example, initial property tax assessments in Texas for retail buildings have increased by 20% to 100% for many retail building owners. In many cases, these large initial assessments have been successfully reduced to a level much closer to the prior year's value.
Cap Example
However, the property tax assessment process can be arbitrary at times. If the property taxes did increase by 20% or 100%, the landlord would be responsible for the increase in excess of 5% for the example given. There are also sometimes expense escalation caps for utilities, insurance, total expenses and other items.
Co-tenancy Termination Clause
A co-tenancy clause for retail defines a tenant's right to terminate the lease if another tenant ceases operations. For example, consider a grocery anchored neighborhood shopping center. Let's assume Kroger's, a nationally known grocery retailer, is the anchor. Bob's dry cleaner store decides to lease space in the center because it believes the Kroger versus will draw all a large volume of traffic. There's an agreement to pay rent commensurate with the traffic which should be generated by Kroger. However, five years after the center is built Kroger decides to "go dark".
Can You Terminate the Lease?
In other words, it ceases operations at this location. A co-tenancy clause would provide Bob an option to terminate his lease. There will typically be a defined period for terminating the lease based upon the co-tenancy clause.
Eminent Domain
Eminent domain is the right of government to take private property. Historically, eminent domain was limited to taking private property for public purposes. However, the US Supreme Court expanded eminent domain to include taking private property for private uses. In most cases, property owners are compensated for "takings" through eminent domain.
Eminent Domain Issues
Issues related to leasing retail space include who retains compensation for a leasehold estate, what happens if eminent domain takes an amount of parking which makes operation of the Senate set retail center impractical and are there any rent abatements during construction related to a partial taking of the retail center.
Leasehold Estate
A leasehold estate is a tenant's interest in real estate obtained through a lease. A leasehold estate becomes meaningful when contract rent is substantially lower than market rent. Having the right to use retail space for a payment well below market rent has value. In the event of a complete taking up (when the government takes the entire retail center) the lease needs to address proceeds of the tenant's leasehold estate. Do they belong to the tenant or to the landlord?
The Market Research and Consulting division of O’Connor & Associates provides information necessary to make decision to commercial real estate professionals. Occupancy and Rental Data, ownership and management information are routinely gathered for four major land uses – multifamily, office, retail and industrial. This information allows investors to compare competitive properties, facilitate business decisions and track market and submarket performance. In addition the data is useful to brokers who for example continually monitor Houston retail space leasing, Dallas Office Data Houston office space leasing, Dallas retail space leasing, Dallas industrial leasing, Houston industrial space leasing, Houston apartments, Dallas apartments, Fort Worth apartments, Dallas Office Lease Austin apartments, and San Antonio apartments. Regularly updated primary market data is the basis for quality real estate market data. It provides the basis for market analysis including absorption, rental rate trends and occupancy rate trends. O’Connor & Associates has provided timely real estate market research since 1988. The data is used by our appraisers, real estate consultants, property tax consultants and clients.
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