Lease Negotiations in a Down Market!

In many areas around the country, the commercial property market is at its highest vacancy rate in years. What does this mean to brokers, tenants and owners of commercial real estate?

For brokers, this means it is a great time to brush up on your tenant representation skills to insure that your clients are educated in the opportunities available to them. When vacancies are high, brokers can help yield greater savings to existing tenants by negotiating early lease renewals as well as relocations to alternate space at below market rates. Savings for new tenants in terms of discounted base rent; capped, controllable operating expenses; increased build-out allowances; free rent; tax breaks and other incentives can and should be attempted when negotiating with landlords who have excess space on their hands.

Knowing the market is imperative, however, in order to help determine the extent to which landlords can offer some or all of these incentives. Knowing the differences among the buildings on the market is also important, such as which buildings are ready to move into immediately and which ones require major renovation. Since build-out costs have increased dramatically (due to soaring steel, cement, copper and other building material prices), landlords with virtual “move-in” buildings can better afford to provide lower rent or free rent to lure tenants to their properties.

Finally, there is no substitute to brokers knowing their clients and their needs and goals, as well as they know the market.

What do landlords need to do in this down market?
First, they need to have a first class marketing plan to educate brokers and prospective tenants about their properties. Competitive edges and highlights should be …highlighted. If their buildings are well-managed, clean, well lit, secure, handicap accessible, and LEED compliant, for example, brochures and marketing materials should reflect these characteristics. Also, having floor plans on CAD helps tenant prospects and their space planners better envision the landlord’s subdivision plan and how the tenant’s plan can best be configured therein.

Second, the more flexible landlords can be in subdividing their buildings, the lower their vacancy rates will be.

Third, amenities are important to tenants with a lot of choices. Shared conference rooms, wifi, plenty of parking and cafés top many tenant wish lists.

Finally, landlords need to focus more on their costs, and the value of a fully rented building, than “old market rent rates” that no longer are “market”. Landlords willing to restructure leases and/or offer incentives will fill vacancies, make it easier to refinance their properties, and make their buildings more attractive to investors still looking for good investment projects.

Tenants today should strongly consider a good team of professionals to help them secure the incentives available today. A good broker specializing in tenant representation can uniquely combine expert market knowledge with a clear understanding of the tenant and its goals to help select the best space, and help negotiate the best deal for its client. A good real estate lawyer can insure the business deal is reflected in the lease language, and negotiate away un-budgeted for expenses and liabilities that are often hidden in form leases. A good space planner can help a tenant see what it really needs in terms of the size of the space, configuration, extent of build out … A good architect can help get the space plan priced out correctly and transform same into detailed plans. Finally, knowing the permit and build-out process and required timing (and incorporating same in the lease) will help ensure that the space need not be paid for until the tenant can operate.

Landlords willing to be competitive, tenants willing to seek out experts to best help them secure opportunities, and brokers, lawyers and other real estate professionals that are good at listening to their clients goals and forging creative plans to bring them to fruition will find great success for 2009 and beyond, even in a “down market”!

This article was originally written by Gregory P. Schenk, SIOR, and edited/expounded upon by Stephen D. Richman, Esq. Mr. Schenk has provided Commercial Real Estate Advisory Services for over 25 years, and can be contacted at: www.irepthetenant.com

CLE Update: Eminent Domain Seminars

The Americal Law Institutie American Bar Association is presenting 2 seminars in the eminent domain area of law. For the experienced practitioner, "Eminent Domain and Land Valuation Litigation." For the practioner that is new to the field, "Condemnation 101: How to Prepare and Present an Eminent Domain Case." Both seminars are being held on January 8-10, 2009 at the Edon Roc Resort in Miami Beach, Florida, and will also be available as webcasts.

For more information on the Eminent Domain and Land Valuation Litigation seminar, click here.

For more information on the Condemnation 101: How to Prepare and Present an Eminent Domain Case, click here.

The following special pricing is also being offered: Take the Eminent Domain and Land Valuation Litigation seminar, and bring an associate to Condemnation 101: How to Prepare and Present an Eminent Domain Case, also being held at the same time and location, and receive 50% off the associate's registration.

CLE Update: Green Technolocy Law

The Practicing Law Institute is presenting a seminar titled "Green Technolocy Law and Business 2009: Strategies for Finance, Carbon Trading, IT and Carbon Neutral Policies" to be held in New York City on February 6, 2009 and in San Francisco on February 23, 2009. A live webcast will be broadcast on February 23, 2009.

Those interested in more information can go online to http://www.pli.edu/ or call 1-800-260-4PLI.

