Commercial Real Estate Leases

by Jon Austin

A commercial real estate lease is intended to capture the long-term relationship between a landlord and tenant, so it is important for both parties to ensure the lease rightly captures their intent. It is beyond the scope of this article to discuss every key provision within a lease. However, we want to point out a few terms both parties will often give extra attention to in the negotiation process.

1. Rent. Tenants need to ensure they understand whether the quoted rent amount is the total amount of rent due or merely the "base" rent amount. Many leases require the tenant to pay a base rent plus the tenant’s pro rata share of the landlord’s insurance, taxes and maintenance costs. It is important for both landlords and tenants to know how rent is calculated, whether it is subject to increases over the life of the lease, and then budget accordingly.
    
2. Commencement Date. This date is generally a trigger for the first payment of rent, but it also can lead to a possible default if either the landlord is unable to deliver the leased space or if the tenant does not take possession by this date. Therefore, both parties need to have a firm understanding of when this date occurs (especially if the date can occur within a certain range as opposed to a date certain) and the impact if someone is not ready by this time.
    
3. Use. The parties will often want to clarify on the front end what the tenant’s expected business will be. This is often an important term in a retail setting due to the competing nature of businesses in a shopping center, but it is still important in an office building as a landlord may want to manage its overall mix of tenants.   
    
4. Scope of Common Area Maintenance. The "common area" is that area within a building or complex that is generally not leasable, but rather is shared (or common) among all tenants and their customers (e.g., parking lots, hallways, restrooms, elevators, etc.). While the landlord is responsible for operating and maintaining the common area, it will also look to pass these costs through to the tenants. Both parties want to make sure the lease clearly defines what is included within this definition and how these costs are calculated on an annual basis.
    
5. Indemnification & Insurance. Unfortunately, people make mistakes and injuries happen. Therefore, it is important both parties have fairly allocated responsibility and risk, and have required sufficient insurance to be in place if needed.

As noted above, this list is not exhaustive and other factors (such as, breach/remedies, shopping center restrictions, and the ability of a party to assign the lease) may be more important than others depending on the circumstances, location, and parties involved.  

Whether one is landlord or tenant and regardless of the type of lease, both parties need to be mindful of the variety of issues at play in negotiating and drafting their lease and the impact these terms can have on the success of their business operations for years to come.

A Few “Best Practice” Resolutions for Businesses at Year-End

by Jon Austin

Just as we often spend time at the end of the year contemplating both the year behind us and the one before us, setting goals, reviewing accomplishments and so forth, the end of the year is also a good time to review similar items for any business. With that in mind, we offer the following non-exhaustive list of some items you may want to consider in your end-of-the-year business review.  

Limit Your Litigation Exposure. One of the effects of a bad economy is increased litigation. Studies have shown a majority of companies report being involved in ongoing litigation during the economic downturn, with contract obligations and employment issues topping the list. Although avoiding litigation may be impossible, you can control certain aspects. 
 

• Keep company assets separate. Business and personal assets and records should be kept separate and distinct. A company’s limited liability protection is easily lost by commingling personal and business assets.  
   
• Make sure contracts are in the company name. It is important that the proper person or entity (business vs. individual) be identified as the party to the contract. And, when you sign documents, be sure to identify your representative capacity when signing in behalf of a business (e.g., president, manager, etc.).  Otherwise, others can seek to impose personal liability upon you for obligations of the business.
   
• Implement and update a document retention policy. A policy governing the retention and destruction of old company documents is a good business practice. The policy needs to be prospective, objective, and rigorously followed to ensure documents are destroyed according to an established schedule and, otherwise, documents are retained according to the retention policy. If you become involved in litigation and your practice of destroying documents appears to be arbitrary and not according to a prescribed policy, courts will often presume the worst and may allow the other side to use it against you. Also remember, a company’s internal documents are not privileged – whatever you say, even in an e-mail or text message, could become public in a lawsuit. 

Know Your Contracts. Do you know when your lease expires?  Or when your biggest customer might start shopping for a lower price?  Entering into a contract is only the first step to ensuring the intended benefits are realized. A good practice is to keep a summary of the significant obligations and liabilities in every major contract. It’s also good to keep a contract calendar with all key dates on one calendar to ensure you do not inadvertently breach a contract or lose a time-limited contractual right. The end of the year is a great time to review and update your contract calendar.

Keep Things Current. Current organizational records can mean the difference between business-level liability and personal liability. We recommend updating organizational records on an annual basis, so the end of the year is a perfect reminder to review the organization’s records for the year. 

• In Oklahoma, limited liabilities companies must file an annual report with the Secretary of State and pay a $25 annual fee.  Corporations must file an annual franchise tax return with the Oklahoma Tax Commission.  
   
