Evan Keith Langert

Office landlords charge rent and state the square footage of office buildings based upon the "gross leasable area" of the office building and of the tenant's premises. Sometimes, that causes tenants difficulty, as they mistakenly think that their space actually contains those measurements. In reality, the gross leasable area of a building includes common areas, elevators, common bathrooms, stairwells, and other portions of the building that the tenant doesn't occupy. The actual square footage of the tenant's space is called the net rentable area of the space. Almost without exception, the gross leasable area of a tenant's space is larger than the actual physical measurements of the space. Thus, that 5,000 sq. ft. of office space that you are looking to lease isn't really 5,000 sq. ft. It's more like 4,300, or 4,500, or 4,700 (it depends on the particular building and the amount of non-rentable space that is included in the figures).

I've seen tenants do drawings of how their company is going to fit into a space. They are often surprised, and say "I could have sworn that 5,000 sq. ft. would have done the trick. In many cases, that's because your 5,000 sq. ft. space isn't really 5,000 sq. ft.. When you are budgeting for your new office space, be sure to take into account the difference between the gross leasable area of your space and the net rentable area.

The term "base year" refers to the payment of property expenses under a lease. The term "triple net" generally portray a situation where the tenant reimburses the landlord for taxes, insurance, and common area maintenance of the property (in addition to paying base rent for its space). A gross lease is essentially the opposite. It portrays a situation where the landlord takes on most of those expenses without tenant reimbursement. A base year lease is sort of the middle ground between those two lease types. Base year scenarios are predominantly found in office leases. Here's how they work:

In theory, the landlord knows what its investment is in the office building right now, and what the return on that investment is given the present income and expense situation at the property. The landlord is satisfied with that scenario, and is willing to invest in the property and take on the taxes, insurance and common area expenses as they exist now. However, what if those costs skyrocket? Then, the landlord's investment returns can get eaten into substantially. That's where a base year lease comes in.

Under a base year lease, the "base year" is typically the calendar year that a particular tenant first occupies the premises (that's the general rule, anyway). The tenant under the lease only reimburses its share of the property expenses to the extent that they exceed the amount of those same expenses for the base year. That's probably a little confusing, so let's do an example.

The law firm of Smith and Jones moves into a nice office building in June of 2008. Under it's lease, the base year would typically be the calendar year 2008. Smith and Jones would reimburse the landlord for its pro rata share of building expenses in 2009 and beyond (not in 2008), but only to the extent that those expenses exceed the amount of the base year expenses. So, let's say that the 2008 base year total expenses for the building is $1 million dollars. During the base year, the tenant does not reimburse the landlord for any such expenses. However, let's say that those costs increase to $1.1 million dollars in 2009. In that case, Smith and Jones would pay its pro rata share of the $100,000 increase in expenses over the base year (whereas under a triple net lease they would pay their share of all $1.1 million). If expenses in 2009 stay at $1 million, then Smith and Jones wouldn't be responsible for reimbursing the landlord for anything in 2009, either.

This type of lease allows the landlord to count more heavily on getting the return on investment that it has today. It takes on today's costs, but any increases belong to the tenants.

A radius clause is a clause typically found in a retail lease that prevents the tenant from opening another location within a certain distance of the leased location. It is usually from 2-5 miles, but is heavily dependent upon the location. The density of a major city is going to require a pretty short radius restriction, whereas a suburban or rural location would require a lot more of a restricted area.

Why are these clauses in the lease in the first place? When a landlord leases a space to a tenant that is a draw, it will bring more people to the shopping center. Let's pretend that there were only three Starbuck's locations in the City of San Francisco, and that they were all in shopping centers. The center would draw a ton of traffic because people would likely come from miles around to buy their frappamochalattechinos. It's advantageous for the landlord to get the best tenants in town, and to make sure that not that many other places have them.

The other reason for these clauses is that the landlords don't want businesses to cannibalize their other locations. There's that old joke that says "I'll meet you down at the Starbuck's across from the Starbuck's, I don't want to pick on Starbuck's. They are a great operation, and I'm sitting in one as I type this blog. However, they had the most aggressive retail expansion that I've ever seen in my career. Now, demand is down due to the economy. Demand can decrease for other reasons, like competition. The first guy on the block (McDonald's, for instance) always has the edge for a while, but eventually a Burger King comes along and takes a bite out of their market share. Thankfully, McDonald's and Starbuck's are both good, strong companies. However, the phenomenon has proven true for as long as anyone has built retail centers.

