This case study deals with renewal negotiations between a landlord and tenant. They both happen to be in the public sector, and notable that the tenant was the architect of the lease documents. I was representing the landlord in this transaction.
Below are some excerpts/definitions from the original lease and the many renewal documents I scoured during my review. I have capitalized the defined terms (or not) as per the documents reviewed, which may be relevant. Where I have an “X” it is a replacement for the associated number, and not relevant to understanding the background of this case study. I’ve added the underline for effect.
Here we go:
- Annual Rent means the rent payable by the Tenant to the Landlord pursuant to Article X of the Lease.
- Article X of the Lease states – The Annual Rent is based on an annual rental charge of $XX.XX for each square foot of the Rentable Area of the Premises, which is comprised of $XX.XX for each square foot for the base rental charge and $XX.XX for each square foot for the estimated Operating Cost and the Building HVAC charges.
- Option to Renew – …the Annual Rent, which shall be for the renewal term based upon…the Market Rental…for Unimproved office premises in the vicinity of the Building taking into consideration the incidence of tenant’s inducements and allowances in the relevant market areas…
- Market Rental means, at any given time, the then current market minimal rental rate for leases with similar terms (including, without limitation, the length of the term and the frequency of adjustments in rent, if any) entered into at arm’s length for Unimproved office premises of similar size, effective age, quality and use in similar buildings in the vicinity in which the Building is located.
- Unimproved means: (i) full completion of exterior and interior finishes on all perimeter walls with standard associated finishes with the Building; (ii) finished demising walls and entrance doors with locking hardware; (iii) fully balanced distribution of Mechanical and Electrical Services to base building standards; (iv) level finished concrete floor; and (v) new or “as new” finished T-bar ceiling, but shall exclude the Building Security system and equipment related thereto installed by the Tenant or on the Tenant’s behalf.
- The latest amending agreement states…the Annual Rent, which shall for each Extension Term be based upon: (1) the Rentable Area of the Premises; and (2) the Market Rental (with specific breakdown showing the Annual Rent and Operating Costs)…
What’s your take from the summary info I provided, can one definitively answer the following questions:
- Is market rent based on (a) gross rent, or, (b) net rent?
- Does the definition of Unimproved office premises indicate (a) shell space, (b) partially finished space, or, (c) fully finished space?
- Under what circumstances can comparable office leases from outside the local market be justified in the analysis?
- Does the current use of the subject property factor into what comparables can be justified in the analysis? What if the current use is a courthouse, are you limited to only using courthouses leases completed in the local market?