Commercial Real Estate Tenant Issues

On November 5, 2011, in Tenant Tips, by Rob

Commercial real estate owners must be thorough when checking out potential tenants for their properties. Entering into a contract with the wrong type of tenants can prove costly to your business. Review the leasing contract carefully with the tenants you select to ensure that all parties are aware of the terms. Be willing to negotiate somewhat on the lease terms, but protect your assets by limiting your liability in certain circumstances.

Property Maintenance

Property owners must make it clear in lease agreements, their responsibilities for maintaining and improving the commercial real estate. If you do not clarify this point in the lease, tenants could make unreasonable demands that you must comply with. Explain in the lease agreement that the tenant is responsible for returning the property to its original condition at the end of the lease terms or risk losing the security deposit.

Use and Exclusivity Clauses

Tenant problems could arise if you do not build in use and exclusivity clauses into your commercial lease contract. Use clauses dictate the type of activities permitted on the premises. Illegal activities must be prohibited to protect your business from liability. Also, if you have a personal aversion to a type of business and worry about the effect on your company’s image, you have the right to forbid the tenant from performing certain activities. If you rent multiple commercial properties, the exclusivity clause prevents you from renting spaces to competing businesses in the same complex or shopping center.

Eviction Process

To protect yourself in the case of tenant issues, build in eviction clauses into your leasing contract. For instance, commercial leases typically give the owner the right to evict a tenant if he violates the lease terms. The violation must be remedied within three to ten days or the eviction process can commence. Non-payment of rents could also launch the eviction process and require tenants to settle rents or be removed from the property.

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I hope you enjoy this issue!  Click Here

Best regards

Rob Cassam

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NC Broker Lien Law

On July 21, 2011, in Trends, by Rob

By Randyl Drummer- NCCCIM June 22, 2011

North Carolina last week became the 29th state to enact a law allowing commercial real estate brokers to obtain a lien as a legal remedy against a property if the buyer, seller, lessee or lessor fails to pay the agreed-upon commission or fee.

The Tar Heel State follows Colorado and Michigan, which adopted similar laws in August and October of 2010, respectively. Legislation has been introduced in a number of other states over the last year, including Oregon, North Dakota and Delaware.

The laws have a common purpose: to protect brokers by statute from clients who can’t or won’t pay commissions, often forcing a time-consuming and costly legal standoff where costs may far exceed the disputed commission or fee. Without the protection of a lien, proponents of the law say, the real estate broker may get stiffed on the commission, or forced to accept a reduced fee or “commission-ectomy,” as it’s known in the business.

The past real estate downturn was rife with examples of brokers losing out on commissions, often by financially distressed buyers, sellers, landlords and tenants.

North Carolina Gov. Bev Perdue on June 17 signed HB174, the Commercial Broker Lien Act. The legislation, co-sponsored by Reps Darrell McCormick (R-Iredell), Pryor Gibson (D-Anson), Leo Daughtry (R-Johnston) and Tom Murry (R-Wake), culminates an effort that started in 1997.

The legislators worked in cooperation with the North Carolina Association of Realtors to steer the bill through the Legislature. In most states, Realtor groups, with support from the National Association of Realtors (NAR) and its affiliates, the Society of Industrial and Office Realtors (SIOR), the CCIM Institute, the Institute of Real Estate Management (IREM), and the Realtors Land Institute (RLI), have led legislative initiatives to introduce and enact the state laws.

Opposition to the laws historically has come through State Bar associations, banks and other groups opposed to the addition of another lien to the property transaction process. Opponents claim the liens may complicate deals, cloud a property’s title, impede financing, interfere with basic property rights and even violate due process.

James A. Hochman, a commercial real estate attorney with Coman & Anderson P.C. based in Lisle, IL, said such arguments are an attempt to exploit “fear of the unknown” and are not grounded in facts, based on his experience asserting and litigating broker lien claims in several states over the last two decades. Hochman has consulted for and represented real estate groups and testified before several legislatures in pushing for broker lien acts, including the first significant law, enacted in Illinois in 1992. He worked as legal counsel for CB Richard Ellis when several of the early laws were adopted.

In North Carolina, he represented NAR and its affiliate SIOR, working with Rep. McCormick and the state association to craft and fine tune the legislation, and address objections.

