Embed Size (px)
Citation preview
The Landlord/Leasing RelationshipREAL ESTATE LAW DUMBED DOWN 2017
Premiere Date: February 13, 2017This webinar is sponsored by: EisnerAmper
1
2
3
4
5
MODERATOR
Howard Kline Law Office of Howard F. Kline, CA
PANELISTS
Max Kanter Bronson & Kahn, Chicago
Biff Ruttenberg Atlas Partners, Chicago
Tracy Treger Syndicated Equities, Chicago
MEET THE FACULTY
6
7
ABOUT THIS WEBINARA key to being a successful landlord is being understanding and being able to work with tenants. This is critical even at the property acquisition phase: if your intention is to realize a particular rate of return on your investment and your investment is a rental property, you need to be confident that the property is desirable from the perspective of potential tenants and that they will pay what you need them to, in order for you to achieve your desired ROI.
Like any smart supplier, a smart landlord will also perform diligence on a prospective tenant, including to make sure the tenant is creditworthy. And like any other supplier, a smart landlord will try to understand the tenant’s needs and preferences, and structure the lease accordingly. These are just some of the aspects of landlord-tenant relationships this webinar discusses.
8
ABOUT THIS SERIESWhether you are a direct owner or investor in real estate, or a business owner who requires a lease or ownership of a property to house your business, it is a good idea to have some basic knowledge of real estate law. Likewise, if you are general practitioner, you must be able to issue spot and respond to general questions your clients may have. Either way, this webinar series provides important basic knowledge and insight into the most fundamental and common of real estate transactions. Each episode is delivered in Plain English understandable to business owners and executives without much background in these areas. Yet, each episode is proven to be valuable to seasoned professionals.
As with all Financial Poise Webinars, each episode in the series brings you into engaging, sometimes humorous, conversations designed to entertain as it teaches. And, as with all Financial Poise Webinars, each episode in the series is designed to be viewed independently of the other episodes, so that participants will enhance their knowledge of this area whether they attend one, some, or all of the episodes.
9
EPISODES IN THIS SERIES
EPISODE #1 Representing the Commercial Landlord 2/2/2017EPISODE #2 The Landlord/Leasing Relationship 2/13/2017EPISODE #3 Representing the Commercial Tenant 3/9/2017EPISODE #4 Representing the Real Estate Developer 4/20/2017EPISODE #5 Representing Buyers and Sellers of 5/18/2017
Commercial Real Property
Dates shown are premiere dates; all webinars will be available on demand after premiere date
10
FOCUS OF WEBINAR
The focus of this webinar is on maximizing the return on direct investment in income or commercial real estate that has already been developed or partially developed.
11
THE NEED FOR AN INVESTMENT STRATEGY
Before you start looking for property, have a strategy in place. Consider:• Your own background and experience; Do you have a team of experts and professionals at your disposal?
• Your financial wherewithal and ability to finance your investment• Your age and level of risk tolerance; Are you looking for short term or long term gain
• Ability and willingness to manage your investment;• Ability and willingness to be flexible• Exit strategy
12
RETURN ON INVESTMENT
• Return on Investment or “ROI” is commonly defined as: The amount of return on an investment, relative to the investment’s cost;
• ROI takes into consideration: Gains from the investment less the costs of the investment; Gains from the investment will include income from rents and other
sources as well as o Increase in value of the property;
There are mathematical formulas used to calculate your ROI
13
DO YOUR DUE DILIGENCE
Due diligence is the investigation of a particular property to determine if it will fit within your investment strategy. It may include the following considerations and a review of:
• Title to the property;• Environmental Issues• Rights and limitations to use the property;• Financial viability of the existing tenants;• Past, current and future income potential of the property; and• A review of the leases to determine the rights and obligations of the
tenants on a going forward basis
14
REVIEW OF TENANT FINANCIAL VIABILITY
• Does the tenant have the financial strength to pay its current rental obligations? Do you have access to the tenant’s sales reports for the property? Do you have access to the tenant’s current financial statements
• Considering the tenant’s current use, will the current tenant likely have the ability to afford the rents that you expect to receive in the future?
• What is the tenant’s business model and is it subject to possible end of useful life, i.e. Blockbuster video. See also Game Stop.
15
REVIEW OF EXISTING LEASES
• Absolutely essential and must be done thoroughly;
• Pay particular attention to: Lease term and options to extend the term of the lease; Use and Exclusivity provisions; Co-tenancy Clauses Rent and other tenant obligations; Go-dark provisions Parking availability and restrictions; Future obligations of the landlord
16
LEASE TERM & OPTIONS TO RENEW
• How long is the tenant committed to remain in the premises?
