When “Triple Net” Isn’t Really Triple Net – Kellogg’s Swale Tale in Detroit

Can the landlord force their tenant to cure all latent defects at a property under a NNN lease?  The answer is yes…if you let them!  Tenants take this on the chin day in and day out without a good, experienced broker in their corner who can come out swinging!

Properties can have latent defects even if they are brand new.  The benefit of brand new is that there are construction warranties in place.  Did the broker make sure those warranties were addressed in the lease to protect their tenant against construction defects?  If not, the tenant just got the shaft!  If the warranties have long since expired, did the broker get wording into the lease that latent defects would be the landlord’s responsibility?  Admittedly, those assurances are hard to get, but you gotta ask!   Putting protections into the lease regarding premature and extensive repairs to a property that is being tendered in “good operating condition” is the stuff of another blog post, but I wanted to share an interesting story that involved my client, The Kellogg Company.

Kellogg was 3 years into a five year lease at a free-standing, single tenant facility in the greater Detroit, Michigan market.  This was a classic triple-net situation: the tenant was the only one using the property.   I got a email from Battle Creek: the Detroit distribution center manager was complaining that a broken concrete drainage swale running down the middle of their truck court was breaking up and causing damage to their trucks.  After reviewing their lease and finding what I expected – pure triple-net without any carve outs – I took a few minutes to reset the client’s expectations; after all, it was their truck traffic that caused the damage.   But before I came to any final conclusion, I asked them to take several photos and send them to me.

What the photos revealed was that the concrete swale was poured with the rebar very close to the surface which arguably caused the concrete to spall.  The rain and freezing temperatures took care of the rest.  I presented the problem to the landlord thusly: the faulty construction of the swale was the root of the problem.  And the tenant was considering their options with respect to renewing this lease.  Can you guess what the outcome was?  Problem solved…and at no cost to the tenant!

The moral of the story here is that the tenant or their broker must give these situations a closer look before incurring the cost of repair.  And if you think you need the leverage afforded by a Fortune 100 tenant, that’s not necessarily the case.  So long as the tenant has held up their end of the lease and paid their rent on time, they are golden.

Nothing is absolute when it comes to business.

 

Aaron Weiner CCIM, CPM, LEED AP

aaron@bailesre.com

Tenant Improvement Allowance -- It's Not Just How Big, It's How Long

So tell me, how does it feel when you negotiate $100,000 of landlord-funded tenant improvements in your lease, you use $75,000 to get the premises ready for your occupancy, and then find out there isn’t any allowance left a year later to replace the broken down air conditioning unit on the roof?  You just got the shaft, dear tenant…twice!

That is a common retail refrain, but it happens a lot in the worlds of industrial and office real estate as well.  Most leases – especially the commonly used “industry standard” ones such as those published by AIR Commercial Real Estate Association – are skewed heavily in the landlord’s favor.  Language in these leases often state that the landlord allowance is for construction and improvements to the premises that relate to the initial space plan and that are performed prior to the lease commencement date; in other words, “use it” for only this work and within this time frame “or lose it”.  Most tenants and many inexperienced or oblivious real estate brokers don’t give this much thought.  The tragedy is that most landlords don’t even pay close attention to this detail; that is, until the tenant surprises them down the road with a request for funding for subsequent improvements, and then they turn the tenant down flat.

I’m giving away a valuable trade secret here, so pay attention!  Delete the language that puts time restraints – direct or implied – on the use of tenant improvement dollars provided by the landlord.  It is amazing how infrequently I find landlords accepting this change to the lease.  The poor soul at the top of this blog could have been $25,000 to the better if his broker had done this for him!

 

What I can't tell you is the secret to getting the landlord to allow you to use your tenant improvement allowance for fixtures and telecom systems that are typically disallowed by the standard form leases.  For that one, you will have to pick me to represent you.

 

Aaron Weiner, CCIM, CPM, LEED AP

aaron.weiner@weinerproperty.com

 

Vanessa's Tale of Woe

Have you ever signed a lease for a location you loved that turned out to be a ulcer-inducing money pit?

Retail business owners are constantly taking on the burden of searching for their new locations.  No sooner do they identify the perfect spot than they find themselves in lease negotiations with the landlord.  Even if they have signed leases in the past, they are intimidated by the process because the landlord’s agent and the landlord obviously have far more experience with leases.  They feel presumptuous questioning the language of the lease; they rationalize that if it has the AIR label at the top, it must be the standard form that everyone else signs and so they sign it.  My friend Vanessa did.  Poor thing…

Vanessa has a big idea for a casual take-out restaurant in downtown Los Angeles.  The agent that showed her this former restaurant space answered only the questions she asked about the condition of the premises.  She did not have an experienced advocate to dig any deeper.  She signed the lease and took possession, only to find that the electrical service was woefully inadequate for her operation.  Right after she spent $10,000 for the necessary upgrades, she learned that the premises had no air conditioning!  That will cost her another $7,500.  Are we having fun yet?

Could an agent negotiating on Vanessa’s behalf have gotten the landlord to spend the $17,500?  Maybe not.  But with a lease hanging like a carrot on a stick in front of the landlord, some rent concessions might have been negotiated using the argument that the tenant was about to perform improvements that would add lasting value to the landlord’s building.   But at this juncture, Vanessa has zero leverage.   She’s coughing up the dough and it’s coming right out of her marketing budget.

A good tenant rep broker could have probably saved her half of those outlays and at no cost, because commissions to all brokers in the deal are paid by the landlord.  And you can take that to the bank.

 

Aaron Weiner, CCIM, CPM, LEED AP

aaron.weiner@weinerproperty.com