A Comprehensive Commercial Leasing Guide 2021 by WDCEP

DOING BUSINESS

TOOLKIT

A COMPREHENSIVE

COMMERCIAL LEASING GUIDE In Public-Private Partnership with

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DOING BUSINESS TOOLKIT | A COMPREHENSIVE COMMERCIAL LEASING GUIDE

iii

THE TOOLKIT This guide provides basic information on some of the legal and practical issues to consider when entering into a commercial lease in the District of Columbia (DC). Topics include location selection, evaluation of space needs, space construction, working with professionals, review of key lease terms, and limiting business and personal risks. The guide also includes additional resources at the end of each section and a checklist with all of the resources at the end of the guide.

Assistance in creating this guide comes from Mark Jackson, Esq. of the law firm Goulston & Storrs PC. This guide does not constitute legal advice and is not a substitute for legal or professional advice. If you are signing a commercial lease, you are strongly encouraged to consult professional legal and real estate advisors.

This guide is a collaboration between the D.C. Bar Pro Bono Center (Pro Bono Center), Goulston & Storrs, and Washington DC Economic Partnership (WDCEP). The Pro Bono Center provides legal assistance to community based nonprofit organizations and small business entrepreneurs serving low-income communities or who are economically disadvantaged. You can find more of our resources at our resource site: lawhelp.org/dc/ced.

DISCLAIMER

WDCEP is a non-profit, public-private organization whose core purpose is to actively position, promote, and support economic development and business opportunities in the District of Columbia. WDCEP provides business engagement & consultations, educational programming, local market research, and site location assistance. To learn more visit wdcep.com.

This Guide is designed to provide practical and educational information with respect to commercial leasing transactions in Washington, DC. The information contained in this publication is general in nature, and should not be construed as legal advice. It is offered with the understanding that the author(s) and/ or publisher(s) are not rendering legal or other professional services or advice of any sort herein. Questions regarding the matters discussed in this publication, including terms contained in any existing or proposed lease agreement, should be directed to a competent legal professional. The author(s) and/or publisher(s) do not undertake a duty to update or revise the information contained herein whether as a result of new information, future events or otherwise.

contents 01 LEASE BASICS & NEGOTIATIONS

02 CONSTRUCTION 17 03 END OF THE LEASE

04 SUMMARY & TAKEAWAYS

05 APPENDIX 25

thinkresults Goulston & Storrs Leasing Group

Jennifer Bisgaier Associate +1 202 721 1158

Mark Jackson Director +1 202 721 1102

The Leasing Group at Goulston & Storrs is a recognized national leader in leasing transactions working with landlords and tenants in leasing matters related to all kinds of commercial office, retail, life sciences, and industrial properties, including but not limited to office towers, shopping centers, research and development facilities, office parks, industrial parks, and medical facilities.

goulstonstorrs.com

lease basics & negotiations A lease is an agreement between

for a certain amount of time.

a landlord and a tenant that

Commercial leases and residential

allows a tenant to occupy a space

leases have important differences.

RESIDENTIAL LEASES

COMMERCIAL LEASES

• Residential tenants have protections under the law Example: The landlord is required to make repairs and provide heat • If an apartment is rent controlled, landlords are limited by how much they can increase rent • The security deposit is limited

VS.

• A tenant’s rights are almost all governed by the lease Example: Unless it is required by the lease, the landlord is not required to make repairs or provide heat • When the lease ends, the law does not limit how much the landlord can increase the rent • There is no limit on the amount of the security deposit

DOING BUSINESS TOOLKIT | A COMPREHENSIVE COMMERCIAL LEASING GUIDE

1.1 THE LEASE PROCESS This section gives an overview of each step towards signing a commercial lease. Depending on the size of the space, the length of the lease term, and how the landlord usually handles leases, you may not follow each of these steps.

1.1.1 | REQUEST FOR PROPOSALS Your broker will help you identify a desired location and the type of space you need. The broker will then gather information or proposals from multiple landlords so that you can compare. The proposals usually include basic terms, including length of the lease term, base rent, any additional rent, utilities, security deposit, leasing concessions and possibly other items (all discussed in detail below).

1.1.2 | LETTER OF INTENT OR TERM SHEET After gathering proposals, consulting with your professionals, and having initial discussions with one or more landlords, you will decide which space you want. The next step is often to prepare a letter of intent, also called a term sheet, with the landlord. The letter of intent contains the basic terms of the lease (such as rent amount, length of the lease, security deposit, free rent and construction allowances) that the landlord and you agreed to. Depending on the parties involved and the size of the space, the term sheet can be basic or very detailed. The letter of intent is generally non-binding, and not a contract. Do not make payments to the landlord or start alterations before the lease is signed. Many important terms are left to the lease itself. Once the term sheet is agreed upon, the landlord will usually have its lawyer prepare the lease.

LETTER OF INTENT: A non-binding letter between the tenant and the landlord that states the basic terms of the lease (ex. length, rent, security deposit, construction allowance) and that the tenant and landlord intend to enter into a lease together.

Consult with your broker and lawyer before signing a letter of intent. It is important to include terms that are important to you. If the landlord is not willing to give you the terms that you need to operate your business successfully, the space may not be a good fit for your business. Knowing at the letter of intent stage (as opposed to the lease negotiation stage) that a landlord will not agree to terms that you need, will save you time and money that you would spend negotiating a lease you won’t sign. For small spaces or short-term leases, the landlord may choose to skip a letter of intent and move right to the lease negotiation (as discussed in the next section).

1.1.3 | THE LEASE The landlord will usually propose the first version or draft of the lease. Many commercial landlords use a template or form lease. This lease can be difficult to understand because of the way it is written, the length, and the small print. The initial draft of the lease will usually heavily favor the landlord. The lease should include the terms included in the term sheet but will contain many other important provisions. Carefully review the lease with a lawyer so they can explain your rights and obligations and help negotiate favorable terms for you. You can negotiate changes to the landlord’s offered lease terms. Ideally, the landlord will email you a Word version of the lease so your attorney and you can make your desired changes. If you do not

have much negotiating power (either because you are a small tenant or the space is in high demand), you might write changes on the lease or add them in a separate document, called a “rider.” The rider is attached to the lease and contains terms that add, clarify, or replace terms in the form lease. If your lease is for a small space, the landlord may be reluctant to make many changes to its lease. If this is the case, it is even more important that professionals explain what these terms mean for your business. The written lease will ultimately govern your relationship with the landlord. Do not depend on oral statements from the landlord or its broker. Everything you agree on with the landlord should be written in the lease. If a term is not included in the lease, it has no effect.

BE AWARE: Landlords asking you to execute a lease with a rapid or artificial deadline may not have your best interests at heart. Be careful.

1.2 TERMS OF THE LEASE The basic financial terms of the lease may have a significant effect on your business’s success. These terms include the base rent, additional rent, the length of the lease term, the permitted uses, and utilities.

1.2.1 | BASE RENT Rent is often divided into separate categories. Base rent is the minimum rent that the tenant owes the landlord each month for occupying the space. Base rent is usually calculated as an annual amount. The amount is determined by multiplying the size

DOING BUSINESS TOOLKIT | A COMPREHENSIVE COMMERCIAL LEASING GUIDE

of the space by a dollar amount. This is what “rent per square foot” means. The rent per square foot is generally determined by the market. In other words, the landlord will charge what other landlords are charging for similar space in similar areas. The size of the space is usually the square footage of the space plus a portion of common areas on your floor and in the building, such as common hallways, bathrooms, lobby areas and fitness centers. This additional allocation is typical for space in office buildings (including first floor retail space in office buildings), but often does not apply to leases for space in a shopping center or a stand-alone retail building. The addition of this common space turns the “useable” area of the space into the “rentable” area. In the DC market, the rentable area of an office building and space therein is typically determined in accordance with standards adopted by the Building Owners and Managers Association (BOMA).

USEABLE VS. RENTABLE AREA: The useable area is the space that you will control. Rentable area includes the useable area plus a portion of the common areas. LOAD FACTOR: rentable area/useable area. The bigger the load factor, the more you are paying for common areas

The rentable area is then multiplied by the dollar amount per square foot to determine the base rent. Often the base rent will increase by 2%–3% per year over the term of the lease, but for leases with shorter terms or for smaller premises, the rent may only increase every few years, or possibly not at all.

CALCULATING BASE RENT

Base Rent =

(Square Footage of Useable Area + Your Portion of Square Footage of Common Area) × Price Per Square Foot EXAMPLE RENT CALCULATION An office space has 1,500 square feet (SF) of useable area. The rent is $50 per square foot. The tenant is also responsible for 10% of 1,000 square feet of common space. 1. Calculate your rent for the common area: Square Footage of Common Area × Your Portion of the Common Area 1,000 × SF of common area

0.10 10% portion of common area

= 100 SF of your share

2. Calculate the rentable area: Square Footage of Useable Area + Your SF Portion of the Common Area 1,500 SF + 100 SF = 1,600 SF 3. Calculate the total yearly rent: Rentable Area × Price Per Square Foot 1,600 SF × $50 = $80,000 The yearly base rent is $80,000. The monthly rent is $6,666.67.

