Tag Archives: CRE

Options to Renew Your Lease: The Good, The Bad, The Ugly

You are a tenant leasing some kind of commercial space like retail, office, industrial or otherwise.  You were smart and negotiated at least one option to renew your lease.  But, should you exercise that option to renew?  Do you really understand what conditions in which it would be favorable or not to exercise this option?

In my market in Southern California, most landlords will grant a tenant who is leasing commercial space an option to renew their lease for one additional lease term that is less or equal to their original term.  For example, if you leased for a 5 year term then you could usually negotiate a 5 year or less option to renew.  If you leased for 10 years, you might get one 10 year option to renew or perhaps two 5 year options to renew.

But here is where it gets tricky.  It’s generally not in your best interest to exercise your option to renew. Instead, you should think of it as a last resort.  Option to renew language usually contains a certain minimum rent to the landlord. For instance, it may be no less than what you were paying at the end of you current term or maybe it has a 3% bump above what you are paying at that time.  I have found that market rents are usually lower than what your option to renew requires you to pay.  And what about current market tenant concessions like free rent, improvements, etc.?  You will most likely miss out on these.

Another provision that option to renew language usually contains is that the lease (except for the rent) will be on the same terms and conditions.  So, if there is a clause in your lease that needs to be negotiated you may want to reconsider the option to renew.  These clauses could include receiving a new base year for operating expense increases for an office tenant or excluding unreasonable lease clauses from applying. For instance, certain Triple Net clauses could be excluded for a retail tenant if you negotiated your renewal instead, but these exclusions won’t apply if you simply exercise your option to renew.

What is a tenant to do?  Hire a good commercial broker to help.  This broker will know the current market rents and be able to review the lease with you and recommend all necessary changes.  If the broker is active in your area, then the landlord will be concerned that this broker might relocate you to another building if the landlord isn’t fair.  You simply don’t have the same clout without a good broker and you won’t get as good of a deal.  But do it at least 6-12 months in advance of when your current lease terminates or at least 3 months before you have to exercise your option to renew so your broker and you have time to review your needs and options. One other really good thing that happens when you don’t exercise your option to renew, but rather negotiate your renewal, is that your option to renew many times gets left in place and is still valid the next time your lease terminates.

I have successfully represented many commercials tenants for renewals for their leases and not just new leases.  I can’t remember the last time I didn’t do much better than the tenant could do on their own.  Many times the landlords end up paying my fee for the tenant’s renewal just like they always do when I represent a tenant for a new lease.

For more information about commercial leasing, buying, and selling please contact David Massie at DJM Commercial Real Estate at 505-217-0791 or david@djmcre.com.

Commercial Real Estate Dual Representation: Possibly Illegal Soon?

Assembly Bill 1059 has been introduced to the California Legislature to ban commercial real estate dual agency relationships. Specifically, the bill “would prohibit an agent from acting as a dual agent in a commercial real estate transaction,” and also prevent different individuals in the same firm from “acting as an agent for both a seller and buyer in the same commercial real estate transaction.”

There are many pro landlord groups opposing this bill like AIR CRE.  Why?  In my opinion, it’s because it will help the tenant and buyer and reduce the profit of the landlord and seller.  Just read some of the weak arguments made by AIR CRE here.  All of them primarily have to do with a landlord or seller making less money or not doing as well somehow.  Don’t you feel sorry for them?

Dual Representation is not legally allowed in many states.  Why?  Because it can’t be done without violating ethical issues as there are simply too many conflicts of interest.  The tenant/buyer loses big time and the owners and their brokers gain big time. This is why so many brokers and owners are in favor of it.

For 25 years I worked as a landlord and seller and directed some very large real estate companies that owned millions of square feet of commercial property across the US and even internationally.  Many brokers wanted my business because I could give them 5 or 6 figure salaries off some of my properties in any one region that I controlled.  As a landlord, I loved it when my brokers were able to do dual representations because I had a great amount of leverage over the brokers who worked for me.  If they, or anyone in their firm representing a tenant/buyer, pushed too hard for a tenant/buyer at one of my properties –all I had to do was hint that they might not be able to keep my listings.  Would a broker risk losing a 5 or 6 figure salary working for me over one deal where they also represented the tenant/buyer?  Not likely.  That is all it took for the tenant/buyer to not get as good of a deal as they could have received had they used another broker from another firm; a firm that was not affiliated with a listing broker who worked for me or that wasn’t trying to get listings from me.  This is why dual representations shouldn’t be done.

