representing the commercial landlord
TRANSCRIPT
REPRESENTING THE COMMERICAL LANDLORD
REAL ESTATE DUMBED DOWN SERIESJanuary 19, 2016
A Financial Poise Webinar
REPRESENTING THE COMMERICAL LANDLORD
Premier Date: JANUARY 19, 2016
WE WOULD LIKE TO TAKE THIS OPPORTUNITY TO THANK OUR SPONSORS
MEET THE FACULTY
PANELISTSJEFF FRIEDMAN LEVENFELD PEARLSTEINHOWARD KLINE LAW OFFICES OF HOWARD F. KLINEADAM NACH LANE & NACH P.C.
MODERATOR FELIX SHALIT,
SILA CAPITAL, LLC
Practical and entertaining education for business owners and executives, accredited
investors, and their legal and financial advisors. For more information, visit
www.financialpoise.comDISCLAIMER: THE MATERIAL IN THIS PRESENTATION IS FOR INFORMATIONAL PURPOSES ONLY. IT SHOULD
NOT BE CONSIDERED LEGAL ADVICE. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS.
ABOUT THIS WEBINAR
While it is the commercial landlord’s goal to maintain a good relationship with its tenants, there can be an underlying tension – while trying to promote a positive rapport, the landlord and its property manager also need to ensure that the tenant fully complies with its lease obligations. When a tenant fails to do so, the landlord must react promptly and in the manner most likely to protect its financial interests, whether that means working with the tenant to get “back on track” or recovering possession in order to re-lease the premises. Numerous issues factor into the analysis of how best to proceed in the face of a tenant default, including rental market conditions, the tenant’s financial status, the tenant’s prior defaults and payment history, the nature of the tenant’s default and whether it can be cured, the length of the remaining lease term and, of course, the landlord’s tolerance for litigation. This webinar will details representing the commercial landlord.
ABOUT THIS SERIES
If you are going to enter into (or represent someone in) a commercial real estate transaction you need to understand the legal and business aspects of the deal and you need to understand the local market. This Financial Poise webinar series provides attendees with a solid overview of the issues one needs to consider when doing real estate deals.
As with all Financial Poise webinars, each episode in the series is designed to be viewed independently of the other episodes, and listeners will enhance their knowledge of this area whether they attend one, some, or all of the programs.
EPISODES IN THIS SERIES
EPISODE #1 Representing the Commercial Landlord January 19, 2016
EPISODE #2 Representing the Commercial Tenant February 26, 2016
EPISODE #3 Basics of Real Estate Syndication March 18, 2016
EPISODE #4 Due Diligence in Real Estate Deals April 29, 2016
EPISODE #5 Real Estate Valuation Basics 101 May 27, 2016
Dates above are premier dates; all webinars also available on demand
NEGOTIATING A COMMERCIAL LEASE ● Commencement Date
○ Issues arise when tenant improvements are not completed by the Commencement Date specified in the Lease
● Use/Exclusivity○ The Landlord generally wants a narrow Use Clause for tenants and no
Exclusive Use Clause ○ The Tenant wants a broad Use Clause and a detailed Exclusive Use Clause to
eliminate competition
● Operating Expenses○ It is appealing for Landlords to recoup all operating expenses with no cap as
well as recoup capital expenses○ The Tenant desires to limit operating expenses paid with an annual cap and
exclude all capital improvements if possibleSource: www.slideshare.net/DScottCcim/commercial-lease-analysis
NEGOTIATING A COMMERCIAL LEASE (CONTINUED)
● Assignment/Subletting○ Landlords are reluctant to agree to this clause due to the additional risk included○ This allows the Tenant to prematurely vacate their leased premises if necessary
● Relocation○ Right to relocate clauses gives the Landlord more control over their property in the event
that it needs to accommodate the needs of another tenant who wants to lease a large amount of space.
○ Tenant typically requests that relocation costs are covered by the Landlord and that the new space is comparable to the old space.
Source: www.slideshare.net/DScottCcim/commercial-lease-analysis
LANDLORD MAINTENANCE AND REPAIRS LIABILITIES
The parties in a commercial lease will agree to a repair and maintenance provision that places some obligations on both parties. The Landlord is only liable for maintenance and repairs as expressly set out in the lease. Typically, the Landlord is responsible for the following:● Structural Repairs
○ Not recoverable as an operating cost● General Non-Premises Repairs/Maintenance
○ Recoverable as an operating cost
COMMERCIAL LEASE TYPES
● Gross Lease – the tenant pays a fixed rent, while the landlord pays all operating expenses such as property taxes, repairs, insurance etc. and occasionally utilities if they are common to the building such as steam from a central boiler for heat.
