Don't Sign that Estoppel Certificate!

Many tenants receive and Estoppel Certificate at some point during their lease term.  Some tenants just take a quick glance, sign it and send it straight back to the landlord.  Don't be that tenant!  Not every tenant knows what an Estoppel Certificate ("EC") is, so here is a brief description: An Estoppel Certificate is a document used to verify the status of an existing lease.  It is typically for the benefit of a prospective buyer or prospective lender on income property.  An EC restates items in a lease, like the parties to the lease, the commencement date, the expiration date, rent, prepaid rent, free rent, security deposit, the tenant improvement allowance and the performance/non-performance of the landlord or tenant.  It is normally used when an owner of commercial property wants to sell or refinance the property.  Most leases have a provision requiring the tenant to sign such a document within 15 to 30 days of receipt.

So why is this important to a tenant?  Sometimes the Estoppel Certificate does not accurately reflect the entire situation that a tenant might enjoy.  It might not include an important amendment that grants the tenant certain rights, it might not list remaining monetary obligations of the Landlord and, it might misstate the tenants rights as it relates to operating expense audits rights.  In the last instance, this is a great time to resolve arguments about what may or not be owed.

To put things in perspective, it is very rare for an institutional buyer of commercial real estate to close escrow without getting EC's from the primary tenants in a building.  They rely on the facts in the EC to make their investment decision, so I always tell tenants to immediately send an EC to their attorney and/or broker upon receipt.  An EC must be reviewed in detail to make sure it doesn't contain any mistakes that would compromise the tenant' rights in the lease.  Certain questions must be asked and addressed:  Has the landlord paid the entire tenant improvement allowance owed under the lease?  Are than any operating expense billings in question?  Is there any free rent left to be taken at a later date?

Sign it! After careful review of the document and the current lease situation, and the revising of the document, if necessary, it is important to sign the EC, if required under the lease.  Most leases will state that if you don't sign within required time, that statements in the EC are true and correct, without exception.  So, don't wait until the last minute to deal with this important issue!

*Click on  the example to the left to see what an Estoppel Certificate typically addresses.

Can I Alter My Office Space?

"You don't get what you want, you get what you negotiate"   We have all heard the phrase, but do we always heed its advice?  Many leasing transactions are done with the thought that the initial tenant improvements will be adequate for the lease term, and they usually are.  But what happens when your business requirements change and the space you occupy needs to be modified to better accommodate your needs?   Or, what happens if you renew the lease many times over and your space just needs to be "refreshened?"  At some point the premises will need to be reshaped.  This concept is dealt with in the "Alterations" section of the lease.

With technology moving so fast, and the way we are using space morphing so quickly to a more open  and "creative" environment, it is more important than ever to have liberal "Alteration" rights in your lease.  Why?  My friend Gregg Pasternak and his associate Roger Canaff describe some of the finer points that must be addressed in today's leases:

Current Topic: Negotiating Alterations Provisions
The right to perform alterations during the lease term is sometimes an afterthought in negotiations, since generally the initial construction of improvements is governed by the terms of a tenant work letter which is attached to the lease as an exhibit.  However, obtaining liberal rights to perform subsequent alterations, especially in leases with terms of more than 5 years, can provide your client valuable flexibility. And, a well negotiated provision can save a tenant significant money at the end of the lease term.  Here are a few of the most important issues to address.

Cosmetic Alterations

Typically, Tenant cannot perform alterations in the Premises without Landlord’s consent, which will not be unreasonably withheld unless such alterations will affect the Building structure, systems, or exterior.  This is a perfectly acceptable starting point, but tenants should have the right to perform purely “cosmetic” alterations (most notably paint and carpet) without going through a potentially lengthy and expensive review and consent process. Most landlords will provide this right, but the specifics can vary substantially from deal to deal.  First, it’s important to try to make the definition of “cosmetic” alterations as broad as possible.  Landlords may try to limit these to merely paint and carpet, but including any non-structural alterations is sometimes achievable, especially in larger transactions.  Perhaps more importantly, landlords usually try to put a cap on the amount of money which can be spent on cosmetic changes made without consent.  Try to remove the cap entirely, by arguing that the nature of the improvements in question are relevant, not the cost.  For example, if the parties agree that Tenant can install new carpet without Landlord’s consent, why should it matter if Tenant chooses the most expensive carpet in the world?  However, if you lose that argument (and more often than not you will), be sure to make the cap large enough for the right to have some utility.  A $10,000 cap on cosmetic alterations (which is fairly typical) essentially provides no right whatsoever to a tenant leasing 25,000 rentable square feet.  A good rule of thumb is $5.00 per rentable square foot of the Premises.

