With a lease agreement in plain English, negotiating parties have an easier time understanding the terms of the deal.
From Development Magazine Online published by NAIOP, National Association of Industrial and Office Properties
"Tenants often don't understand it. Brokers and owners have trouble negotiating it. And it requires hours of tweaking and finessing with each new deal.
But standard lease agreements don't have to be that way. A year ago, Spieker Properties cut the size of its standard lease agreement in half and the results have exceeded expectations.
The speed of doing business becomes more rapid with each day. When companies grow, their need for additional real estate space often must be fulfilled immediately. Deals must be executed quickly, with minimal time wasted in the negotiation process.
Most of Spieker's tenants are businesses occupying between 6,000 and 8,000 square feet. While the long-form lease still is a viable and even preferred option for some larger tenants, these smaller customers often do not have the resources to spend on extensive and sometimes exhausting negotiations.
A great deal of time was being spent negotiating terms irrelevant to many of these smaller tenants. In addition, the 16-page long-form lease included legalistic language difficult for tenants to understand.
Each provision was reviewed in terms of whether or not it was an issue that had bogged down negotiations unnecessarily in the past. If its elimination did not present any true risk to either party, the provision was simply removed. The search was aimed especially for provisions that had repeatedly become sticking points with tenants.
The short-form lease has completely changed the tenor of Spieker's relationships with tenants. No longer are they intimidated by a lengthy document written in complex language more suited to legal experts. With a lease agreement in plain English, negotiating parties have an easier time understanding the terms of the deal. They spend less time discussing interpretations of the language and more time pushing negotiations forward.
The legal time previously required to execute a lease reduced by 50-75%.
In some cases, legal costs are eliminated altogether and leases are signed essentially in their original form." for more information see www:houstonrealtyadvisors.com or www.houstonrealtyadvisors.net
Monday, December 31, 2007
Thursday, December 27, 2007
New Biotech Building for Houston
Dec. 14 - Houston developer Frank Liu is buying the former headquarters buildings of Tanox Inc., with the intention of using them as the first components in a new biotechnology park.
Liu's Lovett Commercial is acquiring the two buildings, which total 110,000 square feet, as well as 24 acres of vacant land that's earmarked for future biotech development. The property is located just south of the 610 Loop on Stella Link, a couple of miles from the Texas Medical Center.
"We're planning on creating a much-needed biotech park to serve the thriving Medical Center," Liu says. "The park will feature state-of-the-art, cutting-edge facilities."
Lovett Commercial is buying the site from California-based Genentech Inc., a large pharmaceutical company that completed the acquisition of Houston-based Tanox several months ago. Genentech paid approximately $919 million for Tanox, which developed the asthma drug Xolair.
Retail landlords offer blue-light specials to tenants
Dec. 7 - Not too long ago, retail broker Joel English was offering neighborhood retail center tenants about $15 to $20 per square foot as an improvement incentive. These days, that sum just won't cut it.
English and other brokers and landlords in the retail real estate field have had to up the ante, offering as much as $35 per square foot or more for tenant improvements. And in some cases, landlords are throwing in other deal sweeteners such as longer build-out periods, and even free rent, in an effort to shore up the struggling sector.
"It's a citywide problem," says English, president of Houston-based CEC Brokerage. "Landlords are getting anxious because there's too much retail on the ground and it's getting tougher to compete with the grocery-anchored centers."
Indeed, the third quarter of this year represented the third straight year-to-year drop in occupancy levels in the neighborhood center sector, as overall occupancy fell to 84.57 percent. That's down from 85.09 percent in the third quarter of 2006 and 85.68 percent in the third quarter of 2005, according to Houston-based real estate services firm O'Connor & Associates.
The south sector of the city recorded the highest occupancy rate, 93 percent, while the lowest occupancy was found in the far north sector at 77 percent.
"It appears that occupancy is trending down, so it would make sense that landlords are offering discounts to lease the vacant space," says Kathryn Koepke, a researcher at O'Connor & Associates. Even with the incentives, English says, some centers are taking as long as three to four years to fully lease.
West Houston office-building boom getting more fuel
Nov. 30 - Two office developments planned in West Houston stand to add nearly half a million square feet of prime space to the booming area where many energy companies and oilfield service firms do business.
Dallas-based Behringer Harvard Real Estate Investments plans to add a third building to its Eldridge Place office complex, with construction slated to start in the spring.