Even though dual representations are legal in California, I won’t do them.  They should be outlawed.  Ask any good real estate attorney how it goes in court when they have to defend a broker for a dual representation. Attorneys that I have spoken with that have experience in this matter have said “it’s not a matter of whether they can win the case but rather of how much they can settle for”.  This is because these attorneys know that it is impossible for a broker to represent both parties correctly without fault.

Can you imagine an attorney who has represented a large property owner for decades attempting to also represent a tenant in a dispute in court?  It wouldn’t be possible to represent both parties fairly.  It doesn’t happen. This is the same reason why dual broker representation should not happen.

Every tenant/buyer should hire a broker that doesn’t have any conflict of interest with a landlord/seller or their broker.  The landlord/seller pays the tenant/buyer’s broker’s commission so it costs the tenant nothing.

Brokerage firms that specialize primarily in representing tenants/buyers are a very good choice because they don’t have the conflicts mentioned above.  If a tenant/buyer is thinking of representing themselves –that can potentially be even worse.  Hire an experienced broker who only has your interests in mind instead.  You will save a lot of time, money and headaches if you use the right broker.

How to Terminate a Commercial Lease Early

Many of my clients have stated, “I don’t want to sign a long term lease like 5 years or more because I’m not sure I will be in business that long or might need more or less space.”   My answer to them?  It’s usually in their best interest to sign a long term lease and there are ways to terminate a lease early.

Signing a longer term lease between 5-10 years makes good sense for many reasons.  You normally get the best economic deal that way with lower rent, more free rent and more tenant improvements paid by the landlord.  You normally get more options like renewal options with more time.   You don’t have to worry about moving sooner either or having to pay a much higher rent in 1-3 years if the market rates increase.  Keep in mind that many landlords won’t agree to less than a 5 year term, especially for space in demand where another party will lease it for 5-10 years, so it will really limit your options for properties if you want to do less than a 5 year term.

If you need to terminate a lease early, you have many options available to you.  You can request an early termination option of the landlord in your lease, but most landlords don’t like to grant them.   If they do, they want enough time to release your space so a 6-12 month notice from you might be required.  You might then have to pay back unamortized tenant concessions like free rent and tenant improvements.  But this is still a good option to have if you can get it.

What if you can’t get the landlord to agree to an early termination option?  There are still other good options like having the right to relocate in the project to a larger or smaller location.  You also generally have rights to sublease or assign your lease to another qualified tenant.

If none of the above options work out, then you can still legally terminate a lease in most states like California.  Courts usually require a landlord to mitigate a tenant’s damages.  This usually means the landlord has to take reasonable steps to re-lease the space, but this mitigation usually only starts after you vacate the space –not while you are in it.  However, I have seen most legal awards and arbitrations settle between 6-12 months of rent.  This is generally the most a landlord can squeeze out of a tenant in Southern California.  This can be a tricky matter, so you have to make sure you do it right and use someone familiar with the process like me or a good real estate attorney. You might need both.  But I have been very successful negotiating an early lease termination for my clients.

Contact David Massie for more help:   805-217-0791 or david@djmcre.com

Commercial Landlords and How Their Reputations Affect Leasing

Most commercial landlords that I deal with don’t seem to understand the relationship between leasing their office, retail or industrial buildings, and their reputation in the community.  It’s pretty simple really.  If a landlord has a poor reputation, it will make it harder for them to lease their building spaces.

Here is a prime example.  Before I was a full time commercial real estate broker, I worked directly as the Director of Leasing and Property Management for a large landlord who owned more than 50 commercial buildings. There were many different types of commercial buildings -usually office, retail or industrial spaces.  Before I accepted this job position, I found out that the local brokers whom I knew well and worked with closely did not like working with this landlord -my new employer.  So, I convinced the landlord to let me leverage my relationships with the brokerage community for 6 months to see if it made a difference in our leasing.  Guess what?  In my first year, I negotiated and completed over 125 commercial leases!  This was more than double the number of commercial leases than anyone else that had the job before me.

