You Are Now Entering… the HUBZone

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HUBzones are “Historically Under-utilized Business” zones located within qualified census tracts; qualified non-metropolitan counties; lands within the external boundaries of an Indian reservation; qualified base closure area; or redesignated areas. The HUBZone program was created in 1998 by the HUBZone Empowerment Act. Its primary goal was/is to incentize businesses to operate and create jobs in historically, economically downtrodden communities/areas by requiring federal agencies to set aside more than 3% of their budget in the form of prime contracts for HUBZone certified small businesses. HUBZone certified companies benefit from preferential treatment in the form of set-aside contracts and 10% price evaluation preference in full and open contract competitions.

The Small Business Administration (SBA) administers the program and establishes the requirements for businesses to qualify as HUBZone certified. First, a company must qualify as a small business under SBA guidelines as based on size requirements established by the North American Industry Classification System (NAICS). Second, the business must be at least 51% owned and controlled by a U.S. citizen(s), a Community Development Corporation, agricultural cooperative, Indian tribe, or Alaska Native Corporation. Third, the company’s principal office must be located in a HUBZone. “Principal office” is defined by as location in which the greatest number of employees work. Because this excludes contract sites maintaining HUBZone certification can be especially challenging in the DC metro area.  Finally, 35% of the company’s employees/total workforce must reside in a HUBZone. Under the current rules, businesses must re-certify their HUBZone status every three years; however, there is no limit to the number of times a company can re-certify as long as they continue to qualify under program’s existing requirements.

The SBA has a HUBZone map on its websites that allows one to search a specific address to see if it is located within a certified HUBZone:

Despite the billions in federal contracts available to HUBZone certified companies, the program, like the areas it attempts to aid, has been historically underutilized. This is because the rules and requirements have made compliance difficult to achieve and maintain, and sudden changes can cause a company to no longer be in compliance; rendering it ineligible for the program. The two biggest compliance challenges are the requirements for the company’s principal office to be located within a HUBZone and for 35% of its employees to reside in a HUBZone. An issue that is further compounded by the continuous and unpredictable movement of HUBZone areas and boundaries.

The SBA has proposed three changes to the HUBZone program requirements to address these issues:

  1. Freezing HUBZone maps until the 2020 census after which maps will be updated every 5 years. The new regulation would also provide companies with up to 3 years to move to a new HUBZone if their principal office and/or employee’s residence loses its designation as a result of changes to the HUBZone map. That’s a total of 8 years to relocate to a new HUBZone, which is more than enough time considering most commercial lease terms are 5-10 years.
  2. Changes to rule requiring 35% of employees to reside in a HUBZone. Current regulations require an employee to live in a qualified HUBZone for at least 180 days or be a currently registered voter in that area and be hired by the company before that employee will count towards the HUBZone/Non-HUBZone employee mix. Under the proposed change, after such period, the employee will always count as a HUBZone employee as long as they remain employed by the HUBZone certified company, even if that employees moves to a non-HUBZone area or their residence loses its HUBZone designation.
  3. Changes to the eligibility requirements for contract awards. Currently companies must be HUBZone certified at both the time they bid on a contract and at the time the contract is awarded. The proposed rule change would only require companies to certify or recertify their HUBZone status once a year (by its annual recertification date) thus eliminating the need to prove compliance at either the date of bid and/or time of award.

So, what does this mean in the context of real estate investment? For one, because the purpose of the HUBZone program is to revitalize economically depressed areas, they increase the likelihood for increased rents and property appreciation. Secondly, landlords with properties within a HUBZone can use this status as a marketing tool to attract prospective tenants. The allure of billions in federal funds could be the deciding factor in a competitive market and the financial stability/prosperity from multi-year government contracts reduces the landlord’s risk of tenant defaults. With changes to the rules that have caused the HUBZone program to be historically under-utilized, itself, property owners and residents of HUBZone areas should begin to see the fruits of the program’s intended purpose.

