OPINE EXPERTS TIPS SERIES:

 How Commercial Landlords Should Balance Rent Payments, Late Fees and Grace Periods

Landlords are in the real estate business for one primary reason: collecting rent. Almost all aspects of property ownership and management revolve around rent collection. John Pagliassotti, AIR Commercial Forms author and expert, and forensic real estate consultant with Opine Experts, offers the following suggestions to landlords and asset managers to better influence rent collection rates and long term property success.

Landlords must be firm in their negotiation of leases and the use of the late payment fee provision in order to provide an uninterrupted income stream and positive cash flow for their properties. The following tips are useful reminders for any new or seasoned landlord.

·       Clearly define the late payment fee in the lease agreement.  The late payment fee is one of the most negotiated of all lease provisions and the first line of defense against nonpayment of rent. For most properties, the late payment fee is usually a percentage of the rent and paid to the landlord if the rent is not paid by the due date.   

·       Be very clear regarding the date in which rent is due and the consequences for not adhering to that date.  Lease agreements should include a clause that not only allows for a grace period, but clearly defines the time frame and consequences for not following it. For example, the rent is due on the first and the late fee is triggered on the fifth.   

o   Tenants mistakenly believe that the grace period serves as a de facto extension to the date on which the rent is due.  

o   Tenants who pay the rent after the first are at risk of defaulting on their lease.

·       Understand that tenants are hesitant to agree to the terms of a late fee clause; take steps to address it early in the process. 

o   This five-day grace period, for example, is a muddy area for both tenants and landlords; it’s imperative that a discussion ensues at the onset of lease negotiation to clearly define what that time frame implies.

·       Determine as a landlord what is acceptable for tardy rent payments.

o   There may be a number of legitimate reasons a tenant delays delivering a rent check. Delays can be caused by checks getting lost in the mail, accounts payable systems failing, or general check processing errors.

o   As a landlord, what are you comfortable with – allowing one or two tardy payments or none? Assess the risk of the tenant – if they’ve paid on time 12 months in a row, and they communicate in advance they may be late on the 13^th rent, you may allow one tardy payment without penalty. This should be a case by case situation.

·       Tenants often try to negotiate a reduction in the amount of the late payment fee, or eliminate it entirely.  

o   One compromise with proven success is an agreement to waive the late fee once per year over the term of the lease.  This allows for unpredictable errors without penalty, while ensuring that the landlord maintains the leverage of a reasonable late payment fee over 90% of the lease period.

·       Avoid impacting the monthly debt service on the property by “floating” the tenant.  

o   In most cases, at least part of the rent payment is used for monthly debt service which carries a late payment penalty of its own.  

o   A prudent landlord understands this and the value of the late payment fee provision as a tool to protect their investment. 

·       Avoid reducing the late payment fee below what is effective in order to maintain positive rent collection.

o    If the late payment fee is reduced too low, late rent payments can effectively become a low interest loan to the tenant. 

o   Avoid this scenario by holding firm to a percentage that both deters a late payment and encourages prompt payment. http://www.opinexperts.com/

Pagliassotti Joins OPINEXPERTS

OPINEXPERTS

TAPS REAL ESTATE INDUSTRY AUTHORITY

John Pagliassotti Joins First-Ever Forensic Talent Agency formed to Bridge Expert Gap between Real Estate and Legal Sectors

SAN FRANCISCO (Aug. 16, 2011) -- Opine Experts, a talent agency launched to provide the legal profession with first-tier real estate industry experts, today announced that John Pagliassotti, a commercial real estate consultant, author and educator with more than 25 years experience in all aspects of commercial real estate brokerage, property and asset management, and expert witness services, has joined its firm as a forensic specialist.  

         Pagliassotti is one of 16 real estate industry consultants who comprise Opine Experts’ elite talent pool.  His background in brokerage, international asset management, lease negotiations, and expert witness experience, provide Opine Experts with a unique skill set and breadth of knowledge.  While running his commercial real estate firm in Orange County, Calif., Pagliassotti also acts as the Managing Member of South North Properties in Los Angeles and President of Fujita Properties in Guam.  He is a member of IREM, AIR and a member of NAIOP, and has successfully co-authored a book for AIR Commercial Real Estate Association, AIR Commercial Real Estate Forms: A User’s Manual Volume I – Lease Forms and Addenda.