Another example is when I had just finished acting as an expert witness where I had to go into court and testify that the landlord had ripped off a tenant for over 15 years.  This included millions of dollars related to the tenant’s share of NNN/operating expenses.  Our side won the case.  But the landlord didn’t just lose this case and have to pay my client back for millions of dollars, he also lost the trust of my client going forward and the trust of the other tenants, brokers, attorneys, other people in the community, and so many more.

Think about it Mr. Landlord.  If you treat your tenants poorly, and try to cheat them on their share of their operating expenses or add expenses that aren’t reasonable (even though maybe legally allowed), you are going to have poor relationships moving forward. If you don’t care about their business and working with them in ways to help them do better, have an unfair lease, or don’t check in with them regularly on how they like being a tenant and how they are doing, etc. -then your landlord reputation will hurt your leasing.  People talk.  And they will talk about you not being a good landlord.

My clients ask me all of the time for intelligence on a landlord.  I tell them what I know and when I tell them that a particular landlord is difficult to deal with, doesn’t have a good reputation or has a lease form that is unfair, etc. then many times this client will simply opt to not even consider the property owned by the landlord with a poor reputation.

My advice to landlords:  Treat your tenants like clients and not tenants.  Treat them like you would like to be treated.  You as the landlord many times have the upper hand in so many ways and if you use this leverage incorrectly you are making a mistake.  Tenants are your life blood and you need them as clients not just tenants.

If you are a landlord and want more information on how you can change your reputation, please contact me as I have many ideas on how to do this.  Some of these include calculating NNN and operating expense increases correctly and fairly, fair lease documents, correct property maintenance, and general things that will make your clients (tenants) want to stay in your building and new ones want to lease there.

Contact David Massie for more help: 805-217-0791 or david@djmcre.com

Tenants Need to Hire a Specialist to Audit Their Lease / Operating Expenses

You are a busy tenant running your business.  You receive your annual reconciliation of your share of expenses from your landlord about April each year.  These expenses go by different names, but are usually called NNN in retail and larger industrial spaces and operating expense increases for office and smaller industrial spaces.

The landlord reconciliation usually just shows the breakdown of each expense category, what your percentage share is, and how much you owed for the year.  You usually have been paying estimates all year so you might owe some or actually might receive a credit if you have overpaid.

Can you tell if this reconciliation is correct on your own?  I doubt it.  Most tenants that even think they can really can’t and don’t know what they are missing.  Landlords usually don’t send you enough information on the reconciliation to tell if it’s correct.  You need someone that specializes in understanding your lease and also that knows how to properly audit this reconciliation.  It’s kind of a combination between a real estate attorney and a CPA, but even having both of these on your side will probably not cover all of your bases in this area and it would be costly to use both.  There is a better way to do, it in my opinion.

I just finished acting as an expert witness in a legal matter related to a tenant vs. a landlord where the landlord overbilled the tenant for over a million dollars for their share of NNN expenses.  The tenant who I represented won the case and this has happened many times where I have been involved as an expert witness.  In my experience, I have found that landlords commonly overbill tenants and have many profit centers in their expenses that should not be there.  There are also other things in a lease beyond these types of expenses that give you financial exposure that you probably don’t even know are there.  These need to be understood and you need to be ready for them if and when they happen.

My background preparing these types of reconciliations for landlords spans over 25 years, thousands of tenant reconciliations, and hundreds of negotiations and lease audits for this type of expense reconciliation.  I also was in a position for the last 6 years of my landlord side career to negotiate over 100 leases per year. I am considered by many real estate attorneys to be an expert with a lease form whether retail, office or industrial.  Put the two types of aforementioned experiences together and you have a specialist in this expense share area like me that can really help a tenant like you.

You can hire me on a contingency or hourly basis, but it depends on your situation as to which is best.  I will be able to advise you on this in less than an hour usually and can usually tell if there is problem with your reconciliation.  Not getting it checked every year is a costly mistake.  So, if you want my help to make sure your share has been calculated correctly or you need an expert witness in this area for a legal matter or a full lease audit, please call me.

805-217-0791

david@djmcre.com

Auditing a Landlord’s Operating Expense/NNN

In my last three articles on operating expense and NNN pass throughs in a lease, we looked at how expensive it can be for a tenant to pay its share of unreasonable insurance deductibles, property management fees, and landlord employee salaries.  This month we dive into how to do a landlord audit of these types of expenses.