Long term may limit your future flexibility to maximize the value of the property
Shorter term reduces the value of the lease and should effectively reduce the purchase price
17
LEASE TERM & OPTIONS TO RENEW CONT’D
• Assume, for the purpose of calculating the term of the lease, that all options will be exercised
• Pay attention to when and how rents will be calculated for the option period; Is the rent for the option period pre-set? Is it a specific amount? Is it calculated based upon a previously agreed upon formula such as the
consumer price index? Is it calculated upon agreement of the parties at the time that the option is
exercised? Is there a written and efficient method to determine the rents?
o Be leery of short, one paragraph option provisions
18
RENTS & OTHER MONETARY OBLIGATIONS
What are the tenant’s monetary obligations?• What does rents include?
Are there charges in addition to the minimum monthly rent or base rent, such as: Common Area (“CAM”) or building operating expenses (“BOE”) Are they charged prospectively and then later reconciled? Do they include insurance, taxes, utilities, administrative and management fees? Is there a base year and does the base year change at the commencement of an option
term? Is there a cap on the amounts that the landlord can charge, such as on tax increases? Are capital expenditures distinguished from operating expenses?
o Can the landlord include charges for capital expenditures and if so, will they be amortized?
19
TENANT’S NON-MONETARY OBLIGATIONS
Are the leases, (a) NNN; (b) Gross; (c) Modified Gross, or (4) Other?
• Do not rely on the title.
People define each of these titles differently and you need to look at the full language of the lease to determine the full obligations of the parties
20
TENANT’S NON-MONETARY OBLIGATIONS CONT’D
• NNN (Triple Net or sometimes referred to as a Net Lease)
If not otherwise modified by the lease terms, typically means that the tenant pays for all costs of maintenance and operation of the property, including payment of taxes, insurance, repairs, etc.
Not uncommon for these to have some modifications, which might require the landlord to repair structural portions of a building, leaving the non-structural portions to the tenant?
Consider who constructed and payed for the costs of development and construction of the building and improvements.
21
TENANT’S NON-MONETARY OBLIGATIONS CONT’D
• Gross Lease Not uncommon in office buildings Generally means that the tenant makes one monthly payment that includes
all costs associated with the maintenance and operation of the building; Not uncommon for the lease, notwithstanding the title, to include other
costs which are the obligation of the tenant;
• Modified Gross Lease This is a Gross Lease that has been modified to include additional monetary
obligations of the tenant. In this writers opinion, the only difference between a Gross Lease and a Modified Gross Lease is the title and the Modified Gross Lease is more transparent to the reader.
• MOST IMPORTANT POINT: DON’T RELY ON THE TITLE!
22
TENANT’S NON-MONETARY OBLIGATIONS CONT’D
• Repair and Maintenance Duty to pay for repairs may differ from duty to pay for repairs If landlord has the duty to make repairs, can the rent and other
payments be abated? Does the tenant have the right to withhold rents and if so, is
there a waiting period? How much time does the landlord have to make repairs? If the landlord does not make repairs within a prescribed period
of time, can the tenant terminate the lease?
23
WHO OWNS THE TENANT IMPROVEMENTS?• Some tenant improvements are valuable and the landlord may want to keep them in
place: May increase the value of the property; May make it easier to release the premises with the tenant improvements in place;
• Some tenant improvements are costly to remove; Example: Bank vaults
• Consider if trade fixtures v. ownership are defined in lease; Possible bankruptcy ramifications
• Who is obligated to remove the tenant improvements at lease termination? Landlord may want to have the option to decide who has the right or obligations to
remove
24
LEASE EXCLUSIVITY PROVISIONS
• Primarily used in retail shopping centers
• Favors tenant and limits the landlord’s ability to place competing tenants in center
• Be careful of overly broad definitions of what is considered competing products and activity;
• What if the tenant is no longer selling or providing a particular product or service on the list?
• What are the remedies upon breach?
25
CO-TENANCY CLAUSE Provides that:
• If another or other tenants in the center stop doing business in the center, limits their hours of operation and/or vacates their premises, the tenant has a number of contingent rights which may include: Remaining open but cessation or reduction in rents; Temporary or permanent cessation of business Termination of the Lease.
• May also be triggered if a certain percentage of the center is vacant.• May cause issues for your lender• Typically required by major retailers
26
GO-DARK PROVISIONS
• Not uncommon in retail leases
• May give the tenant the right to stop operating at the property, for any reason;
• Often requires the tenant to continue to pay rent or may require increased rent;
• May have a negative impact upon the traffic in the center and a negative impact upon the value of the property
27
PARKING AVAILABILITY AND RESTRICTIONS
• The availability or lack thereof, including certain parking restrictions may have severe impact upon the business operations of tenants;
• Common issue and problem and is often subject to regulation by local governmental entities
28
OTHER LEASE ISSUES
• Security deposits and letters of credit
• Guarantees
• SNDA
• Estoppel Certificates
29
SECURITY DEPOSITS & LETTERS OF CREDIT
• Who holds the security deposit and if cash, must it be segregated from landlord’s other accounts?