            “Opine frees lawyers from the hassle of finding experts qualified to testify on a wide range of issues involving California real estate. We pre-screen specialists who are not just highly-credentialed but persuasive communicators, too. Our experts must be able to help judges and juries understand complex real estate matters – and John’s got what it takes. He’s accustomed to the role of expert witness and draws on his years of experience in the commercial real estate field to make him one of the more sought after stars in the real estate universe,” said Bill Lightner, Esq., co-founder of Opine Experts. “With talents like John Pagliassotti, Opine is becoming the go-to place for California real estate industry experts.”      

About Opine Experts

Opine Experts represents authoritative experts who provide forensic and business consulting services regarding California real estate matters. Its clients include law firms seeking expert witnesses, real estate practitioners needing focused expertise and real estate investors seeking project consultants. Opine searches for, qualifies and invites the best California real estate authorities to join its talent pool. Experts highly-qualified in specialties and regions not represented on our existing roster of experts are invited to engage Opine Experts as their agent.  Follow Opine Experts on Twitter @Opinexperts or its LinkedIn company page.                 

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Contact:           Jayme Soulati

                        Soulati Media, Inc.

                        937.312.1363 @Soulati

                        jayme@soulati.com

Subordination in Tough Times

Arbitration Clause

Rentable v. Usable: Load Factor

Most office buildings have a load factor. This load factor is a percentage that describes the difference between the rentable and useable square footages for the building. The usable square footage of a building is all the square footage behind the front doors of the tenant’s suite; the space that is exclusive to them. The rentable square footage is the usable square footage plus the common areas. The common areas include the hallways, lobbies, elevators, stairwells and restrooms of the building. These areas are not exclusive to any one tenant, but are for the use all the tenants and their guests.

Let’s say the gross square footage of an office building is 100,000 square feet. The gross square footage of the building is everything contained within the exterior walls. Let’s say that the total square footage of the common areas of the building is 15,000 square feet. This leaves 85,000 sq.ft. of usable space (i.e. suites).

To calculate the load factor we take the total square footage of the common areas, (15,000 sq.ft.) and divide it by the gross square footage of the building, (100,000 sq.ft.). The formula looks like this:

15,000/100,000 = .15. Therefore, the load factor of the building is 15%.

Let’s see how the load factor relates to leasing space within the building. Let’s say that a tenant plans on leasing a suite with 1,200 square feet of usable space. Knowing that the load factor of the building is 15%, the tenant could then calculate the rentable square footage of the suite (1,200 + 15% = 1,380 sq.ft.). So if the monthly rent for the suite is $2.00 per square foot, the tenant’s total monthly rent would be $2,760.00:

(1,380 rentable sq.ft. x $2.00 per sq.ft.= $2,760.00).

The rentable square footage is always higher than the usable square footage because it includes both the tenant’s suite and their percentage of the common areas.

When shopping for space, it’s important for tenants to understand and compare the load factors of the buildings they may be interested in. Higher load factors mean that more of a tenant’s monthly rent will be dedicated to common areas and less to the suite they occupy. That being said, buildings with higher load factors often have amenities, such as spacious lobbies or atriums, which many tenants may find appealing.

Dual Agency-Single Broker of Record

In order to fully understand dual agency, it is important to understand that as far as representation is concerned, the law views the broker of record as the agent and the salespeople that hang their real estate license with that broker as licensees, not as agents. What this means is that a dual agency can exist even if two agents are involved in a transaction because they may share the same broker.

This is particularly important for companies that use a single broker of record for multiple sales offices. In such case, if a licensee from the Downtown office makes an offer on a listing held by another licensee in the Westside office, a dual agency must be disclosed to the parties. Again, this is because there is a single broker of record, agent, for both offices and both licensees are working under that broker/agent. Clearly the same is also true for a single licensee who is acting on behalf of, say, a buyer and seller.

It is important for brokers to understand all the laws surrounding dual agency and how these laws affect their duties of disclosure to their clientele.

Abitration Clauses

Arbitration is often offered as an alternate form of dispute resolution in commercial leases. By agreeing to use the services of an arbitrator, the parties agree to waive their rights to litigate disputes in civil court. There are a few matters, however, such as eviction, fraud and criminal activity where use of the public court system is mandatory.