1.2.2 | ADDITIONAL RENT The landlord will likely require you to pay costs in addition to the base rent, including reimbursement for the landlord’s own expenses, such as the property’s operating expenses and real estate taxes.

OPERATING EXPENSES: A landlord spends a certain amount of money per year operating a building. This includes maintaining and insuring the building. The landlord looks to tenants to recover these costs. REAL ESTATE TAXES: Annual property taxes that the landlord owes to DC

The additional rent takes various forms. Office, retail, and industrial space usually use different methods for calculating additional rent shown below, but your lease may involve a combination of the following: 1. Office Space – A landlord for office space typically has a lot responsibility for maintaining the exterior and interior of the building, including sometimes portions of tenant’s premises, and for providing various services (including utilities and janitorial services). The landlord further must insure its building and pay all real estate taxes. All of these costs will likely increase during the term of the lease. These costs can be charged to tenant by the landlord in one of several ways:

costs on an annual basis pursuant to a so-called “triple net” (or “NNN”) lease. Generally speaking, “triple net” is an allencompassing term which refers to the landlord’s real estate taxes, insurance payments and operating costs. In office leases, insurance costs are typically included as a subset of operating costs. For example, under a triple net lease, the tenant would pay (i) a fixed or minimum rental amount plus (ii) its pro-rata share of the landlord’s real estate taxes plus (iii) its pro-rata share of the building’s operating costs. An office tenant’s pro-rata share is determined by dividing the rentable area of the leased premises by the rentable office area of the building; an office tenant’s pro-rata share of taxes is share is determined by dividing the rentable area of the leased premises by the rentable office and retail areas of the building. o Full-Service Lease – Under a fully service lease, (i) the initial base rent will include an amount which includes the tenant’s share of real estate reflects the tenant’s share of operating expenses and taxes for a “base year” (which is typically either the calendar year in which the tenant’s rental obligations commence or the calendar year thereafter) and (ii) after the base year, the tenant will be charged additional rent for its pro-rata share of increases in operating expenses and real estate taxes over the base year expenses.

o Gross Lease – The tenant can pay an all-inclusive, or “gross”, rental amount, which is intended to cover all of the foregoing costs. This is not a common lease structure, but is sometimes used for short term occupancy arrangements where the risk to the landlord of cost increases is minimal.

As noted above, real estate taxes and operating expenses typically increase over time. Tenants should attempt to limit increases in operating expenses which are reasonably controllable (excluding utility costs, insurance, snow and ice removal, cost of compliance with laws and other matters) to 4%–6% per year. A small tenant may not have the leverage to force landlord to cap expenses.

o Triple Net Lease – The tenant can pay for its pro-rata share of all of these

It is critical to carefully review the list of costs which the landlord wants to pass

DOING BUSINESS TOOLKIT | A COMPREHENSIVE COMMERCIAL LEASING GUIDE

through as a part of operating expenses. This is an important economic term of the lease. Your attorney may be able to help you exclude, reduce or qualify some of the costs included in the landlord’s standard lease form. For example, a tenant with a 5 year lease should not be required to pay its share of capital expenses which it will not benefit from; however, it would be common for a tenant to pay its share of capital expenses which either reduce operating costs or are incurred to comply with new laws, as long as such capital expenses are amortized over the useful life of the applicable item (with a reasonable interest rate), and only the annual amortized portion is passed through to the tenant in a given year. 2. Industrial Space – A landlord for industrial space typically is only responsible for structural portions of the building and possibly replacing the parking area after a number of years (with some or all of such costs being passed through to the tenant as additional rent), while the tenant has a lot more responsibility for maintenance and repair of its space. . 3. Retail Space – Additional rent for retail space in an office or residential building usually consists of (i) the tenant’s share of real estate taxes (or sometimes tenant’s share of the real estate taxes applicable to the retail component of the building) plus (ii) tenant’s share of

operating costs which benefit the retail areas. A retail tenant in an office or apartment building should make sure that it is not paying its share of operating expenses which exclusively serve or benefit other parts of the building (such as, for example, elevators). In a shopping center context, the tenant would pay its share of real estate taxes, the landlord’s insurance costs and common area expenses (or “CAM”), which may or may not include items such as roof and parking lot repairs and replacements. Here again, your attorney may be able to limit the scope and extent of some of these pass-through obligations. Retail leases sometimes contain another element of additional rent called percentage rent. Percentage rent is when a tenant pays a certain percentage of its gross sales over a “breakpoint.” The breakpoint can be a fixed amount (which may increase over time) or can be a “natural breakpoint”, which is determined by dividing the annual rent by the agreed upon percentage. The percentage, the breakpoint, and the definition of “gross sales” can all be negotiated and the tenant should seek the advice from its broker or lawyer. In order to plan for these expenses, ask the landlord or broker for an estimate of the additional costs. You can also find past real estate tax assessments through the DC Office of Tax and Review website. The easiest way to search will likely be by using the “Premises Address” box.

1.2.3 | LEASE TERM The lease term is the period of time you are allowed to occupy the space. There are several factors to consider when deciding on a lease term.

SHORT-TERM VS. LONG TERM-LEASES

Short-Term

Long-Term

(5 years or less)

(more than 5 years, often 10 + years)

ADVANTAGES

• Limits the length of your obligation to pay rent if the business does not succeed or you decide to move.

Provides you with the stability of knowing that your business will have a space, and your base rent will not increase, for a long period of time.

DISADVANTAGES

• No guarantee that the landlord will renew the lease.

• You are responsible for the rent for a longer period of time even if your business fails or you want to move to another location.

• If you will need to pay a substantial amount to alter the space, you may not want a short term lease in case the landlord chooses not to renew the lease. TAKEAWAY

TAKEAWAY

A long term lease may be a good option for an established business that has a history of success and believes it will operate for many years.

A short term lease may be a good option for a new business or a business that is less certain whether they will be successful. A start-up office tenant might also consider a short-term lease for furnished office space or a co-working space arrangement.

DOING BUSINESS TOOLKIT | A COMPREHENSIVE COMMERCIAL LEASING GUIDE

If the space being leased is in a condition sufficient for the tenant’s occupancy, then the lease term may commence upon delivery of the space. Often that is not the case, and either the landlord or the tenant will be required to make certain improvements to the space before rent becomes due and payable. The date rent first becomes due is often referred to as the “rent commencement date.” If the tenant is the party responsible for construction, the rent commencement date is typically the earlier to occur of (i) the date the tenant completes its construction and (ii) a specified outside date tied to the typical time period required for the tenant to complete its design work, obtain all required permits and complete its work. The period of time between the date the lease is signed and the rent commencement date is sometimes referred to as the tenant’s construction or fit-up period. As noted below, in some cases the tenant’s construction period will not commence until certain contingencies have been satisfied. For example, a restaurant tenant may require receipt of a liquor license.

1.2.4 | RENEWAL OPTIONS; EARLY TERMINATION RIGHTS Commercial landlords are not required to renew your lease. Absent any agreement in the lease to the contrary, once your lease term ends, the landlord is also permitted to ask for any amount of rent. Protect yourself against a high increase by negotiating for an option to renew in your lease. Options for how to determine the increased rent include a fixed rent increase or a “market” base rent increase, also called fair market rent.

OPTION TO RENEW: The most common commercial lease term has an initial term of 7–10 years with an option to renew for another 5 years at a “market” rate.

Fixed rent is a fixed amount your rent will increase each year. Typically the increase is 2.5%–3% each year. Fair market rent is determined by looking at similar prices to rent comparable space in comparable buildings in the same market area. Consider asking the landlord to set a limit on the increase. The limit could be a fixed or capped amount or the fair market rent (or sometimes 95% of the fair market rent). If you and the landlord cannot agree on the fair market rent, it is typical to designate one or more neutral brokers or appraisers to determine the market rate. If the renewal rent is to be determined pursuant to a 3-broker or other appraisal mechanism, be sure that the landlord is required to provide you with market leasing concessions (free rent, construction allowances). Also, for renewals of space leased on a full service basis, it is common for the “base year” to be reset, so that both the new rental rate and the base year reflect then-current market conditions. If your lease does not have an option to renew and you want to stay in your space, contact your landlord well before your term will end to request that they renew the lease. If you are a good tenant, the landlord may be motivated to extend the term at a reasonable rent. Unless the parties agree otherwise, a tenant is under no obligation to renew its lease. In fact, office tenants rarely exercise renewal rights for terms of more than a few years per the original lease terms; rather, most longer term extension arrangements are typically reached through negotiations with the tenant’s current landlord and with owners of other buildings that have space that suits the tenant’s needs. Unfortunately, it is unlikely that a landlord will offer the best renewal terms unless it believes there is a strong chance that the tenant will relocate. Accordingly, tenants should evaluate their space requirements well in advance of the lease expiration date to determine, among other things, (i) whether their existing space is sufficient for its future needs or whether the tenant needs more or less space, (ii) what sort of modifications to the space would be required for the tenant to continue its occupancy for an extended period, (iii)

HOW CAN I BE A GOOD COMMERCIAL TENANT? • Pay your rent on time each month • Do not violate the lease

• Quickly contact the landlord when building systems need repair, such as a leaking roof or burst pipe.

