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.