• Corporations, both for profit and non-profit, must also hold annual meetings in accordance with their bylaws, and minutes of the shareholder’s meeting and board of director’s meeting should be kept with the corporate record books. Although limited liability companies do not have the same requirement, we believe it is best practice for the owners to have similar documentation.

Non-profit corporations must generally follow the same requirements of any other corporation under Oklahoma law, including keeping board of director minutes with the corporate records. Most Oklahoma non-profits are also required to file and renew annually the Registration Statement of Charitable Organization with the Secretary of State. 

Public charities must also file an annual information return (Form 990) with the IRS.  The last several years have seen substantial changes to the Form 990, both in terms of which version is required (often depending on revenue and assets) and in terms of what information the organization must provide. The most significant change has been the transition of the Form 990 from a reporting form with mostly “fill in the box” type responses to an organizational governance form that relies on extensive narrative responses and seeks to move away from a one-size-fits-all approach. Certain governance practices and policies are now encouraged through their inclusion on the Form 990. Implementing new governance practices now should result in less scrutiny later by the IRS. Private foundations are still required to file Form 990-PF with the IRS, which is a modified version of Form 990 tailored for the distinctive characteristics associated with private foundations.

One best practice is for the organization to require officers and board members to annually review and agree to a conflict of interest policy. A good conflict of interest policy will consider, among other things, actual and perceived conflicts between the organization and its directors and employees, especially with respect to financial considerations such as salaries, contracts or purchases that benefit directors or employees, leases between the organization and a director or employee, and benefits provided to directors or employees who are related through family, marriage, or business interests. 

We have had the privilege of helping establish and counsel many businesses and non-profit organizations. If you have questions about anything discussed here or if you would like our assistance with an annual review of your business practices, we would be pleased to help. 

A Closer Look at the Private Foundation

by Jon Austin

In 1936 Henry Ford’s son Edsel started and funded the Ford Foundation, now one of the most famous private foundations in the world, to promote philanthropic goals shared by the family. The Ford Foundation has been actively funding the family’s charitable goals for seventy-five years and at the end of 2009 had over $10 billion in assets. In the world of private foundations, the Ford Foundation is the exception; there are over 120,000 private foundations in the United States and approximately 75% of them have less than $10 million in assets. But the purposes and benefits of private foundations are uniform to all, from the smallest to the largest.

Private foundations have a number of useful purposes and you don’t have to be worth billions for it to be a valuable planning tool. One of the most common reasons people create private foundations is tax reduction.  There are other significant benefits, including:

• Promoting and directing long-term charitable giving for certain specified purposes; and
• Creating a family purpose that will provide common ground and common goals to guide future giving efforts.

Private foundations are only one of many methods commonly used to fund charitable purposes and reduce taxes. However, private foundations generally have three distinctive characteristics:

• Most or all of the funding comes from a single source, usually a family or business, rather than from the general public;
• Distributions from the foundation are typically in the form of grants to public charities or government entities, rather than the foundation directly operating charitable programs; and
• Grants and administrative expenses come out of the foundation’s endowment or investment income of the endowment, rather than through a fundraising program.

Private foundations are not without their trade-offs. Like most other planning techniques with significant tax benefits, private foundations are subject to a number of complex and sometimes burdensome rules.  These rules are intended to prevent “abuse” of the benefits and ensure a private foundation is managed consistently with the charitable purpose of its creation. There are rules associated with funding the foundation, including restrictions on how much stock or other ownership interest a foundation can hold in a business, and percentage caps on the amount deductible as a charitable contribution. There are also rules regarding the ongoing operation of a private foundation, such as the requirements the foundation generally distribute at least five percent of the foundation’s net investment assets each year, make annual filings with the IRS and pay a small tax on certain investment income.  There are also substantial due diligence and conflict of interest requirements the board must adhere to. Particularly relevant to many business owners are the self-dealing rules that impose severe limitations on business transactions (e.g., selling, leasing, etc.) between a foundation and related parties.

The private foundation is not, however, the only way to reach many common charitable goals. Another option, the donor advised fund, operates in much the same manner but is generally easier and less expensive to set-up. The trade-off is less control over the assets and the long-term direction of the giving. And for many people, other more common gifting and estate planning techniques will accomplish their goals without the complexity often associated with a private foundation. But for people with a real philanthropic passion, or people with a potential estate tax concern, the private foundation is a worthwhile option to consider.

Our firm is routinely approached by persons with charitable intentions to assist them in evaluating the alternative means by which their charitable intentions might best be fulfilled, including the possibility of setting-up private foundations.  We are honored to contribute in this important aspect of planning and gifting. Whether you are taking the first step of exploring the options or you are working to implement a complex charitable gifting plan, we would consider it a privilege to help.