• Be respectful of neighbors, especially regarding noise

• Keep an open line of communication with your landlord.

whether space in another building would better suit the tenants needs and (iv) the likely relative cost of all space alternatives (taking into account leasing concessions, the costs of relocation, relative space efficiencies, etc.). A reputable commercial real estate broker can provide valuable services to the tenant in evaluating alternatives and negotiating the best possible deal terms. Similarly, an architect can help the tenant with its space utilization requirements and analysis and design planning. For leases with longer terms, many businesses prefer to have a contractual means to cancel the lease early in case their business needs material change. A landlord may be willing to provide a tenant with an early termination right upon payment of fee. For example, a tenant may have a lease for a term of 10 years with the right to cancel after 7 years with sufficient prior notice and upon payment to the landlord of an “early termination fee” equal to the landlord’s unamortized transaction costs (free rent, construction costs, tenant allowance and legal fees, amortized over the original 10 year term with a market interest rate) plus some number of months of base rent.

1.2.5 | PERMITTED USE It is important that the lease clearly allows your type of business(es) to operate in the space. This is called the “permitted use.” This is a restriction imposed by the landlord in addition to any restrictions imposed by law (building code, certificate of occupancy, zoning).

It is important for a tenant to confirm that its use is permitted as a matter of right and that the tenant will be able to secure a certificate of occupancy for its leased premises permitting it to legally conduct its desired use.

PERMITTED USE: The part of the lease that describes the types of uses permitted by landlord in the space

For a retail business, the lease should permit your specific use, but the landlord may be agreeable to allowing for a reasonable expansion of the use unless prohibited from doing so by the terms of existing leases at the property. For example, if you operate a pizza parlor, you may want the option to expand into a full-service restaurant with the right to sell alcoholic beverages. In this case, the permitted use provision should say “restaurant” and not specifically a “pizza parlor.” For an office business, the lease can allow for any office use. Sometimes retail businesses will include “exclusives” in the lease. These “exclusives” prohibit the landlord from renting another space in the building or shopping center to a similar type of business. For example, if you will be operating a pizza parlor from retail space in an office or residential building, you may want assurances that no other portion of the building will be used for a similar purposes. Your landlord will also want to make sure that you do not violate the terms of any exclusives that are included in other leases in the building or shopping center.

DOING BUSINESS TOOLKIT | A COMPREHENSIVE COMMERCIAL LEASING GUIDE

Tenant’s leasing retail space in a shopping center often rely upon the presence of the key or “anchor” tenants of the center (such as grocery stores and larger general merchandise stores) to generate foot traffic and sales. Such tenants may attempt to negotiate “co-tenancy” provisions, which condition the tenant’s obligation to initially open for business upon the key shopping center tenants being open for business. This is called an “opening co-tenancy” clause. An “ongoing co-tenancy clause” is a provision which gives the tenant a right to reduce rent and/or terminate its lease if the key shopping center tenants (or similar replacement tenants) are not open and operating for a specified period of time.

1.2.6 | UTILITY CHARGES When comparing and deciding among spaces, the method of paying for utilities is an important cost factor. Electricity: The primary utility expense is electricity. Most office leases include electrical charge as a part of operating expenses which are passed through to the tenant in whole or in part; however, in some cases, an office lease may be structured as a “net of electric” lease, where the tenant makes separate payments for electricity. Retail lease typically require the tenant to make separate payment for electricity. There are two different ways to pay for electricity: 1. Direct meter – You obtain electricity directly from the utility company. This is usually the least expensive option and is called “direct meter.” 2. Submeter – The landlord charges you based on your actual usage, as measured by a “submeter.” The landlord reads the meter and directly bills you. The cost is based upon what the utility company charges the landlord plus an additional administrative charge. If a submeter must be installed, the lease should state who is responsible for the cost of installation.

DIRECT METER: A main (master) meter that is installed by the utility company. It measures the tenant’s usage SUBMETER: A secondary meter that the landlord uses to measure and bill the tenant for their usage

Other Utilities: The other utility charges, such as water, sewage, heat, and gas, are less costly and are usually charged by a fixed amount or by meter. If usage is low, such as a normal bathroom usage, the landlord may cover that cost in the base rent or will determine a fixed charge. If usage is high, the landlord may not want to take the risk of a fixed charge, so will measure and charge you for actual usage. Here again, in most office leases, standard utility charges are included as a part of operating expenses which are passed through to the tenant in whole or in part. The tenant will be required to pay additional charges for heating and air conditioning after normal office hours, and electrical charges (and sometimes condenser water charges) for any supplemental HVAC units that are required to cool server rooms and other area requiring additional cooling. A landlord is only responsible for providing utilities and services to the extent agreed to in the lease. Even if tenant is responsible for paying utilities, make sure landlord is responsible for providing utilities to your premises. Your lease should provide electricity, water, heating , air conditioning, passenger and freight elevator service (if necessary), and potentially gas, cleaning and directory listings. HVAC Charges: For most office leases, the landlord provides heating and air conditioning either through a building system as a part of operating expenses, but only during the building’s operating hours stated in the lease. If you require these systems to operate after those hours, you need to notify the landlord, who will usually charge an overtime charge for this service.

For most retail leases, the tenant has its own HVAC unit, and can control the hours of use. If a new HVAC unit is not being furnished as a part of the lease transaction, attention should be paid to the condition of such unit and which party is responsible for the repair and replacement of the same. Interruptions: The lease can also address how quickly a landlord must respond to utility interruptions they cause. If the leased space is small, most landlords will not agree to a specific time period. If the leased space is large, you may be able to negotiate a time period that the landlord must respond to the interruption. In some cases, you may also be able to negotiate rental abatements if you are unable to operate your business due to an interruption of utilities or other essential services which continues for a specified period of time (5–10 consecutive days). The landlord will usually limit these rights to interruptions that are the fault of the landlord or its agents or contractors, and not the utility company.

3. Your business’s financial condition. If you are business with little or no financial history, or if you have limited access to cash or credit, the security deposit may be quite large. In this case, the landlord may be willing to negotiate returning part of the security deposit after a few years if your business is successful. Negotiate this sort of “burn down” provision before signing the lease, if possible. Whether you provided a guaranty (discussed below). The landlord may also require a letter of credit from an acceptable bank as the security deposit instead of or in addition to cash.

LETTER OF CREDIT: A document through which the bank guarantees they will pay the security deposit if the tenant is in default under the lease. The bank charges a fee and may require collateral.

1.2.7 | SECURITY DEPOSIT A landlord will generally require you to pay a security deposit when you sign the lease. Discuss the security deposit at the term sheet stage if possible. The security deposit protects the landlord in the event you fail to pay rent or violate the lease. The security deposit is refundable, but the landlord will hold the deposit during the term of the lease. The landlord may deposit the money in a bank account that earns interest. In such cases, you may receive the interest when the landlord returns the security deposit. The amount of the security deposit is based upon several factors: 1. Amount of the base rent 2. The expenses incurred by the landlord in connection with the transaction (such as brokerage commissions, construction costs or allowances, free rent and legal fees).

At the end of the lease term, the landlord should refund the security deposit if you leave the space in the condition required by the lease, and do not owe the landlord any money under the lease. The lease will typically require that the landlord refund the security deposit 30 to 90 days after you vacate the space. Unlike residential leases, the security deposit is not applied to the last month’s rent.

1.3 LIMITING BUSINESS AND PERSONAL RISK This section includes those most important ways to limit your business and personal risk in regards to a commercial lease. A combination of these will likely be necessary to adequately protect you and your business. The landlord is

DOING BUSINESS TOOLKIT | A COMPREHENSIVE COMMERCIAL LEASING GUIDE

also trying to limit its risk around the points below, so careful negotiation of each is important.

1.3.1 | TENANT ENTITY If you have a business entity, such as a corporation or a limited liability company (LLC), you can sign the lease as the business to avoid personal liability. The business, not you, is the tenant and is called a tenant entity. Ideally, the tenant entity would be separate from your main business entity, and its sole purpose would be to sign the lease.

TENANT ENTITY: An entity you create that will be the tenant under the lease.

The advantage of a tenant entity is that, if the entity is properly formed, capitalized and maintained, claims by the landlord or a third party against the tenant are generally limited to the assets of that entity (and not its owners or partners). The disadvantage is that there are costs associated with setting up and maintaining such entities. In addition, a tenant entity with low financial worth may require a large security deposit and/ or it can also require a personal guaranty.