● Net Lease – a lease in which the tenant pays some or all of the property or operating expenses such as property taxes, insurance, management, fees, and CAM in addition to monthly rent payment. Typically used for commercial properties.
COMMERCIAL LEASE TYPES (CONTINUED)
● Double Net Lease – is one in which the tenant pays rent, maintenance, operating expense, and either insurance or property taxes (net-net).
● Triple Net Lease – a lease in which the tenant pays rent, maintenance, operating expenses, as well as both insurance and property taxes (net-net-net, NNN).
COMMERCIAL LEASE TYPES (CONTINUED)
● Percentage Lease – one in which the tenant pays a percentage of gross sales generated on the premises, typically in addition to the monthly base rent. Most common for retail tenants found in a mall.
● Land Lease – often called a ground lease, is a lease for which a tenant leases only the land from the landlord. Then the tenant typically builds their own building, which the tenant actually owns, much like a trade fixture
ALTERNATIVE OFFICE LEASE
Shared Office Space is an alternative type of office leasing that is growing more common. This type of agreement include more amenities than what is included in a typical lease such as:● Granting the right to use workstations without defining a specific area● Services included in the lease
● Access to Shared Space● Liability of Personal Property in the Space● Additional Expenses the Lessee is responsible for
○ Receptionist○ Security○ Furnished Offices and Shared
Spaces○ Conference Room
○ Wi-Fi/High-Speed Internet○ Kitchen facilities○ Printer○ Mail delivery
NEGOTIATING THE RENEWAL OPTION
Four items to include in the “Renewal Clause” of the commercial lease are:
● Notice Period
● Term
● Rental Rate
● Fair Market Value
LANDLORD/TENANT INTERACTION
Detailed documentation of Landlord/Tenant interaction is key:● It creates a chronological history● Demonstrates consistent lease enforcement● Makes enforcement less difficult● Creates a stronger, more clear case against a tenant in the
event of a default
BREACH OF CONTRACT AND CAUSES FOR EVICTION
● Non-Payment of Rent● Disorderly Conduct● Destruction, Damage, or Injury to premises● Habitual Late Payment● Continuous Substantial Breach of Covenants or Agreements
Source: www.slideshare.net/EinhornHarris/landlord-tenants-landlords-options-when-the-deal-goes-bad
KEEP OR EVICT THE TENANT
Items to Consider:● Likelihood of future defaults● Financial Condition of the Tenant● Desirability of the Tenant
MONETARY BREACH, FAILURE TO PAY RENT
Landlords have a reasonable expectation to receive the full amount of the rent owed on or before the date the rent is due, as defined by the lease agreement.● Late Fees
○ The landlord may charge the tenant late fees, interest and other penalties for failing to pay the rent on time.
○ The lease agreement must define these penalties and the tenant must have previously agreed to the lease terms.
○ Most states require a landlord to provide the tenant with written notification of the late fee within 24 to 72 hours of the missed rental payment.
MONETARY BREACH, FAILURE TO PAY RENT(CONTINUED)
● Eviction○ Landlord/tenancy laws governing how long a landlord must wait before
evicting vary from state to state, but most states allow landlords to initiate the eviction process after three consecutive months of missed payments.
■Give Notice of Default■File an eviction case in the appropriate county court as soon as the cure
period expires■Request a Writ of Possession from the court, if the judge finds in your favor
REMEDIES IN THE EVENT OF A COMMERCIAL LEASE BREACH
Landlords have a variety of legal options at their disposal in the event that one of their tenants breaches the commercial lease.
● Contractual Remedies o Terminate this Leaseo Re-enter the Premises, terminate Tenant's right of possession of the
Premises without terminating this Lease, and re-let all or any part of the Premises
o Remedy such event of default for Tenant at Tenant's expenseo Apply the Security Deposit toward unpaid monetary obligations of Tenanto Pursue any other remedy now or hereafter available to Landlord under the
law
REMEDIES IN THE EVENT OF A COMMERCIAL LEASE BREACH
(CONTINUED)
● Liquidated Damages o The cost of recovering possession of the Leased Premises and curing any
defaults by Tenanto Unpaid Rent or other amounts owed at the time of terminationo The balance of the Rent and any late fees for the remainder of the Term, o Any other sum of money or damages (including late fees) owed by Tenant
to Landlord, less the fair market rental value of the Leased Premises for the remainder of the Term of the Lease (but only if more than six months remain in the Term)
● Lawsuit for Finding a New Tenant ○ A landlord will have to mitigate damages when a commercial tenant is in
breach by re-letting the space to a new tenant.○ The landlord can sue the breaching tenant for the difference between what
that tenant had been paying and what the new tenant pays, assuming the new rental rate is less.