Route 7 Corridor & Leesburg/West Loudoun Submarkets Q3 2019

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Route 7 Corridor

  • RBA: 4,688,075 SF
  • Vacancy Rate: 7.2%
  • 12 Month Net Absorption: 26,900 SF
  • Average Asking Rent: $28.17
  • 12 Month Rent Growth: 0.9%

With only 4,688,075 SF of total inventory, the Route 7 Corridor is a relatively small submarket; however, fundamentals are strong. The submarket’s “age” differentiates it from other, similar size submarkets. The average age in Ashburn is 35, a statistic only surpassed by the average age of its office buildings: 15 years (median age is 13 years). In fact, the submarket does not have an office building that was built before 1990 and over 40% of its inventory is comprised of 4 & 5-Star properties. The average rent for the submarket is $28.17/SF but this is a little deceptive as 3-Star properties account for 56.6% of the inventory with average rents of $25.08/SF ($7.44/SF lower than the average rent for 4 & 5-Star properties). The submarket’s vacancy rate is well below the metro average at 7.2% with 4 & 5-Star properties lower still at 6.1%. Based on this it’s not surprising that over 103,000 SF of 4 & 5-Star space is currently under construction with another 195,000 SF proposed. Fundamentals should remain strong despite this new supply as the submarket is likely to see increased demand with the delivery of the 2nd phase of the Silver Line metro and continued expansion of notable projects like One Loudoun.

Leesburg/West Loudoun Submarket

  • RBA: 3,829,925 SF
  • Vacancy Rate: 7.6%
  • 12 Month Net Absorption: 7,700 SF
  • Average Asking Rent: $26.49
  • 12 Month Rent Growth: 0.6%

The Leesburg/West Loudoun submarket encompasses South Riding, Leesburg, Purcelville, Aldie, Middleburg, and Hamilton. Despite spanning such a large area the submarket only has 3,829,925 of total inventory. What’s interesting is that this is comprised of 346 individual properties while its neighbor, the Route 7 Corridor, has over 850,000 SF more inventory which is spread over only 81 properties. The median age and size of the submarket’s inventory is 41 years and 4,900 SF with over 65% of the office product located in Leesburg. Despite its distance from public transportation, the submarket has experienced continuous positive net absorption since 2011; resulting in a vacancy rate that is well below the metro average at 7.6%. The average market rent for the submarket is $26.49/SF; however, nearly 83% of the submarket is comprised of 1 & 2-Star and 3-Star properties which have average rents of $25.75/SF and $25.22/SF respectively. Of the many “cities” that make up the Leesburg/West Loudoun submarket, South Riding may be the most promising and primed for commercial development. The recent expansion of Route 50 has improved east-west transit and Route 28 and Loudoun County Pkwy provide convenient north-south access.

It’s Unreasonable to be Unreasonable

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As mentioned in previous articles, every commercial lease is unique. Landlords have their standard lease agreements, which vary based on asset type, i.e. office, retail, etc. and by individual property within the same asset type, i.e. freestanding retail vs. strip center. Even leases for the same property will differ based on the tenant and the specific deal terms. On top of that, leases are subject to further customization based on the tenant’s/broker’s/attorney’s review and negotiation of individual lease provisions. Despite this, most commercial leases have a similar structure and governing practices that are common. Because of this there are certain standards that should be verified in each lease or inserted if absent in the initial draft. The standard of “reasonableness” is perhaps the most important.

A relatively minor case in which a reasonable standard should always be applied is for attorneys’ fees. Many leases require the tenant to pay for the landlord’s “attorneys’ fees” if the landlord must enforce any of the lease provisions against the tenant or review any tenant requests such as subletting the premises. Particularly in contentious situations where there is a dispute between the tenant and landlord, legal fees can be significant. Landlord’s do not necessarily have an interest in incurring unnecessary or excessive attorney’s fees, but in the absence of a reasonable standard there is nothing limiting their ability to do so and pass the expense along to the tenant. In this case, “reasonable” does not have a strict or set definition, but such a standard imposes a requirement on the landlord to justify such costs if contested.

Reasonableness is most important in cases where landlord’s approval/consent is required. In commercial leases such cases include but are not limited to signage, assignment/subletting, and alterations to the premises. Regardless, in each and every case, consent/approval should not be “unreasonably withheld, conditioned, or delayed.”

The initial draft lease may already include this standard but, because most leases are landlord-sided, it’s likely that the standard is that “consent shall be granted or withheld in landlord’s sole discretion.” Another possibility is that “consent shall not be unreasonably withheld.” This is certainly better than the previous standard, but the addition of “conditioned” and “delayed” are important distinctions that should be included.

Having consent not unreasonably “conditioned” imposes a reasonable standard on the factors guiding the landlord’s approval. Some leases will explicitly list the conditions governing the landlord’s approval. In such a case tenants/brokers must review and assess the reasonableness of said conditions. Common examples include minimum requirements of financial strength (often the same as tenant at the time of lease signing), impact on building systems, other tenants, and/or building (aesthetic and/or reputation); etc. Reasonableness should be based on an objective standard but must also be viewed through the lens of the tenant’s business/use, plans, i.e. selling the business during the lease term, etc.