End May Be In Sight for Depressed Investment Sales Market

According to brokerage firm Grubb & Ellis, as more commercial real estate loans expire in 2009 and property fundamentals deteriorate, the volume of asset sales is expected to increase, particularly during the second half of 2009. Many borrowers have commercial real estate loans that will expire in 2009 (approx. $36 billion), and if financing on acceptable terms is not available the assets will likely have to be sold.

In the first 3 quarters of 2008, transaction volume for office, industrial, retail and multi-family properties is down 67% compared to the first 3 quarters of 2007. (stats from Real Capital Analytics) However, in the latter half of 2009, with commercial real estate prices continuing to fall along with the expiration of real estate loans in 2009, Grubb & Ellis expects the transaction volume to increase next year by as much as 15%.

For more information, click here for read an article published on National Real Estate Investor online by Poonkulali Thangavelu.

Trouble Building in Hotel Construction

In the online edition of the National Real Estate Investor an article was published on November 11th by Matt Hudgins regarding the trouble building in hotel constuction. According to Mr. Hudgins, developers are building more new hotels, increasing the global supply of hotel rooms at a remarkable pace even as per-room revenue and occupancy rates decline for most of the world.

As of September 30, 2008, more than 1.8 million hotel rooms are in the pipeline, a 28% increase from one year ago. Construction spending for hotels has been increasing faster than for any other non-residential sector in the past 2 years.

With the global economic slowdown occupancy rates have started to decline and are likely to continue declining. Adding additional hotel rooms will further drive down the occupancy rates as increased supply is coupled with the softening demand for rooms. For those who travel a lot, it should be a buyer's market.

It should also not be surprising if hotel projects that are still in the planning stage are put on hold for the indefinite future.

To read Mr. Hudgins' article, click here.

Fannie Mae & Freddie Mac Announced Plans for Mortgage Loan Modifications

At a press conference held today at the Federal Housing Finance Agency, temporary conservator of Fannie Mae and Freddie Mac, a plan was announced to speed up the modification of hundreds of thousands of loans held by Fannie Mae and Freddie Mac. The loans being targeted are those that are 90 days or more past due.

The program's goal is to bring the ratio of mortgage payments for these targeted homeowners to 38% of their income by modifying interest rates and in some cases forgiving portions of principal debt. It will only apply to loans made on or before January 1, 2008, for homes that are owner-occupied, and if a homeowner has filed for bankruptcy, he or she will be disqualified from participating in the program.

U.S. government officials plan to encourage large banking institutions that hold mortgage loans in their portfolios to take similar streamlined modification measures. Several large banking institutions, including Bank of America Corp., Citigroup Inc. and J.P. Morgan Case & Co., have already announced their own foreclosure plans.

For more information, click here for the Federal Housing Finance Agency news release which includes FAQs about the program.

Forest City Announces Completion of $167 Million in Financing Transactions

Forest City Enterprises, Inc., based in Cleveland, Ohio, announced today the following three separate, recently completed financing transactions, totaling in the aggregate, more than $167 million:

• A $75 million construction loan closed November 7th for a 127,000-square-foot expansion of an existing 1.1 million square-foot retail center at The Promenade in Temecula in Southern California, which expansion financing was provided by The New York State Teachers’ Retirement System.

• $67.5 million in construction financing closed October 31st for a 161-unit adaptive re-use apartment community in San Francisco.

• $24.9 million refinancing closed October 31st of a 135-unit apartment community at University Park at MIT in Cambridge, Mass.

Forest City Enterprises, Inc., http://www.forestcity.net/, is a publicly traded real estate company principally engaged in the ownership, development, management and acquisition of commercial and residential real estate throughout the U.S. For a copy of the press release, click here.

Before You Can Evict (a Tenant) Your Notice Must Be Legit

Most landlords with a right to evict a tenant by judicial means know the requirements of Section 1923.04(A) of the Ohio Revised Code calling for what has been commonly known as a “Statutory Three-Day Notice”. (Note: There are a number of cases in Ohio granting commercial landlords the right to seek non-judicial means to evict a commercial tenant, provided there is no “breach of the peace”. See Northfield Park v. Northeast Ohio Harness, 36 Ohio App. 3d 14 (8th Dist 1987). Landlords of residential property, however, can only use judicial means for eviction pursuant to Ohio Revised Code Section 5321.15). In fact, most of these landlords have a stack of Ohio Legal Blank “Three-Day Notice” forms that contain the “magical statutory language” in the proper font.

What many landlords lose sight of, however, is the notice that is required (in certain circumstances in Ohio) to terminate a lease as a pre-condition to serving a three-day notice. The following threshold questions to ask and answer will help you determine when you must provide a “Notice to Terminate”, prior to the “Three day Notice”.