“[Broker liens] don’t hurt anybody other than somebody who agrees in writing to pay a commission and then doesn’t do it,” Hochman tells CoStar. “When brokers have lien rights, they typically get paid without the need for litigation. The mere threat of the broker lien leads to payment at closing in exchange for a lien waiver.”

The NAR supports enacting legislation in the remaining 21 states where no broker lien law exists, the association said in a statement.

Litigation to recover commissions is not always economically feasible and invariably results in delays, to the detriment of the real estate brokerages and commissioned agents involved in the transaction, CCIM Institute said in a public policy statement published on its Web site this week. However, because attorney’s fees can be recovered by the successful lien claimant, brokers in states protected by the law can threaten or pursue litigation to protect their interests that otherwise wouldn’t make financial sense, Hochman said.

Language varies from state to state, but most laws require that the lien language be placed in the written agreement signed by both the client or party the broker represents, and the real estate brokerage agency. Typically the agreement is valid only for the principal broker.

In its position statement, CCIM Institute “supports the enactment of commercial broker lien laws in all states to serve as a safety net for brokers who previously had no means of insuring payment of the agreed upon fee for their services, other than costly legal battles.” Further, lien laws should be forceful and efficient in protecting brokers in commercial lease transactions as well as property sales.

“As more and more states contemplate creation of such laws, commercial brokers will have a greater sense of security when completing a transaction, which is beneficial to not only the brokers themselves, but their clients and the commercial real estate market as a whole,” CCIM said.

Although brokers take haircuts on commissions in good times and bad, the weak economy and pressure on small brokerages played a role in finally pushing the law through in North Carolina after 14 years.

“Because of the economic situation we’re in, and what we’re seeing happening to our brokers, this definitely gave us a better leg to stand on to get this done,” said Cady Thomas, director of government affairs for the North Carolina Association of Realtors, who pushed for the recent legislation. “We’ve been trying to enact this law since 1997. We couldn’t even get a hearing back then.”

Realtors in North Carolina resurrected the issue two years ago during the recession but could not get the state legislature to bring the matter to a vote.

The North Carolina law gained impetus from the case of a Raleigh broker who had been working on a transaction for several years with an investor based in Texas, which has lien rights for brokers. “Whenever they sent a closing packet, it included a lien waiver. The broker promptly called the investor and said ‘we don’t need this, we don’t have lien rights,’” Thomas said.

The Texas investor then said they intended to renegotiate the broker’s commission, at a loss of $170,000.

“That gave us a real-life example of our brokers being taken advantage of,” Thomas said.

Some claim the broker lien laws afford more protection for smaller firms that may lack the legal resources of larger ones, Thomas said. Larger companies tend to have more clout, contacts and resources than boutique shops, ensuring their participation in a transaction from start to finish, and often representing both sides in deals.

“The broker is the easiest party to cut out of a transaction when they don’t have lien rights because in most cases it’s not economically feasible to sue for their commissions,” added Thomas.

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 Knowing what the condition is of the space you are considering leaseing is important!  Failure to discuss these issues and address them on your lease could lead to lots of unwanted problems and potential charges.

Consider these important questions:

1.  Is the tenant accepting the premises AS IS and without any build-out obligation from landlord? Even so, the landlord should still represent and warrant that the condition of the premises, building and project comply with applicable laws as of the commencement date, including those relating to disability access and hazardous
materials (including asbestos), and that the building systems serving the premises are in good working order.
2. Is the landlord delivering a cold shell, warm shell or turn-key tenant improvements?
3. Can you describe the line between the work the landlord is to perform (and pay for) and the work the tenant is to perform (and pay for)? Misunderstandings about the parties’ build out responsibilities are a major source of conflict, so be sure to discuss these responsibilities in great detail.
4. What is the tenant improvement allowance and how is it calculated? Per rentable or usable square foot? Is the landlord open to providing an additional allowance which would be amortized and repaid over the term of the lease as additional rent?
5. If the entire allowance is not applied, who gets the remainder? Preferably it would be credited to rent. Alternatively, the funds remain available to the tenant for alterations later in the lease term.
6. Are there any unusual build-out requirements, such as internal staircases, high density file cabinets, showers, training or childcare facilities, satellite dishes or extra HVAC? Have those been approved by the landlord at least in concept?
7. Has the landlord approved the tenant’s finishes?
8. Does the lease provide a mechanism for delivering a punchlist and when is the punchlist due?

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Q1 2011 Bottom Line Secrets Newsletter

On March 4, 2011, in Newsletter, by Rob

I hope you enjoy this issue!  Click Here

Please note our offices have moved to:

1001 East Blvd. Suite B

Charlotte NC 28203

Best regards

Rob Cassam

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According to Small Business Notes, it is important that you know exactly what you want or don’t want, in a lease before you begin looking for office space or initiate the negotiating process. What is the maximum lease that fits your needs? Your ideal timeframe? Do you know the basics of leasing and how to analyze the cost of the lease? It is equally important that you go into the process prepared and with reasonable expectations.

The process of locating usable space with a knowledgeable real estate agent is the real start. Have you determined the location that is best for you? Your search will help prepare you and temper expectations greatly. Even if you are contemplating renegotiating a lease at an existing location, or moving to a different space with the same landlord, it is a good idea to comparison shop just to familiarize yourself with what the market trends and prices are.

Know what you want and what you must have.  You must know the maximum and minimum amount of square footage that fits your needs, as well as the floor requirements. Does the nature of your business make the groundfloor a necessity? Is a panoramic view from the conference room important to you? Do you want a build-out of the office from the concrete, meaning totally new floor, carpet, walls, etc.? Is there a security system in existence at the office space? Do you require one? Is the heating and air conditioning individually maintained? If not, how will you be charged for it?

The more that you require, the less negotiating room you will have. On the other hand, make sure you, or the realtor, find out important information like the occupancy ratio over the last year. Is there square footage available where a lease has fallen through? There are instances in which large corporations rent entire floors, then do not need as much or decide to rent elsewhere. In these cases, the management company of the building will sublet the space – often for less than the going rate for office space in that building. All of these things could be negotiating points in getting the best rent.

Determining the length of the lease.  One year leases are few and far between, with the most typical being three (3) years. It is important that you take your growth potential into consideration. It will not be smart to sign a 1,200 square foot, five (5) year lease when you anticipate tremendous growth and will need 2,500 square feet in three years. It might not be a bad idea to put a clause in your lease that addresses this if much growth is anticipated. This can be done in a variety of ways, which your realtor can address for you.

Have a monetary range in mind.  During the negotiations, you will need to have the amount of rent that you can afford every month. Your search and your realtor should be able to provide you with the current market rental costs for the area in which you want to relocate, or even for renegotiating at your present location. The national average for rent has been noted to be between four (4) and five (5) percent of your total operating costs.

Determine all costs of the lease.  It is essential that you determine the other costs associated with the lease of the space. For instance, what portion of the heating and air conditioning are you responsible for; and what is the average monthly cost. Get types and figures on associated costs, from the landlord and the Realtor – it will not hurt to have them from two sources. As you plan your finances, you do not want any unexpected expense surprises.

One cost that is often overlooked is the common area factor. The common area is all parts in the building that are used by or for all tenants of the building. Usually included are: building lobby, all corridors, janitorial and electrical closets, elevator rooms and rest rooms. The owner determines what percentage of the building these areas represent and adds that percentage to the amount of space, you, the tenant occupies. So, while your rent per leaseable square foot may be $18.00, if there is a 15% common area factor, you actual cost per square foot is going to be $20.70.

Although the previous tasks may seem arduous, the real task is getting final lease approval – that is all parties agreeing on the finer points. You should write down all the things you would like to see in the lease and any specific time frames. You do yourself an immense favor by having a clear cut idea of what you want, which things are negotiable and which things are not.

Be ready to compromise, as it is highly unlikely that the lessor will tailor the lease to your exact specification. It is important that you have a clear idea of those items which you can easily give up, as flexibility is essential to successful lease negotiations. Equally important is not being desperate, or you can end up with a lease on a property which does not fit your needs at all and it will give the lessor all the bargaining power. It is an excellent idea to have your strongest negotiator handle this area, or brush up on your negotiation skills before going in.

At the very least, being knowledgeable about the current market trends for your area, the particulars of the real estate you are looking at and what you want is crucial to obtain a successful lease.

There are many options and terms available when leasing office space. You should always be ready to walk away if the terms are not acceptable to you. In order to make sure you have this option, you must start your search early enough and be thorough. You should have a couple of properties which might work for you, ranked in order of most desirable. successful negotiations are easiest when you have prepared yourself and really know what your needs are.

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Beginning in 2011, landlords will be required to issue 1099 statements to any service provider who receives $600 or more for work relating to the rental property.

The 1099 statements will need to be submitted to the service provider, and will also be sent to the IRS.

This means that landlords will need to develop a system for collecting tax identification information, legal names and addresses for contractor they do business with.

The new provision is part of the Small Business Jobs Act that was passed two months ago, and signals a change over existing rules that used to apply only to landlords who rented as a business or trade. Now, anyone who receives rental income is required to disburse 1099 statements. The rules will also include vacation home rentals.

It is estimated that any one landlord will need to prepare a number of these 1099 statements, a dozen or so on average, at the end of each tax season or pay to have a tax preparer do the work. Industry experts fear the requirement will place a financial burden on small landlords, which is an irony given the intention of the jobs law was to help small businesses.

A second tax reporting provision is set to begin in 2012. In this case, landlords will be required to prepare 1099 statements on both services and goods purchased. This requirement, tucked into the health reform law, is the more controversial and attempts have already been made to repeal it. Prior IRS regulations appears to exempt credit card purchases, which are already tracked by banks and card servicers.

The IRS is currently developing regulations to aid taxpayers in compliance with both provisions, but the agency is still in the preliminary stages of rule-making, where it is evaluating public comments to the proposed changes.

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Hopefully your business is slowly starting to get healthy again. While you continue to work hard, take a few minutes in thinking about your space and what it could be doing for you that it is not already.

Now if the perfect time to start making those plans as the market is still soft. Property owners are thinking creatively like never before. Consider the possibilities for the future!

This months issue is has some great tips and ideas to consider  as you start to make those plans. 

Click Here for the entire issue!

Best regards

Rob Cassam

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There is No Such Thing As The Perfect Space

On November 24, 2010, in Tenant Tips, by Rob

Once you have decided you need a new space for your business, your work really is just beginning.   Here is what to do.

First conduct extensive market research intensive enough to do the detective work thoroughly investigating all alternatives and leaving no opportunity uncovered.

Make sure your search covers the following areas: vacancies, rental rates (current), effective rates (long-term), building expenses, leasehold improvement costs and demographic information (if applicable).

If you do this correctly, this process should include:
• Develop availability study of buildings.
• Visit the different local market and conduct examination.
• Examine public domain information, such as: Office guides, market research reports, trade publications, chamber of commerce material, on-line databases, economic development committee analyses.
• Gain market intelligence from wide variety of sources, including: Local brokers, developers, lenders, corporate real estate executives, business leaders, industry trade groups.
• Evaluate all facilities that are consistent with your requirements, as well as “hidden opportunities”.
• Catalog fact sheets on buildings, photographs, floor plans, location map, transportation accessibility and competitors in market.
• Make sure you have information on demographics, traffic patterns and location analyses(if applicable to your business).

While you are looking, keep one thing in mind:
THERE IS NO SUCH THING AS THE “PERFECT” SPACE!
You certainly want to make sure that the space that you lease meets your needs, but you will drive yourself crazy if you go through dozens and dozens of properties searching for the “perfect” space.

Make a list that includes your price range, all the items you must have in your facility, along with the items you don’t want. Take it with you whenever you look at homes, so you don’t get sidetracked.

You will want to thoroughly research the different offerings in your target area. You need to know what people are asking for their lease rates, and most importantly, what they are getting for it as well as their total lease structure. You want to be on the lookout for and avoid problem properties.

Although you certainly don’t have to use one, the services of a good real estate tenant rep broker can be quite valuable during this stage. They can help you with this part of the process.

Once you have a list of spaces that you are interested in, you need to find out more information. There are several questions that you must ask the landlord before you start any negotiations. You need to know as much as possible about the landlord’s position and motivation.
This is done in a formal process with a “RFP” or request for proposal.