Before agreeing to arbitration, there are a few things to consider. First, the process for preparing to appear in arbitration can be identical to preparing for an appearance in civil court. That is to say attorneys can be retained, depositions can be taken and evidence can be requested and exchanged. Therefore, the preparation costs can be the same as for a traditional court case. Also, the final decision of the arbitrator is binding and cannot be appealed, regardless of the legal standing for the decision. In other words, the arbitrator’s decision can be totally arbitrary and without legal precedent or standing. In addition, the cost/fees for the arbitrator can be higher than court fees and costs depending on the length of the arbitration. Finally, there is no assurance that an arbitrator’s decision will be any better or worse than that of a judge. That being said certain ADR companies such as JAMS employ retired judges almost exclusively. This is not to say that binding arbitration is without merit, it is potentially faster than the civil courts and some argue have more predictable outcomes than a jury trial. Also, if privacy is an issue, ADR can be much more discreet than the civil court system. In addition, in the event that there are technical elements to a case, many attorneys prefer to argue in front of an arbitrator with some level of technical expertise as opposed to a jury of laypeople.

A few precautions can be taken prior to agreeing to an arbitration clause. First, make vetting the arbitrator a part of the agreement. Selecting an arbitrator with an extensive real estate background would be wise. Also, the parties may want to consider setting financial limits. For example, the parties could exclude any disputed amounts that qualify for small claims court and/or placing a cap on the amount subject to the arbitration.

Subordination and Distressed Assets

In a real estate market where failing loans are more common than in years past, tenants should be aware of the concept of subordination. Any lease entered into subsequent to a loan being placed on a particular property will be subordinate to that loan. In the event that a lender takes ownership of a property through foreclosure, or other such means, it is under no obligation to honor a lease that commenced subsequent to the loan that was placed on the property. Clearly, the potential impact this could have on a tenant is devastating. Tenants considering entering into a long term lease and/or spending a great deal of money on improvements to a leased property should seriously consider investigating the solvency of the landlord and status of the loan to which their lease will be subordinate. In addition, tenants may want to consider making the receipt of a non disturbance agreement from the lender a condition for entering into a lease.

Video: AIR- Single Tenant Net versus Gross Lease

Negotiating with the GSA-Consultants

The ITC office building in Guam, (www.itcguam.net), has gotten a great deal of attention from the U.S. Government lately. As you may have seen in my profile, I'm the president of Fujita Property Guam, the company that owns and manages this 210,000 square foot office building. We are currently in various stages of negotiations with several U.S. Government tenants. As you may know, the job of negotiating leases on behalf of the Government belongs to the General Services Administration, (GSA).

Candidly I was shocked when I received the GSA's version of a request for proposal/solicitation. The document was over 100 pages. It was overwhelming to say the least. In addition to the volume of the solicitation, it required a great deal of attention to detail. Landlords are required to respond to a number of requests, surveys and questions. A potential property can be disqualified if just one error is made in response to the GSA’s solicitation. This is just the start of the process of leasing space to the Federal Government. If our building is selected, we will begin the process of negotiating the lease document and constructing the tenant improvements. I have been told that neither is easy because of the difficult requirements set forth by the GSA.  

Because of the importance of these transactions, I sought out a consultant that could provide guidance from start to finish. As it turns out, two former GSA employees have started a company that provides such consultation. It is called Unified Interest (www.unifiedinterest.com). They offer a comprehensive set of consulting services for dealing with the GSA.

Considering that the U.S. Government is expanding quite rapidly, the likelihood of leasing space to them is greater now than ever. Landlords, and brokers for that matter, should seriously consider utilizing the services of expert consultants to help them through the rigorous process of completing a lease transaction with the U.S. Government. Here's a link to an interesting article relating to GSA leasing. www.ccim.com/cire-magazine/articles/gsa-way

The Square Footage Debate

I worked on a large office lease transaction and part of the deal involved determining the exact square footage of the floor that the tenant would be occupying. We, the landlord, hired an architect to measure the space as did the tenant. Both architects were instructed to use the BOMA standard as their basis for measuring the space. As it turns out, the architects both came up with different results. As a resolution, we agreed to hire a third architect to measure the space. That architect, too, came up with a different number. Three professionals using an exact standard of measurement could not agree upon the square footage of a single space. This may sound odd, but it is not unusual. In fact, it is not uncommon for the actual square footage of a building to be different than what is shown on the original building plans. Obtaining an accurate measurement of any space or building can be tricky at best.

