Mixed-use, multi-level developments are capturing the money and the imaginations of developers, investors and lenders alike. But while such projects offer tenants the potential of great reward, they also present risk — particularly to pioneers who make an early commitment to lease space when a project is merely a vision.
To mitigate that risk, a pioneering tenant must challenge and probe the developer's vision. Whether at the RFP (request for proposals) stage or during lease negotiations, the would-be tenant should ask the developer tough questions about project timing, security and other critical issues.
Developers should not only be prepared to answer these questions, but also to document their answers as lease provisions that guide performance and ensure that the ultimate development is consistent with the project vision.
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Timing of Project Construction: Does the lease outline milestones to measure progress? Does the tenant have the right to terminate the lease if the milestones are not reached? What holdover rights and obligations does the tenant have in its existing facilities? If the tenant's move is delayed due to a project delay, does the lease obligate the developer to cover the excess holdover rent (the portion of the holdover rent in excess of the tenant's new project rent during the period of the delay)? If the tenant has to undergo a temporary move, does the lease obligate the developer to cover moving costs and excess relocation rent?
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Security: If the tenant is going to be one of the first occupants of the project, are there any security risks or concerns? Will project security be fully implemented or phased in as occupancy levels rise? What combination of on-site/in-building security, roving security or remote video surveillance will be provided to minimize security risks? Does the lease give the tenant the right to request or require that the developer implement additional security?
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Accessibility: Will all of the project's means of access, ingress and egress be completed, open and operational when the tenant occupies the building? If not, what minimum levels of access are required for the tenant to have reasonably efficient access? What directional signage will be provided to minimize a sense of confusion in using the project's parking facilities or accessways?
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Parking: Is there so-called “shared parking” among office, retail, hotel or residential occupants and their guests? If so, how will the landlord or the parking facility manager handle the cross-over or peak-demand times when competing users are vying for the same spaces? Does a tenant have the right to have a vehicle towed? How will reserved parking spaces be allocated among tenants and other parking facility users?
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Operating Expenses or “CAM”: What is the proposed base year or base amount for purposes of determining the tenant's additional rental for operating expenses or common area maintenance (CAM) contributions? Does that base year include a full assessment of real estate taxes, reflecting the completion of the project as a whole, or, at a minimum, the completion of the improvements on the tax parcel in question? Are there any exclusive service providers (for telephone or power, for example)? If so, does the lease limit the tenant's obligation to pay for services to levels that would have been achieved on a negotiated basis, if services were competitively bid?
The tenant's failure to ask these important questions — and to turn the developer's answers into lease provisions that guide performance and require the developer to fulfill the promise of his project vision — may expose the tenant to risks that are potentially fatal to his or her goals.
Abe J. Schear is co-chair of Arnall Golden Gregory's commercial real estate/leasing practice team.
Philip G. Skinner is a partner of the firm, and heads up the firm's leasing practice with Schear.