FINANCIAL WORTH: Calculated by adding the value of the business’s assets and property and subtracting liabilities and debts.

1.3.2 | GUARANTY Even if the business entity is the tenant according to the lease, a landlord may require you, the business owner (and in many cases, where applicable, spouses), to provide a personal guaranty. This means you agree to be personally responsible for obligations under the lease. A guaranty of all of the obligations of the tenant is considered a “full guaranty.” A guaranty can also (i) be limited to a specified amount of specified number of months of rent, and/or (ii) reduce over time, and (iii) expire after some number of years or when the tenant entity can demonstrate a specified net worth or tangible net worth. A guaranty may also terminate after the initial lease term, and not apply during any renewal period. Whether the landlord will require a guaranty depends on the same factors discussed above with respect to the security deposit amount. Note, the personal guaranty will place some personal liability on you with respect to the landlord, but not other third parties.

1.3.3 | INSURANCE Insurance limits your risk by protecting your business against claims for personal injury or property loss. Your landlord will also likely require that you maintain insurance. At a minimum, you will usually need commercial general liability insurance and personal property insurance, and maybe real property insurance (this is more common if you are renting an entire building) and automobile liability insurance. If your business is in a flood zone, you may also need to purchase flood insurance. If you serve alcohol, you may be required to secure liquor liability insurance. Speak to a licensed insurance broker about the types of insurance products that will best protect your business.

COMMERCIAL GENERAL LIABILITY INSURANCE: Protects your business from lawsuits for physical injuries PROPERTY INSURANCE: Covers damage to personal property and to the space when caused by fire, theft, vandalism, or some natural weather events

1.3.4 | INDEMNIFICATION PROVISIONS Leases contain indemnification provisions, which determine who is held responsible when there is an incident in your space and on the property. Generally, these are incidents that result in injury or damage.

INDEMNIFICATION: Agreement by a person or entity to be responsible for loss or damage Your landlord may require you to name additional insured parties on your policy. These include the landlord, any property manager, and any mortgage lender of the landlord. This protects additional insured parties if a claim against them is your fault as the tenant. Additionally, obtain business interruption insurance. Business interruption insurance covers loss of income if your business is closed temporarily because of damage to your space. Such insurance may only cover damages that result from some accidents and not others. Review its provisions thoroughly before making a decision. The landlord’s lease form will likely require you to waive your right to sue the landlord for damage to your property which may have been caused by the landlord or its agents, and instead look to your own property insurance. This so-called “waiver of subrogation” clause is typical and effects a “no fault” arrangement as to property insurance. It is important, however, that you get a similar waiver from the landlord for damage to the landlord’s property caused by your employees.

The landlord does not want to be responsible for anything that occurs inside your space. You also do not want to be responsible for anything that occurs on the property outside of your space. To address these concerns, leases should contain indemnification provisions. The landlord should agree to protect you against claims from incidents that occur in areas of the property it controls, except for incidents that are your fault. For example, if you spill water in a shared elevator and someone slips and falls, you will be liable for the personal injury claim. As the tenant, you protect the landlord against claims from incidents that occur inside your space, except for incidents that are the landlord’s fault. For example, if the landlord makes a negligent repair in your space and someone is injured, the landlord will be responsible.

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1.3.5 | CONTINGENCY TERMINATION PROVISIONS If your business will require a certain license or permit, consider including a contingency provision. This is the right to end the lease early if you are not able to get the license or permit despite reasonable efforts. Examples include liquor licenses, day care licenses, sign approvals and building permits. The landlord will likely require that you show proof of reasonable efforts to obtain the license or permit. This may mean working with a professional (such as a permit expeditor) to apply for the permit or license, submitting an application to the appropriate agency, and tracking your communications with the agency.

1.3.6 | ACTS OF GOD AND PANDEMICS The current COVID-19 pandemic has created a myriad of problems for tenants and property owners in DC and throughout the country. Tenants may not legally be able to occupy their space or, if they can, their operations may be significantly restricted or scaled back. This has resulted in many tenants that cannot pay their full rent (or sometimes any rent) as and when due. While the impact of COVID-19 and related closure orders have been felt most keenly by retail tenants, office tenant have also been adversely impacted. Of course, when office and retail tenants do not pay their rent, the landlord does not have the funds to pay its mortgage lender. The term “force majeure”, when used in a business context, refers to events beyond the control of the parties which impact the ability of one party to perform its contractual obligations. Common examples of “force majeure” events include fire and other casualty events, war or insurrection, acts of God (hurricanes, tornadoes and other extreme weather conditions), strikes, lockouts, and governmental acts (such as excessive permitting delays). Some pre-COVID leases and many post-COVID events include “pandemic events” and governmental closure orders in their laundry list of force majeure events.

Most commercial leases will extend a party’s time for performance of its non-monetary obligations — such as its obligation to complete construction and/or to open for business to the public - to the extent performance is delayed due to a force majeure event; however, in many cases this sort of relief does not extend to a tenant’s monetary obligations (such as its obligation to pay rent), and many leases specifically state that the existence of a force majeure event does not excuse a tenant from its obligation to pay all rent and additional rent as and when due. Tenants should seek advice from legal counsel to determine whether or not their lease contains the foregoing typical landlord-friendly language. While clever attorneys are attempting to apply the force majeure clause to a tenant’s rental obligations and are raising other defenses to a tenant’s obligation to pay rent during a pandemic (such as “impossibility of performance”), to date such arguments have been mostly (but not always) unsuccessful outside of the bankruptcy context. The market is still determining how to best allocate the risks of a business closure due to a future pandemic between landlords and tenants. We may in the future see retail leases which convert to percentage rent only during a pandemic period, or provide for a deferral or partial (or total) abatement of rental obligations during a pandemic period of any significant duration. For example, in several recent leases between landlord’s and national and regional tenants (including restaurant tenants) will permit a tenant to defer all or a portion of its rent for a specified period (60–120 days) if due to a future pandemic event, the tenant cannot legally operate its business or can only operate on a scaled back basis (for example, 25% restaurant capacity), with the deferred rent being repaid over the following 1 year period. This example is by no means reflective of general market condition, and many landlords are taking a hard line stance and refusing to contractually provide any rental relief, or limiting such deferral arrangement to once during the lease term. As such, at this point, no consensus has developed as to how to address this issue, and landlords and tenants are negotiating terms on a case by case basis. Finally, please note that, pursuant to current DC law, a landlord may be required to offer a retail tenant that cannot operate or pay its rent due to COVID-19 a payment plan.

construction

2.1 ALTERING THE SPACE It is rare for a space to meet all of your needs without some alterations. During the term of the lease, you may also want the ability to further alter the space.

2.1.1 | INITIAL ALTERATIONS: WHO PERFORMS AND WHO PAYS? When evaluating a space, consider how much time and money your alterations will require and when you can begin operating. Here are some of the questions to consider:

•

What is the estimated cost of the alterations?

•

When would I like to start using the space? When do I need to start using the space?

•

How long will it take the architect and engineer to prepare plans for my alterations?

•

How long will it take the landlord to review plans?

•

What governmental permits and approvals are needed before beginning construction? How long will it take to obtain all the required permits and approvals?

•

Are there any special approvals I must obtain that could extend the approval process? Will I need approval from the Historic Preservation Review Board, a co-

TOOLKIT | A COMPREHENSIVE GUIDE TO COMMERCIAL LEASING

op board, or a condominium association? The additional resources section has information on landmarked buildings and contributing buildings in a historic district. •

When will the space be available to begin construction?

•

How long will it take to build out the space?

•

What sort of fees and additional costs will the landlord be attempting to collect?

•

Will I be able to secure a certificate of occupancy upon completion of the work which will enable me to conduct the intended business?

•

What will happen if there are construction delays and I am unable to open on time?

•

Once construction in the space is complete, how long will it take me to prepare the space to operate my business? Do I need to factor in time to stock the space or train employees?

If you need substantial alterations to the space, such as alterations before you move in, decide whether you or the landlord will perform the work and who will pay. If you make the alterations, the landlord may provide a tenant improvement allowance to cover some or all of the costs. Note that the landlord will factor the tenant improvement allowance or the extent of alterations into the base rent.

TENANT IMPROVEMENT ALLOWANCE (TI OR TIA): Amount the landlord is willing to pay for initial alterations

If the landlord will make the initial alterations, then you can negotiate the right to review and approve the plans. If you make the initial alterations, the landlord will want to review and

approve the plans. The landlord may charge a fee to review construction plans or supervise work. You can negotiate a limit to how much the landlord can charge and require that the landlord review the plans in a reasonable time period. If the landlord is performing the work subject to an allowance, then you will be responsible for the cost of the work in excess of the allowance and will want to include various clauses in the lease to protect against cost overruns.