If you are a landlord, you want to prevent cannibalization, and thus your tenant roster at the center. If you are a retailer, you want to open whereever you see fit. That's where the negotiation begins. I urge both tenants and landlords to pay attention to this clause, as it can deeply affect your business/expansion plans.

It sounds simple. You need 10,000 sq. ft. of warehouse space to house your inventory, and to do some light manufacturing or assembly. You drive around the local warehouse districts and industrial parks, and you find a place that suits every one of your needs. So, you sign a lease, and you are ready to move in.

Just as the moving trucks have been scheduled, you find out that you can't use the property for your intended purposes. Think it can't happen? It can, and it does. Worst of all, most lease language puts the onus of finding out whether you can use the space on the tenant. So, you would remain responsible for payment of rent whether you can use the space or not.

Many cities, including South San Francisco (for example), have re-zoned entire quadrants of their towns for other uses. With Genentech and others eating up portions of South San Francisco, some large areas have been re-zoned for bio-tech and other uses. Yet, there are furniture warehouses, organic produce warehouses, and many other similar uses throughout the area. If you drive through there, you'd think that it would be no problem opening an inventory warehouse. Unfortunately, unless your use is grandfathered in to a particular location, you are probably out of luck.

When the dot.com boom occurred several years ago, high tech businesses were eating up downtown retail locations. In an effort to maintain the character of their downtown areas, many local cities enacted statutes requiring occupants of the downtown storefronts to be retail in nature. They often define "retail" as someone with a high percentage of their revenue derived from the sale of goods. If you are a karate or yoga studio, a tutoring facility (like a Sylvan learning center, for instance), you don't qualify as retail.

Here's a third example. Some cities have imposed a moratorium on new restaurants in certain areas. If you find a space in an area with a lot of restaurants and sign your lease, only to find out that you can't open your restaurant there because of a moratorium, then you are in a bad spot.

Many tenants, especially mom and pop operations and franchisees that don't have good representation, just drive around the area looking for spaces. They see a bunch of "for lease" signs, and they pick what they think is the perfect spot. However, any number of things can stop you from being able to occupy, including zoning laws, moratoriams on certain uses, hight and density restrictions, parking restrictions, and many other things.

It's better to be safe than sorry. Before you sign your lease, make sure that you can actually occupy and use the space that you lease. It isn't the slam dunk that it appears to be in some cases.

I have frequently represented both landlords and tenants. So, occasionally one of my posts may seem to benefit either one side of the table or the other. This is a post for primarily for landlords.

Quite often, a tenant will come to the table seeking to have a corporate entity, LLC, or other limited liability entity as the tenant. Many times these entities are brand new, and/or they have no meaningful assets, no net worth, and no credit. It shocks me how often landlords, even on the institutional side of the coin, allow that to happen.

Sometimes, the landlords even put a fair amount of money out for tenant specific improvements, whether in the form of a tenant improvement allowance or by directly purchasing and installing items to benefit the tenant. Then, when the tenant runs into hard times and stops paying rent, those landlords have nothing to go after. It doesn't matter if the principals are worth a billion dollars. If you don't have them on the hook, you can't go after them. If the entity that signed your lease has nothing, then you have nothing.

During the dot.com heyday, landlords lost a fortune signing leases with new tech companies that had no financial wherewithal. They often spent well into the six figures providing tenant improvements and giving out tenant improvement allowances to those tenants. Then, when those companies went belly up, they brought their leases to their attorneys telling them to go make those rotten tenants pay. All they heard from their lawyers was "sorry...I can't help you".

If a tenant comes to you with a corporate entity, get financial statements and make sure that the exact entity that you have on the hook has sufficient income and net worth to pay your rent and other charges. If they don't, require a personal guarantee, have them post a letter of credit, require an additional security deposit, or take some other steps to make sure that you have viable credit on the lease.

If you install tenant improvements for the tenant, or give them a tenant improvement allowance, you are basically lending the tenant money. Instead of a note promising to pay that loan, you have a lease requiring rent payments. Theoretically, you've got the repayment amortized in your rent schedule. If the tenant defaults on the lease, you have no repayment of your "loan". No reputable lending institution would lend money without seeing financial statements and making sure that the borrower had the ability to repay. Landlords should think long and hard about doing so as well.