Restoration Requirements
Landlords always want the right to make tenants remove improvements at the end of the lease term, and early lease drafts generally give landlords not only the right to pick and choose what stays in the space and what goes, but the right to defer the final decision until the end of the lease term (and sometimes even 30 days after lease expiration).  On large office deals, sometimes it’s possible to remove the restoration obligation entirely, especially if your client is a law firm or other user likely to construct largely re-usable improvements.  However, most of the time your client will face the possibility of being required to remove some permanent improvements at the end of the term.  First, you should always try to limit the removal requirement to non-general office improvements.  If the space is likely to be usable by the next occupier, then that provides a value to Landlord, and they shouldn’t require your client to spend money to take it out.  In deals 10,000 rentable square feet and larger, this concession should be obtained more often than not.  Of course, arguments will ensue regarding what are typical office improvements (internal stairwells and cabling are often hot-buttons), but arguing about such things is fun and that’s why you became a broker in the first place, right?  Secondly, Landlord should ALWAYS be required to notify Tenant of the restoration requirement at the time consent to the applicable alterations is given.  It’s possible that your client may want to modify its plans for construction if a potentially expensive removal obligation is triggered, and you won’t be able to advise your client effectively without all the information at the time the decision is made.

Supervision Fee
Landlords are always looking for places to add a little profit to their bottom line, and management/supervision fees are a popular tool.  Most leases will provide that Tenant has to pay a supervision fee in connection with any alterations.  The size of the fee of course varies by region and by premises size.  Of course deleting the fee entirely is optimal, and limiting Landlord’s recovery to reimbursement of actual out-of-pocket expenses is the next best thing.  However, unless it’s a large deal, you often will be forced to live with some mark-up on alterations.  These fees are usually 3%-5% of the total cost of construction, and often a sliding scale can be negotiated where the fee decreases as the cost of the project increases.  No fee should be charged on purely cosmetic alterations.

Operating Expense Review

By this is the time of year you have probably received your annual reconciliation statement of real estate tax and operating expenses from your landlord.  If your Landlord is on a fiscal year, like The Irvine Company, you may receive it at a different time.  This statement will calculate your pro rata share of actual building expenses as compared to the estimated payments made throughout the course of the past year, and modify how much you must pay each month. 

These real estate tax and operating expense reconciliations are frequently incorrect and the errors are rarely in your favor.  Consequently, after spending considerable time and effort to negotiate your lease, it is critically important to monitor the implementation of the lease terms going forward. 

Most leases only allow a short window in which to dispute incorrect charges in these statements.  Tenant Guardian would like to offer you the opportunity to have your reconciliation statement reviewed by our experts – without cost or obligation – in order to ensure their accuracy and verify that you are not being overcharged. 

Please call or e-mail us to set up a review. 

Share FASB Finalizes Lease Accounting Standards

The final FASB (GAAP) Lease Accounting Standard was released today. It has been a long time (2006) since the IASB and FASB (IFRS) endeavored to increase transparency and consistency in accounting standards.  Ultimately the two bodies did not agree on everything and there are still two standards, but they are much more similar than before.

Additionally, there is still quite some time before implementation is required.  The standard will take effect for public companies for fiscal years beginning after December 15, 2018. For all others it will take effect for fiscal years beginning after Dec. 15, 2019. Early application will be permitted for all organizations.

You can find a more in depth article on the subject here or go directly to theFASB Update site to read the changes in detail.

For those who have not followed this saga over the last 10 years it is important to note that these changes will affect how companies structure leases and make decisions on owning vs. leasing real estate and equipment due to effects these standards will have on financial statements.

After we read the new standard in depth we will update this blog.