2.1.2 | RENT ABATEMENT In many leases, the landlord will often agree to an initial rent abatement. A rent abatement applies to a period of time at the beginning of the lease when no rent is due. Rent abatements are common and best discussed with the landlord during the term sheet stage. Note that the landlord will take the rent abatement into account when determining the base rent.

RENT ABATEMENT: Free rent.

2.1.3 | PERMITS & LICENSES Before beginning significant alterations, you may need to obtain government permits and approvals from governmental agencies. Your licensed professionals will determine which permits are necessary for the work and will prepare and submit the applications for permits and approval on your behalf. To learn more about licenses and permits, you can review WDCEP’s Doing Business Guide or contact the Small Business Resource Center at the Department of Consumer & Regulatory Affairs (“DCRA”).

2.1.4 | BUILDING CODES Require the landlord to deliver the space to you in compliance with all applicable laws. If the space does not comply, certain governmental agencies may not permit you to start your alterations until the space complies. Any time you make alterations to the space, the landlord will require that the alterations comply with the law. If your space is open to the public, you will likely need to comply with Americans with Disabilities Act. An architect can help you understand these requirements.

AMERICANS WITH DISABILITIES ACT (ADA): The ADA is a law that prohibits discrimination against people with disabilities. This includes making sure that spaces open to the public are accessible to the disabled

Some types of businesses may have additional building code requirements. The Department of Consumer and Regulatory Affairs, your architect, engineer, or code consultant can help you determine these requirements.

2.1.5 | ALTERATIONS DURING THE TERM Most landlords will agree that you can make cosmetic or decorative alterations to the space without its approval as long as they are not visible from the exterior of the space, do not impact any building systems and do not require a building permit. There will often be a limit to the cost and type of alterations you can make. While painting and installing wall or floor coverings are unlikely to require landlords’ approval, for example, most others will. This should be written in the lease.

The landlord will always require review and approval of alterations that require a permit or affect any building systems. The landlord may charge a fee for monitoring the alterations.

2.1.6 | RETURNING THE SPACE TO THE LANDLORD Almost all leases require that the space is left in good condition. It should be free of personal property, swept with a broom (“broomclean”), and with certain tenant alterations removed. Avoid any agreement to restore the space to its original condition. Your lease should allow for reasonable wear and tear. The lease may require you to remove some “specialty alterations” from the space. Your lease should define the specialty alterations, which may include kitchens, internal staircases, showers and other alterations which are not likely to benefit a new tenant and/or are costly to remove. The landlord may try to include a provision in the lease to give the landlord the right to force you to remove certain alterations at the end of the lease. If requested during lease negotiations, a landlord will often agree that you should only remove an alteration if the landlord required the removal when it approved the alteration. You will usually be required to repair any damage caused by the removal of your property and alterations.

FIXTURE: Anything you attach to the property that is fixed in place and would damage the property if removed (ex. counter) TRADE FIXTURE: Personal property used for a business purpose and detachable from the space (ex. soda machine)

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Unless otherwise written in the lease, you must remove all furniture at the end of the lease. Usually a landlord will require you to leave all fixtures, but generally trade fixtures remain your property. This should be written in the lease. Typically, any furniture or personal items left at the end of the term become the property of your landlord, or the landlord may charge you to remove them. A typical landlord lease may also give the Landlord lien rights with respect to the tenant’s personal property. This may be problematic if you need to pledge your assets to a bank. If so, seek to have the landlord waive any such lien rights or subordinate them to your business lender.

ADDITIONAL RESOURCES To see whether a building is landmarked or a contributing building in a historic district, look at the Zoning Map at maps.dcoz.dc.gov/zr16/. Enter in the building address and look under “Zoning” on the left-hand side to see if it is a landmark or in a historic district. If the building is in a historic district, check planning.dc.gov/node/623272, click on the applicable historic district, and see whether the building is listed as a contributing building. For information on construction and building laws and regulations, go to dcra.dc.gov/page/dc-construction-codes. For information on permits, licenses, inspections, and zoning, go to dcra.dc.gov and click on the “Services” tab toward the top of the page.

2.2 ASSIGNMENT & SUBLEASING Even with careful planning, you may decide it is best for your business to move to a different space, maybe larger or smaller, or in another location, before the lease ends. Or you may decide that you need to share the space with another tenant to help you pay the rent. You may also choose to close your business during the lease term. 20

To reduce your personal and your business’s liability, you may want to find another business to take over your lease by assigning or subleasing the space to them. You can negotiate and include in the lease that you have the right to assign the lease or sublet the space. Most landlords will only permit an assignment or sublet with its prior written consent. You can, however, negotiate a provision in the lease that requires the landlord to be reasonable in giving its consent or a provision that establishes criteria for the new tenant.

ASSIGNMENT OF A LEASE: An arrangement in which the rights and obligations of the original tenant are transferred to the new tenant. The new tenant pays rent to the landlord SUBLEASE: An arrangement in which the tenant rents its space to a subtenant. The subtenant pays rent to the tenant. The original tenant remains the tenant under the lease and pays rent to the landlord

If you sublet the space, you will still have obligations and liabilities under the lease. If the new tenant fails to pay rent, you, the original tenant, will be responsible for the unpaid rent. Landlords typically require the same thing as a condition to permitting an assignment. Landlords will sometimes allow assignments or subleases to companies that are affiliated with the original tenant. For example, if you sell your business to a new owner who continues to operate the business with no substantial changes. In addition, it is becoming more common for landlords to permit office tenants to enter into occupancy or “desk sharing” arrangements for a portion of the leased space (often 15%–20%) with clients and subcontractors (and, in some cases, third parties). These sort of arrangements permit temporary occupancy arrangements without the need to construct demising walls, and typically involve the sharing of certain areas and services.

end of the lease

It is equally important to review your lease when you end it as when you sign it. Know what your obligations are when returning the space to the landlord. This includes any alterations you may need to remove or repairs you will need to make.

3.1 DEFAULT ON THE LEASE A default occurs when a landlord or tenant violates the lease. Examples of default include failure to pay rent or other charges, placement of a lien on the property, or a breach of any other lease term. You can negotiate a provision in the lease that requires the landlord to provide written notice of any default before exercising its remedies. This can include the opportunity to cure, or fix, the default. Landlords are less likely to agree to provide notice of defaults on rent payments since you know when the rent is due and whether you paid, but often agree to a short notice and cure period at least one per year. Landlords are more likely to agree

DOING BUSINESS TOOLKIT | A COMPREHENSIVE COMMERCIAL LEASING GUIDE

to provide notice of failure to make a required repair. Depending on the type of repair, they usually give you 30 days to complete the repair. If you default in your obligations under the lease, the landlord has various rights and remedies, including but not limited to: •

•

Terminating the lease or your right to possession of the leased premises, and suing you for damages; Drawing on any security deposit or letter of credit;

•

Enforcing the terms of any personal guaranty; and

•

Curing the breach on behalf of the tenant and billing the tenant for the cure costs plus additional fees.

ADDITIONAL RESOURCES For information on pro bono legal assistance, visit the Pro Bono Center’s resource site, Lawhelp, at lawhelp.org/dc/npsb.

summary & takeaways Careful planning with a team of

your responsibilities and the

professionals when choosing

landlord’s. An important part of

a space and signing a lease

the negotiation is to determine

is critical to a business’s

the most important concerns

success. Once you are ready to

for your business. When you

negotiate the term sheet and

prepare for your negotiation,

lease, you must understand

consider what you can and

all of the terms, including

cannot accept in a lease.

DOING BUSINESS TOOLKIT | A COMPREHENSIVE COMMERCIAL LEASING GUIDE

COMMERCIAL LEASING DO’S AND DON’TS

Do ✓ Identify what size and kind of space your business needs and what you can afford before you begin negotiating a lease. ✓ Work with professionals (brokers, lawyers, architects, engineers, and code consultants). ✓ Consider the complexity and timing of build-out when deciding the start date of a lease term. ✓ Determine whether your business will need special licenses or permits to operate. ✓ Negotiate a lease term that guarantees the option to renew. ✓ Figure out how much additional rent you will need to pay and if the cost of the lease is still affordable. ✓ Agree upon the security deposit and any required guarantees (and any reduction provisions) up front. ✓ Be clear who is responsible for expenses and liabilities. ✓ Buy insurance.

Don’t x Don’t rely on oral agreements or a letter of intent. x Don’t sign a “standard lease” without understanding your responsibilities. x Don’t sign a lease without trying to negotiate terms more favorable to you. x Don’t sign the lease in your own name without conditions. x Don’t trust that the landlord knows the space’s permitted uses and restrictions. x Don’t assume that the landlord is required to make repairs or provide heat, water, electric, or other utilities free of charge.

appendix

5.1 REAL ESTATE CONSIDERATIONS Signing a commercial lease can be one of the most significant and expensive choices that you can make as a business owner. Investing the time to create an intentional plan will give your business an advantage. This section presents some important considerations when developing your plan.

to consider when looking for the location that best suits your business. These questions can apply to office, retail, or industrial businesses. •

Identify who your customers are, and research where they are located. Select a business location near the people who will buy your products or services. •

5.1.1 | THE LOCATION Selecting the right location is an important decision that can affect the success or failure of your business. Below are some questions

Who are my customers? Where do they live, work or shop?

