Thursday, August 25, 2011

 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 13th 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.

Wednesday, August 24, 2011

Pagliassotti Joins OPINEXPERTS

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

Monday, June 13, 2011

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.

Saturday, May 21, 2011

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.

Wednesday, May 4, 2011

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.