• Is the security deposit being transferred to you upon sale closing?
• Letters of credit may be preferable to a cash security deposit, particularly if the tenant goes bankrupt.
• Make sure that the Letter of Credit is transferrable to you upon sale.
• Does the Letter of Credit have a “step down” or partial release provision that reduces the letter of credit over time or upon the payment of a certain amount of rent?
30
GUARANTEESConsider if there any any limitations on the guarantee, such as:
• Limited by time; Example: 2-3 years from lease commencement date
• Limited by amount of liability Example: Limited to a total of $50,000 liability
• Have statutory protections of guarantor been waived and can they be waived in the state that the property is located Example: In California a guarantor of a non-consumer debt can
waive nearly all of the statutory rights provided to consumers
31
SUBORDINATION, ATTORNMENT AND NON-DISTURBANCE
• Effects the relationship between the tenant and lender
• What does state law provide in absence of these provisions in the lease?
• After foreclosure sale, usually at the option of the successor owner, the lease will be assumed, enforceable and remain in place so long as the successor does not disturb the tenant’s right to possession;
32
SUBORDINATION, ATTORNMENT AND NON-DISTURBANCE CONT’D
• Can determine if the tenant’s lease remains in effect after a foreclosure, which may be relevant if you are considering buying the property sometime after the property was foreclosed upon.
• Can be automatic or at the option of the lender/purchaser at foreclosure sale
• Leases written from the early 2000’s until about 2007 often were written without an understanding of these provisions. Care should be taken in reviewing these provisions
33
ESTOPPEL CERTIFICATES
• Will stop the tenant from claiming lease terms or changes to lease terms other than as stated in the certificate;
• Usually required in the lease upon regular intervals during the lease term, upon finance or refinance of the property or upon sale of the property;
• Can alter the terms of the lease if not closely paid attention to.
34
ABOUT THE FACULTY:
35
HOWARD [email protected]
Twitter @[email protected]
Howard has been involved in commercial real estate for over 39 years now as both an attorney, broker, arbitrator and now radio show host and founder of CRE Radio & TV, since December 2010.
Over the years, Howard has worked in-house as General Counsel and Director of Real Estate for a national user of office, R &D and retail space, utilizing both my legal and brokerage licenses, General Counsel for a major regional supermarket chain that owned its own shopping centers. As an attorney, he has also practiced law as outside counsel to many major commercial landlords doing lease transactional work and lease litigation, including unlawful detainers and rent collections. As a real estate salesperson, he has served as a tenant rep in New York City and as a broker for numerous lease transactions throughout the United States.
While Howard continues to practice law on behalf of commercial landlords and tenants, his passion has become the radio show. It is incredibly fulfilling to inspire others to improve themselves and reach for the stars.
ABOUT THE FACULTY:
36
Max Kanter is an attorney at Bronson & Kahn LLC in Chicago.
Max’s practice is focused on commercial real estate transactions. These include real estate and lending transactions across the country, with a focus on shopping centers, office and industrial, apartment buildings and nursing homes. Mr. Kanter understands the complexities and potential pitfalls in commercial real estate transactions large and small. He ensures that his clients are legally protected, while never getting in the way of meeting the client’s end objective - getting a deal across the finish line.
ABOUT THE FACULTY:
37
BIFF [email protected]
Roger “Biff” Ruttenberg is Principal at Atlas Partners LLC in Chicago. Biff has 45 years of retail development, redevelopment, management, and leasing experience. His real estate background, including mortgage banking and construction experience, has contributed to his years of successful business projects and relationships. He has developed shopping centers and other retail properties, and has a portfolio of single tenant net leases at the present time.
Biff is also involved, as a principal, with the acquisition of distressed commercial and industrial loans and distressed and “orphaned divisions and operating businesses. Finally, he has made many investments in early-stage and startup businesses as an angel investor. His professional qualifications include designations of CRX, CSM, CLS and CTP, and he has spoken at and participated as a faculty member in numerous conferences and webinars.
ABOUT THE FACULTY:
38
TRACY [email protected]
Tracy Treger is a Principal at Syndicated Equities, a private equity real estate investment firm in Chicago established in 1986. Tracy assists investors in assessing the company’s investment offerings, and she evaluates prospective properties for the company’s acquisition. She also helps investors to identify replacement properties to complete tax-deferred “like-kind” § 1031 exchanges.
Prior to joining Syndicated Equities, Tracy spent 20 years practicing law, serving as VP and assistant GC for a private REIT, and as a partner in two large Chicago law firms. Tracy holds a B.A. and an M.S. from the University of Pennsylvania, a J.D. from Chicago Kent College of Law, and FINRA Series 22 and 63 licenses. She is a frequent author and speaker on real estate and finance topics, including § 1031 exchanges and real estate investments. Tracy is an active member of CREW and the National Leadership Co-Chair of the Anti-Defamation League.
39
40
41