Is location important to my employees? Consider if a location is convenient for the employees. A business location should be easily accessible to your employees and customers.

DOING BUSINESS TOOLKIT | A COMPREHENSIVE COMMERCIAL LEASING GUIDE

•

Do my customers or employees need easy access to public transportation or parking?

•

Not all your customers and employees will be within walking distance of your location. Locating your business near public transportation or parking facilities can help attract customers. •

If you expect customers to buy your products without planning in advance, you may want to locate your business where a large number of people will pass by. If your customers will seek you out, you can be in a less traveled location. Spend time around the space and its neighborhood on different days of the week and different times of day to observe the amount of traffic.

How close do I need to be to my suppliers? Will delivery trucks need easy access to my business? If you need frequent deliveries, you may need to locate the business near your suppliers. Easy access to loading and unloading areas may also be important. Permission to use the loading areas at desired times may need to be negotiated into your lease.

Do I need to be on a busy street where many potential customers will pass by my store? Or will my customers seek out and visit my store?

EXAMPLES OF BUSINESSES THAT NEED STREET TRAFFIC

EXAMPLES OF DESTINATION BUSINESSES

• Convenience Store,

• Specialty Store (such as a bridal shop)

• Grocery Store, • Restaurant • Nail Salon

•

• Doctor’s Office

Would other businesses nearby attract customers to my business? If so, what type of businesses? Locating near similar businesses can attract customers who are already visiting other nearby businesses. Also, if you want to connect with a specific group of customers, you may want to locate near other businesses that target and appeal to the same group. For example, if you want to sell specialty foods imported from Latin America, you may want

to locate near successful businesses that sell different items also imported from that region. On the flip side, you need to determine if your business will be hurt by proximity to competitors, although in an urban situation it will be hard to ensure that competitors won’t move close to you. •

•

Even if a location seems perfect, the rent may be higher than your business can afford. Before you decide on a location, create a budget for your business, and determine what you can afford. See sections below discussing base rent and additional rent. Additionally, if possible, ask some of your soon-to-be neighbors about their rents to see if they have similar rents or lease terms. It may also be a good way to get some intel on your landlord.

Is the area growing or declining in population and businesses? It can be an advantage to locate in neighborhoods experiencing population and businesses growth. If commercial activity is decreasing, you may have difficulty building a sufficient customer base.

ZONING DESIGNATION: DC limits the uses of areas, or “zones,” throughout the city. The most common zones that the City designates are residential, mixed-use, and production, distribution, and repair (PDR). A zoning designation also limits the building features in a zone, such as its height and signage. SPECIAL EXCEPTION: some uses are allowed if approved by the Board of Zoning Adjustment if the use meets certain conditions. ZONING VARIANCE: DC can give permission for owners or tenants to use a property for a purpose outside the zoning laws.

Is a desired area too expensive for my business?

•

Is my business permitted in the desired area? DC laws may prohibit your type of business from operating in a specific area or building. Every property has its own zoning designation, which may permit your use as a matter of right or by special exception. However, this can mean that your planned use of a space may not be allowed. If you find a space like this, you can seek a zoning variance that will allow for that use. The process to acquire one, however, requires significant money and time. To learn if you can get a variance, contact the DC Board of Zoning Adjustment by going to dcoz.dc.gov/bza/about and find the contact information on the left. You can view the zoning restrictions for a property on the DC Zone Map (maps. dcoz.dc.gov/zr16/). Search for the building by entering the address. Its zoning information is on the left under “Zoning.”

DOING BUSINESS TOOLKIT | A COMPREHENSIVE COMMERCIAL LEASING GUIDE

EXERCISE: LOCATION NEEDS AND PRIORITIES Try listing out what your business needs from a location. Then assign a number based on its importance. Since you may not find a location that suits all of your needs, prioritizing your needs is an important exercise. TO SUCCEED MY BUSINESS NEEDS:

PRIORITY (1, 2, 3)

Who can help you answer these questions? •

People who operate a business in a similar industry

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Businesses in the neighborhood you would like to move into

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Trade associations

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Local development organizations (such as Business Improvement Districts (BIDs) throughout the city)

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Main Streets

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Real Estate Broker Search online or visit wdcep.com for organizations in your neighborhood.

It is also important to consult with experienced professionals real estate brokers, architects and other professionals. They can provide answers to the questions above and guide you through the leasing process.

BUSINESS IMPROVEMENT DISTRICT: A commercial area where property and business owners contribute money to a shared fund that pays for maintaining, developing, and promoting the area DC MAIN STREETS PROGRAM: DC Main Streets is a comprehensive program that promotes the revitalization of business corridors in the District of Columbia

ADDITIONAL RESOURCES WDCEP offers a variety of resources to help you identify a perfect location for your business. This includes their site location assistance, DC Real Estate Search Tool, DC Neighborhood Profiles and DC Development Report. For more information about their services, contact realestate@wdcep.com.

Atlas Plus (atlasplus.dcgis.dc.gov) is an interactive map with data of DC. Enter an address to find information about the neighborhood and nearby transportation, parks, schools, senior centers, and much more. Search for the building by entering the address. Its zoning information is on the left under “Zoning.”

•

Spaces with few or no windows, or windows that do not face the street, are usually less expensive. •

For more information about zoning, go to dcra. dc.gov/page/zoning-information-0 view the Zoning Handbook online at: handbook.dcoz.dc.gov.

For a list of current DC Main Streets programs, visit dslbd.dc.gov/service/DCMS. •

5.1.2 | THE SPACE

•

How much space do you need?

•

Do I need the ability to add space in the future? It is not easy to predict how well your business will do. You may want to start with a smaller space with the option to expand in the future if your business grows. You may wish to negotiate an option in your lease to rent space next to yours if it becomes available.

Is the layout important? Some businesses or offices may need a large open area. Other businesses may need multiple offices or separate rooms. For example, if you plan to open a clothing store, a space with a large open area can help customers see and navigate your entire selection. If your employees need privacy for phone calls or meetings, however, a space with separate offices or the ability to add cubicles could benefit them and your business. Given the current COVID-19 pandemic, many businesses are revisiting their space requirements and incorporating features which promote greater privacy and other safety measures.

Do I need space for storage? Using commercial space for storage can be an expensive option. Basements can be a helpful and less expensive place for storage. Off-site storage facilities can also be a cheaper option than using commercial space for storage, but will take time and money moving items to and from the storage facility.

Once you select a location, you can determine your space requirements. Consider these questions:

Different types of businesses need different amounts of space. You want only enough space to meet the needs of customers and to manage your operations. Unused or unnecessary space means unnecessary costs.

Do I need to be on the ground floor? If you want customers to find and visit your business by seeing it on the street, a ground floor space with windows may be a good choice, even though it can be more expensive. Spaces on higher floors are better for businesses whose customers are more likely to seek the business out. For example, if your business is an office or expects customers to make appointments, a second-floor or higher location may be the better choice.

For a list of Business Improvement Districts (BIDs) in DC, visit dslbd.dc.gov/service/ business-improvement-districts-bids.

•

Do I need lots of windows?

•

Do I want a space already set up for my type of business? Or am I willing to change it to my specifications? Construction takes time and can be expensive. This is especially true if the space will need structural changes, such as building or removing walls. If you find a space that fits your needs and does not need much work, you will save time and money.

DOING BUSINESS TOOLKIT | A COMPREHENSIVE COMMERCIAL LEASING GUIDE

•

What utilities does my business need?

in a specific way that can increase the cost of renovation. If possible, negotiate a provision in the lease that requires the landlord to remediate any hazardous materials.

Make sure that the location has access to enough electricity, natural gas, and water to run all of your equipment. • •

Does my business need special equipment? For example, a restaurant may need refrigerators, ovens, and grease traps. Some spaces, such as a previous restaurant location, may already have the equipment you need. If Landlord is willing to let you use it, this will save you the cost of buying new equipment and connecting the equipment to building systems.

A landlord will want to lease a space to a new tenant before the current tenant moves out. This assures the landlord a steady income.

HOLDOVER TENANT: A tenant that does not leave the property after its lease ends

BUILDING SYSTEMS: These may include mechanical, electrical, plumbing, gas, air conditioning (HVAC) systems and fire/life-safety systems (sprinklers)

•

Will I need to remove asbestos, mold or other hazardous materials before I can occupy the space? If you rent a space with asbestos, lead paint or other hazardous materials that must be removed, it will increase the cost of preparing the space. Older spaces in particular may contain asbestos, a fire-proofing material often found in ceiling tiles, floor tiles and in insulation wrapping pipes, that is a health hazard. Laws require asbestos to be removed

It is possible, however, that the current tenant may not leave when its lease term ends. The landlord can bring a lawsuit against the holdover tenant, but it may still be weeks or months before the space is available. If you already signed the lease, you are still required to take the space and start making rent payments once the space is available. To protect yourself, you can include a lease provision that allows you to cancel the lease if the space is not available by a certain date or a provisions which grants rent abatements for late delivery.

Is the building structurally sound with no leaks? Inspect the space for any signs of problems such as large cracks or water damages. If you see a reason for concern, ask a professional, such as an architect, contractor, or engineer, to inspect the space and negotiate a provision in the lease that makes repairs for these concerning items the landlord’s responsibility.

Can I sign a lease for occupied space and wait for the current tenant to leave? Or do I need the space immediately?

•

Do I want a direct lease with the landlord? Or will I accept a sublease from an existing tenant? In some cases, commercial tenants can choose to lease their space to a secondary tenant through a sublease. These “primary tenants” act as “sublandlords” in this way. If you choose to sign a sublease, be aware that any violations by your sublandlord can lead to the landlord terminating your sublease. In other words, if you are paying rent to the sublandlord but the sublandlord fails to pay rent to the landlord, the landlord can evict you.

A subtenant can protect itself from this risk by entering into a “recognition agreement” with the prime landlord, which provides that if the primary tenant’s lease with the prime landlord is terminated, then the sublease will become a direct lease between the prime landlord and the subtenant. Such arrangements are, unfortunately, not common in the market.

SUBLEASE: An agreement in which tenant leases property from another tenant (or “sublandlord”) instead of from the landlord directly

Whichever option you choose, be sure you know whether you are leasing directly from the landlord or from a tenant. You can check the identity of the landlord on the Office of Tax and Revenue website. •

Does the existing certificate of occupancy allow my use? How you use the space must comply with the legal uses allowed by the certificate of occupancy. For example, if you rent a space for a yoga studio and the existing certificate of occupancy says the space can only be used as an office, your use will not be permitted unless you secure a new certificate of occupancy. Even if the space is currently or was recently being used the same way or for the same type of business you plan to open, it is still critical that you check the certificate of occupancy to ensure that the use conforms to or is permitted by the existing certificate of occupancy. Most leases clearly state that the landlord does not promise that the space is suitable or licensed for a specific purpose; the business has the responsibility to check ahead of time and usually cannot get out of a lease due to issues with the certificate of occupancy.

5.2 THE TEAM OF PROFESSIONALS If possible, consult with a team of professionals from the start, because they can help answer many questions and help negotiate a lease that protects your interests. It may require more upfront costs, but it will save you money in the future. Additionally, you can sometimes find professionals to help you at no or low cost. As noted below, a tenant’s broker is typically paid by the landlord, and not by the tenant. For each specialty, be sure to interview several professionals and hire the one who best suits your needs. In each section below and in the additional resources section, you can find suggestions on where to find assistance. Below are types of professionals you may want on your team.

5.2.1 | REAL ESTATE BROKER Purpose: A licensed real estate broker will show you potential spaces based on your desired location and space. They can offer information about the space’s surrounding neighborhood. They can also provide expertise on market rent, costs which are passed through as a part of the lease (such as real estate taxes, operating costs, insurance costs, common area maintenance, etc.), concessions (such as free rent periods and construction allowances), which parts of the lease the landlord may negotiate, insight on how the landlord operates, and resources for the tenant construction process. Timing: Look for a broker when you know your desired neighborhood area(s) and are ready to look at potential spaces. Where to Find: Ask for recommendations from other business owners, trade associations, and the local real estate broker association. To check whether a real estate broker is licensed, click on the following link: realestate.dcopla. com/Public/MemberSearch/RECLicense.

DOING BUSINESS TOOLKIT | A COMPREHENSIVE COMMERCIAL LEASING GUIDE

Cost (Broker): The broker is only paid if the tenant signs the lease. In this case, the landlord usually pays a commission to the broker that is a percentage of the annual rent or equal to a number of months’ rent. The amount depends on the length of the lease, the location, and the broker. The landlord will take the commission amount into account when negotiating the rent for your space.

5.2.2 | ARCHITECT Purpose: An architect helps you determine the space and layout your business needs, create a plan for the space, make sure your space complies with building codes and other requirements, and advise whether the space will meet your needs and your budget (taking into account any allowances provided by the landlord). The architect may engage other third parties, such as mechanical engineers, to assist it with portions of your construction drawings. The architect can also supervise construction to ensure it is done according to the plans. Note that in some cases, a landlord may agree to build out the space for a tenant using plans developed by the landlord’s architect or the tenant’s architect. Even if the landlord’s architect will be preparing the construction drawings, it may be advisable for the tenant to engage its own architect to review the proposed plans. Timing: If you need to renovate or build out the space, look for an architect before you sign the lease. If the lease gives the landlord approval rights over the tenant’s choice of architect, make sure to obtain the landlord’s approval before incurring costs. Where to Find: The best sources are recommendations from other business owners, your broker, or your attorney. Cost: Typically, the architect is paid a fixed fee.

5.2.3 | ENGINEER Purpose: An engineer helps determine whether the space has the technical requirements your business needs. This is necessary if your business requires alterations to the building systems or structure. For example, some businesses may need special air conditioning or electrical systems. Timing: If your business requires alterations to the building systems or structure, you should work with an engineer before you sign the lease. If the lease gives the landlord approval rights over the tenant’s choice of engineer, make sure to obtain the landlord’s approval before incurring costs. Where to Find: Your architect, your broker and/or your attorney can be helpful sources of recommendations. Cost: Typically, the engineer is paid a fixed fee.

5.2.4 | CONTRACTOR Purpose: The contractor will construct your space according to the building plans created by your architect and/or engineer. It is typical for landlords to require the contractor to be licensed in the District of Columbia and to satisfy certain other criteria (including being reputable, experienced in the type of work and maintaining certain levels of insurance). Business licenses are issued by DCRA. You can confirm whether a contractor is licensed by going to scout.dcra.dc.gov. Timing: If your construction will change the building’s structure or utility systems, you may need to hire a contractor after the architect develops plans. If your alterations are mainly cosmetic, you may not need an architect and can hire a contractor after you sign the lease. If the lease gives the landlord approval rights over the tenant’s choice of contractor, make sure to obtain the landlord’s approval before incurring costs.

5.3 RESOURCES

Where to Find: Your broker, architect, engineer, attorney or landlord can be helpful sources of recommendations. Cost: Contractors are typically paid either by a fixed fee or a percentage of the cost of the work, which may be subject to a guaranteed maximum amount (GMAX) which cannot be exceeded except on account of differing site conditions or change orders. The cost of constructing new space is often substantial, and may exceed any construction allowances which your landlord may provide. It may be advisable to solicit bids from several qualified contracting firms in order to keep your costs in line with the project budget.

Accelerated Rent: Lease provision giving the landlord the right to demand the entire balance of unpaid rent Additional Rent: Any costs for a tenant in addition to the base rent (most often a share of the landlord’s taxes, and operating expenses) due to the landlord As-is: A term used to describe the state of the space upon landlord’s delivery, and tenant’s acceptance of the space, in its present, unaltered, or improved condition

5.2.5 | LAWYER Purpose: The lawyer is your legal representative and is critical to protecting your rights. A lawyer reviews the lease to determine your responsibilities and liabilities under the lease. They can negotiate contracts with both the landlord and other professionals. Timing: It is important to engage a lawyer early in the process, ideally before you begin negotiating the lease. Even if your broker is negotiating the basic terms of the transaction, your lawyer has additional expertise that can make the lease negotiation easier and faster, and can offer advice when negotiating an initial term sheet or letter of intent Where to Find: The Pro Bono Center may be able to connect you to a pro bono (free) lawyer who can provide a lease review. Cost: Free with the help of the Pro Bono Center, based upon eligibility. Find more information at lawhelp.org/dc/npsb.