First of all, a landlord should be sending you an annual operating expense or NNN reconciliation each year that compares the actual expenses incurred versus the estimated ones that they budgeted and based your estimated payment on.

Second, you should always make the landlord provide reasonable records for each of the expense categories on this reconciliation as I have found that landlords typically don’t give a tenant enough information to determine if the numbers are correct or not.  These back up records usually require the landlord to, at a minimum, send you a general ledger showing the payments for each of the expense accounts that make up the total expenses.  Many times landlords will also send you supplemental spreadsheets that give more information about how and why they billed the expenses in a certain manner so you understand it better and can make sure that it matches what the landlord is allowed to bill you for in the lease or even to just make sure the expense is reasonable.

I have successfully negotiated many landlord expense audits where, in almost all cases, my client receives a refund and sometimes for many years in the past so the refund can be quite sizable.  The ones that go the best for my clients are the ones that have someone like me that understands this area to negotiate their lease before they sign.  Having a fair lease, especially in this area of a tenant’s share of expenses, is critical.  Deleting unfair expenses, capping other expenses, and much more are necessary to make the lease fair for a tenant.

Again, every tenant and landlord should have their operating expenses audited annually by someone that understands them fully to make sure they are correct.  If you don’t, it will cost you much more than hiring someone like me to make sure it’s done correctly.  And doing it before you sign the lease is much better than thereafter but it still makes sense to do annually.  Landlords simply have too many unreasonable profit centers in their operating expenses/NNN such as management fees, salaries, property tax increases from a sale, high insurance deductibles, and so much more that can really cripple a tenant in an unfair manner.

If you are a tenant or landlord and want to find out how to avoid pitfalls related to leasing, buying, or selling commercial real estate of any kind (retail, office, industrial, etc.), please contact me as I have in depth experience and knowledge in these areas including operating expense/NNN.

Conejo Valley Retail Real Estate Updates

Agoura Hills: Valley Bakery at 5879 Kanan (in the retail center called Agoura Hills City Mall where Agoura’s Famous Deli is also located) is set to open very soon sometime in September, 2016. It is a bakery/dessert/coffee and tea type of cafe. Café Bizou opened up another location at 30315 Canwood St., #14, by replacing the previously existing Café 14 in the Reyes Adobe Center. Café Bizou has two other locations in Sherman Oaks and Pasadena and their website is http://www.cafebizou.com/. David Massie of DJM Commercial Real Estate represented Café Bizou in both the purchase of Café 14 and the lease for this new location.

Westlake Village: Cici’s Café, a family-friendly breakfast and lunch café known for its massive breakfast selection, including decadent pancakes, should be opening its doors in late 2016 at 30990 Russell Ranch Road near Lure in between Barone’s Pizza and Aroha New Zealand Restaurants. Cici’s has another location in Tarzana and a large following.

Oxnard: Bottle & Pint, currently located in Newbury Park, is opening up their second location at The Collection where Whole Foods and many other retailers are located in the Riverpark area. David Massie represented Bottle & Pint this lease transaction.

Round 2: What Tenants & Landlords Should Know About Operating Expenses/NNN

In my last article on operating expense and NNN pass throughs in a lease, we looked at how expensive and unreasonable it is to require a tenant to pay its share of an insurance policy with a large deductible such as with an earthquake policy.

This month, we look at another expense that is commonly passed through to tenants where landlords pad the numbers in their favor:  Property Management Fees.

Why should a tenant pay a landlord, or the landlord’s property manager, to manage their property as part of operating expenses?  And, even if a tenant does have to pay their share of this fee, shouldn’t the fee be based upon the amount of hours actually spent managing the property?

The short answers are that the tenant really should not have to pay a landlord to manage the landlord’s property.  This should be included in the rent.  But it is almost always added.  And the amount of the property management fee should be reasonable and bear a relationship to the hours actually spent working on the property.  Unfortunately, it usually doesn’t reflect that as most management fees are instead based on a % of the total revenue collected at the project.  This fee is usually much higher than it should be, especially compared to the actual hours spent managing the property.

What is a tenant to do?  How can a tenant get the landlord to be reasonable here?  That’s where I come in.  Having directed some very large landlord companies for over 25 years has given me great insight into how to help a tenant in this area.

