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Translating a Retail Tenant’s Lease and Work Letter

One of the advantages of managing high-rise office property in an urban area is the mix of retail tenants that is usually found on the ground level.  Three Wells Fargo Center has approximately 18,000 SF of retail space around the perimeter or on the lobby level of the building, about two-thirds of which is occupied or currently being built out.  One of the newest tenants is opening up a satellite restaurant in space accessible directly from Martin Luther King Jr. Blvd.

Located in the Ballantyne area (South Charlotte), Café Nirvana’s first restaurant boasts primarily positive reviews on sites like Yelp and UrbanSpoon.  Their second restaurant, at Three Wells Fargo Center, will be a satellite operation of the Ballantyne restaurant that serves the uptown crowd.

That’s the background of the recent deal. What I have is the executed Lease and Work Letter for the construction activity of the newly leased retail space.

The Task at Hand:

  1. Determine landlord’s required work prior to delivering the premises to tenant
  2. Perform a detailed review of the following sections of the Lease to understand implications and impact to property:
    1. Determine the commencement date
    2. Review the lease term, base rent, CAM or OPEX charges and rent escalations
    3. Note the percentage rent triggers
    4. Review the Maintenance by Landlord and Maintenance by Tenant sections to determine any on-going maintenance obligations for the landlord and any renovation requirements prior to turning the space over to the tenant for construction
    5. Review Utilities and understand who pays for what (water, electric, sewer, etc.)
    6. Understand the tenant’s operating requirements (minimum operating hours)
    7. Review, in detail, the Work Letter and determine the deadlines for drawing review,  drawing creation, construction and certificate of occupancy

The Work Letter:

Each Work Letter varies depending on the space and type of tenant.  Further, the relevance of the Work Letter depends on a tenant’s plans for the space, tenant’s investment and landlord’s contribution towards construction.

A colleague developed a great tool to track Work Letter requirements and deadlines.  The retail construction dashboard highlights the key milestones of the process:

  • Lease Signed
  • Premises Delivered and Handoff Meeting
  • Design Drawings Reviewed by Landlord
  • Construction Drawings Reviewed by Landlord
  • Pre-construction Meeting
  • Construction Commencement
  • Temporary Certificate of Occupancy Received
  • Opening Day
  • Rent Commencement

Each key milestone has predecessor task that should be completed before the milestone is met.  For example, the Construction Drawings Reviewed milestone requires the Design Drawings to be reviewed with comments sent to the tenant and tenant’s architect for incorporation into the design.  The Pre-construction Meeting includes predecessor tasks such as reviewing the Construction Drawings, providing additional comments (if necessary), approving the General Contractor (GC) and reviewing the GC contract.  Additionally, the Pre-construction Meeting has successor tasks like issuing access badges to contractors, holding subcontractor meetings, receiving and verifying the Certificate of Insurance for the GC, etc.

The Work Letter is an interesting part of a lease.  It is very popular immediately after the lease is signed, but quickly looses tracking as the tenant begins operating.  With 60 tasks in the construction dashboard to check off, we have completed about a quarter of them for the future Café Nirvana space at Three Wells Fargo Center.

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By Greg Scharlemann
— July 6, 2011 at 8:25 pm

Setting Up Step Rents – Argus Valuation DCF

Great news! I have signed a lease with an office tenant, 10,000SF $25 per square foot a year with $1 bumps each year over the five-year term. How can I capture this $1 bumps in Argus? It’s easy with the Step Rent option. Check out the Tenant Rent roll. For the new lease, click the details button under the Rent Changes column. This brings up the following Rent Changes window with options for:

  • Step Rent
  • Porters’ Wage
  • Miscellaneous
  • CPI Rent and
  • Parking

 

Step Rent

Step Rent is an easy way to insert rent changes in accordance with the lease terms. In the above example, $1 bumps each year would be entered by clicking the detail button of the Step Rent drop down and adding a new category:

 

Adding a new category brings up the screen you have probably seen in the past. These are the details of the category. Annual $1 per square foot per year bumps have been setup in the below screenshot. You will notice that the bumps do not stack automatically, therefore in year 5 we have to setup the increase based on the base year.

 

To ensure step rent is entered correctly, run the calculation on the appropriate tenant, requesting the Tenant Cash Flow information. From the report you see that in year 2 Base Rental Step Revenue increases by $10,000 and $20,000 in year 3.

Pretty straight forward and easy.  Step rents provide a simple way to capture changes to the base rents.

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By Greg Scharlemann
— January 5, 2011 at 9:55 am

relative and fixed start dates – argus valuation dcf

One of the fields in the Tenant Rent Roll screen is the Start Date field.  Used to specify when the lease starts, the start date can be relative, fixed or blank.  This will be a short post because this field is quite easy to explain.  Let’s start with the easiest, a blank start date.  When setting up the Argus Valuation DCF file, an analysis start date is defined.  The analysis start date could be the date you company acquires the property or the date construction is complete and the property opens for operation.

A blank field in the Start Date, has the space/lease default to the start of the analysis.

A fixed date in the Start Date field, defines when the lease starts.  As you would expect, fixed dates are defined as month / year.  Dates by default are done in whole months, but Argus Valuation allows beginning and end dates to fall on specific dates (daily rent) rather than whole months.  Setting up specific dates is done through Options->Input and selecting Allow lease to start and end on specific dates as seen in the below screen shot.  Space absorption is not affected by daily rent calculations.

The last option is a relative start date.  Relative start date is based on the analysis start date of the Argus file.  Entering a relative start date, select the number of months from the analysis start date.  For example, a lease that starts 14 months after the analysis start date, would require 14 in the Start Date field.  This means the lease would start 14 months after the analysis start date.

Fixed vs. Relative Start Date

The difference between fixed and relative start date isn’t just a semantic issue.  A fixed start date tells Argus that the space was not available for lease prior to the start date of the lease.

A relative start date tells Argus that the space was available and has been vacant up until the relative start date.  The potential revenue for the space is subtracted from the potential rent as turnover vacancy.

What Does This Mean?

For space that is vacant and cannot be leased immediately, use the fixed start date.  Using a relative start date in this scenario would overstate the potential revenue from the property and the vacancy loss.

For space that can be leased immediately, use the relative start date in the Start Date field.

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By Greg Scharlemann
— December 20, 2010 at 10:04 am