PERSONAL GUARANTEE – Landlord’s Perspective

We touched on the subject of a “PERSONAL GUARANTEE” (PG) in an earlier blog, so let’s expand on the subject further from the Landlord’s perspective. This can often be a controversial part of any lease negotiation, so here's a practical strategy and approach to work with.

First, a PG is simply an assurance that the Tenant (likely the principal of the company) will be personally liable financially for the lease agreement and its terms. It can be structured in many ways, for example, time limited, subject to a maximum amount ($ figure), or tied to the Landlord investment towards tenant improvements. It most often becomes enforceable when the company or entity which has signed the lease fails to meet its terms.

As Landlord, you are effectively a creditor and in some situations you may have more financial exposure than just the loss of the rental payments due. Understanding this, it’s good business to construct a PG structure that fits the particular deal you are considering. Think in terms of your risk & exposure in the event of a tenant failure, with a clear assessment of the downside potential. The best practice is to think like a banker and secure the deal accordingly.

In terms of the Tenant expectations and their willingness to accept a PG, none of it should come as a surprise. The informed ones will understand why it is required, the rationale behind it and should negotiate the best terms of a PG accordingly based on their interests. Tenants unwilling to accept a PG are limited in the market options they can consider and are in effect asking you to accept a higher risk by taking them on.

Just a final thought on a PERSONAL GUARANTEE – they never matter much the day that the lease is signed, but they do when the business fails and the lease goes into default!

CALLING ALL LANDLORDS! We would love to hear any great stories on the subject from your experience(s). As always we're just a click or call away from discussing the investment opportunities here in Windsor-Essex!

RENT FREE INCENTIVES (RFI) – An Alternative Strategy to TI ALLOWANCES

Landlords will often consider offering a RENT FREE INCENTIVE in order to attract Tenants on vacancies they are looking to lease. An RFI can be offered in addition to a TI ALLOWANCE or in lieu of, depending on the specific deal. However, from a Landlord’s perspective there are certain considerations that you should clearly assess, as you look to build-in a rent free period into any lease deal.

Questions to Consider:

Q: How does the RFI affect your overall cashflow for the property?
A: Cashflow – 2 months not as much a factor, as say a 6 month RFI would be.

Q: How does the RFI affect the net effective rent over the lease term?
A: Net Effective Rent is reduced from the face rate as shown on the lease (do the math).

Q: Does it include the operating cost/ft. of the property or strictly the base rental?
A: If Operating Cost/Ft. forms part of the RFI, it costs the same as if the unit were vacant.

Q: Are the TI costs being invested by the Tenant comparable to the rent free amount?
A: Tenant Investment is an ideal trade-off and helps substantiate the RFI.

Q: Is the Tenant stable and do they offer a Good Covenant?
A: Tenant Stability is a key factor and one which requires a close look.

Q: Does the RFI have to be provided at the front of the lease term?
A: RFI Upfront – not necessarily, and helps reduce the risk if it’s spread out over the term.

Q: Can RFI be conditional upon the Tenant not defaulting and otherwise becoming repayable?
A: RFI Conditional – all terms are negotiable and this ties the RFI to tenant’s performance under the lease agreement.

As with TI allowances, rent free incentives are considered to be a cost of doing business, and when offered in the right circumstances can be an effective inducement. The above Q&A gives you a good basis for assessment and ensures any RFI concessions make good business sense. RFI expectations vary  from the Tenant’s perspective and is really a market call based on your area.

In any real estate deal – a lease in this case – remember you don’t get what you deserve, but what you negotiate. RFI terms are often a key point in any lease negotiation and hopefully this gives you a better perspective as you assess a future deal.

We welcome your comments and stories about RENT FREE INCENTIVES based on your experiences – both Landlord and Broker alike. Just a click/call away from discussing our investment opportunities here in Windsor-Essex!

Letter of Intent vs. Agreement to Lease

Next up in our Leasing Series…Letter of Intent vs. Agreement to Lease.

There are generally two methods by which an initial agreement is struck between a Landlord and Tenant. The first is a ‘Letter of Intent’ (LOI), and the second being an ‘Agreement to Lease’ (ATL). Although both can accomplish the same objective, there are significant differences which have implications for both parties.

The LOI is often a short summary of terms and conditions as proposed by the Tenant and forms the basis for a final lease agreement. Key items such as rental rates, square footage, deposits, possession date, landlord’s work, signage (etc.), are normally included as terms within the letter. However, there is most often a disclaimer contained in the letter which indicates something to the effect of - ‘the LOI is not binding on the parties and is pursuant to a final lease agreement’. In short it most likely has no legal weight, and depends almost exclusively on the goodwill of the parties. If used, and they are used effectively throughout the commercial leasing world, the goal should be to move to the final/executed lease agreement as quickly as possible.

Alternatively, the ATL becomes an actual contractual agreement between the parties, and generally spells out the details of the proposal in greater detail. Even though it is still subject to the signing of a final lease agreement, it will have legal consequences on the parties in the event of any sort of default. The benefits beyond the legal weight issue include - the ability to give possession prior to a final lease being signed, that the ATL can become the actual agreement on the premises (should a final lease not ultimately be agreed upon), and better justification for the time/costs of the parties involved in pursuing a deal. Generally the more complex the deal, the more an ATL makes sense.

Again, seek out experienced commercial realtors with solid leasing backgrounds in your market to assist you in the area of LOI vs. ATL.