5.3.1 | GLOSSARY OF LEGAL TERMS

Assignment: When the tenant transfers its rights under a lease to a third party through a contract Base Rent: The minimum fixed rent due to the landlord under the terms of a lease agreement Broker: A guide to the local real estate market and neighborhood Brokerage Commission: Money that the landlord pays to the broker for finding a tenant for the property Business Interruption: Insurance in case of a disaster and a disaster-related closing (ex. extended power outages). A policy usually will cover lost profits and operating expenses still being incurred Casualty and Liability Coverage: Casualty insurance covers injuries and crimes that occur on the premise. Liability insurance coverage injuries caused by an owner or employee or injuries caused by your product

DOING BUSINESS TOOLKIT | A COMPREHENSIVE COMMERCIAL LEASING GUIDE

Certificate of Insurance: A document from the insurance company verifying your insurance coverage Certificate of Occupancy: A document issued by DCRA that states a building’s or premise’s legal use and/or type of permitted occupancy Commencement Date: The date on which the lease term begins. This date is often the day that the tenant takes possession of the leased space Commercial General Liability Insurance: Protects your business from lawsuits for physical injuries

Fixtures: Anything you attach to the property that is fixed in place and would damage the property if removed (e.g. window treatments, built-in furniture and some appliances like washing machines in a laundromat) Free Rent: A period during which the tenant does not have to pay rent, typically during the build-out. It is also known as rent abatement Holdover: The previous tenant continues to occupy the premises after its lease term has ended Indemnification: A promise to repay another party for future losses or damages

Default: A failure to perform a contractual obligation Escalations: Increases in rent above the base year. This can include a fixed amount each year, a percentage increase each year, or an increase based on the landlord’s actual increase in expenses such as real estate taxes Exclusivity Provision: An exclusivity provision prohibits the landlord from renting space in the building to a competing business Fair Market Rent: An estimate of what a reasonable tenant would be willing to pay a reasonable landlord for a given space Form Lease: A template lease landlords use as the first draft of the lease. It will usually heavily favor the landlord’s interests

Landmarked Buildings: Property that you may not be able to make interior or exterior changes to without an approval process by the City Lease Term: The period of time in which the landlord grants the tenant the right to possess and use the space Letter of Credit: A letter from a bank or financial institution that can be a substitute to a cash security deposit. The letter guarantees that the bank will pay the security deposit if the tenant is unable to do so. The bank requires a fee and may require collateral such as a mortgage on your home Letter of Intent: A written (and usually nonbinding) agreement between the tenant and the landlord stating the intention of both parties to sign a lease and the essential terms of the lease (ex. length, costs, construction)

Lien: Claim against a property for an unpaid debt. For example, a construction company may place a lien against the property during a payment dispute Operating Expenses: The costs of operating a building, including maintaining and insuring the building A tenant may pay a share of these costs, known as the Additional Rent (See above definition) Permitted Use: Lease provision describing how the space may be used Personal Guaranty: The promise by a business owner, or guarantor, to pay on a loan or contract in the case that the business cannot Performance Obligation: Contractual obligation to deliver services such as repairs or improvements to a space

Security Deposit: A deposit of cash or noncash alternative (See Letter of Credit) the tenant gives to landlord to secure performance of a lease throughout the lease term Sublet: When a tenant leases part or all of a space to another party for a period of time during the lease term Submeter: A system for measuring utility usage, such as electricity, by a tenant in a building with multiple tenants Tenant Improvement Allowance: Amount the landlord will pay for the tenant to renovate or alter the space Trade Fixture: Removable personal property that a tenant attaches to a space for business purposes. Examples include a display counter or kitchen equipment

Premises: The space that a landlord leases to a tenant Property Insurance: A policy that repays a property owner for loss of or damages to personal property. Examples of loss and damages include fire, theft, vandalism, and natural weather events Property Manager: A company hired by the landlord to manage the property. They handle tasks including the leasing process, collect rent, and make repairs

Termination Right: A provision that allows the tenant to terminate the lease when a certain condition is met. For example, if a restaurant is unable to secure a liquor license Zoning Restriction: Limits to how property owners and tenants can use space throughout the District of Columbia.

Rider: Attachment to the lease that adds, clarifies, or replaces lease terms in the “form” lease

DOING BUSINESS TOOLKIT | A COMPREHENSIVE COMMERCIAL LEASING GUIDE

5.3.2 | SAMPLE TIMELINE

•

Your process may be longer or shorter.

The timing of the commercial lease process will depend on the factors discussed in this guide. Factors include the type and size of the space, the extent of the alterations, and the types of permits you will need. Below is a sample timeline of the process from start to finish.

•

You may not need each step.

•

You may not need to complete each step in this particular order.

•

Some steps can be completed at the same time.

Note that this is a sample:

The last column of the timeline is blank for you to estimate how long each step may take for your business.

STEPS TOWARD OPENING YOUR BUSINESS Consider and research what your business will need from a location and space Interview and decide on a real estate broker Look at potential spaces and choose ones that meet most of your needs Broker asks for proposed basic lease terms Hire an architect and/or engineer Consult with the architect/engineer about whether the space will work for you Interview and hire a lawyer Draft a term sheet with the landlord Architect draws up plans for the space Research insurance options and costs Negotiate and sign the lease Review architect plans and submit them to the landlord for review If you need a government permit to make the alterations, hire a code consultant Submit plans to DCRA After approval, interview and hire a contractor Construction (this will vary significantly) If necessary, schedule inspections Minor and decorative alterations, move-in furniture

ESTIMATE FOR YOUR BUSINESS

5.3.3 | CHECKLIST AND SUPPORT ORGANIZATIONS

☐

LEASING COMMERCIAL SPACE

☐

Check landlord identity, building and property information, and the tax assessment of the property. RESOURCE: DC Office of Tax and Revenue

Research neighborhoods and properties.

LINK: taxpayerservicecenter.com/RP_

RESOURCE 1: Washington DC

Search.jsp?search_type=Sales. Input the address under “Premises Address.”

Economic Partnership (WDCEP) RESOURCE 2: DC Office of Tax and Revenue LINK: wdcep.com/ | search.wdcep.com/ LINK: otr.cfo.dc.gov/page/real-property-tax-

rates. Identify the property tax rate for the property and multiply that rate by the assessed value of the property above to determine the landlord’s annual property tax bill.

RESOURCE 2: Office of Tax and Revenue (OTR) LINK: otr.cfo.dc.gov/page/real-property-

geographic-information-systems-gis-program

☐

Engage a real estate broker and verify that they are licensed.

Have the lease reviewed by an attorney. RESOURCE: D.C. Bar Pro Bono Center

RESOURCE: District of Columbia

(Pro Bono Center)

Real Estate Commission LINK: probono.center/commercialleaseadvice

☐

Determine the zoning designation of the property you want to lease and verify applicable zoning restrictions. Also determine whether a building is landmarked or a contributing building in a historic district.

The Pro Bono Center may be able to connect you to an attorney for pro bono (free) assistance with the lease.

☐

Consider creating an entity that will be the tenant on the lease.

RESOURCE 1: DC Zoning Map RESOURCE 1: DC Department of LINK: maps.dcoz.dc.gov/zr16/

Consumer and Regulatory Affairs

RESOURCE 2: DC Office of Planning

LINK: corponline.dcra.dc.gov/Account.

LINK: planning.dc.gov/node/623272. Click

aspx/LogOn?ReturnUrl=%2f. Create an account and follow the instructions for establishing an entity.

on the applicable historic district after using the DC Zoning Map to identify which historic district the property may be located in.

RESOURCE 2: D.C. Bar Pro Bono Center LINK: lawhelp.org/dc/npsb The Pro

Bono Center may be able to connect you to an attorney for pro bono (free) brief legal assistance to understand which entity is right for your business.

DOING BUSINESS TOOLKIT | A COMPREHENSIVE COMMERCIAL LEASING GUIDE

☐

Purchase commercial general liability insurance and property insurance by contacting a local insurance broker who works with businesses.

☐

Have a professional submit construction plans to landlord if required by the lease. RESOURCE: DC Department of

Consumer and Regulatory Affairs RESOURCE: D.C. Department of

Insurance, Securities and Banking to check an insurance broker’s license.

☐

PROFESSIONALS

☐

Identify and engage professional assistance from architect, contractor, engineer, and/or code consultant. RESOURCE: DC Department of

Consumer and Regulatory Affairs

Have a professional submit applications to relevant government agencies. RESOURCE: DC Department of

Consumer and Regulatory Affairs

OTHER ITEMS

☐

Consider business incubators and coworking spaces if you seek temporary, lowcost space and networking opportunities.

LINK: govservices.dcra.dc.gov/

contractorratingsystem

☐

RESOURCE: WDCEP’s Co-working Map LINK: wdcep.co/coworking

Check if a contractor is licensed. RESOURCE: DC Department of

Consumer and Regulatory Affairs

☐

Review rules for liquor licenses and apply for one if you wish to serve liquor at a food and/or drinking services establishment.

LINK: scout.dcra.dc.gov/ RESOURCE: Alcoholic Beverage

☐

Regulation Administration (“ABRA”) Have a professional review the lease to ensure construction plans are permitted. RESOURCE: DC Department of

Consumer and Regulatory Affairs

LINK: abra.dc.gov/

Consider consulting an attorney who specializes in procuring liquor licenses because of the process’s length and complexity.

It is the mission of the Washington DC Economic Partnership, a 501(c)3 organization, to promote business opportunities throughout the District of Columbia and to contribute to business retention and attraction activities. The Washington DC Economic Partnership supports businesses and entrepreneurs looking to open, expand, or invest in DC through our programs and services focusing on business development, education of the real estate market, and business opportunities. To learn more about the Washington DC Economic Partnership please visit wdcep.com. © 2021 Washington DC Economic Partnership—Published May 2021

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