It is important to not have consent unreasonably “delayed” because of the old adage, “Time Kills All Deals.” As is the case with the conditions guiding consent, many leases will provide specific timeframes in which the landlord must respond to tenant requests. These must also be evaluated both objectively and with an understanding of the time required for the landlord to consider and process the tenant’s request. A key example in which unnecessary/unreasonable delays could negatively impact the tenant is in the case of a requested sublet or assignment. The tenant’s proposed subtenant may have a required sublease commencement date due a lease expiration date, contract, etc. and if landlords are not required to respond in a timely manner/within a reasonable timeframe, the tenant may lose the deal.

After the initial adversarial nature of the LOI/lease negotiations process, relationships between tenant and landlord are generally good and reasonableness governs the relationship. Communication and ample notice are good practices that can prevent many of the issues that reasonable standards protect against. Still, tenants should require a reasonable standard in every leases and landlords should be amenable to this standard. It’s unreasonable to be unreasonable.

Landlord-ing 101: CAD Files

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CAD stands for Computer Aided Design. In the context of commercial real estate, CAD files are essentially digital blueprints/drawings/schematics that allow architects to more easily manipulate and design buildings/spaces. Because CAD files come in both 2D and 3D formats they can be used to create simple floor plans to in-depth, walkthroughs of imaginary spaces. Previously, architects/engineers were forced to use paper drawings which were not easily modified, shared, or understood. Basically, CAD files make life easier for everyone involved in the space planning, design, and construction process.

The importance of CAD files cannot be understated, but it can be measured based on asset type. The owner of a single office condo may not “need” CAD files depending on how they choose to manage their asset; meaning whether or not they choose to obtain permits for any alterations (whether they’re required or not). If owners/landlords opt to perform any work without the required permits they are at risk of potential ADA (Americans with Disabilities Act), fire/life safety, etc. violations and in addition to fines may be required to remove the alterations without compensation.

On the other end of the spectrum, for landlords with multi-story, multi-tenant office buildings, CAD files are an absolute must. In order to appeal to the greatest number of potential tenants, landlords must offer the greatest number of square footage options. There are a number of code requirements that govern how spaces can be demised, but one of the most important is ingress/egress requirements. This is specifically related to fire safety and refers to the maximum allowable distance to an exit. By using CAD files, architects can easily measure distances from anywhere on the floor to the nearest available exit and thus create a “blocking” plan which shows how the floor can be divided into individual, smaller suites.

Even if a floor is not multi-tenanted, CAD files allow architects to easily and quickly create “test-fit” plans, which represent their interpretation of the tenant’s desired floor plan/layout. If the initial plan is rejected by the tenant the architect can simply modify the existing plan until they create one that works. Because CAD files have dimensions they can also be used by the tenant’s furniture provider to digitally furnish the office with accuracy. Tenant’s can see exactly what their space will look like furnished before the space is even built and furniture ordered. They can even add digital employees.

Despite their importance, some buildings/spaces do not have CAD files or, for whatever reason, they’re unavailable to a new owner. In this case, one of the first orders of business should be to have CAD files created for the entire building. Time kills all deals and if a prospective tenant is considering multiple spaces the time required to have CAD files created, after the fact, and a test-fit performed could be the factor that causes the landlord to lose the deal. Furthermore, when marketing a property it is in the landlord’s interest to be able to present the most (code compliant) options possible. CAD files are absolutely necessary if landlords want to effectively market and lease their space. They provide owners with the information they need to estimate the cost of tenant improvements, which in many cases is the driving economic force behind the deal.

Have a Nice [Business] Day!

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Every tenant is unique. Two tenants may be in the same business/industry with the same number of employees, years in business, etc., but their financial situation, growth/strategic plans, etc. may be different. Tenants/companies are as unique as the people that comprise them.

On the other side of the transaction, every landlord is unique. There are buy and hold landlords as well as buy and flip landlords. Like tenants, landlords have different financial situations. Holding periods and financial strength are only two factors that combine to create the framework; governing landlord decision-making.

Every commercial real estate deal is unique because of the nearly infinite combination of unique tenants and unique landlords. As a result, every commercial lease is different. Certainly landlords have their standard lease agreements, but these are unique one, because the tenant, space, etc. are unique. Secondly, while most commercial leases contain the same provisions, i.e. Events of Default, Subordination, Assignment/Subletting, etc. they are subject to negotiation and, depending on the tenant’s leverage, (broker’s) negotiation skills, etc. may look markedly different when an executable document is finally reached.