And Houston-based Woodcreek Development Co. is entering into the office development business with plans to start construction on two facilities in Park 10 during 2008 -- a 150,000-square-foot Class A building and a 90,000-square-foot tiltwall building.
Behringer Harvard is making plans for Three Eldridge Place, an office building with 275,000 square feet to 300,000 square feet of Class A space.
"Since that property is not scheduled to start construction until '08, we honestly aren't able to disclose any details," says Jasmine Bouyer, a Behringer Harvard spokeswoman.
The new structure would be added to One Eldridge Place, which was built in 1984, and Two Eldridge Place, which went up in 1986. The real estate investment trust acquired the buildings in December 2006.
Those two buildings -- located in the Energy Corridor submarket -- have a total of 519,000 square feet of space. They are located at 757 N. Eldridge Parkway and 777 N. Eldridge Parkway, just south of I-10 near Memorial Drive. For more information see www.houstonrealtyadvisors.com or www.houstonrealtyadvisors.net
Liu's Lovett Commercial is acquiring the two buildings, which total 110,000 square feet, as well as 24 acres of vacant land that's earmarked for future biotech development. The property is located just south of the 610 Loop on Stella Link, a couple of miles from the Texas Medical Center.
"We're planning on creating a much-needed biotech park to serve the thriving Medical Center," Liu says. "The park will feature state-of-the-art, cutting-edge facilities."
Lovett Commercial is buying the site from California-based Genentech Inc., a large pharmaceutical company that completed the acquisition of Houston-based Tanox several months ago. Genentech paid approximately $919 million for Tanox, which developed the asthma drug Xolair.
Retail landlords offer blue-light specials to tenants
Dec. 7 - Not too long ago, retail broker Joel English was offering neighborhood retail center tenants about $15 to $20 per square foot as an improvement incentive. These days, that sum just won't cut it.
English and other brokers and landlords in the retail real estate field have had to up the ante, offering as much as $35 per square foot or more for tenant improvements. And in some cases, landlords are throwing in other deal sweeteners such as longer build-out periods, and even free rent, in an effort to shore up the struggling sector.
"It's a citywide problem," says English, president of Houston-based CEC Brokerage. "Landlords are getting anxious because there's too much retail on the ground and it's getting tougher to compete with the grocery-anchored centers."
Indeed, the third quarter of this year represented the third straight year-to-year drop in occupancy levels in the neighborhood center sector, as overall occupancy fell to 84.57 percent. That's down from 85.09 percent in the third quarter of 2006 and 85.68 percent in the third quarter of 2005, according to Houston-based real estate services firm O'Connor & Associates.
The south sector of the city recorded the highest occupancy rate, 93 percent, while the lowest occupancy was found in the far north sector at 77 percent.
"It appears that occupancy is trending down, so it would make sense that landlords are offering discounts to lease the vacant space," says Kathryn Koepke, a researcher at O'Connor & Associates. Even with the incentives, English says, some centers are taking as long as three to four years to fully lease.
West Houston office-building boom getting more fuel
Nov. 30 - Two office developments planned in West Houston stand to add nearly half a million square feet of prime space to the booming area where many energy companies and oilfield service firms do business.
Dallas-based Behringer Harvard Real Estate Investments plans to add a third building to its Eldridge Place office complex, with construction slated to start in the spring.
And Houston-based Woodcreek Development Co. is entering into the office development business with plans to start construction on two facilities in Park 10 during 2008 -- a 150,000-square-foot Class A building and a 90,000-square-foot tiltwall building.
Behringer Harvard is making plans for Three Eldridge Place, an office building with 275,000 square feet to 300,000 square feet of Class A space.
"Since that property is not scheduled to start construction until '08, we honestly aren't able to disclose any details," says Jasmine Bouyer, a Behringer Harvard spokeswoman.
The new structure would be added to One Eldridge Place, which was built in 1984, and Two Eldridge Place, which went up in 1986. The real estate investment trust acquired the buildings in December 2006.
Those two buildings -- located in the Energy Corridor submarket -- have a total of 519,000 square feet of space. They are located at 757 N. Eldridge Parkway and 777 N. Eldridge Parkway, just south of I-10 near Memorial Drive. For more information see www.houstonrealtyadvisors.com or www.houstonrealtyadvisors.net
Wednesday, December 19, 2007
Simplified lease documents aid the need for speed, better tenant
"Tenants often don't understand it. Brokers and owners have trouble negotiating it. And it requires hours of tweaking and finessing with each new deal.
