Leveraged Breakdowns

A Beginner’s Guide to Commercial Leases, Part Four: More Terms

The original three posts under this title were extremely well-received (Part One, Part Two, Part Three), so we have decided to write two more. The goal of these articles is to explain real estate private equity for beginners in layman’s terms. If you’re fresh out of college or looking to make a career change, finding your first job in real estate private equity can be daunting. Leveraged Breakdowns is here to help guide you to career success!

The two terms covered in this post really get deep into the weeds, so to speak: easements and estoppels.

Easements

An easement is the legal right for a non-owner to use somebody else’s property. Easements usually explain a specific purpose or a specific use for the non-owner, and include a description of exactly which property can be used.

The most frequent use of easements are for utilities. Electrical, water, and sewer service are provided by public or private utility companies, and they record easements along public streets (often referred to by their legal term: right-of-way) which allow them to install, remove, or otherwise maintain their respective services. To be specific, if an office building is situated along a public street, it is likely that there is a ten or twenty foot utility easement that parallels and abuts the street. The utility company can come out and dig up water or sewer lines and not ask for permission; the easement grants them permission.

In other instances, easements may be for vehicular or pedestrian access. If you’ve been to a major shopping center you’ve probably noticed that there are larger stores away from the main access, and smaller stores (usually restaurants, gas stations or small strip centers) along the street. It is quite common for there to be an access easement between the various owners of the real estate in the center. This access easement grants the customers and employees of each other’s property the right to drive and walk over each other’s property.

This may sound silly, but there are many reasons for it. The City may not allow direct access onto the street for some land parcels (due to traffic concerns), so the only solution is to share access points and provide easements so that the landlocked parcels can be developed. When the general public is encouraged to shop or utilize the services of these businesses, it does create potential liability for accidents, falls, and so on. Finally, there is the issue of repairs and maintenance that must be recognized from the added traffic. All of these issues are handled in easement agreements between the various owners, called Reciprocal Easement Agreements, or REAs (another name is an Operating and Easement Agreement, or OEA).

Estoppels

In commercial real estate an estoppel is a written statement from a tenant indicating the current facts surrounding a lease. Estoppels are often required as a part of a property purchase or refinance. In those instances, the buyer or the lender want a written verification of the lease terms and status prior to closing on the purchase or the financing. Estoppels include a recitation of the lease commencement and expiration, any remaining extension options, current base rent, and any operating expense payments (property tax, insurance, CAM, etc.). An estoppel will usually state the next month’s payments that are due from the tenant, and whether there exists any event of default on the part of the Tenant or the Landlord. Normally an estoppel must be executed by the Tenant within 30 days of the expected closing or financing.

Knowing your Way Around

Finding your first job in real estate private equity can be a challenge, especially if you aren’t completely fluent in the language of REPE. The Leveraged Breakdowns coursework provides ample opportunity to learn, practice, and develop your skills in the language of REPE. Leveraged Breakdowns is the home of real estate private equity for beginners!

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