Questions Re Commercial Lease on STL-Gross So Cal and on AIREA Forms
I'd like to ask about a Single Tenant Lease – Gross and some questions related to change in tenants.
I currently own a free standing building in LA county with a tenant running a convenience store/ liquore store. The current tenant is under contract but they have decided to sell and have now found a buyer so we are in negotiation. When the current tenant began this lease I had the help of a broker draft the sales paperwork and the lease. This time I do not have a broker so the buyer sent over the lease with the terms. I have a few questions about the process of switching over from one tenant to the next.
- 1. Lease Doc - The buyer sent over the lease drafted by AIR COMMERCIAL REAL ESTATE ASSOCIATION STANDARD INDUSTRIAL/COMMERICAL SINGLE-TENANT LEASE – GROSS (2001). My previous lease was the same form but an older version. Is this the standard form many small biz owners use for lease contracts? I've tried researching online but could not find much info on the leases good or bad. Law firms tout their services with pros and cons if I seek their service but before seeking legal advice I'd like to hear the RE advice from the pros here first.
Anyone out there with experience dealing with leases to the mom and pop type stores? Does this lease favor either side?
- 2. Guarantor – The current lessee is in the name of the owner of the business but the new lessee wants to have the lease in the name of the corporation. New buyer owned a prior business under the same corporation and has sent the lease in the name of the corporation. He has also sent over a form from AIREA Guaranty of Lease with the buyers name as the Guarantors. Does a Guaranty of Lease basically mean that if the corporation can't make payment he'll be responsible for the payment?
- 3. Lease Terms – The terms of the lease are for 10 yrs with a 5 yr option. The option has an adjustment with COLA (CPI W) factored in. My previous option had a fixed amount. I am wondering when the option is exercised, and let's say the contract starts in October do I take the CPI W that's released by Social Security in the beginning of the year and in October of the option years adjust it up with that rate? Also, I am assuming that CPI W is a rate put out by Social Security and is not locally set. Is that correct?
- 4. Prior Lessee and New Lessee – Is there some type of form or letter that I should draft to the outgoing lessee saying that once the incoming lessee has signed the lease, the outgoing lessee's lease will terminate? I am not very familiar with this lease terms that discuss the change in ownership of the business and new lessee coming in.
- 5. Insurance – In a STL Gross lease does the lessee ever buy insurance for the building? In the form is says that the Insuring Party Lessor is the one paying. Is this negotiable with the new tenant?
- 6. Recommendations -
- Lawyer - Anyone have any recommendation to a good RE lawyers in So Cal? A plus if they routinely deal with this AIR form and small mom and pop leases.
- Insurance – I'm shopping for an insurance provider who can sell me insurance on building, liability, as well as an umbrella policy. A plus if they also have home/car business as well.
I realize this is long and I am asking a lot of questions so if you can help with even one I would appreciate your input and advice.
1) AIR is somewhat the standard for commercial leases in CA. With that said, most retail still have their own drawn up leases. However, since you are dealing with mom/pop, the standard AIR lease should be fine. In my opinion, these leases tend to favor the landlord slightly.
2) This is how it is most often done. The lease is specified in the name of the business, however the guarantee is usually the principal owner. He is essentially guaranteeing the lease and would be liable individually if the business does not pay the debt. With that said, most of these mom/pop shop owners work full time in the business and it's their sole source of income. And so if the business can't meet its obligations, then good luck trying to collect from the guarantor.
3) CPI is released by the Bureau of Labor Statistics. Yes you would just adjust it upwards. I try to avoid this in my leases because it's just a hassle. I don't use CPI so I'm not sure, but I know there are several different CPI statistics, possibly by region. Also you need to look to see when the CPI is released and specify in the lease exactly which CPI data you are adhering to. Or else you and the tenant might get into an issue of exactly how much to increase.
4) Essentially you are talking about an Assignment. Yup, you guessed it, there's an AIR form for this as well.
5) For a "gross lease", essentially you are paying for your own insurance. However everything in the contract is negotiable. In most cases, with small mom/pops, even in a net-lease situation, you still pay for your own insurance, and just have the tenant reimburse you. For things that are important, such as your property taxes, insurance, etc., I'd never trust a small mom/pop to pay those for me directly.
6) Since you are dealing with AIR forms, I'd recommend just a good broker. Most commercial brokers are very familiar with AIR forms. Lawyers never hurt, probably more expensive. Regardless, if I were you, I'd have the new owner pay for all transactional costs to you, since you are essentially blessing the transaction, but not really a party to it.
Sorry, no lawyer recommendations. PM if you need a transactional broker.
Thank you for your reply. I sent you a PM via the Colleague request for a broker recommendation.
Also for 4) Assignment - does that apply in situation when I want to start a new lease with the incoming renter and not when the incoming renter is just taking over the lease contract of the outgoing renter?
6) What is considered part of the transactional costs? Broker fee and maybe lawyer fees?
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