This is just one of many examples of operating expenses/NNN a tenant is exposed to in most leases.  Most tenants, and even landlords, don’t really understand this particular issue until it happens and it’s too late.  Stay tuned for my next blog with more examples and even some savvy advice for landlords on my recommendation on how to negotiate the leases in this area.  I also have advice on how to calculate these expenses correctly so you don’t end up losing the tenant at renewal time and/or get into expensive litigation over this matter.

If you are a tenant or landlord and want to find out how to avoid pitfalls related to leasing, buying, or selling, please contact me.  I have in depth experience and knowledge in these areas including operating expense/NNN audits related to commercial properties.

What Every Tenant & Landlord Should Know About Operating Expense/NNN

So, you are a tenant that just signed an office, retail or industrial lease.  And, as part of that lease, you agreed to pay your share of operating expenses/NNN.  This may be a direct share or just increases over the base year when the lease term began.  This is normal and happens in most commercial leases.

However, what varies is what expenses each landlord includes in their operating expenses/NNN and how they calculate them.  If you don’t negotiate this part of the lease correctly, your financial exposure can be way more than all of the rent you pay over your entire lease term and could even potentially bankrupt you.

One such example has to do with insurance policy deductibles.  Most leases require you as the tenant to pay your share of such a deductible if there ever is a claim.  Sounds reasonable and normal, right?  But what if it’s for an earthquake policy where the deductible is 20% of the entire project value?  This is the normal deductible carried by landlords for this type of insurance policy.  This could cost you tens to hundreds of thousands of dollars because you have to pay your share of this expense.

Here’s an example.  Let’s suppose you lease just 5% of a building.  If the entire project is worth 10 million dollars then the deductible on most earthquake insurance policies will be 20% of that or, in this example, 2 million dollars.  Your share of this is 5% x $2,000,000 = $100,000.  How would you, as the tenant, like to have to pay this amount in a lump sum suddenly after an applicable insurance claim was made by the landlord?  Especially when your rent is only $5,000 per month to begin with?

This is just one of many examples of operating expenses/NNN a tenant is exposed to in most leases.  And most tenants and even landlords don’t really understand this particular issue until it happens and it’s too late.  Stay tuned for my next blog with more examples and even some savvy advice for landlords on my recommendation for how to negotiate the lease in this area and calculate these expenses correctly so you don’t end up losing the tenant at renewal time and/or get into expensive litigation over this matter.

If you are a tenant or landlord and want to find out how to avoid pitfalls related to leasing, buying, or selling, please contact me as I have in depth experience and knowledge in these areas including operating expense/NNN audits related to commercial properties.

Property Tax Increases Caused by a Sale: Should Commercial Tenants Have to Pay?

It’s pretty common for a commercial lease to require a tenant to pay for a property tax increase due to the sale of the property.  But is this fair?

What benefit does a tenant derive from the sale of the property?  None or minimal.  But the landlord/seller and the buyer benefit greatly at the tenant’s expense.

This property tax increase can be expensive and quite a surprise to a tenant who doesn’t understand this issue.  Example:  Suppose a 100,000 square foot office property was bought or even built over 20 years ago when market prices were low for about  20 million dollars and market prices are now high. This is very much like the current market is now.  The property could now be worth 2-4 times or more compared to when it was originally bought or built. Let’s figure on an increase of just 2 times so let’s say it’s worth 40 million now for our example.  This will cause the property taxes to go up in the same amount, so 2 times using our example.  Now the tenant has to pay their share of property taxes at this increased rate even though there is no real benefit to the tenant.

In California, the tax rate for increases is usually about 1.1% of the property value.  So, if the tenant has just 5% of the project which would equate to about 5,000 square feet and the property taxes increase as per our example above, you are going to pay the following amount now annually over and above what you were paying before:  $20,000,000 (value increase) x 1.1% (property tax rate) x 5% (your share of property tax increase) = about $11,000 per year for the remainder of your lease term.

This expense is usually quite a surprise to a tenant.  There are ways to negotiate this type of increase away but you usually have to have a very good broker to make that happen.

And this is just one example of where tenants aren’t aware of the true costs of leasing space as there are many more.  Don’t lease office space without a broker who can show you the true cost or you will be sorry.

Have more questions about: property tax or other operating expense/NNN increases, leasing, buying or selling of commercial real estate, and more?  Please feel free to get in touch!  You can contact me for help on these matters at 805-217-0791 or david@djmcre.com.