n g i G S Elements of a Lease / Points of Negotiation u o Most of these factors are negotiated well before a lease is ever drafted. During the letter of intent (LOI) process, N Y landlords and tenants will discuss and negotiate each point of the lease through their brokers, and only when both parties agree on the terms is a formal lease document drafted. The generally terms agreed to in the LOI include, at a I e r minimum: o Term, rate, and escalations S f Concessions (TI and free rent) e Parking B A Sublease, expansion, and renewal options d n E a Escalations t s L r The longer the lease, the more a landlord is exposed to inflation and rising rental rates in the market. If a tenant has e signed a lease for $20/sf, but 5 years later the market average is $30/sf, what can the landlord do to keep rates close d to market level without having to renegotiate leases every year? Many landlords require base rent escalations in their n L leases to help account for this issue. Escalations are used as a way for the landlord to incrementally increase the base U rent annually to keep up with inflating market rates. Tenants can also benefit from escalations because it allows them to pay a lower base rent in the beginning years of the lease. Without escalations, the landlord would likely charge a high A rate for the entire lease. There are a few different types of escalations, and they each have their own unique provisions: I Amount: In this type of escalation, a predetermined increase in base rent is agreed upon by both parties in the negotiation process. Each year, the base rent will increase by this set amount, and will continue to do so until the C term of the lease is over. Percent: Similar to a specific amount of escalation, a percent escalation is a predetermined percentage increase in base rent. Each year, the current base rent will be increased by the percentage agreed upon by both parties. R Indexed: Indexed escalations introduce a little more variability into a tenant’s rental rate because they do not increase by a predetermined amount. Instead, the escalation follows an index (usually the Consumer Price Index) and increases based on the amount of the index. Indexed escalations can also lead to lower rent if the index being E used sees a decrease from one year to the next. M Common Area Maintenance (CAM) Fees paid by tenants to landlords to help cover costs associated with overhead and operating expenses for common areas. Common areas are spaces used for or benefited by all tenants and include, but are not limited to, hallways, M elevators, parking lots, lobbies, public bathrooms and building security. CAM expenses are usually defined in the lease to clear up any ambiguity as to what they entail. It is important to have a clear understanding of these expenses before signing a new lease. O Exclusivity C An exclusivity clause is a clause in a commercial lease that grants a tenant the exclusive right to engage in a certain type of activity at that location. Ask for exclusivity for your building or complex. If you're a dentist, that means no other dental offices can open in your building. If you build a restaurant, make sure there can be no direct competitors to the cuisine you offer, etc. Right of First Refusal Right of first refusal (ROFR), also known as first right of refusal, is a contractual right to enter into a business transaction with a person or company before anyone else can. Make sure you have first right of refusal should the building or unit ever become available for sale. In other words, should your landlord decide to put the building or unit up for sale that they come to you first to offer. REHI 843.300.5387 www.rehouseintl.com