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Real Estate Journal — Fall Preview — September 26 - October 9, 2014 — 13A
M id A tlantic
R etail
By Scott C. Butler, Esquire, Kaplin Stewart Protecting rental income in the current market a longer and unexpected free rent period. Retail leases customarily and maintenance costs. Many tenants, however, are now very cognizant of costs and
D
ue to the previous expansion of retail stores and the in-
for a set additional rental amount or are negotiating fixed caps on all such costs and expenses. If these costs and expenses are higher than the set amount or cap, then the excess will decrease the amount of income that is being realized from the base rental amount. In the past, the common resolution has been for landlords to provide a cap only on certain expens- es, excluding non-controllable expenses such as taxes, util- ity costs, snow removal costs, insurance costs and taxes. Some tenants, however, have
been trying to cap such un- controllable expenses as well, thus passing the risk of these increased costs on to the landlord. Retail leasing in this econ- omy is still very competitive and landlords have to be very careful in order to protect the income that they are ex- pecting to receive from their leases. Scott C. Butler, Esq. is a principal in the Real Es- tate Transactions group of Kaplin Stewart in Blue Bell, Pennsylvania. n
c r e a s e d p r e s e n c e of internet sales, there r e m a i n s strong com- p e t i t i o n among land- lords for ten- ants to fill a v a i l a b l e
Retail leasing in this economy is still very competitive and landlords have to be very careful in order to protect the income that they are expecting to receive from their leases.
Scott C. Butler
have been negotiated on a “triple net” basis, meaning that the tenants bear most of the expenses of the lease including all taxes, insurance
are not willing to bear the risk of the unknown amounts for taxes, insurance and main- tenance costs. As a result, such tenants are negotiating
retail spaces. If a landlord has a desirable project with strong anchor tenants, there is a market for retail tenants to lease space; however, all tenants are cost conscious and are focusing on addi- tional rent and other costs in a lease. Most landlords and ten- ants focus on the base rental amount when negotiating a letter of intent and, in the event they are able to agree on this amount, they feel that a lease will be able to be signed. The base rental amount, however, is only one aspect of the rental income to be received from a lease. Landlords should focus on the construction costs, free rent, brokerage costs and additional rent if they want to truly realize a majority of the base rental amount as their income from the space. Construction costs, free rent and brokerage costs are all initial costs of a lease and will need to be amortized over the initial term in order determine howmuch income is part of the base rental amount. In order to protect against unexpected construc- tion costs, landlords should attempt to place a maximum amount on these costs either in the lease itself or in the construction contract with the general contractor for the build-out of the space. With regard to the amount of free rent being granted to the tenant, landlords should negotiate a set period of time after the delivery of the space to the tenant for the free rent period to expire and provide that, if the tenant opens for business earlier, the free rent period ends. Many tenants try to provide that the free rent period does not com- mence until after they have received their construction permits; however, landlords do not have any control over this date and this could cause
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Contact: : Scott Butler • sbutler@kaplaw.com Visit our Construction Blog: www.pennsylvaniaconstructionlawyer.com Other Offices: Cherry Hill, NJ 856-675-1550 • Philadelphia, PA 215-567-3120 Kaplin Stewart A t t o r n e y s a t Law 910 Harvest Drive, Blue Bell, PA 19422-0765 • 610-941-2521 • www.kaplaw.com
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