Get renewal upfront in first lease

"A tenant is negotiating with a landlord to lease office space. The term of the potential lease is 5 years, but the tenant also wants the right to extend the lease for an additional 5 years. This situation is increasingly common in today's market. Office tenants often bargain for the right to extend the terms of their leases, since without renewal clauses, they may have to relocate at the end of their lease, incurring significant executive down-time, out-of-pocket expenses, and business interruption. In addition, without an express renewal right, the landlord could require the tenant to pay above market rent during the renewal term. To prevent this, tenants should attempt to negotiate renewal options at the fair-market rent for the space.
Formulating the Renewal
Renewal clauses focus on the actual formula used to calculate a fair-market renewal rental rate and the method used to determine the rate. Between these issues, the process used to determine the rate is at least as important as the formula itself. As fair-market rents almost never are based on a set rental rate or a set inflation index, such as the Consumer Price Index, a process for determining the fair-market rate must be agreed upon and set forth in the lease. Throughout the arbitration process several significant issues must be addressed.
Exercise Date.
The deadline by which a tenant must exercise a renewal option is dependent upon several factors. First, the landlord should be informed well in advance if the tenant intends to exercise a renewal option. This allows the landlord time to find a third party to lease the space to if the tenant fails to exercise its option. The timeline depends upon the size, type, and location of the space.
The general rule of thumb is the larger the space, the more notice landlords require. For example, typical standards dictate spaces between 5,000 square feet and 20,000 sf require nine months to 12 months prior notice; spaces between 20,000 sf and 60,000 sf require 12 months to 15 months prior notice; and spaces greater than 60,000 sf need 15 months to
18 months. If the tenant fails to notify the landlord in a timely manner, the renewal right terminates and the landlord can lease the space to another tenant.
Negotiation Period.
If the tenant exercises its renewal option within the set time period, the landlord and tenant should meet to discuss and attempt to agree upon the fair-market rental rate for the space. Issues to consider include whether or not the tenant must irrevocably exercise its renewal option before the landlord is obligated to discuss fair-market rental rates, if the landlord is required to discuss fair-market rental rates with the tenant at any time, if the landlord is obligated to provide back-up documentation of the fair-market rental rate determination, and the process to be followed if the landlord and tenant are not able to agree upon the fair-market rental rate.
Landlords often agree to discuss fair-market rents before tenants irrevocably have exercised their renewal option, provided a tenant exercises the renewal option before the landlord is obligated to proceed with any type of dispute resolution. With respect to back-up documentation, landlords generally consider the economic terms of other leases in the building to be confidential and are reluctant to turn over such information to the tenant. As a result, tenants are expected to rely upon their own sources to determine fair-market rental rates.
Finally, if the parties are unable to agree upon the fair-market rental rate within a set time period, such as 30 days, the lease must provide some mechanism for resolving the dispute.
Dispute Resolution.
Landlords do not want to incur the time and costs of dispute resolution only to have tenants decide they are unhappy with the result and rescind the renewal option. Therefore, landlords almost always require tenants to irrevocably exercise renewal options before proceeding to any type of dispute resolution. The most common method of resolving a fair-market rental rate dispute is for each party to submit a final, binding fair-market rental rate determination to arbitration.
To arbitrate the fair-market rental rate, the landlord and tenant first must agree upon an arbitrator. This generally is done by each selecting their own advocate arbitrator, who usually is required to be a real estate broker, appraiser, or attorney with no less than five years of experience in the applicable space's real estate sector. Once the two advocate arbitrators have been selected, they meet and mutually select a third, neutral arbitrator who is responsible for determining the actual fair-market rental rate.
Type of Arbitration.
During arbitration, the neutral arbitrator must select either the landlord's or the tenant's fair-market rental rate, but should not be allowed to select an alternative determination. Commonly known as baseball arbitration, this method was developed originally to resolve salary disputes between professional baseball players and owners. This approach is preferred over others because it tends to cause landlords and tenants to be more flexible in compromising. Each party knows that if its submitted rental rate is not closer to the rental rate that the neutral arbitrator believes to be the actual rental rate, then the neutral arbitrator will select the other party's submitted rental rate.
As a result, baseball arbitration causes both parties to submit more realistic rental rates, and the process often results in the parties agreeing upon the fair-market rate without having to resort to arbitration, which saves both parties considerable time and money.
In today's marketplace, tenants often negotiate for and receive valuable renewal rights at the fair-market rental rate for the premises. To make such rights easily understood by both parties, landlords and tenants should ensure that a very precise process for determining the fair-market rental rate is set forth in the lease." for more information see www.houstonrealtyadvisors.net
and www.houstonrealtyadvisor.com


from Commercial Investment Real Estate, May-June 2006

Broker license portability

For real estate services firms that handle properties in various parts of the country, license portability is of vital concern.


from Commercial Property News, September 1, 2006


"License portability gives a real estate licensee the freedom to provide transactional services in a state other than the one in which he is licensed, provided that the service company individual works in concert with a locally licensed individual in the partner state. For example, if the originating broker is licensed in California, but it working on a property in Ohio, the partner must be licensed in Ohio.


In some states, this law ties the hands of real estate service providers that do not have offices – and thus do not have locally licensed brokers – in the distant market in which they are pursuing a transaction.


In these situations, brokers have to be in compliance with each state's statutes.


Some localities were able to get the law altered during the past few years. The National Association of Realtors continues to categorize 5 states as turf states – those that prevent out-of-state licensees from providing services on transactions, leaving the company no choice but to refer its clients or transactions to local brokers.


5 Turf Territories: Kentucky, Missouri, Nebraska, New Jersey, Pennsylvania.


24 states are deemed cooperative, simply requiring the involvement of a local-partner licensee in the deal: Alabama, Arizona, Colorado, Connecticut, Georgia, Indiana, Kansas, Louisiana, Maryland, Michigan, Mississippi, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oregon, Rhode Island, South Carolina, South Dakota, Tennessee, Washington, Wyoming.


Regulations in the remaining 21 states and DC – categorized as physical locations – require that the out-of-state licensee be physically located in the state in which it is licensed: Alaska, Arkansas, California, Delaware, District of Columbia, Florida, Hawaii, Idaho, Illinois, Iowa, Maine, Massachusetts, Minnesota, Montana, New York, Oklahoma, Texas, Utah, Vermont, Virginia, West Virginia, Wisconsin." for more information see; www.houstonrealtyadvisors.net
or www.houstonrealtyadvisor.com

Brokers, owners file suit against RE commission

A group of commercial property owners and real estate brokers has filed a federal lawsuit challenging certain regulations and practices by the Kentucky Real Estate Commission.
The suit alleges that the commission has misused its regulatory authority to exclude regional and national commercial brokerage firms from the Kentucky market. The plaintiffs argue that the commission is working to protect special interests by ensuring broker payments stay within the state.


According to new regulations outlined in the commission's literature, it is improper for a broker licensed in Kentucky to aid, abet or otherwise assist any individual who is not actively licensed in Kentucky to perform real estate brokerage in this state. Kentucky has reciprocity with 19 states, and states that it is simple to become licensed in state. The regulations are hardly a way to protect local brokers against national competition. But to broker in Kentucky, you have to be willing to give up real estate jurisdiction to commission.


The prohibition includes a Kentucky broker assisting a non-Kentucky licensed individual with listing, selling or managing Kentucky property for a buyer or seller. A non-Kentucky licensed individual includes someone who may be affiliated with a national franchise and may have a license in another state, but is not actively licensed in Kentucky.


It is this regulation that has owners and investors up in arms. The commission's adoption of licensure laws violates the rights of Kentucky property owners and others under the Commerce Clause of the United States Constitution, they say. The regulations severely limit access to capital markets, preventing interstate trade and harming property values.
The National Multi Housing Council fully supports the plaintiffs in the lawsuit. If you over-regulate a sector of the market, you disrupt it and create inefficiencies; you are less likely to get optimal prices or the right mix of potential investors. If you can't bring investors or bring capital to a market, that market suffers.


National and international investors that have solidified relationships with national brokerage firms should not have to surrender their associations to comply with Kentucky regulations. Rather than forging a new relationship with a local broker, investors will simply look for other investment markets. All brokers are not created equal; they come with a wide range of skill sets and a wide range of expertise. With this regulation, the state is losing a wide range of national and international capital. All we're trying to do is join a cause that preserves open markets."


Is this true in your state? for more informaion see www.houstonrealtyadvisors.net
or www.houstonrealtyadvisor.com

Abandoned cables – a hidden danger

"These cables have the potential to both fuel and spread a very large, very hot fire in concealed spaces in the event of a building fire.


Over the years, many types of cable made from a variety of materials have been installed in the concealed spaces of commercial and public buildings. Some of these materials were engineered to resist high heat, flame spread and smoke generation, while others were not. So in addition to fueling and spreading a fire, abandoned cables often generate large amounts of smoke, making the fire extremely difficult to find and fight.
The fire spread problem is further exacerbated when fire-stopped penetrations are disrupted and not adequately replace or protected when new cabling is installed in the same pathways as the old.


What is Abandoned Cable?
In general, abandoned cable is cable that is no longer used for voice and data communication and other low-voltage signaling circuits in buildings. The 2002 NEC Article 800 Communications Circuits defines abandoned cable as:


Installed communications cable that is not terminated at both ends at a connector or other equipment and not identified for future use with a tag.


New Codes and Standards
Recognizing the serious potential hazard from abandoned cable prompted the ENC and NFPA to write codes and standards requiring its removal.


The accessible portion of abandoned communications cables shall not be permitted to remain.


Code Compliance
The NEC is the most widely recognized and adopted model from which most states and local jurisdictions develop their codes. The specific requirements for the jurisdiction in which the building is located must be followed.


The question is who is ultimately responsible for code compliance.
It's important to note that in the event of a fire, both the building owner and tenants are likely to bear some responsibility.


Enforcement
The permitting process triggers inspections. Typically, electrical inspectors are responsible for inspecting the removal of abandoned cable and enforcing the code. Due to the potential fire hazard from accumulation of abandoned cable, fire and life safety inspectors, such as fire marshals, may also be involved in inspections and enforcement.


Removal of Abandoned Cable
The NEC does not address the issue of when abandoned cable must be removed. Most end-users initiate removal projects when new cabling systems are added, or when a major renovation is being done. Timing is up to local jurisdiction.


Another issue not addressed by the NEC is how removed abandoned cable should be disposed. Local code and statutory requirements may come into play. Some states do not allow disposal of these cables in landfills.
While the copper in cables if often recovered and recycled, the major problem is the large amount of plastic material used for insulate and jacketing.


The Future of Cable
Several leading cable manufactures have begun to address the cable fuel load problem using innovative fluoropolymer materials create limited combustible cabling. Limited combustible cables meet all primary NFPA fuel load, flame spread and smoke generation requirements for materials exposed to the airflow. They are also more easily recycled. As cable is removed, there are now new recycling options to capture the plastic waste streams and reuse them in new cable constructions." for more information see www.houstonrealtyadvisors.net or www.houstonrealtyadvisor.com

14 points in moderate damage and destruction clause for strong tenant's lease

With the looming threat of fire, hurricanes, terrorist acts and other disasters, landlords and tenants take a closer look at their lease clauses for damage and destruction.


from Commercial Lease Law Insider, September 2006


"This will be the first clause that is looked at after a building suffers a casualty, since it spells out both the landlord's and tenant's rights and obligations when a casualty occurs.


A moderate clause using a more moderate damage and destruction clause eliminates protracted and time-consuming negotiations between landlords and prospective tenants, and still protects the landlord.


1. Tenant must notify landlord of casualty.
2. Landlord keeps tenant on hook for rent after casualty
3. Landlord gets right to decide if damage can be reasonably repaired within set time frame.
4. The landlord's repair obligation is only if the space that is damaged or rendered unusable or inaccessible by total or substantial damage.
5. Landlord should use reasonable efforts to make repairs.
6. Landlord must repair space only to the extent permitted by law.
7. Tenant would be responsible for certain repairs, such as personal property, fixtures and alterations.
8. Tenant must cooperate with the repairs.
9. Landlord should give the tenant rent abatement proportionate to the percentage of the space that is unusable or inaccessible.
10. Tenant's rent abatement would end when the repairs are substantially complete.
11. Landlord has the right to terminate the lease.
12. List termination procedures in the lease.
13. There would be no abatement, or termination right, if the damage was caused by tenant's negligence.
14. Landlord requires a waiver of its rights under state laws that may give a tenant whose space has been damaged the right to terminate its lease. A tenant would demand that the landlord also waive termination rights under state law.


A tough damage and destruction clause typically states that the landlord is not required to make repairs to a tenant's space to the extent that they would cost more than the insurance proceeds. Strong tenants balk at that limitation. Tenants argue that the landlord should be responsible for all repairs."for more information see www.houstonrealtyadvisors.net or www.houstonrealtyadvisor.com ask for Ed A. Ayres 713 782-0260

Credit Squeeze effects NET LEASE DEALS

Has the Credit Squeeze Put the Squeeze on Net Lease Office Deals? September 04, 2007 By Dees Stribling, Contributing Correspondent
Until sometime this summer, it looked to be a strong year for office-oriented net lease deals, a segment of the net lease market often overshadowed by more numerous retail deals. As with the rest of the market for investment properties, however, all bets are off now, though the period immediately after Labor Day may shed light on whether the market segment will see renewed velocity.According to Dan Fasulo, a partner with Real Capital Analytics, investors are still waiting for volatility to die down, "but no one's quite sure how long that's going to take," he said. This wait-and-see attitude applies not only to the big real estate M&A deals and the portfolio transactionswhich tend to get the most attentionbut also the sort of smaller deals typically represented by net lease transactions.
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Randy Blankstein, president of Northbrook, Ill.-based Boulder Net Lease Funds, agrees that the summer was marked by sluggish uncertainty in the net lease world, including the previously robust office segment. "There's been uncertainty in pricing, and so July and August were slow," he said. "Lenders havent figured out quite where to set the bar yet."Once velocity returns, net lease investors may pick up where they left off, according to Blankstein. According to Boulder Net Lease Funds' Net Lease Market Report for the second quarter of 2007--the most recent available, published before the liquidity freeze inspired by the subprime meltdown--the sale of net lease office properties had spiked in the second quarter of this year, compared to the first. Some 4,122 office properties were sold in net lease deals the second quarter, compared with 1,796 in the first, a 130 percent increase."The cap rate advantage that retail net lease properties enjoyed in recent years had pretty much disappeared by the early part of the year," Blankstein noted. "That was the case before the credit crunch, and it probably will be as investors return to the market."He predicts an uptick in net lease deals of all varieties by last quarter of this year at the latest, office deals included. "Pricing will stabilize, and there are also owners that need to sell before the end of the year," he said. FOR MORE INFORMATION SEE : www.houstonrealtyadvisors.net or www.houstonrealtyadvisor.com