Leasing Real Estate in Westchester and New York City

What is rentable space compared to usable space?

The rentable space is the total usable area of the premises that also includes a portion of the common areas. These common areas may include the lobby, public corridors, shared restrooms, stairwells, etc. Therefore, tenants must keep in mind that they are also paying for space outside of tenant’s premises as part of the stated rent per square foot.

The percentage difference between rentable and usable space of the premises is commonly known as the loss factor, and will vary from space to space and building to building. For example, loss factor is typically greater in older buildings than in more modern buildings that typically are designed more efficiently. Additionally, loss factors are typically greater on divided floors than on full floors. Tenants and their real estate brokers should take the loss factor into account when evaluating potential spaces in order to compare the net effective rent of each space.

What does it mean if my lease includes an escalation provision?

The escalation provision allows a landlord to pass on future increases in real estate taxes and operating expenses to the tenant so that the tenant pays for its proportionate share of increases in taxes and operating expenses. The proportionate share is a percentage of tenant’s occupancy of the building which is typically determined by the landlord and calculated as follows: tenant’s proportionate share = tenant’s rentable square feet / total rentable square feet in building.

Can I lease commercial space in New York for one year or do most landlords require multi-year agreements?

While there are some landlords in New York that specialize in renting small, relatively inexpensive spaces for one year, the majority of landlords, especially those who lease space in valuable buildings will require agreements that include minimum three-year terms. And while you may find a sublet in New York with one year remaining on the lease, such a situation is challenging to identify.

The reason behind this is simple economics. Generally, landlords must invest time and money to prepare commercial space based on the tenant’s needs. Other costs include legal fees, brokerage commission, and carrying mortgages and utilities between occupancies.

What is a Good Guy Guaranty?

A Good Guy Guaranty is a limited guaranty in which guarantor promises to be a “good guy” and surrender the premises to landlord if the tenant defaults on the rent. In exchange, the guarantor will be released from any liability for rent or any other obligations under the lease after surrender. Typically, under a Good Guy Guaranty, tenant must pay all rent from the date of default to the date tenant surrenders the premises and leave the space in “broom clean” condition in order to avoid liability under the guaranty.

What is the average amount paid as a security deposit?

Usually, the security deposit is calculated as a certain percentage of tenant’s fixed annual rent and/or based on the landlord’s financial commitment to tenant improvements or up- front investment to prepare the space for occupancy, which is commonly referred to as build-out.

The security deposit is typically expressed as a negotiated amount of months’ rent. The security deposit correlates with landlord’s assessment of the tenant as a financial risk. Some factors that landlords typically use to assess risk include the strength of the tenant’s balance sheet, credit history, the availability of a guarantor, and a thorough review of the tenant’s financials. If a landlord believes a tenant poses a higher financial risk, it might require a tenant to provide a higher security deposit, e.g., up to twelve months of rent.

What is a burn-down provision?

Tenants that are required to provide a security deposit larger than four to six months of rent may negotiate for a security deposit reduction provision which is often called burn-down. Landlords are often willing to provide a burn-down in exchange for a larger security deposit. Overall, a burn-down provides that, as long as tenant is not in default, the security deposit will be reduced and returned to tenant in equal portions throughout an agreed- upon timeframe.

For example, if the initial security deposit equals eight months of rent then, at the first anniversary of the lease, the security deposit could be reduced to six months of rent. At the second anniversary, the security deposit could then be reduced to four months of rent, and so on. This allows for tenant to recoup some of the initial security deposit, provided it complies with the terms of the lease.

As a tenant, can I make alterations to the space I lease?

Typically, an alterations provision in the lease will require a tenant to obtain written consent from the landlord for any alteration except for decorative alterations such as painting, pictures, floor coverings, etc. However, landlords will generally agree not to unreasonably withhold its consent unless the alteration is substantial, or exceeds a dollar amount agreed to by the parties. Once a tenant obtains the landlord’s consent, the tenant will be subject to additional restrictions and obligations such as obtaining government approvals and restrictions on hiring contractors.

I heard someone mention a “build-out” in relation to leasing commercial space. What does that mean?

Landlords and tenants must negotiate who will “build-out” the space, meaning the scope and design of improvements, who will pay for it, and who will bear other risks associated with construction and renovations. Build-out is heavily negotiated and carefully planned. Generally, the terms of the build-out are set forth in an exhibit to the lease, often referred to as a work letter. Work letters generally come in two varieties: (1) tenant or landlord build-out, and (2) landlord build-out and delivery of a completed space, also known as turnkey. Turnkey refers to when landlord completes all of the construction and delivers tenant a key to the completed space.

Can I assign my lease? Can I sublet my space to another organization?

There are generally two ways for tenant to transfer its lease to another party and be released from some or all of its obligations under the lease: either a tenant can sublease the space to a new tenant (subtenant) for a period of time shorter than the full lease term, or a tenant can assign the entire space to a new tenant (assignee). In either case, the original tenant is not released from its obligations under the lease unless landlord specifically releases tenant.

In a sublease arrangement, the subtenant will pay rent to the original tenant under the sublease. The original tenant will, in turn, pay the rent due under the original lease to landlord. For example, if a space is $50 per square foot under the lease and tenant subleases the space for $45 per square foot to a subtenant, the original tenant still pays $50 per square foot to landlord. Because the original tenant still has the primary responsibility to pay under the lease, it must ensure that the subtenant abides by all of the provisions and rules and regulations under the lease.

In an assignment arrangement, the assignee will pay rent directly to landlord. This relieves some pressure from the current tenant, as the assignee becomes primarily responsible for all of the obligations under the original lease. However, a landlord can still sue the current tenant for any unpaid rent under the lease unless tenant is released.

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