Rob Cassam's Commercial Real Estate Insider Newsletter

Money making tips for commercial real estate investors and end users!

Guest

In this May 2013, issue I focus on a variety of important commercial real estate topics for investors and owners. I hope some of these may help you know or in the future. This new format includes money making tips for all types of commercial real estate including tips for end users of commercial real estate.  Enjoy!
Rob Cassam

Carolina Realty Advisors
704-442-1774 Ext. 100

Sublease Cooperation Between Tenant and Landlord

With changes in business strategies, some existing tenants may want to sublease all or some of their rented office space to eliminate some locations and shrink operations in others. In this situation, the problem for landlords is whether it is a better strategy to enforce lease restrictions against subleasing or to work with tenants on the theory that the sooner cheap sublease space is filled, the better for all. (In addition, another problem could be whether landlords should insist on sublease restrictions in new leases being negotiated now.)

Lease Restrictions

If there is no provision against the sublease in the original lease, the tenant has the right to assign or sublease without the owner's consent or approval. However, most leases do contain this provision. In the mid-1980s, when rents were at high levels, tenants could obtain the landlord's consent only if no other space was available in the building, and even then, the landlord might have insisted on sharing in any profit realized on the sublease. (In those days, sub-rent was often higher than the prime rent.)
At this time, few tenants are trying to sublease for a profit. Instead, they are interested in cutting costs of unused space and are often willing to accept current market rents, something landlords are reluctant to do for prime space.

Negotiating A Sublease
Although the building owner may take the position that no consent will be given to a sublease as long as prime space is available in the building, the tenant may make some good arguments for cooperation.
First, when there is much space available all around, a tenant looking for space can find it easily. A landlord is better off having a tenant in possession, even with a sublease, because the tenant may stay when the sublease expires.

Second, the landlord takes the risk that a prime tenant with much excess space may default under the lease either by being forced out of business or because the tenant is willing to risk a lawsuit to collect unpaid rent. By being cooperative in finding a subtenant, the landlord reduces the risk of a default by the prime tenant and has the additional security of the subtenant's rent payments (even though the amount may be less than the prime rent).

Perhaps most important, the landlord may gain the reputation for good tenant relationships that can help in the competitive years ahead. Helping the tenant to shed excess space can pay off when the tenant considers renewal of the present lease. Landlords who are known for taking a reasonable approach to tenant problems, both during and after lease negotiations, are bound to have an edge when a tenant must make a choice between very similar rental space in different buildings. 

The Net Lease Checklist

When you purchase a commercial property, you may find that a net lease is already in place. You have a tenant that has certain rights that continue with the change in ownership. Or, perhaps you are the lessee that is negotiating a net lease. Either way, you should know the bases that should be touched in order to insure that you have a net lease. Here is a checklist of what the net lease should cover:

Performance: Provision should be made for termination for nonperformance by tenant. The landlord should have the right of reentry for tenant's continued default. There should be continued rent liability on the part of the tenant where there is a default.

Repairs: The lease should provide that the tenant shall bear all costs of repair. The tenant's responsibility should cover all repairs: external or internal, structural or nonstructural, ordinary or extraordinary. The tenant may seek some limitation on his responsibility in this respect. For example, he may want the lease to be cancelled if the cost of restoration exceeds a certain amount. However, this type of provision is against the concept of a net lease.

Restoration of Premises: While the tenant may be entitled to cancel the lease if the premises are substantially destroyed, the tenant should not be given the right to cancel merely because the tenant's improvement is damaged. If state law permits the tenant to waive the right to cancel, he may be required to do so in the lease.

Insurance: Insurance should be carried in the names of both the tenant and the landlord and should be paid for by tenant. The lease should provide for rent insurance covering at least one year's rent, taxes, and insurance premiums, unless you are dealing with a tenant with a very high credit rating. Where there is a mortgage in effect on the property, loss, if any, should be payable to the extent of the mortgagee's interest. The tenant should be required to provide additional insurance if the mortgagee requires it. In the event of loss, the landlord will want the mortgagee to make the proceeds available to restore the premises.

Alterations: Alterations and improvements should be made by the tenant subject to both the landlord's and the mortgagee's consent. In addition, the tenant should be required to give security for satisfactory completion of the improvements and for restoration of the property to its original condition at the termination of the lease.

Obligations of Mortgage: In figuring out the net rental, all obligations imposed by the mortgage on the property should be taken into account. If there's no mortgage on the property, the lease should make provision for including the obligations of a mortgage if one is placed on the property.

Subordination to Mortgages: Provision should be made for subordination of the lease to the mortgage. Provision can be made for the mortgagee to give the tenant a recordable instrument stating that, in the event of foreclosure, the tenant will not be joined as a party defendant as long as he's not in default under the terms of the lease.

