A commercial real estate attorney should have one goal: protecting you.

When creating or negotiating a commercial real estate lease, the attorney will ensure that nothing is left up to chance. If it’s not in writing, it doesn’t exist.

Disputes arise between the landlord and tenant when there is a lack of communication, especially if the basis is an item that isn’t explained in the lease. For example, who is responsible for a faulty HVAC system or unexpected repairs?

That’s why a proper lease is so important. If these items are not addressed in the lease, it can lead to litigation, which means more of your time and money.

Purchase agreements

A purchase agreement is an in-depth document that contains conditions and disclosure forms. These documents contain deadlines for things such as earnest money deposit, inspections, contingency removals, as well as the condition of the property that is sold. This is signed by and agreed to by both parties.

If either party needs more time, it is imperative for the party to notify the other one well in advance. This maintains a smooth relationship between the landlord and tenant and allows time to create an extension.

Similarly to a lease, you want to know what exactly you are getting into. A commercial real estate attorney will help you know and understand your obligations and understand what you are getting into what your options are for getting out if it if necessary.

Get it in writing.

If you rent a commercial property, you need to have all of your terms written in detail and agreed to by landlord and tenant. Oral lease agreements are often thought of as being an easy way to create an agreement. However, that creates opportunity for confusion and misinterpretation.

Do you have a personal relationship with your landlord? That’s great – but you still need to have an agreement that holds each party responsible.

When you work with a commercial real estate attorney, she will discuss your concerns and your documents. Consider these questions:

With an attorney and a well-crafted lease, these questions will be answered in detail.

Option Agreement

A long-term lease locks you into the agreement for a certain amount of time. It could be one year, five years or even more. During that specified time, you are, of course, obligated to the terms of the agreement.

In the unfortunate event that your business becomes unsuccessful, you would be obligated to continue your five-year lease, paying 60 months worth of rent/lease. That’s a large amount of money! With the option agreement, the tenant has a pre-negotiated lease term once the original lease ends. That means the tenant knows the amount of time and rent that will be set going forward.

Avoid Conflict

No matter the lease option that you partake in, a commercial real estate attorney is key. She looks out for your best interests and makes sure that your lease is detailed and fair.

Call me to discuss your lease options and learn how to protect yourself and your business!

Disclaimer
The transmission and receipt of information contained on this website does not constitute an attorney-client relationship. Persons should not act upon information found on this website without first seeking professional legal counsel.

As the end of 2019 approaches, there will be a few things in commercial real estate leases that will change in 2020 that you need to know about.

Short-term Lease

Lease accounting standards will be changing for private companies. Lease costs will be accounted for differently, which means short-term leases will be more popular than ever.

Currently, long-term leases (longer than 12 months), have a large amount of bookkeeping that is required with ASC 842. The shorter-term leases will affect their balance sheets, but in different ways.

Short-term commercial real estate leases are becoming more popular. Tenants appreciate these leases due to the benefits such as:

  • Flexible space
  • Co-working
  • Pop-ups
  • Shared space
  • Changing demands

Tenants will experience more flexibility, which gives landlords less certainty with budgeting and planning and their tenant mix.

If the landlord is using a discounted cash flow model, the short-term lease could cause him/her to change to a valuation model. There are a few factors that carry weight in the valuation model:

  • Higher expenses
  • Shorter leases
  • Lease commissions
  • Marketing costs
  • Change in vacancy rate
  • Rental premiums to offset expenses
  • Replacement building costs

Tenants may consider entering a short-term lease and reassessing annually. Reassessing can save him/her money if there’s a better economic leasing option available.

Landlords may provide incentives to tenants in order to agree on a long-term lease. This guarantees a fixed rental income for the Landlord each month for a longer period of time, as opposed to the short-term lease.

Short-term leases affect the tenant, landlord, and both parties in their capacity as a borrower. This shorter commercial real estate lease may affect a borrower’s access to credit. Initial direct costs and disclosures will be required on the balance sheet, instead of as a footnote. All lease types cover the possibility that the borrower may default. The good news is, for the most part, the rate of defaults has stayed low.

Recourse Loans

The borrower is personally liable for the loan due if using a recourse loan. Recourse loans “can help a lender recoup its investment if a borrower fails to pay the liability and the value of the underlying asset is not enough to cover it. A recourse loan lets the lender go after other assets of that debtor that were not used as loan collateral.

For example, if a tenant stops paying rent, files bankruptcy and is eventually evicted, the landlord may have a lien on the tenant’s equipment. This may allow the landlord to sell the equipment in order to recoup the unpaid rent- of course, it depends on what the lease says, it will ultimately control. With recourse loans, the landlord cannot exercise that lien.

Recourse loans and landlord liens greatly reduce bankruptcy filings. Borrowers often use bankruptcy to avoid receivership and stop foreclosures. This is a pain to lenders and can take years to resolve.

Non-recourse Carveout Guarantees

With short-term leases, there are also non-recourse carveout guarantees.  This means that the guarantor is either partially or not liable for repayment of the principal and interest on the loan. It’s important to have a commercial real estate attorney that will negotiate the wording in this area. Non-recourse carveout guarantees are imperative. It ranks right up there with rate, proceeds and terms.

Texas has a quick, non-judicial process when dealing with foreclosures.

Learn more about how a short-term lease can benefit you by filling out the contact form at the bottom of the page today!

Disclaimer
The transmission and receipt of information contained on this website does not constitute an attorney-client relationship. Persons should not act upon information found on this website without first seeking professional legal counsel.

 

Tenancy

As a tenant in commercial real estate, you need to be aware of the different kinds of tenancy, what they mean and how they affect you. By working with a commercial real estate attorney, you can be sure that you are entering into a commercial lease that benefits you.

Tenancy at will

This type of tenancy can be terminated at any time. It can be terminated by the tenant, owner or landlord. There is often no written lease or contract and no specification about how long the lease is or how rent is paid.

Tenancy at sufferance

Generally, the tenant is legally permitted to remain on the property after the lease has expired but before the landlord demands the tenant to vacate. The original lease conditions must be met, including the rent payment. Otherwise, the tenant can be evicted at any time without notice.

Month-to-month

The easiest and most beneficial for many tenants is a month-to-month rental. This lease does not tie the tenant down as a long-term lease often does. It allows for flexibility and is particularly favorable for a new business.

Holdover

A holdover tenant remains in a property after the lease expires. If the tenant continues to pay rent and the landlord accepts, the tenant can continue to occupy the property. State laws and court rulings determine the length of the new rental term after the lease expires. This is common law and avoidable. Month-to-month is preferred, as it will not cost additional legal fees to determine the rental term.

Option to Extend

At the end of your lease, you may have an option to extend the lease. This is a pre-negotiated agreement that allows the tenant to continue renting the property at a set rate and set term. The tenant and landlord agree on the option terms when the lease is signed.

Fair Market Value

Sometimes, the landlord and tenant can’t agree on the rental amount in an option, but they agree that the amount should be determined fairly. This is know as setting fair market value, and the method for the determination should be included in the lease. Some of the more popular methods are:

Two-Broker Method: The landlord uses a broker and the tenant uses a broker. The brokers determine the fair market value of the property and, that becomes the new rental amount.

Three-Broker Method: If the landlord and tenant brokers cannot make a decision, they bring in a third broker. The third, neutral broker determines the fair market value based on the information provided from each broker.

Option to Negotiate an Amendment

This isn’t a true option, but it’s an agreement that the landlord and tenant will extend the current lease, but negotiate the terms of the extension, not at lease execution, but sometime before the lease expires. Tenants need to be cautious- sometimes the landlord will require the tenant to agree to the rent before telling the tenant what the new rent is!

A commercial real estate attorney understands these tenancy terms in full and is familiar with working in each area. By partnering with an attorney, she will make sure that your lease works best for your particular needs. It is crucial that your tenancy be feasible. After all, it is a commitment, whether it’s 30 days or three years.

Call me today to discuss which type of tenancy is best for your business!

Disclaimer
The transmission and receipt of information contained on this website does not constitute an attorney-client relationship. Persons should not act upon information found on this website without first seeking professional legal counsel.

Did you know?

Contrary to the online shopping craze, 85% of consumers prefer to shop at a physical store. Timetrade found that:

  • Consumers prefer brick and mortar stores
  • In-store expertise drives purchase volume
  • In-store purchasing preferences span generations
  • Mobile purchasing

Shopping In-store

A major reason shoppers are still physically going in stores is because of the experience. When walking into the location, shoppers use their senses. They see the patterns, feel the fabrics, and smell the fragrance. It’s all about creating an experience. This doesn’t only fall on the retail tenant. It also falls on the landlord – making sure there is adequate parking, clean restrooms and welcoming common areas all play into the experience.

Ripen cited the reasons people shop in-store as opposed to online:

  • Want items right away
  • Protects privacy
  • Save on shipping costs
  • Easier returns
  • See products in person

Think about how you shop. Do you plan a specific day and time to go to a specific store? Sure. Do you walk around a local shop after your date on Saturday night? Yes. You are taking part in impulse shopping – which is a large reason that retail locations are flourishing.

So what?

This is all good news for landlords, tenants and investors. More in-store shoppers mean more money in the tenant’s pockets. A building full of tenants means more money for the landlord. Successful landlords mean new investment properties.

It’s a ripple-down effect. In order to remain successful, all parties must keep up with the ever-changing industry. While name brand and national stores are closing, many retailers across the country are thriving. Through a mixture of tenants including discount retailers, service-oriented businesses and tech shops, commercial real estate is booming.

Warehouses

The explosion of e-commerce has benefited investors and landlords alike. All of those packages that are dropped off at shoppers’ doorsteps each day have to be packaged somewhere. Warehouses and packaging facilities are popping up all over the country. Texas specifically has seen growth in the area of warehouses due to an increase in online shopping.

The Houston Chronicle stated, “Commercial tenants in distribution and consumer goods leased more than 6.7 million square feet of space over the last two years in Houston, a 60 percent increase over the two years prior, real estate service firm JLL reports. Of 27 industrial facilities completed in Houston in the fourth quarter of 2016, 25 were warehouse and distribution spaces, according to market research by CBRE.”

Changes

  • Commercial real estate properties are now including multiple tenants in their property instead of just one.
  • Lease terms are evolving as the type of stores that come into the property are evolving. Month-to-month has become popular for pop-up shops.
  • Knowing how people shop and why they shop that way is beneficial to everyone involved in commercial real estate.
  • While e-commerce is continuing to grow, retailers are realizing the need for a physical location to please their customers and provide a pleasurable experience.

Being flexible and growing with the changes is essential. Call me to learn more about creating a unique commercial real estate lease that works for you.

Disclaimer
The transmission and receipt of information contained on this website does not constitute an attorney-client relationship. Persons should not act upon information found on this website without first seeking professional legal counsel.