With that in mind, all leases have a section where the premises are described. Many people feel compelled to include the square footage as a part of that description when preparing the lease. I urge against that. It opens the door for disputes during the term, such as tenants wanting to renegotiate their rent based upon a discrepancy in the square footage of the space. In other words, in the lease the landlord states that the square footage is 1,000 square feet, but two years into the term the tenant decides to measure the space and comes up with 975 square feet. In addition, the California Court of Appeal has weighed in on this matter in the matter of McClain v. Octagon Plaza. For further information visit http://www.gordonrees.com/publications/viewPublication.cfm?contentID=576 

If it is necessary to provide the square footage in the lease, have an attorney draft language that specifies how the space was measured and by whom, and that the Lessor and Lessee agree upon same.

Getting an Estoppel Signed

Buyers in a transaction involving the purchase of a leased property will usually require the tenant to complete an estoppel certificate. By completing this form, the tenant has an opportunity to confirm the terms of the lease, verify that the landlord is in compliance with those terms and/or provide any other information relating to their relationship with the landlord. It is important for a buyer to have a solid understanding of the tenant's perspective of their relationship with the landlord; after all it is a relationship that the buyer will inherit. Because of its importance, the estoppel certificate is usually a condition of closing a sale transaction. Most leases have language that requires tenants to complete and execute an estoppel certificate within a certain time period, say 10 days. 

Despite its importance and the requirements of the lease, it is not uncommon for tenants to make completing the estoppel a low priority. This can lead to a delay in closing the sale transaction. Depending on the language of the lease, the landlord has a few remedies against the tenant. First, he can pursue a breach action against the tenant. This option is probably not practical considering the time required and the fact that most buyers do not want to inherit a lease that is in breach. Secondly, many leases have language which allows landlords to provide an estoppel on behalf of the tenant if the tenant refuses to provide it. That being said, most buyers prefer to have an estoppel provided by the tenant themselves. Perhaps the most effective option is a monetary penalty. Try adding language to your leases that allows for charging an amount equal to one month’s rent. This could be the most effective way to motivate a tenant to complete an estoppel certificate.

One last word on estoppels. It's not unsual for a buyer or lender to add language to an estoppel that essentially amends/modifies the lease rather than just confirm its terms. Tenants are under no obliation to execute such an estoppel.

Video: Defined Terms

Tips for Using CPI Rent Adjustments

Rental adjustment provisions are a common component of most leases. Often such adjustments are linked to the rise and fall of the Consumer Price Index (CPI). Sometimes referred to as a cost of living adjustment (COLA), these adjustments typically occur annually on the anniversary of the start date of the lease.  The adjustments parallel the increase, or decrease, in the CPI over that same period. For example if the CPI increases 3% then the rent will increase 3% as well.

One inherent problem with using the CPI as an index for adjusting rent is that landlords are forced to wait a few months before billing tenants for the newly adjusted rent.  This problem is a result of the fact that there is a delay in the publication of the CPI. In other words, the CPI for January may not be published until March because the Government must gather and analyze data prior to releasing the index to the public. This forces landlords to bill tenants retroactively for the adjustment in rent each year. If January is used as the month that the rent adjusts each year, then landlords must wait until the CPI for January is published at some later date in order to know exactly how much to increase, or decrease, the rent. Besides being inconvenient, retroactively billing a tenant causes budgeting problems and accounts payable issues for tenants not to mention cash flow planning problems for landlords.  

One solution is to set the CPI index date as a date prior to the rental adjustment date. In other words, separate the two dates. If a lease begins in January and the landlord would like to bill and collect the adjusted rent annually in January, he should set the CPI index date as the month of November (i.e. two months prior). In doing so, the landlord can be assured of having the published CPI index by the time he is ready to bill the rent for January. The difference between the November CPI and January CPI will be almost certainly be negligible, so there is little downside for either the tenant or landlord.

Conceptually, and in an abbreviated form, the lease language might read: "The monthly rent shall be adjusted annually in the month of January. The adjustment will be based upon the difference in the CPI between the months of November 2011 and November 2012…"

For more information about the Consumer Price Index you can visit:

http://www.bls.gov/cpi/home.htm

Certificates Of Insurance- Worthless?

