Back to the Basics: Commercial Leasing for Lenders Julie Schoepf Dinsmore & Shohl LLP, Cincinnati, Ohio Susan Cornett Thompson Hine LLP, Dayton, Ohio

Commercial Lease Review Confirming the Basics Complete Tenant Identity Premises Term Renewal Options Termination Options

Show me the Money: Rent Base/Minimum/Fixed Rent Additional Rent What is included When is it due Escalation vs Pass-through Caps on increases or Gross up provisions Percentage Rent

Rent - Pay Attention to: Rent concessions Confirm all rent is due and payable without deduction, setoff or counterclaim Consider adding a carve-out and/or limiting any such rights via SNDA Rent payment due date Confirm no payments due more than 30 days in advance Rent adjustment provisions Initial or Renewal Term? Fixed amount or tied to CPI?

Show me the Money: Security Deposits Requirement / Amount / Collection Obligation to Replenish Form Cash Letter of Credit Landlord draw rights; triggers Ability to pledge to Lender

Protecting the Collateral: Insurance Tenant’s Responsibility Commercial general liability insurance All-Risk Policy covering Tenant’s personal property and leasehold improvements Landlord’s Responsibility Liability, fire and extended coverage on the Building/Project/Center as a whole Name Landlord and Lender as additional insureds

Insurance, continued: Waiver of subrogation Endorsements Depending on the nature of the Tenant and/or the property, it may be appropriate, or Lender may expect, Tenant to carry all insurance (including insurance typically carried by the Landlord) Compare against Lender’s insurance requirements

Casualty/Condemnation - Pay Attention to: Landlord Rebuild/Restore Obligations Termination Rights Landlord Tenant Inconsistencies Lease and Loan Documents Abatement Rights Business interruption insurance

Initial Construction - Pay attention to: Landlord build-out obligations Clear obligations Budget Status of Landlord's work Tenant acceptance of demised premises Tenant in occupancy and paying contractual rent Issuance of Certificate of Occupancy

Initial Construction, continued Avoid: Lender becoming obligated to complete the Landlord's work or paying tenant allowances Escrow at closing Recourse Carveout Estoppel / SNDA Avoid: Lender liability for Landlord warranties Avoid: Lack of clarity surrounding Tenant Allowances

Repairs & Maintenance Typical Landlord Responsibilities: Typical Tenant Responsibilities: Roof Foundation Exterior walls (other than store fronts and plate glass) Utility lines to the point of connection to the Demised Premises Other structural portions and common areas (parking lots, driveways, landscaping etc) Interior of the Demised Premises Non-structural portions (e.g. walls, ceiling, flooring, entry and interior doors) Plumbing fixtures, Light fixtures Mechanical systems within the Demised Premises

Repairs & Maintenance (cont.) Typically pass-through to the Tenant as Additional Rent Things to look for: Does “repair” include replacement Is HVAC maintenance/replacement specifically addressed Non-standard maintenance/repair obligations of the Landlord

Alterations Landlord is typically permitted to make alterations/modifications to the common areas so long as it does not reasonably interfere with Tenant's use Things to look for: Any Tenant alteration rights without the Landlord's prior written consent Do leasehold improvements automatically belong to Landlord upon Lease expiration Tenant obligation to remove leasehold improvements

Americans with Disabilities Act (“ADA”) Issues General Requirement: Landlords and Tenants must "remove architectural, and communication barriers that are structural in nature, in existing facilities ... where such removal is readily achievable“ to ensure that disabled individuals have complete access to goods and services This is a very litigious area. Lease determines which party has legal responsibility for barrier removal since it governs which party has the legal authority to modify/alter the Demised Premises Best Case Scenario: A covenant to comply with all laws obligates the covenanting party to comply with ADA at its own expense, unless ADA compliance is expressly carved out. Note: if a structural modification is required due to a change in the law after the Lease is signed, Landlord will generally be held responsible regardless of any such covenant

Assignment and Subletting Best Case Scenario: Tenant has no rights to assign or sublet Typical Scenario: Tenant may not assign or sublet without Landlord’s consent, except for certain permitted assignments Loan Documents should give Lender the right to approve any assignment or sublease whenever Landlord has a consent right

Assignment and Subletting Key clauses to look for: Controlling interest transfers in Tenant = Assignment No release of Original Tenant following an assignment Limit permitted transfers and include restrictions that preserve the credit of the Tenant and the value of the Lease

Tenant Defaults and Landlord Remedies Landlord and Lender Concerns are typically aligned Confirm default provision does not provide unusual cure periods Check for typical remedies including termination of lease, termination of possession, self-help and monetary damages

Landlord Defaults and Tenant Remedies Landlord defaults are often not directly addressed Lender should look for protections in the event of Landlord’s default including: providing that covenant to pay rent is independent, prohibiting termination, waiving special, consequential or punitive damages and limiting liability to Landlord’s interest in the premises

Landlord Defaults and Tenant Remedies If Tenant has the right to terminate, Tenant should be required to provide notice to Lender and an opportunity to cure Carefully review Tenant self-help and offset rights and consider adding protections in the SNDA Confirm cure periods in the SNDA provide ample time for Lender to cure if Landlord fails to do so within the allotted time period – Lender should have the time to obtain possession if possession is necessary to cure

Lender Protections The loan documents should provide that Landlord may not terminate or amend leases in without Lender’s consent except for leases below a certain square footage that meet other requirements Tenants should be required to enter into a SNDA and provide an estoppel at Lender’s request

SNDAs – Critical Elements Subordination – including to renewals Attornment Non-disturbance Lender right to notice and cure Limitation of Lender’s liability Lender consent to amendments

Estoppels – Critical Elements Lease in full force and effect No amendments except as stated Rent and paid-to date Commencement and termination dates Security Deposit Tenant acceptance of premises / in occupancy Landlord delivery of premises and payment of required allowances / completion of Landlord work Any outstanding defaults/ disputes Any claims of offset

Special Tenant Rights of Concern to Lenders Rights to purchase (including rights of first offer and rights of first refusal) Termination rights Offset Rights

Continued Due Diligence after Loan Closing Lender right to request estoppels from time to time Follow up on any missing documents Require that copies of all lease documents be delivered to Lender, even if consent is not required Proactively review rent rolls and other property reports to spot issues and confirm Landlord’s compliance with leasing restrictions and covenants