Rob Cassam's Commercial Real Estate Insider Newsletter
Money making tips for commercial real estate investors and end users!
November 2012

In this issue I focus on a variety of important commercial real estate topics for both tenants and owners. I hope some of these may help you know or in the future. This new format includes money making tips for all types of commercial real estate including tips for end users of commercial real estate.
Rob Cassam
Carolina Realty Advisors

704-442-1774 Ext. 100

Warding Off The "Ghost Tenant" In Centers

"Ghost tenants" are one of the nightmares of shopping center owners. What are ghost tenants? They are tenants who do not operate their businesses on the premises continuously or who vacate the leased premises, but paying the minimum rentals. As the manager or landlord of a shopping center, most of your income depends upon income produced by overages under the percentage rental provisions of your store leases. Not only will ghost tenants directly affect you by not paying their specific overages, they will also hurt you indirectly since vacant stores will cut down on your center's drawing power, which in turn means reduced sales and overages for other tenants.

Following are some of the steps that we will take to protect our clients against deserting tenants.

Continuous Occupancy
The landlord and manager should insist on an express covenant by the tenant to continue to occupy the leased premises throughout the lease term. This covenant should also provide that the tenant will operate his or her business on the leased premises during that time and keep the store open daily for the regular conduct of business during the hours specified. To give teeth to this provision, we will have a clause calling for injunctive relief requiring the tenant to occupy and operate his or her business continuously on the premises. Also, of the tenant fails to comply, we shall have the right to reoccupy and relet the premises. Thus, the lease should include a so-called "recapture provision" under which you can both terminate the lease and preserve the right to collect reasonable damages from the defaulting tenant while making reasonable efforts to relet the premises to a suitable tenant. The provision should expressly describe the acts of the tenant that will amount to vacating the premises.

Suggested Provisions
The shopping center lease might provide as follows:

1. If the tenant fails to occupy and use the premises for the conduct of his or her business for a specified uninterrupted period of time, the landlord or manager can immediately terminate the lease.

2. If the tenant fails to maintain a specified sales volume, the landlord can immediately terminate the lease.

3. The minimum rental should not be deemed adequate or substantial for purposes of determining damages for tenant's failure to comply with these provisions.

4. The inducement for entering into the lease on the part of the landlord was the expectation of earning percentage rentals and the minimum rental is only a partial advance payment of the annual percentage rental (as shown by the credit granted to the tenant for the minimum rental payments).

5. A provision for liquidated damages should also be included under which the measure of damages is the combined sum of the established minimum rental plus, say, the average percentage rental paid for the preceding three years or the highest percentage rental previously paid under the lease.

The Insurance That A Commercial Tenant Must Carry

When Insurance coverage must be addressed by both landlords and
tenants. For the run-of-the-mill daily problems, a landlord must have the maximum coverage for the building and the tenant's leases. The tenant must cover the business with coverage that will protect it. What if you have a small disaster that is easily repaired, but you lose a tenant because he was not covered for the damage inside the business?

Consequential Loss Coverage
A fire or other peril may cause a financial loss other than that resulting from direct destruction of the property. Such losses are called "consequential losses" and include those resulting from the loss of use of the property destroyed, such as interruption of business, and property loss from indirect connection with the hazard rather than from direct destruction. The types of insurance against consequential losses include:
1) Business interruption insurance.
2) Delayed profits insurance, which covers the loss of profits that result from a delay in the completion of the construction.
3) Leasehold insurance, which covers a tenant's financial loss if the lease is canceled as a result of fire or other insured peril.
Business Interruption Insurance A business interruption policy normally embraces both loss of income and "added expense" protection. The latter may be the more important because it reimburses the tenant for the special costs associated with obtaining substitute equipment and (if temporary space is needed elsewhere), the cost of renting such quarters. To the extent that the tenant's profits are adversely affected, notwithstanding the ability to continue operations, protection is furnished by the loss-of-income feature of this coverage. Business interruption policies can be more effective with appropriate endorsements that enlarge the covered causes of loss and extend the period of indemnity.

Two examples are the following:
1) Nonbuilding damage. The standard policy only covers losses
attributable to a casualty to the building itself. If damage extended to
telephone and data service lines located outside the building, resulting losses to the tenant would be covered only under an appropriate endorsement to the policy.

2) Extended restoration. The standard policy limits the indemnity
period to the time needed to restore the building to its precasualty
condition. This may be less than the time needed for actual restoration, for example, when local law requires the reconstructed building to meet updated code standards. The policy coverage can be extended for this purpose by endorsement.

Lease Termination Insurance
When casualty damage is so extensive that the landlord can cancel the lease, the tenant may incur loss because it is unable to lease elsewhere on comparable terms. Leasehold interest insurance protects against such loss. The loss is equal to the discounted present value of the difference between (1) the rental specified in the lease and (2) the higher market rent for comparable space, projected for the balance of the lease term, including all renewal option periods.