This documents asks and gets answers to important questions like:
Who owns the building?
How is the size calculated and how what will the rates be based upon?
Who handles utilities?
Who handles maintenance?
Who handles common area costs?
What about taxes and insurance?
What about the ADA act?
What about tenant improvement allowances?
What about all those legal lease terms like exclusivity, assignment and termination?
When you have answers to these questions, you will have a good feel for the overall terms of the lease. You’ll be in a position to decide if you want to move forward with this space or not.

ANALIZE THE VALUE
If everything looks good, you may want to proceed in the process. The next step is to make sure you understand how the complete offering will work.

This is where the information you learned from the RFP can be quite useful.

There are many different strategies for negotiating, but the one that I have seen produce the best results is not all that difficult. It starts by studying the market data to determine what the fair market value is for the space.

Your objective is to make your offer at a price that is lower than what the landlord has in their mind as their “bottom line”, but is close enough that they say, “Oh, I guess we will go ahead and take it”.
Keep in mind the three basic options that a seller has when presented with an offer:
1) Accept the offer.
2) Reject the offer.
3) Make a counter offer.
This process goes back and forth typically.

The rate is always the focal point of the offer, but there are lots of additional areas that you need to address and pay close attention to also. In your offer, be as specific as possible about every aspect of the transaction. Details that are not clear or are left out can lead to big problems down the road.

Spelling out every detail can save lots of confusion and misunderstandings, and keep you out of a costly court battle!
One area where you need to be especially careful is termination provisions and duties. These are things that must or must not happen in order for you to exit the lease.

Determining the total cost of the lease and comparing it to the other targeted proposals allows you to make an apples to apples decision. Keep one important fact in mind: There is always another space- so long as you have time to find it!

If you start to feel pressured or uncomfortable, step back and review your goals. Don’t let yourself be bullied around. Remember that the landlord usually needs to lease that property a lot more than you need to lease it!

NEGOTIATING THE CONTRACT
After all of the terms and conditions of the contract have been mutually agreed upon by both you and the landlord, you still need to stay on your toes. Many people tend to relax and end up dropping the ball. There are at least a hundred things that can go wrong and foul up the transaction.

This is where you take what was agreed upon informally and transferred to the lease, that is the lease you will be signing to “close” the transaction.

You will want to make sure that all of the terms of the lease have been met, including the build out (renovation) agreement.
All of your preparation and planning will pay off handsomely when you move into your new space!

Once the lease has been signed and the build out has been completed, you are ready to really move! WAIT, what about the move?
That is the subject of another discussion. Pre-move planning should be take place when you are deciding to move or stay. Again, a good tenant rep broker can help you with the pre-planning move and the actual implementation of that move as well as other important items like phones and data lines. DON’T FORGET THIS!!

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 Imagine negotiating and moving into the perfect property for your business today and buying it several years from now! This can be possible using a lease agreement with the option to purchase the property in the future.  A purchase option is a unilateral agreement that one has with the owner of a property where the tenant (in this case) has the right but not the obligation of purchasing the property.  This can be a great situation for several reasons. Here are some of the benefits.

1.Very Low Down Payment (aka option fee) (1% to 2% vs. 10% to 30%).
2.No Loan Qualification Necessary Up-front.
3.Rent Money Is Working For You (in the form of a Rent Credit).
4.Option Consideration Is often Credited towards the Purchase-100%.
5.Price Is Usually Locked In Up-front.
6.Profits From Any Appreciation (good down market strategy).
7.Time To Check Out The Property (and make sure the roof really doesn’t leak).
8.Time to Check Out the Area and Employment Base
9.Time To Obtain the Best Financing (No pressure, no rush, no bank financing up-front).
10.No Real Estate Taxes To Pay.
11.Buys Time To Develop Credit or Develop Needed Down Payment
12.Quick Move In Time (No Lengthy Closings or Mortgage Approvals. )
14.Rents are Negotiable
15.Tenants/Buyers May be Able to Sell Their Option In the Future!

Owners of property like the idea of a tenant who is making a commitment to buy the property. They like knowing that they will have a cash flow for a time under the lease, and get their equity out at the end when the tenant exercises their option.  However, do not expect to get the option for free. Many owners will want non refundable option consideration in order to give you all of these benefits.

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