Commercial leases are full of legal jargon and paragraph-long sentences that require thorough, in-depth review. Still there are certain changes that should be made to every lease. One such example is changing “days” to “business days” or vice versa. This is a relatively easy change but, as in all things, there are subtleties involved. The importance of “days” in a commercial lease is that they establish notice and grace periods. They govern the timeliness of the landlord and tenant’s responsibilities to the other.

First, it’s important to understand what a business day is. As one may reasonably intuit, business days are typically Monday through Friday. The exceptions are federally recognized holidays, i.e. Thanksgiving, Labor Day, etc. An important distinction must be made for retail tenants whose business may primarily be conducted on the weekend.

Second, it’s important to distinguish between timeframes for “days” and “business days.” For example, 5 business days is essentially the same as 7 days (one week). Thirty days (one month) is essentially the same as 20 business days. If the intention is a week then there is no reason to change the language. If the landlord initially proposes “10 days;” however, tenants should request 10 business days to provide themselves with a minimum 2 weeks. Business days are of primary importance when considering the impact of weekends and holidays. For example, if a tenant is required to execute an estoppel certificate within 10 days versus 10 business days and the landlord provides notice on the Friday the week before a long weekend, the tenant may be in serious risk of default. Two weekends and a full week equals 9 days, add a Monday holiday and the 10 day period has expired. What if the tenant is on vacation and does not receive the notice until they return? If the tenant had simply negotiated 10 business days they would have had an additional week to execute the document thus saving themselves from default.

Another example, where business days can be to the tenant’s detriment, is in the case of service interruption and rental abatement. In this situation, business days can negatively impact the tenant. For example, if the landlord is willing to concede to rental abatement if services are interrupted for a period of 3 business days, rental abatement starting on the 4th business day, the tenant should change “business days” to “days.” Three business days, if spanning a long weekend is actually 6 days. That means the tenant would be without critical services for nearly a week before they are entitled to rental abatement and, as mentioned previously, this could be devastating to a retail tenant.

General rule of thumb, you want your party/client to have as much time as possible and the other to have as little as possible. All of this should be grounded in reasonableness and based on an understanding of each party’s business. When it comes to timeframes for responding to the landlord, tenants should always change “days” to “business days” to prevent unintentional defaults due to weekends and holidays. Conversely, in situations where the landlord must respond (provide consent/approval) or remedy a default, make a repair, etc. “business days” should be changed to “days.” Lastly, tenants should seek uniformity in their various timeframes, again to prevent confusion and unintentional defaults.

*I generally recommend 5 business days before late charges are assessed for nonpayment of base rent and 5 business days after written notice of nonpayment of base rent before it becomes an event of default. Ten business days are sufficient for such cases as estoppel certificates, subordination agreements, restoration of the security deposit, etc. Finally, in the case of nonmonetary events of default, 20 business days or 30 days are reasonable.

Route 28 Corridor Q3 2019

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Route 28 North Industrial Submarket

  • RBA: 35,287,627 SF
  • Vacancy Rate: 3.7%
  • 12 Month Net Absorption: 1,800,000 SF
  • Average Asking Rent: $12.65
  • 12 Month Rent Growth: 4.5%

The Route 28 North Industrial submarket may be the strongest in the DC metro area across every asset class. Even with 2,000,000 SF delivering in the past 12 months the vacancy rate only increased by 0.3% in that time and is well below the market average at 3.7%. The submarket saw 1,800,000 SF in positive net absorption over the same period and a staggering 4.5% growth in rents. Over 1.1M SF is set to deliver in the next year with an additional 694,000 SF proposed. This area is also known as Data Center Alley with one of the largest concentrations of data centers in the nation/world with nearly 70% of the world’s internet traffic flowing through the corridor. The submarket has AOL to thank for the infrastructure that eventually led Amazon, Google, and Microsoft to purchase hundreds of acres for future development. In addition to this, the submarket’s proximity to Dulles International Airport, location in the richest county in the nation (Loudoun), and major north/south and east/west highways (Route 28 and the Dulles Greenway respectively) have all combined to create the region’s largest industrial submarket with seemingly unlimited potential.