Taxes: The lease should provide that all taxes, water charges, etc., are to be paid by the tenant, including all assessments, recurring and special. Periodic deposits by the tenant to prevent default should also be provided for.

Municipal and Other Government Regulations: The lease should require the tenant to comply with all governmental--federal, state, and local--laws and regulations presently in effect and also laws and regulations that may subsequently be adopted.

Condemnation: Here is how the lease may provide for the possibility that the property may be condemned by public authorities: In the event of a complete taking of mortgaged property, the condemnation award should go first to the mortgagee to the extent of the value of the land and improvements, with a fixed sum to the tenant for the value of the leasehold and the improvements. The remainder, if any, should go to the landlord and tenant according to a predetermined formula.

In the event of a partial taking by public authorities, the lease should require that the tenant bear the cost of restoring the property to a "workable unit," with the landlord making the net proceeds of the award available to the extent necessary and to retain the remainder. Reduction, if any, in rent should be based on a reasonable formula, not necessarily in proportion to the area taken; productivity to the tenant of the area taken and the area remaining should be taken into consideration.

Affordable Shopping Centers

In a recent interview, a well-known billionaire said that he and his companies are buyers. The downturn was a buying opportunity, particularly shopping centers.
When you are looking at shopping centers, bigger is not necessarily better. While a well-run regional or super-regional shopping center can produce a good financial return, so can a successful small-market shopping center. In many cases, the small town center can turn out a better return. One of the benefits is the control that the owners can have by being "the only game in town." This can help generate high returns.

Good Customers and Stable Tenants
In a small town center (10,000 to 100,000 people within a 5-mile radius), there is usually little tenant turnover. The tenants are attuned to shifts in the local economy and can be flexible when economic change occurs.

The stores in the small-town shopping centers have a stable business because they concentrate on basic necessities (food, clothing, dry cleaning services, etc.), thereby insulating themselves from economic downturn which can often spell disaster for merchants of luxury items. These centers can also benefit from the nature of the customers. They are loyal and want to help their neighbors, who are often the store owners. Further, the small-town shopping center is viewed as a community asset. It can be where community activity takes place--the July 4th parade forms there, band concerts are held there, holiday promotions are celebrated there. For investors, these community events bring additional traffic and sales.

The Successful Center
A small-town shopping center needs "hands-on" investors who carefully plan the investment. It should:

1.  Dominate the market. The key factors are consumer habits, surrounding businesses, and accessibility. Consumers must habitually look to the shopping center as the place to go for their needs. The surrounding businesses must complement the wares offered at the shopping center. And the center must be readily accessible via a good roadway system with safe entrances off the highway. The minimum size for market dominance usually is 75,000 square feet.

2.  Be in a stable market. Employment base and local industry should be strong and diversified.

3.  Locate in an area with the right demographics. Young families, with growing children who need and want lots of products, are "right." Analyze the growth potential for the market.

4.  Have a good tenant mix. There should be a strong anchor, usually a department store or a nationally known grocery chain, with at least 10 years remaining on its lease. The remaining store tenants should offer products or services in special demand in this particular locale. Sporting goods, for example, usually are popular in small town shopping centers. Expensive jewelry stores typically are not. While stationery and greeting card stores generally attract customers, sophisticated and costly gift shops do not. Also successful are stores selling hardware, family shoes, and books and records.

Re-Energizing The Center
After about ten years, a small-town shopping center may need something to re­vitalize it. Expanding the center with a national retailer might help invigorate the tenant mix. Enclosing an open mall can be a good renovation to attract new interest. Simply giving the shopping center a face-lift might insure its dominate role in the area.

 

Services

 I provide real estate brokerage services for small and medium sized businesses, investors, and individuals who are fed up with losing money, paying too much and/or, spending too much time not getting the right piece of property for their particular situation. I act as the quarterback in the real estate transaction for my clients who coach me in managing all of their different needs.

My clients love not needing to worry about making bad decisions or bad investments and love winning negotiations.

Owners Of Commercial Space

  • How are your properties helping you in your life?
  • Have your investments turned out as planned?
  • What types of problems have you had growing your portfolio?
  • How has the economy impacted your rents and vacancy?
  • Are you satisfied with your income and asset portfolio? Is it meeting your needs?
  • How much of a problem is dead equity in your property?
  • How long are you prepared to go on doing nothing about situations in your business that are not quite right?


End Users Of Commercial Space

  • What types of growing pains is your company facing with your location?
  • Are rising occupancy costs a challenge your company is facing?
  • Is having too much space or not enough space a challenge your company is facing?
  • How much of a problem is dead equity in your property for you?
  • How long are you prepared to go on doing nothing about situations in your business that are not quite right?


Give me a call, I may be able to help.

704-533-3074

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