commercial real estate · Malls · Office Properties · Retail leases · Shopping Center · Uncategorized

It’s just a couple of days

We will not complete the date fields in a lease abstract until we know which dates we are going to use as the Commencement Date and the Rent Commencement Date. That can be incredibly frustrating for anyone that has to deal with us.

Think about that. You’ve just executed a lease and you want a final abstract so you can start using the information to run a rent roll or do some  projections. You are confident it is going to open by February 1. Just use that date Jack!

But, if you have followed this blog at all, you know that a day here or there can make all of the difference in the world. Seriously?  All of the difference in the world?  Surely, you’re exaggerating? Maybe not quite that extreme, but it could mean the difference in the term by a year. It could make a difference in when a tenant has a right to terminate based upon sales. It could make a difference in the lease year end for percentage rent purposes. It could make a difference when a guaranty ends. It could make a difference in a tenant’s operating covenant. It could make a difference in when an exclusive expires. It could make a difference when a radius restriction expires. There are so many clauses in a lease that can be affected by just a couple of days. And, that is no exaggeration.

The three most common ways to define a Lease Year across all retail leases are: 1) Based upon a Calendar Year (where Calendar Year is 1/1-12/31), 2) A Lease Year ending January 31, and 3) 12 full months from the Rent Commencement Date. There are naturally endless variations of the definition of Lease Year, but those three cover 75%+ of all leases. Complicating the definition of Lease Year is the definition of Partial Lease Year. In some cases, a Partial Lease Year is a Lease Year. In most  cases, a Partial Lease Year is not a Lease Year because it is not a full 12 months. (There are qualifiers that you’ll see in leases regularly – something to the effect of “if a Partial Lease Year contains more than 6 full calendar months, it shall be considered a Lease Year.”)

You’re getting off track Jack! We were talking about a couple of days.

No. Not off track at all. All of these leases clauses are tied together and contingent on a couple of days. Think about a lease with a Term of five full Lease Years that defines Lease Year as ending January 31. You are confident that the lease is going to commence on February 1, 2019, so just use that date! But, let’s say that instead of the Rent Commencement Date being 2/1/19, it turned out to be 2/3/19. Two days. That’s it. In the case of 2/1/19, the first full Lease Year is 2/1/19-1/31/20. In the case of 2/3/19, the first full Lease Year is 2/1/20-1/31/21. Depending upon how that lease defines Rents (by Lease Year) and Term, the Term itself could end either 1/31/24 or 1/31/25 – a full year’s difference!

Or consider a ten Lease Year term with a right to terminate if sales for any 12 consecutive calendar months never exceed $350/sf through the end of the 5th Lease Year. Again, is the end of the 5th Lease Year 1/31/24 or 1/31/25?

Or an operating covenant that states a tenant has to operate as a _________ supermarket through the end of the 3rd Lease Year and as any supermarket through the end of the 10th Lease Year. Those dates could be contingent upon a couple of days.

Could you put in 2/1/19 and then go back and change all of the clauses if there is a change? Absolutely! But, history tells us that once that information is in the system, more often than not, it stays in the system. Yes, someone may think to change the expiration date (instead of 1/31/24 to 2/29/24) and the bump dates (from 2/1 to 3/1), but those may be (and likely are) wrong. And, rarely do the log codes (the non-financial clauses) get properly changed.

So, because the Commencement Date and the Rent Commencement Date have the potential to impact so many other clauses, we leave the definitions in the abstract as Lease Year One, Lease Year Two, etc. until we have a final date. In that way, because there are not absolute dates in the abstract, all of those dates are still open until they can be confirmed. Until that start date can truly be considered.

What’s the solution, then, if you need to run a rent roll or projections with that new lease’s rents? Use that 2/1/19 as the start date for rents, but absolutely, positively do not put other dates in to the abstracts so that those dates are still blatantly empty.

A couple of days do really matter.

(On a similar issue handled completely differently would be a start date for a lease that has commenced and is part of an acquisition. In a case where commencement may have been one or two sellers ago, you are forced to pick a date as the commencement because you know that you will never have a true absolute. You hate it, but sometimes that truly is the best you can do.)

One thought on “It’s just a couple of days

  1. Thank you for your explanation on lease year.

    It has enhanced my knowledge in lease and impact of those couple of days particularly in non financial clauses is a eye opener for me.

    Thank you.

    Like

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