How You Can Use Options For Big Profits

When most owners and investors think about options on real estate,it is usually one-dimensional. The option is just a way for a buyer to tie up a piece of property. Sometimes it is for a speculation, with the buyer gambling that the property will increase in value to a figure higher than the option price. Other times, the buyer just wishes to hold the property with a smaller investment of cash until the time is right to purchase and use it. Sometimes buyers and sellers use options for long term planning and tax considerations. Here are
some examples:

Ensure Future Sale At a Fixed Price
Suppose the owner of real estate wishes to hold it for an additional two years when he expects to be in a much lower tax bracket. However, he would like to ensure a sale at that time at a price to be fixed now. The owner could enter into an immediate contract of sale with a delayed closing. However, this likely would be considered an immediate sale for tax purposes because the burdens and benefits of ownership would be deemed transferred immediately to the buyer. Instead, the parties could enter into the following arrangement. The owner gives the buyer an option to purchase the property in two years at the current market price, for which the buyer pays a $5,000 fee to the owner. The buyer simultaneously gives the owner a put option on the property with the same exercise price. In order that the two options not be mirror images of each other, the owner pays the buyer a fee of $2,500 and his option expires several months earlier than the buyer's option. As a practical matter, it is virtually certain that the sale actually will take place, since either the owner or the buyer will exercise his option depending on whether market value rises or falls. Nevertheless, the (somewhat remote) possibility that neither party will wish to exercise his option should protect the parties from an IRS challenge that an immediate sale occurred. (For some authority to support this view, see Penn-Dixie Steel Corp. v. Commissioner, 69 T.C. 837 (1978).)

Providing Nonrecourse Financing
Suppose a farmer wants to continue to operate his farm for another five years, until he reaches age 65. A developer wants to buy the land for a residential subdivision. The developer offers to pay $100,000 for an option giving him the right to buy the land after five years for $1.1 million (his projection of the market value at that time). The farmer, who needs cash, counters with an offer to give the developer an option for a fee of $500,000, under which the developer would have the right to buy the property five years hence for 85% of the then market value, with the $500,000 to be a credit against the purchase price. If the developer accepts, the farmer, in effect, has received a $500,000 loan repayable in five years, assuming the option then is exercised by the developer. In consideration of the "loan," the farmer will pay "interest" equal to 15% of the property's fair market value at the end of five years. If the market value then is $ 1.1 million, total interest would be $165,000 (15% of $1.1 million) or about 6.6% annually. The developer might be willing to accept this offer because of the following benefits to him:
>He will get a 15% discount if the option is exercised;
>The entire $500,000 will be credited against the purchase price; and
>He is protected on the downside, since the exercise price will drop if market value in five years is less than projected. Of course, if the option is not exercised by the developer, the farmer gets $500,000 outright. Thus, the developer is not likely to agree unless he is very sure he wants the property. (If the property rises in value, the developer must pay more; but given the $500,000 cash credit plus 15% discount, it is highly unlikely that he would end up paying more than the $1.1 million value originally placed on the property.)

Note: The risk in the transaction is that the IRS might challenge it by arguing that exercise of the option by the developer is a foregone conclusion, since the option price is a fraction (85%) of fair market value at the time of exercise and also because the $500,000 fee is credited against the purchase price. The developer's position is that his business is highly speculative and that a recession or high interest rates could prevent exercise of the option.

In This Issue
Warding Off The 'Ghost Tenant' In Centers
The Insurance That A Commercial Tenant Must Carry
How You Can Use Options For Big Profits
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Contact Information
Rob Cassam, MBA, CCIM
Carolina Realty Advisors
1001 East Blvd. Ste. B
Charlotte NC 28203
Tel: (800) 587-4066 Ext. 100
Fax: (704) 442-8841
What I do...

I provide real estate brokerage services for small and medium sized businesses, investors, and individuals who are fed up with losing money, paying too much and/or, spending too much time not getting the right piece of property for their particular situation. I act as the quarterback in the real estate transaction for my clients who coach me in managing all of their different needs.

My clients love not needing to worry about making bad decisions or bad investments and love winning negotiations.

Owners Of Commercial Space

How are your properties helping you in your life?

Have your investments turned out as planned?

What types of problems have you had growing your portfolio?

How has the economy impacted your rents and vacancy?

Are you satisfied with your income and asset portfolio? Is it meeting your needs?

How much of a problem is dead equity in your property?

How long are you prepared to go on doing nothing about situations in your business that are not quite right?

End Users Of Commercial Space

What types of growing pains is your company facing with your location?

Are rising occupancy costs a challenge your company is facing?

Is having too much space or not enough space a challenge your company is facing?

How much of a problem is dead equity in your property for you?

How long are you prepared to go on doing nothing about situations in your business that are not quite right?

Give me a call, I may be able to help.

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