● Lawsuit for Damages ○ Even if the landlord finds a new tenant, there may be costs associated with
the prior breach.○ If the landlord lost several months of rent while diligently searching for a new
tenant, the landlord can sue for the rent during that time that the breaching tenant would have paid.
REMEDIES IN THE EVENT OF A COMMERCIAL LEASE BREACH
(CONTINUED)
TENANT BANKRUPTCY
● “Notice to Creditors” ○ Commercial property owners will receive notice about a
tenant’s bankruptcy filing from a letter sent by the Bankruptcy Court
● Automatic Stay ○ When any type of bankruptcy is filed the court automatically
issues an order to all the creditors that they are not to pursue any collection actions.
○ The Automatic Stay freezes all attempts to collect debts. This includes eviction proceedings and sending collection letters for back rent.
Source:www.propertymetrics.com/blog/2015/06/22/what-happens-when-a-commercial-tenant-files-bankruptcy/
● Seek permission to continue collection activities ○ Landlords can go to the bankruptcy court to ask for relief from the
automatic stay.
● Landlords who are already in eviction proceedings often can get the right to continue to proceedings. ○ The tenant may also have the right to cure the breach of the
rental contract by paying the back rent.
TENANT BANKRUPTCY (CONTINUED)
Source:www.propertymetrics.com/blog/2015/06/22/what-happens-when-a-commercial-tenant-files-bankruptcy/
MORE ABOUT THE FACULTY
D
FELIX SHALIT
Sila Capital is a real estate investment company dedicated to acquiring, redeveloping, and stabilizing distressed or failed commercial properties. Felix Shalit, Founder, has more than 15 years of real estate industry experience. His experience includes all of the various disciplines that are central to successful investment in real estate: acquisitions, transaction structuring, capital markets, asset and portfolio management, redevelopment and dispositions. Sila focuses on office, industrial, and retail assets and portfolios. Target assets are properties that can succeed through proactive leasing efforts, physical improvement or repositioning, entitlement changes, or realization of adaptive re-use strategies.
MORE ABOUT THE FACULTY
D
JEFF [email protected]
Jeff Friedman is a partner in the Real Estate Group, where he works with clients across a broad spectrum of commercial real estate transactions and distressed property situations. Institutional and entrepreneurial owners and investors call on Jeff for help with their property acquisitions and dispositions, and for his leasing, management and development acumen. In all situations, no matter how big or small, Jeff is focused on succeeding because he understands that every real estate challenge can feel like do or die, especially in today’s climate.
Jeff partners with his clients in the hopes that they can rest easier at night knowing he is working to resolve the obstacles they face. He cares about the people for whom he works and the successes they are looking to achieve, and has built a reputation for dedicating himself fully to their matters.
MORE ABOUT THE FACULTY
DADAM NACH
CLLA Member, Adam Nach is the managing partner of Lane & Nach, PC . Mr. Nach was the judicial law clerk to the former Chief Bankruptcy Judge for the District of Arizona, Robert G. Mooreman. He is a frequent lecturer on bankruptcy law and creditors’ rights and has written extensively on such matters, for the Norton Bankruptcy Institute, the National Association of Bankruptcy Trustees, the Arizona State Bar, and the National Business Institute. Mr. Nach is also admitted to the Arizona State Bar and 9th Circuit Court of Appeals and the United States Supreme Court. Mr. Nach is a Board Certified Bankruptcy Law Specialist – State Bar of Arizona and Board Certified – Creditors’ Rights Law – American Board of Certification.
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IMPORTANT NOTES
• THE MATERIAL IN THIS PRESENTATION IS FOR GENERAL EDUCATIONAL PURPOSES ONLY.
• IT SHOULD NOT BE CONSIDERED LEGAL, INVESTMENT, FINANCIAL, OR ANY OTHER TYPE OF ADVICE ON WHICH YOU SHOULD RELY.
• YOU SHOULD CONSULT WITH AN APPROPRIATE PROFESSIONAL ADVISOR TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS.