Leasing under an industrial development agency transaction - by Louis Fiore

A commercial property owner has just closed an industrial development agency (IDA) transaction providing real estate, sales and use and mortgage recording tax exemptions through a lease/leaseback structure. There are a number of considerations to keep in mind when leasing space to third-party businesses.

Typically, commercial leases, if not approved as part of the IDA transaction, will require the IDA Board’s consent which are only considered at the IDA’s monthly meetings. Also, there will be limits to the percentage of the property which can be used for retail uses (including medical office use).

Furthermore, tenants must enter into an agreement with the IDA called a Tenant Agency Compliance Agreement (TACA) providing, among other things:  (i) increased insurance obligations, (ii) a broad indemnity, (iii) an obligation to provide annual financial statements, (iv) a requirement to list job openings with the Department of Labor and give preference to referrals therefrom, (v) with some IDA’s, hiring preferences for local residents, and (vi) annual reporting of jobs and salary/benefit ranges or averages. Therefore, an owner will want to consider the optimal timing to disclose the TACA requirement to a potential tenant.

The owner should also consider the following lease form changes. The definition of “taxes” in the lease must include PILOT Payments. If the lease provides a base year for taxes, the parties may have to negotiate how to handle the built-in burn-down of the PILOT benefits. Also, the lease should be subject and subordinate to the IDA lease/leaseback documents. Finally, the tenant should indemnify the owner against IDA related defaults caused by the tenant which cause a termination of the IDA documents and/or a recapture of past benefits.

Taking these considerations into account as early as possible can facilitate a smoother leasing process and avoid problems with the IDA.

Louis Fiore is a partner at Forchelli Deegan Terrana LLP, Uniondale, N.Y.