Many leases require tenants to carry insurance for their personal property and, quite possibly, the property that they occupy. Part of this requirement is to provide the landlord with proof that the tenant's insurance is current and that the policy meets the landlord's requirements. To satisfy this requirement the tenant will often provide the landlord with a "certificate of insurance". This is usually a one page standard form that is issued by the tenant's insurance agent. The form provides basic information about the insurance policy and the effective dates of the policy.
However, it is important to note that many of these certificates of insurance contain disclaimer language such as:

THIS EVIDENCE OF PROPERTY INSURANCE IS ISSUED AS A MATTER OF INFORMATION ONLY AND CONFERS NO RIGHTS UPON THE

ADDITIONAL INTEREST NAMED BELOW. THIS EVIDENCE OF PROPERTY INSURANCE DOES NOT AMEND, EXTEND OR ALTER THE COVERAGE

While there is no reason to believe that the certificate is inaccurate or fraudulent, the landlord needs to be aware that these certificates do not guaranty the information they contain is correct or, in fact, an insurance policy exists at all. Keep in mind, most of the time these certificates are issued by the agent and not the insurance company itself.
To be sure, a landlord should contact the insurance company directly and request a certified copy of the actual policy. 

Tenant Use Provision

The tenant's use provision of a lease is more critical than you might think. The way in which the tenant's use is described can be instrumental in the event that the tenant wishes to sublease the space or in the event his business plans change during the term of the lease which would require a change in his use of the premises. Both events require the landlord's approval. One of the conditions of the landlord's approval is his approval of the subtenant's use or change of use by the existing tenant. Generally, there are two ways to describe a tenant's use:

• Very specifically (i.e. Metal fabrication operation.) 
• Very generically (i.e. Industrial manufacturing and all other legal uses.)

The first way favors the landlord since it allows him to be more restrictive in his approval of a change of use to the building. The second favors the tenant since it gives him more flexibility with his use of the building.

Whether repping the landlord or tenant, be diligent when describing the tenant's use in the lease.

Waiver of Subrogation

Many leases contain a "waiver of subrogation" clause. This clause relates to insurance. First, let's understand what subrogation is. Many insurance policies allow for the insurance company to seek reimbursement from a third party for claims made by the person they insure. In other words, if the insured individual makes a claim as a result of a loss caused by a third party, the insurance company would pay that claim to the insured. Subrogation allows the insurance company to then pursue that third party in order to get reimbursed for the cost of the claim paid to the insured individual. This action would be taken on behalf of the insured individual.
A waiver of subrogation would disallow the insurance company from taking such action and pursuing the third party.

Video: Guarantor Section of AIR Lease Forms

Occupancy Costs for Tenants

In addition to rent, a tenant may incur other costs associated with their occupancy of a premises. Such costs may include property maintenance, property insurance and property tax payments. Even under gross leases, tenants may be liable for building related expenses beyond rental payment.
At a minimum, when negotiating a lease document, brokers should make sure that tenants are aware of all the costs associated with the lease. If you are unsure about such costs, ask the owner for an operating budget for the building or simply ask for a breakdown of all costs for which the tenant may be liable. Negotiating a cap or fixing the amount of such costs should be done during lease negotiations.
Think of it the same way you do when purchasing a car. There's the sticker price and then there is the "out the door" price with all the extras.

Sublease v. Assignment of Lease

Let's discuss a tenant that occupies a 5,000 square foot space and has three years of term remaining on his lease. Say this tenant wishes to dispose of a part, or all, of his space. Should he use a sublease or a lease assignment.
If the tenant subleases any amount of space less than 5,000 square feet or subleases for anything less than the entire three years of remaining term, then he should use a sublease. If, however, he subleases the entire space for the entire remaining term, he should use an assignment form.


Rules of Thumb:

• Less than entire space= Sublease
• Less than entire term= Sublease
• Less than entire space and less than entire term= Sublease
• Entire space for entire remaining term= Assignment

Keep in mind that subletting and/or assigning a lease does not relieve the original tenant of their obligations to the landlord under the original lease.

Using the Correct Names on Leases

When preparing a lease, or any legal document, always make sure to use the full and correct names of all the parties involved. Failing to do so can create problems down the road for the parties. For example, if Acme Inc. was going to be the tenant under a new lease, and Acme Inc. is a Delaware corporation, then the lease should read, Acme Inc., A Delaware Corporation. Acme or Acme Corp. is not satisfactory. If the tenant were an individual with the name John Jones, then the lease should read, John Jones, Individual. Also, the signature blocks should match the name filled in as the tenant and it is critical that all parties sign the lease on each of the blanks provided on the signature block.
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