10/16/2000

The Abstract Art of Lease Abstracting

By Todd Zeldin and Michael Schwartz

ACG Professionals, Inc.

Headnote: Like abstract art, the Lease Abstract has evolved over time from a simple depiction of the landlord/tenant relationship to a more comprehensive work of art describing in greater detail the rights of parties in commercial real property transactions.

While Rembrandt might not have viewed the Lease Abstract as worthy of inclusion in the Louvre Museum, the fact is that Abstracts have become an integral part of any commercial real estate transaction. As such, the Lease Abstract has evolved from a bare bones summary of a Lease to a more detailed lease analysis. Some parties might still desire the simple Abstract, similar to the most basic still-life artistic drawing, for relatively uncomplicated transactions. These transactions are often dictated by time-sensitive deadlines. However, notwithstanding time sensitivity issues, many industry players have developed an appreciation for, and hence have expressed a desire to receive, a more comprehensive financial and non-financial lease abstract, akin to a Peter Max or Leroy Neiman artistic masterpiece.

While the consummate Lease Abstract should contain more than basic lease provisions, a regurgitation of the Lease is not necessary to develop the abstract either. Given the evolution of commercial property Leases over the years to voluminous proportions, real estate professionals have increasingly conveyed the desire to not want to look at a Lease again after execution unless it is absolutely necessary. As a result, the Lease Abstract has also evolved from a work containing basic lease information to a more detailed description of the rights of parties in commercial landlord/tenant transactions. This article analyzes those concepts that might be included in the Lease Abstract and the method of describing the terms of the Lease to avoid a mere restatement of an otherwise difficult and often incomprehensible Lease document.

Financial Lease Information

In preparing a lease abstract, the most critical information to include is the financial lease information. The obvious reasons are because the financial components of each lease drive every commercial real estate transaction whether it be the preparation of a property owner's annual budget, an accounts payable or year-end recoverable expense reconciliation, or a valuation of a building or portfolio in connection with an acquisition, disposition or refinancing. But what financial information should be included in the Lease Abstract? Clearly, the Lease Begin Date and End Date, Square Footage, and Base Rent and rent increases (including Percentage Rent for retail properties) should be included in all cases. Sometimes the inclusion of the security deposit clause is also important, especially when a property is changing hands. Extending this further, all abstracted financial information should be compared against the property rent roll or accounts payable ledger to ensure that the tenant or space in question is being accurately reflected in financial reports for the premises and property. This information, however, does not require much artistic synopsizing as it is usually comprised of dates and dollars.

In addition to these base clauses, additional landlord and tenant rights such as options should be included in an Abstract. But while the mere inclusion of data relating to options is necessary, the level of detail and manner of stating such data is equally as important to ensure an accurate understanding of the Lease. The abstract need not go into an analysis of all details of the option – i.e. whether three appraisers are necessary for a determination of fair market rental upon the exercise of a lease renewal. For example, an abstracted renewal option provision might state the following: "Two 5-year options, with 180 days notice, at 95% of the fair market rental at the time the option is exercised but in no event less than Base Rent during the last month of the initial Lease Term." Clear, concise and succinct. If stated properly, the Abstract should enable its reader to better understand the landlord's or tenant's basic option rights under the applicable provision without having to refer to the Lease.

Equally as important in the financial abstract is the inclusion of as much information relating to operating expenses, taxes and other recoveries as is possible, again, without restating the entire recovery provision of the Lease. Such information necessitates the inclusion of whether such recoveries are paid as a Tenant's pro-rata share, whether a Base Year is used, any specific charges (e.g. $150/month for chilled water), caps and the primary definition of the pro-rata share denominator. As with options, the manner of stating the relevant language can assist a party to better understand the applicable obligations under the Lease.

Other financial information that should be included in connection with retail abstracts are go-dark, kickout and co-tenancy provisions, as well as tenant exclusives and radius clauses and any financial penalties associated with a landlord's or tenant's violation of the restrictions imposed by these clauses. For example, an abstracted radius provision might state the following: "Radius: 10 Miles; Penalty for Radius Violation: 50% of Minimum Rent then in effect prorated on a per diem basis." Again, one need not restate the Lease provisions in the abstract, but should include the relevant information needed to convey to the parties that the restriction exists in the Lease and that the parties should take heed of what are the potential ramifications of a violation.

Non-Financial Lease Information

While most, if not all, financial information should be included in the lease abstract, the inclusion of non-financial information offers more discretion to the Abstractor than financial information. Inclusion of these provisions is often dictated by what a party deems relevant in connection with the specific property or tenant in question.

One non-financial concept that should always be included in larger tenant lease abstracts, however, is the assignment or sublease clause. However, because these provisions tend to be wordy and all-inclusive, artful abstracting is critical. For example, it is generally necessary to include whether landlord's consent is required to assign or sublease, what type of consent (e.g. written) is mandated and what the terms are of a landlord's obligation in giving such consent (whether it may be unreasonably withheld or delayed). An assignment or sublease abstracted provision might thus state as follows: "Landlord's prior written consent is required to assign or sublet, which consent shall not be unreasonably withheld, delayed or conditioned. Consent is not required, however, to assign or sublet to a successor by merger or consolidation, or to at affiliate of the Tenant." This information is enough to put the interested Lease parties on notice that consent in many cases may be required when an assignment or sublease situation arises. One might also want to include in the Abstract a reference to what fees are payable by a tenant to the landlord for a request for consent to a sublease or assignment, as well as how sublease and/or assignment profits are to be allocated among the parties.

Another item often overlooked, but important in acquisition and re-financing transactions, is the estoppel provision. This provision might be critical as the party acquiring or refinancing a property would certainly want to know what are the estoppel rights of the property's tenants considering that certificates will likely be requested of such tenants in the near future in these transactions. Again, the abstract might merely state the following regarding estoppel: "Tenant shall execute and deliver to Landlord a certified statement within 14 days of Landlord's request." Short and simple enough to put the parties on notice as to what the Lease obligations impose.

Finally, another non-financial item that real estate professionals tend to not abstract on a regular basis but one that surfaces often enough, is the Tenant Alterations section of a Lease. When alterations are requested to be included in an abstract, one can be more creative in both the scope and the manner of abstracting. This is because alteration provisions often are more wordy and filled with legalese than financial and some of the referenced non-financial lease provisions. For example, it is generally not necessary to include in the abstract language regarding the submission of a tenant's plans as plans are invariably subject to the landlord's approval in most cases. It is necessary, however, to include whether landlord's consent is required for certain alterations and the dollar threshold (e.g. aggregate cost of less than $25,000) for such consent. Thus, the abstract might state as follows in connection with alterations: "Landlord's prior consent is required for all alterations, except consent is not required for those alterations costing less than $25,000 in the aggregate." Again, the abstracted provision should be stated clearly and concisely without restating the entire Lease section.

Conclusion

The Lease Abstract has evolved in direct proportion to the increased complexity of commercial property transactions. A lot of data can and should be included in the Lease Abstract. Much of this data is critical to the valuation and lease administration of properties and portfolios. However, it is important to recognize that the Lease Abstract should be artfully stated to allow the landlord or tenant to accomplish their goal of understanding the basic Lease provisions without having to refer to the actual Lease document.

Todd Zeldin is President and Michael Schwartz is Vice President of ACG Professionals, Inc., with offices in Atlanta and Chicago. You may contact them at respectively or via www.acgprofessionals.com