Route 28 North Office Submarket 

  • RBA: 10,348,741 SF
  • Vacancy Rate: 16.3%
  • 12 Month Net Absorption: (115,000 SF)
  • Average Asking Rent: $26.52
  • 12 Month Rent Growth: 0.8%

Route 28 North’s office and industrial markets’ fundamentals are in stark contrast and tell a story that began before the Great Recession. Before 2008, Loudoun County planners had a much more optimistic outlook for area’s office demand, as evidenced by the prevalence of land zoned PD-OP (Planned Development Office Park). Over the years the submarket became known as Data Center Alley and demand was primarily for industrial uses. This quietly created prime conditions for a surge in office demand in the submarket. Amazon, Google, and Microsoft have invested heavily in the submarket and with the completion of the Silver Line in late 2020, developers will have the opportunity to transform the office market into mixed use, transit-oriented office projects that attract both international and regional companies that support and/or collaborate with the tech giants.

Route 28 South Industrial Submarket 

  • RBA: 11,780,111 SF
  • Vacancy Rate: 8.2%
  • 12 Month Net Absorption: 126,000 SF
  • Average Asking Rent: $12.96
  • 12 Month Rent Growth: 4.2%

The Route 28 South Industrial submarket is a smaller, older version of its northern neighbor; however, its fundamentals comparatively strong. The past 12 months saw a 1% drop in the vacancy rate, 126,000 SF of net absorption, and a 4.2% growth in rents. Despite having a vacancy rate that is above the metro average (8.2% vs. 6.6%), the submarket commands an average rental rate that is $0.31/SF higher than Route 28 North. There are no projects proposed or set to deliver in the next 12 months which should cause vacancy rates to continue to decline. Further evidence of the submarket’s health is the average and median submarket cap rates in the past 12 months: 6.3% and 5.4% respectively.

Route 28 South Submarket Office 

  • RBA: 14,330,215 SF
  • Vacancy Rate: 15.2%
  • 12 Month Net Absorption: 210,000 SF
  • Average Asking Rent: $28.25
  • 12 Month Rent Growth: 0.7%

Route 28 South’s office vacancy is above the metro average, but this is not necessarily reflective of the overall health of the submarket. It does, however, reveal its vulnerability to large move-outs as UNICOM’s move in 2018 increased the submarket’s vacancy rate by a brutal 3.2%. The submarket’s inventory is nearly evenly split between 4 & 5-Star and 3-Star properties, but the differences in average rents and vacancy is anything but even at $31.70/SF vs. $25.21/SF and 13.9% and 21.5% respectively. Peterson Companies delivered 480,000 SF in September 2018 (for a government tenant) and there is 125,000 SF set to deliver in the next 12 months with another 170,000 SF proposed. The presence of large (3-letter) government tenants should generate consistent demand from government contractor tenants and, barring any large-scale move-outs, should contribute to a continued improvement in submarket fundamentals.


Delaware Statutory Trusts… Delaware

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Delaware Statutory Trusts (DSTs), otherwise known as an Unincorporated Business Trust, are legally recognized trusts that allow (1) accredited investors to (2) defer capital gains through a 1031 exchange and (3) invest in a fractional interest in (4) large, institutional quality and (5) professionally managed commercial properties. While DSTs are created by filing a Certificate of Trust with the Delaware Division of Corporations, the business purpose for which they are formed is not restricted to the State of Delaware. Trusts are fiduciary arrangements that allow a third-party, known as a trustee, to hold assets on behalf of a beneficiary or beneficiaries. In this article, I will break down the various components of a DST and explain how, for some investors, they can be an excellent alternative to a traditional 1031 exchange.

(1) Accredited investors

Delaware law does not require DSTs to be registered with the Securities & Exchange Commission (SEC), which is why they are only available to accredited investors. Private trust agreements govern the relationship between the trustee and beneficiaries; including distribution of the trust’s assets, voting rights, etc. There are no regulations or restrictions on the format or phraseology of the governing agreement or limits to the powers of the trustee. As a result, investors must be sophisticated enough to analyze and understand the terms of the trust agreement so that they can accurately calculate their projected return, identify the risks associated with the existing language, and determine whether or not to invest in the particular entity.

(2) Defer capital gains through a 1031 exchange

Delaware Statutory Trusts invest in real property and ownership interests are available for purchase to accredited investors, many with minimum investments as low as $100,000. Because DST real property assets are held for investment purposes they qualify as “like-kind”/replacement properties under Section 1031 of the Internal Revenue Code. Therefore, investors can defer capital gains by reinvesting the money in a DST through a 1031 exchange.

(3) Invest in a fractional interest

The traditional 1031 exchange requires a seller to reinvest capital gains into a “like-kind” property or properties of equal or greater value within certain time limits and, while the timeframes don’t change, DSTs allow investors to take the entirety of their gains and pool them with other investors’ funds. For example, if an investor has $100,000 of capital gains they could invest in a DST investment valued at $10,000,000, effectively purchasing a 1% interest in the asset. Investors are not partners but rather individual owners within the trust and, as a result, receive their percentage share of cash flow income, tax benefits, etc. Liquidity is a potential issue as many investments have long holding periods (5-10 years) and owners’ ability to transfer or sell their interests may be prohibited or limited by the trust agreement.

(4) Large, institutional quality

Because DSTs allow investors to pool funds they are able to invest in properties that were previously only available to the ultra-wealthy and to large institutions such as pension funds, insurance companies, etc., hence the term “institutional quality.” Examples of such investments include hundred plus unit multi-family apartments, high-rise office buildings, industrial projects, shopping centers, etc. The stability and diversification inherent in such properties is reflected in their price tag.

(5) Professionally managed commercial properties

A major reason that property owners may hesitate to sell an investment property despite positive market conditions is that they do not want to pay capital gains taxes but also do not want to have to find a replacement property that they have to manage. They don’t want to be a landlord anymore. One of the greatest features of Delaware Statutory Trusts is that they are held, managed, and administered by the trustee. This is another reason DSTs are reserved for accredited investors. The quality of the “professional management” is paramount to the success of the investment. Trustees should be qualified and vetted by investors to ensure their competency and experience. Ideally, trustees are sufficiently connected and knowledgeable to be able to identify analyze investments regardless of location and structure acquisitions in a way as to maximize the investment’s return. They should also manage the asset efficiently; minimizing operating expenses while adequately maintaining the common areas and building systems so that the property maintains its value and provides the highest return to investors.

Delaware Statutory Trusts provide accredited investors with the ability to defer capital gains and invest in institutional quality investments without the responsibility of managing the properties, themselves. Depending on the skill, experience, etc. of the trustee, beneficiaries may have the opportunity to invest in markets outside their area of expertise where returns are higher or where there is a greater likelihood of appreciation either through effective management or capital investments. Finally, DSTs provide a “fallback plan” if sellers are unable to identify a suitable or desirable replacement property within 1031 exchange timeframes.

Enjoy the Silence: Quiet Enjoyment Covenants

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Quiet enjoyment refers to a tenant or landowner’s right to the undisturbed use and enjoyment of real property. It is also defined as a covenant that promises that a grantee or tenant of an estate in real estate shall be able to possess the premises in peace, without disturbance or interference from hostile claimants. This concept is so vital to the leasing and/or ownership of real estate that courts have ruled it to be an implied covenant in leases/contract regardless of whether it is explicitly included.

The concept of quiet enjoyment is most relevant in commercial leasing; however, it can also apply to the exchange or conveyance of land ownership. In this case, quiet enjoyment is synonymous with conveying title, free and clear and absent of encumbrances or claims by other parties. Warranty deeds include covenants of quiet enjoyment while quitclaim deeds do not. As the terms suggest, a warranty deed “warrants”/guarantees the transfer of the owner’s interest in the property, while a quitclaim deed simply “quits”/terminates the owner’s interest in the property; allowing the grantee to take possession. Translation: make sure you’re buying land through a general or special warranty deed, unless you want some long lost relatives popping up one day with real or false claims to ownership of your property.

Purchase and sales contracts are “short-term” agreements that dictate the terms of a transfer of interests in real property. Commercial leases, on the other hand, lay out the terms/ground rules for a “long-term” relationship between landlord and tenant; establishing requirements and restrictions. As a result, the concept of quiet enjoyment is one of, if not, THE most important of all and has implications for both the tenant and landlord.

For tenants, quiet enjoyment means a couple things. The first is “quiet;” meaning that if they abide by the terms of the lease they will not be bothered… peace and QUIET. The second is “enjoyment;” meaning that they have the right to use the premises and ENJOY that use. The practical application of these rights varies by asset class but includes the right to exclude others from the premises, the right to clean premises, basic utilities, i.e. electricity, heat, hot water, etc. Basically, the case is that the absence of such services would interfere with the tenant’s use/enjoyment of the property. Imagine leasing an office space in February without heat… not very enjoyable. Therefore, quiet enjoyment can be viewed as a covenant that inure to the benefit of the tenant while placing certain requirements and restrictions on the landlord.

If a landlord breaches the covenant of quiet enjoyment, common law provides at least two remedies for tenants: rental abatement or lease termination. In practice though, commercial leases contain many, common provisions that specifically addresses elements of quiet enjoyment and seek to limit the landlord’s responsibility. One example are lease provisions that address interruption of services. Landlords, typically, try to exempt themselves from any responsibility from service interruptions, i.e. electricity, heat, elevator service, etc., even in cases of their own gross negligence or willful misconduct. Despite the existence of business interruption insurance and the landlord’s own interest in maintaining the property and timely addressing any issues, tenants should push back on such attempts to limit their rights of quiet enjoyment.

The relationship between tenant and landlord is naturally contentious, at first, as both parties seek to extract the maximum concessions from the other all while limiting their own exposure. Tenants should approach lease negotiations skeptically and cautiously, but must also realize that they are being given use of someone else’s property. Commercial leases are legally binding documents in which both parties are agreeing to do and not do certain things. It is justifiable and reasonable for tenants to do everything they can to limit their own liabilities but, at the end of the day, they’re as responsible for abiding by the terms and conditions of the lease as the landlord. Quiet enjoyment may be to the benefit of the tenant but is also a condition of the tenant’s faithful adherence to the terms of the lease agreement. In closing, pay your rent on time and you’ll be fine.



Tenant shall have quiet possession of the Premises for the Lease Term hereof, free from any disturbance or molestation by Landlord, or anyone claiming by, through or under Landlord, but in all events subject to all the provisions of this Lease.


Landlord covenants and agrees that so long as Tenant has not committed an Event of Default, Tenant’s peaceful and quiet possession of the Premises during the Term shall not be disturbed by Landlord or by anyone claiming by, through or under Landlord, subject to the terms and conditions of this Lease, any Mortgage, and all matters of record, or any other agreements to which this Lease is or may hereafter be subordinated.

Prince William County’s Office & Industrial Submarkets Q3 2019

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Route 29/I-66 Corridor Office

  • RBA: 3,057,959 SF
  • Vacancy Rate: 9.1%
  • 12 Month Net Absorption: 3,300 SF
  • Average Asking Rent: $25.43
  • 12 Month Rent Growth: 0.8%

The Route 29/I-66 Corridor (Gainesville & Haymarket) has seen significant growth from a residential and supportive retail standpoint, but there is little office demand in the area as evidenced by its small inventory of space. Of the 3,057,959 total square feet only 368,251 SF is considered 4 & 5-Star (12%). Over 89,000 SF of space delivered in the past 12 months with another 168,250 SF over three properties that is set to deliver in August 2020. This has the potential to increase vacancy and impact the submarket’s meager rent growth; however, it could also be an indicator of increased demand.

Route 29/I-66 Corridor Industrial

  • RBA: 13,303,456 SF
  • Vacancy Rate: 6.5%
  • 12 Month Net Absorption: 254,000 SF
  • Average Asking Rent: $11.83
  • 12 Month Rent Growth: 4.5%

Gainesville and Haymarket’s industrial market is thriving and is 2nd to only the Route 28 North submarket in terms of asset value. In the past 12 months, even with 193,000 SF of new inventory the submarket saw positive net absorption of 254,000 SF, a 0.6% decrease in vacancy, and rent growth of 4.5%. This is clearly an indication of strong demand and even with over 800,000 SF delivering in the next year and another 100,000+ SF proposed, it’s likely that fundamentals will remain strong.

Manassas Office

  • RBA: 2,622,226 SF
  • Vacancy Rate: 5.0%
  • 12 Month Net Absorption: 29,000 SF
  • Average Asking Rent: $21.69
  • 12 Month Rent Growth: 0.4%

Fundamentals in the Manassas are solid… boring but solid. At 5% vacancy the submarket is well below the metro average and the past 12 months saw a 0.4% rent growth and 29,000 SF of net absorption. Still, at only 2,622,226 SF of total inventory, who cares? The submarket only has 163,000 SF of 4 & 5-Star space, the last of which delivered in 2009, and while Manassas rents may be affordable at an average $21.69/SF, the Route 29/I-66 Corridor seems more likely to absorb any new demand in Prince William County.

Manassas Industrial

  • RBA: 6,692,340 SF
  • Vacancy Rate: 1.3%
  • 12 Month Net Absorption: 45,000 SF
  • Average Asking Rent: $11.79
  • 12 Month Rent Growth: 4.3%

Manassas’ industrial submarket is similar to its office market in terms of its relationship to the Route 29/I-66 Corridor. The submarket is only half the size of its neighbor with no new deliveries since Q4 2016 and none in the pipeline. The logistics industry makes up the majority of the inventory, which is not surprising when considering Amazon’s impact on brick and mortar retail.   Developers may see Gainesville and Haymarket as the future, but with average rents and rent growth only slightly lower ($0.04/SF and 0.2% respectively) and with vacancy at an astonishing 1.3%, Manassas still boasts strong fundamentals. A fact that is further evidenced by the average and median cap rate for sales in the past 12 months (6.4% and 5.6% respectively).


How to Approach Lease Negotiations (Tenant POV)

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Commercial leases are binding, legal documents that should not be taken lightly. Purchase and sale agreements are “easy.” They dictate the terms of a single transaction at one moment in time. Leases, on the other hand, formalize a long-term relationship between the landlord and tenant. These parties have to “live with one another” and the terms of the lease govern what that life looks like, what is expected of each party, and what happens if either party violates the terms of their agreement.

Every commercial lease is different but, without exception, they are weighted in favor of the landlord. This is to be expected as the landlord is the one leasing their property to a (usually) unknown party. That being said, the level of one-sidedness varies and the goal when negotiating a commercial lease is to even it out so that the terms are reasonable. Reasonableness can vary as well based on the tenant and deal terms, but at the end of the day, a lease should protect the tenant against unnecessary, onerous, and/or malicious fees, disturbances, and requirements so that if they abide by the terms of the lease (particularly payment of rent) there won’t be any issues and they can quietly enjoy the space for the duration of the lease term.

This article deals with the approach to commercial lease negotiations from the tenant’s point of view. The emphasis on “how” relates to the appropriate and productive frame of mind or perspective from which to approach the lease terms based on the stage/round of negotiations. The relationship between landlord and tenant is always combative at first as both parties seek to extract the maximum concessions from the other; however, as the process nears lease signing it becomes increasingly collaborative as it is in the best interest of both parties to have a good relationship. While lease negotiations can involve multiple rounds of comments back and forth, there are generally 3 stages, each requiring a unique perspective from which to approach the process in order to yield the best results.

Stage 1: Tenant’s Initial Review

When the tenant first receives the lease from the landlord, they are receiving the most landlord-sided version of the lease and should approach the review with the assumption that the landlord is a scoundrel and will act in bad faith in any and every way the lease allows. First and foremost, tenants should verify that everything that was in the letter of intent (LOI) is accurately included in the lease, i.e. rent, renewal option(s), etc. I review every sentence and paragraph; imagining the craziest thing that could happen and how it could impact my client (based on their use). I identify the operative language (phrase, word, etc.) and either modify it or delete it to protect my client against probable and improbable situations governed by that particular section of the lease. When landlord’s consent or approval is required it should always be “not unreasonably withheld, conditioned, or delayed.” Exclusions or inclusions should be added where appropriate and/or for clarification to reduce the likelihood of (future) issues resulting from different interpretations. Finally, timeframes should be modified from “days” to “business days” to avoid unintentional defaults due to weekends or holidays. This is the most critical stage of the lease negotiations process in both its importance and the level of scrutiny applied.

Stage 2: Tenant’s Review of Landlord’s Response (to Tenant’s Initial Review)

In this stage, tenants receive a modified version of the lease in which the landlord has accepted some of the tenant’s changes, rejected others, and modified or added language in an attempt at compromise or to address the spirit or intent of the tenant’s requested change. Unbridled skepticism must be replaced by reason. Was the tenant’s original change/request reasonable? Is the landlord’s response? This stage requires a deeper understanding of the implications, likelihood, and purpose of specific lease terms/language. It is no longer productive to view the landlord as the enemy. In most cases, there are good reasons behind a landlord’s “push back,” and it’s important for a tenant to understand those reasons so that they can appeal to the landlord within that context. Some issues simply require push back from the tenant to be accepted by the landlord in the next round (persistence pays off) while others require a deeper, more nuanced explanation. There are times when landlords will simply not agree to a tenant’s demand/change, and, in cases such as this, tenants must conduct an honest risk analysis and realize, as the Rolling Stones said, “you can’t always get what you want.”

Stage 3: Conference Call

This is the collaborative phase of the lease negotiations. The best way to resolve any issues after Stage 2 is to schedule a conference call in which both parties discuss (and hopefully resolve) any remaining issues. The best approach at this stage is to approach the landlord as a friend and partner. It is in the tenant’s interest to express the rationale behind their request and explain to the landlord that they intend to be good tenants that pay on time but simply want to protect against any unforeseen or unintentional issues. In many cases, the landlord will agree to language that addresses the tenant’s concerns; however, when the landlord cannot or will not concede to the tenant’s request based on the impact on other tenants in the building/project and/or the landlord’s management of the property, they will explain why.  At the end of the day, both parties are entering into an agreement for their mutual benefit, and a conversation can go a long way to establish the trust necessary to formalize that relationship.

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