1. Is there a tenancy? In a recent Ohio residential landlord/tenant case, (Amick v. Sickles, 177 Ohio. App. 3d 337, 2008-Ohio-3913) the 4th District Court of Appeals held that no notice of termination of the lease was required because there was no lease of any kind established between the homeowner and the resident. In this Case, an ex-spouse stayed in the house that the other spouse sold as part of a divorce proceeding. Since this individual never paid rent and never had a lease, the owner was able to file the three-day notice, as the only notice required before filing for eviction. Commercial landlords wanting a hold-over tenant to leave quickly, need to ensure that their lease provides that the holdover does not become a tenant. Many clauses in tenant oriented commercial leases provide that a hold-over situation is to be treated as a month-to-month tenancy, terminable by either party via a thirty-day notice. For landlords that want to make clear that there is no new tenancy created, the lease should so specify, in which case the holdover is more trespasser than tenant.

2. What type of tenant is involved? If it is a tenant of residential property, Ohio Revised Code Chapter 5321 governs. With regard to termination notices, Sections 5321.17, 5321.11, and 5321.09 are dispositive (See Paragraphs 3 and 4 below).

The requirements regarding termination notices for commercial tenancies can be found in Ohio case law. As a general rule, unless contrary to statute, there is no prior notice requirement to terminate a commercial lease, if not found in the lease itself. In Section 3 below, we ask what kind of tenancy is required (i.e. fixed term or periodic) in order to determine what notice is required. In commercial leases, however, this next question need not be answered due to the Ohio Supreme Court case of Maggiori v. Kovach (101 Ohio St. 3d 184 (2004). The Court in Kovach held that a commercial tenant need not give a thirty-day notice to a tenant to terminate a month-to-month tenancy, prior to serving a Three Day Notice. The simple basis for this holding is that the Ohio statute calling for such a thirty-day notice defines ”tenant” as one that uses and occupies a residential premises.

3. What is the type of tenancy? While there are variations, the two true forms of tenancy are “periodic tenancy” and “fixed tenancy”. A fixed tenancy is a tenancy with a fixed term (e.g. one year, five years, one month). A periodic tenancy is one in which the term is not fixed, and is typically defined by when one pays rent. For example, if a tenant pays rent on a monthly basis, and there is no fixed time period, the lease is said to be a month-to-month periodic lease. As discussed earlier, there is no notice required in Ohio to terminate a commercial, periodic tenancy. For residential, periodic tenancies, Ohio Revised Code Section 5321.17 governs. It basically calls for a seven-day prior notice for a week-to-week tenancy and a thirty-day notice for a month-to-month tenancy. These notices must be sent prior to the Three-Day Notice.

4. What is the basis for terminating the lease? Specifically excluded from the residential periodic tenancy notice required by virtue of ORC Sec. 5321 17 (A) and (B), are the situations when one is terminating a periodic tenancy due to breach of the lease or failure to perform other duties or obligations set by law (See ORC Sec. 5321.17 (C). In other words, terminating a residential periodic tenancy for non-payment of rent does not require a notice to terminate prior to the Three-Day Notice. Neither is such a termination notice required when the tenant has violated certain drug offenses in the premises pursuant to ORC Sec. 5321.09. On the other hand, Section 5321.11 of the Ohio Revised Code calls for a minimum thirty days termination notice if a landlord is attempting to terminate a lease agreement for tenant’s non-compliance with its Section 5321.05 obligations.

The moral of this story is if landlord and tenant cannot work out between themselves new payment schedules or other resolutions of their disputes (highly recommended in today’s economy) legal advice is recommended so that an amicable result may still be able to be worked out, or if not, and eviction is necessary, it will not be prevented or delayed due to failure to follow necessary procedures. If you are a landlord or represent landlords of residential premises, a thorough understanding of Chapter 5321 of the Ohio Revised Code is essential. If you are a commercial tenant, or represent commercial tenants, a clear understanding of your lease, as well as Ohio case law is important.

CLE Update: Upcoming Title Seminars

National Business Institute is sponsoring 2 seminars on title-related issues in the coming months.

The first is "Resolving Real Estate Title Defects," being held on December 16, 2008 at the Holiday Inn Independence, 6001 Rockside Road, Independence, Ohio (216-524-8050).

The second is "In-Depth Title Insurance Principles," scheduled on February 4, 2009 at the Sheraton Suites, 1989 Front Street, Cuyahoga Falls, Ohio (330-929-3000) and on February 5, 2009 at The Forum Confererence Center, One Cleveland Center, 1375 East 9th Street, Cleveland, Ohio (216-241-6338).

Continuing education credit is available or pending for several licenses in addition to CLE.

For more information, select the links to each seminar above, go to www.nbi-sems.com or call 1-800-930-6182.