But standard lease agreements don't have to be that way. A year ago, Spieker Properties cut the size of its standard lease agreement in half and the results have exceeded expectations.
The speed of doing business becomes more rapid with each day. When companies grow, their need for additional real estate space often must be fulfilled immediately. Deals must be executed quickly, with minimal time wasted in the negotiation process.
Most of Spieker's tenants are businesses occupying between 6,000 and 8,000 square feet. While the long-form lease still is a viable and even preferred option for some larger tenants, these smaller customers often do not have the resources to spend on extensive and sometimes exhausting negotiations.
A great deal of time was being spent negotiating terms irrelevant to many of these smaller tenants. In addition, the 16-page long-form lease included legalistic language difficult for tenants to understand.
Each provision was reviewed in terms of whether or not it was an issue that had bogged down negotiations unnecessarily in the past. If its elimination did not present any true risk to either party, the provision was simply removed. The search was aimed especially for provisions that had repeatedly become sticking points with tenants.
The short-form lease has completely changed the tenor of Spieker's relationships with tenants. No longer are they intimidated by a lengthy document written in complex language more suited to legal experts. With a lease agreement in plain English, negotiating parties have an easier time understanding the terms of the deal. They spend less time discussing interpretations of the language and more time pushing negotiations forward.
The legal time previously required to execute a lease reduced by 50-75%.
In some cases, legal costs are eliminated altogether and leases are signed essentially in their original form." for more information see : www.houstonrealtyadvisors.com and www.houstonrealtyadvisors.net
But standard lease agreements don't have to be that way. A year ago, Spieker Properties cut the size of its standard lease agreement in half and the results have exceeded expectations.
The speed of doing business becomes more rapid with each day. When companies grow, their need for additional real estate space often must be fulfilled immediately. Deals must be executed quickly, with minimal time wasted in the negotiation process.
Most of Spieker's tenants are businesses occupying between 6,000 and 8,000 square feet. While the long-form lease still is a viable and even preferred option for some larger tenants, these smaller customers often do not have the resources to spend on extensive and sometimes exhausting negotiations.
A great deal of time was being spent negotiating terms irrelevant to many of these smaller tenants. In addition, the 16-page long-form lease included legalistic language difficult for tenants to understand.
Each provision was reviewed in terms of whether or not it was an issue that had bogged down negotiations unnecessarily in the past. If its elimination did not present any true risk to either party, the provision was simply removed. The search was aimed especially for provisions that had repeatedly become sticking points with tenants.
The short-form lease has completely changed the tenor of Spieker's relationships with tenants. No longer are they intimidated by a lengthy document written in complex language more suited to legal experts. With a lease agreement in plain English, negotiating parties have an easier time understanding the terms of the deal. They spend less time discussing interpretations of the language and more time pushing negotiations forward.
The legal time previously required to execute a lease reduced by 50-75%.
In some cases, legal costs are eliminated altogether and leases are signed essentially in their original form." for more information see : www.houstonrealtyadvisors.com and www.houstonrealtyadvisors.net
Tuesday, December 18, 2007
Arbitration Sets $56M Rent For Sony Offices
Sony Pictures Entertainment will pay rent of $56.1 million to landlord Transpacific Development Co. over the next five years as the result of what is believed to be the largest rent arbitration ever decided on the West Coast. The arbitration decision in favor of Transpacific came after Sony and the Torrance-based building owner failed to reach an agreement during negotiations over rent for Sony's approximately 330,000 sf of office space at 10000 W. Washington Blvd.
From GlobeSt.com News, December 4, 2007 www.globest.com/news <http://www.globest.com/news>
"Sony occupies the entire building at 10000 W. Washington, which is also known as Sony Pictures Plaza, under a 35-year triple-net lease that began in 1993. The entertainment firm's lease provides that the rent be adjusted once every five years rather than through yearly CPI increases, and that the new rent be established by arbitration if the parties can't agree on a figure.
In the recent arbitration, Sony proposed a new rent of $870,000 per month for the next five years, compared with the $710,000 per month that the entertainment firm has been paying for the past five years.
Transpacific proposed a rent of $935,000 per month for the 330,000 sf of office space and a 400,000-sf parking garage totaling 1,100 spaces that is covered by the lease.
Sony's proposal would have totaled $52.2 million over the five years, compared with the $56.1-million Transpacific proposal. The decision was made according to what is known as baseball-style arbitration, so named because of its use by Major League Baseball, in which matters in dispute are decided by arbitrators who must choose either one or the other of the two proposals submitted by the opposing parties.
Sony did not return calls seeking comment on the arbitration, but those who were involved on the Transpacific side tell GlobeSt.com that the case is a sign of the growing number of rent arbitrations now under way in the L.A. area. Transpacific president Tom Irish, attorney Tony Natsis of Allen Matkins Leck Gamble Mallory & Natsis, and CB Richard Ellis appraiser Dave Zoraster all tell GlobeSt.com that the already rising number of rent arbitrations appears likely to keep increasing.
`This is something that is really starting to take off,'
Zoraster says. The CBRE appraiser says he is working on six or seven rent arbitration appraisals right now. Natsis says that he is working on 10 rent arbitration cases now, compared with only 20 that he worked on for the first seven years of this decade, and Irish says that he knows of 25 or so that are in the works in the Los Angeles area.
Natsis points out that rent arbitrations occur primarily in two
circumstances: in the case of an extremely long-term lease like Sony's that adjusts the rent mid-term, or in a more standard-length lease that comes up for renewal. He says that the rising number of arbitrations lately reflects supply-and-demand market conditions that have turned the Westside into one of the tightest and most expensive office markets in Southern California, as well as the determination to push rents substantially higher on the part of landlords who paid top dollar for their properties and need to achieve higher rents to pay for them.
In rent disputes, as Natsis explains, the arbitrators typically are appraisers. The three arbitrators include one chosen by the landlord, one chosen by the tenant and one neutral third party that both parties agree upon.
The tenant's arbitrator and the landlord's arbitrator each submits a number representing what they believe the fair market rent should be, and neither party knows what the other's number is until the figures are exchanged at arbitration. When the arbitration is baseball style, Natsis points out, the neutral third party arbitrator is the one who makes the decision by choosing one of the two figures.
Natsis says that in theory, at least, baseball arbitration encourages both sides to submit figures more toward the middle ground because the neutral third party arbitrator is likely to reject any number that is excessively high or low. In practice, however, landlords and tenants are still sometimes miles apart in their perceptions of what the rent should be.
A case in point was the previous arbitration between Sony and Transpacific five years ago, when the two parties were $20 million apart in their proposals. Natsis, who along with Zoraster also represented Transpacific in that case, says that $20-million difference is the largest spread ever that he is aware of in rent arbitration and that the
$56.1 million is the largest rent figure he knows of that has been arbitrated on the West Coast.
Zoraster says that no two arbitrations are alike because the leases vary so much in how they are structured and in the array of factors that must be considered in determining fair market rent. The appraiser must first look at the lease, to see what it specifies regarding the obligations of the landlord and the tenant, and then must research a host of factors, including comparable leases of similar facilities. Appraisal work for leases is `a lot more complex than looking at a sale value,'
Zoraster says.
Natsis and Irish both credit Zoraster with producing comprehensive and accurate appraisals that won the case for Transpacific both in this arbitration and in Transpacific's previous arbitration with Sony. The Torrance-based investment and development firm bought Sony Pictures Plaza in 2000, when the 35-year lease was already in place, and although Transpacific has prevailed in both of its arbitrations, Irish says that he would prefer not to have to go to through the process because it is both costly and unpleasant.
`We prefer to reach agreement with our tenants through negotiation rather than arbitration,' Irish says. `If we agree, both parties are satisfied. If we go to baseball-style arbitration, one side wins and one side loses, which is not conducive to a positive landlord/tenant relationship--especially if the rents are significant.'
The Sony lease commenced on Jan. 1, 1993, so the new rent will be for years 16 through 20 of the 35-year lease. Irish points out that although it's a 35-year lease, Sony is only locked into the building for 20 years and both parties have the option to terminate at the end of the next five years." For more information see www:houstonrealtyadviosrs.com
or www.houstonrealtyadvisors.net
From GlobeSt.com News, December 4, 2007 www.globest.com/news <http://www.globest.com/news>
"Sony occupies the entire building at 10000 W. Washington, which is also known as Sony Pictures Plaza, under a 35-year triple-net lease that began in 1993. The entertainment firm's lease provides that the rent be adjusted once every five years rather than through yearly CPI increases, and that the new rent be established by arbitration if the parties can't agree on a figure.
In the recent arbitration, Sony proposed a new rent of $870,000 per month for the next five years, compared with the $710,000 per month that the entertainment firm has been paying for the past five years.
Transpacific proposed a rent of $935,000 per month for the 330,000 sf of office space and a 400,000-sf parking garage totaling 1,100 spaces that is covered by the lease.
Sony's proposal would have totaled $52.2 million over the five years, compared with the $56.1-million Transpacific proposal. The decision was made according to what is known as baseball-style arbitration, so named because of its use by Major League Baseball, in which matters in dispute are decided by arbitrators who must choose either one or the other of the two proposals submitted by the opposing parties.
Sony did not return calls seeking comment on the arbitration, but those who were involved on the Transpacific side tell GlobeSt.com that the case is a sign of the growing number of rent arbitrations now under way in the L.A. area. Transpacific president Tom Irish, attorney Tony Natsis of Allen Matkins Leck Gamble Mallory & Natsis, and CB Richard Ellis appraiser Dave Zoraster all tell GlobeSt.com that the already rising number of rent arbitrations appears likely to keep increasing.
`This is something that is really starting to take off,'
Zoraster says. The CBRE appraiser says he is working on six or seven rent arbitration appraisals right now. Natsis says that he is working on 10 rent arbitration cases now, compared with only 20 that he worked on for the first seven years of this decade, and Irish says that he knows of 25 or so that are in the works in the Los Angeles area.
Natsis points out that rent arbitrations occur primarily in two
circumstances: in the case of an extremely long-term lease like Sony's that adjusts the rent mid-term, or in a more standard-length lease that comes up for renewal. He says that the rising number of arbitrations lately reflects supply-and-demand market conditions that have turned the Westside into one of the tightest and most expensive office markets in Southern California, as well as the determination to push rents substantially higher on the part of landlords who paid top dollar for their properties and need to achieve higher rents to pay for them.
In rent disputes, as Natsis explains, the arbitrators typically are appraisers. The three arbitrators include one chosen by the landlord, one chosen by the tenant and one neutral third party that both parties agree upon.
The tenant's arbitrator and the landlord's arbitrator each submits a number representing what they believe the fair market rent should be, and neither party knows what the other's number is until the figures are exchanged at arbitration. When the arbitration is baseball style, Natsis points out, the neutral third party arbitrator is the one who makes the decision by choosing one of the two figures.
Natsis says that in theory, at least, baseball arbitration encourages both sides to submit figures more toward the middle ground because the neutral third party arbitrator is likely to reject any number that is excessively high or low. In practice, however, landlords and tenants are still sometimes miles apart in their perceptions of what the rent should be.
A case in point was the previous arbitration between Sony and Transpacific five years ago, when the two parties were $20 million apart in their proposals. Natsis, who along with Zoraster also represented Transpacific in that case, says that $20-million difference is the largest spread ever that he is aware of in rent arbitration and that the
$56.1 million is the largest rent figure he knows of that has been arbitrated on the West Coast.
Zoraster says that no two arbitrations are alike because the leases vary so much in how they are structured and in the array of factors that must be considered in determining fair market rent. The appraiser must first look at the lease, to see what it specifies regarding the obligations of the landlord and the tenant, and then must research a host of factors, including comparable leases of similar facilities. Appraisal work for leases is `a lot more complex than looking at a sale value,'
Zoraster says.
Natsis and Irish both credit Zoraster with producing comprehensive and accurate appraisals that won the case for Transpacific both in this arbitration and in Transpacific's previous arbitration with Sony. The Torrance-based investment and development firm bought Sony Pictures Plaza in 2000, when the 35-year lease was already in place, and although Transpacific has prevailed in both of its arbitrations, Irish says that he would prefer not to have to go to through the process because it is both costly and unpleasant.
`We prefer to reach agreement with our tenants through negotiation rather than arbitration,' Irish says. `If we agree, both parties are satisfied. If we go to baseball-style arbitration, one side wins and one side loses, which is not conducive to a positive landlord/tenant relationship--especially if the rents are significant.'
The Sony lease commenced on Jan. 1, 1993, so the new rent will be for years 16 through 20 of the 35-year lease. Irish points out that although it's a 35-year lease, Sony is only locked into the building for 20 years and both parties have the option to terminate at the end of the next five years." For more information see www:houstonrealtyadviosrs.com
or www.houstonrealtyadvisors.net
Friday, December 14, 2007
Retail landlords offer blue-light specials to tenants
Not too long ago, retail broker Joel English was offering neighborhood retail center tenants about $15 to $20 per square foot as in improvement incentive. These days, that sum just won't cut it.
English and other brokers and landlords in the retail real estate field have had to up the ante, offering as much as $35 per square foot or more for tenant improvements. And in some cases, landlords are throwing in other deal-sweeteners such as longer build-out periods and even free rent in an effort to shore up the struggling sector.
"It's a citywide problem," says English, president of Houston-based CEC Brokerage. "Landlords are getting anxious because there's too much retail on the ground and it's getting tougher to compete with the grocery-anchored centers."
Indeed, the third quarter of this year represented the third straight year-to-year drop in occupancy levels in the neighborhood center sector, as overall occupancy fell to 84.57 percent. That's down from 85.09 percent in the third quarter of 2006 and 85.68 percent in the third quarter of 2005, according to Houston-based real estate services firm O'Connor & Associates.
The south sector of the city recorded the highest occupancy rate, 93 percent, while the lowest occupancy was found in the far north sector at 77 percent.
"It appears that occupancy is trending down, so it would make sense that landlords are offering discounts to lease the vacant space," says Kathryn Koepke, a researcher at O'Connor & Associates.
Even with the incentives, English says, some centers are taking as long as three to four years to fully lease.
English has represented six centers on Louetta over the past year and says he has had particular difficulty finding tenants for the centers in that area of Northwest Houston.
That's where the financial carrots come in.
English was given the green light to offer that $35-per-foot tenant improvement at a retail center he is currently leasing at 4000 Louetta. The center, which was built in 2006, is only 70 percent leased.
English has also been involved in leasing a center in the 9000 block of Louetta, which was built in January 2007, that is only 40 percent leased, as well as another center on the same block built in March of this year that hasn't leased to a single tenant.
"It's very unfortunate because there's just a glut of this type of space out there, and it's hard to attract any sort of interest," he says.
Meanwhile, Lyle Cowand, senior vice president with retail brokerage firm The Weitzman Group, says certain areas -- such as north of Barker Cypress, north of Fry Road and north of Eldridge -- are home to a large percentage of these struggling neighborhood centers, which typically are designed to be unanchored.
He says the roads in those areas are full of vacant neighborhood centers flying banners that read "Free Rent." Cowand believes many of these centers were built by inexperienced developers who didn't fully study the market before breaking ground.
"They build 30,000-square-foot centers under the notion that if they build it, retailers will come, but there has to be a reason for the center and a reason for the retailers to come," he says.
Cowand believes that low occupancy rates are more a function of poorly located neighborhood centers rather than a marketwide problem. Weitzman Group leases 25 centers in the Houston market, and Cowand says free rent is not even a topic of discussion when it comes to leasing those centers.
Hard time for small-timers
Typical tenants of unanchored neighborhood centers are mom-and-pop shops and service retailers such as restaurants and hair salons, but retail sources say many of these businesses are having trouble surviving.
Ace Schlameus, a vice president with Grubb & Ellis, says typical neighborhood center occupants are having difficulty getting finances to open or expand their businesses.
"We're definitely seeing a softness in the market," Schlameus says. "These individuals don't have capital access to credit lines to realize their dreams. We're just not seeing the same level of interest."
Meanwhile, he says, many landlords are having to deal with the one-two punch of higher operating costs, which are often passed on to the tenant.
"Higher tax valuations are raising operating costs, and the market is being taxed out," Schlameus says. "I know of one center where operating costs went up by $12 per foot."
Schlameus says landlords are beginning to work as partners with potential tenants in order to seal a deal.
"If a person's credit is good, the landlords are now willing to extend additional concessions to try and structure a deal the build their business," he says. "We're having to be a lot more creative."
awollam@bizjournals.com • 713-395-9632
For more inforamtion see : www.houstonrealtyadvisors.com
or www.houstonrealtyadvisors.net
English and other brokers and landlords in the retail real estate field have had to up the ante, offering as much as $35 per square foot or more for tenant improvements. And in some cases, landlords are throwing in other deal-sweeteners such as longer build-out periods and even free rent in an effort to shore up the struggling sector.
"It's a citywide problem," says English, president of Houston-based CEC Brokerage. "Landlords are getting anxious because there's too much retail on the ground and it's getting tougher to compete with the grocery-anchored centers."
Indeed, the third quarter of this year represented the third straight year-to-year drop in occupancy levels in the neighborhood center sector, as overall occupancy fell to 84.57 percent. That's down from 85.09 percent in the third quarter of 2006 and 85.68 percent in the third quarter of 2005, according to Houston-based real estate services firm O'Connor & Associates.
The south sector of the city recorded the highest occupancy rate, 93 percent, while the lowest occupancy was found in the far north sector at 77 percent.
"It appears that occupancy is trending down, so it would make sense that landlords are offering discounts to lease the vacant space," says Kathryn Koepke, a researcher at O'Connor & Associates.
Even with the incentives, English says, some centers are taking as long as three to four years to fully lease.
English has represented six centers on Louetta over the past year and says he has had particular difficulty finding tenants for the centers in that area of Northwest Houston.
That's where the financial carrots come in.
English was given the green light to offer that $35-per-foot tenant improvement at a retail center he is currently leasing at 4000 Louetta. The center, which was built in 2006, is only 70 percent leased.
English has also been involved in leasing a center in the 9000 block of Louetta, which was built in January 2007, that is only 40 percent leased, as well as another center on the same block built in March of this year that hasn't leased to a single tenant.
"It's very unfortunate because there's just a glut of this type of space out there, and it's hard to attract any sort of interest," he says.
Meanwhile, Lyle Cowand, senior vice president with retail brokerage firm The Weitzman Group, says certain areas -- such as north of Barker Cypress, north of Fry Road and north of Eldridge -- are home to a large percentage of these struggling neighborhood centers, which typically are designed to be unanchored.
He says the roads in those areas are full of vacant neighborhood centers flying banners that read "Free Rent." Cowand believes many of these centers were built by inexperienced developers who didn't fully study the market before breaking ground.
"They build 30,000-square-foot centers under the notion that if they build it, retailers will come, but there has to be a reason for the center and a reason for the retailers to come," he says.
Cowand believes that low occupancy rates are more a function of poorly located neighborhood centers rather than a marketwide problem. Weitzman Group leases 25 centers in the Houston market, and Cowand says free rent is not even a topic of discussion when it comes to leasing those centers.
Hard time for small-timers
Typical tenants of unanchored neighborhood centers are mom-and-pop shops and service retailers such as restaurants and hair salons, but retail sources say many of these businesses are having trouble surviving.
Ace Schlameus, a vice president with Grubb & Ellis, says typical neighborhood center occupants are having difficulty getting finances to open or expand their businesses.
"We're definitely seeing a softness in the market," Schlameus says. "These individuals don't have capital access to credit lines to realize their dreams. We're just not seeing the same level of interest."
Meanwhile, he says, many landlords are having to deal with the one-two punch of higher operating costs, which are often passed on to the tenant.
"Higher tax valuations are raising operating costs, and the market is being taxed out," Schlameus says. "I know of one center where operating costs went up by $12 per foot."
Schlameus says landlords are beginning to work as partners with potential tenants in order to seal a deal.
"If a person's credit is good, the landlords are now willing to extend additional concessions to try and structure a deal the build their business," he says. "We're having to be a lot more creative."
awollam@bizjournals.com • 713-395-9632
For more inforamtion see : www.houstonrealtyadvisors.com
or www.houstonrealtyadvisors.net
Thursday, December 13, 2007
TROUBLE IN TEXAS: Huge Multifamily Owner Nears Collapse
Apartment Giant MBS Cos. Goes Deep in Arrears on More Than $600 Million in LoansMBS Cos., one of the largest multifamily property owners in the country, is delinquent, in default or in danger of becoming so, on more than $900 million in loans. For Michael B. Smuck (the MBS in the company name), that means he is in danger of seeing his apartment empire dissipate for the second time in his nearly 30-year real estate career. Based in the New Orleans area, MBS Cos. owns and operates more than 65 apartment complexes totaling about 17,000 units - all in Texas. Smuck's debt problems have been the subject of whispered conversations among financial firms and analysts for the past month as the extent of the company's financial problems slowly came to light. Those same financial analysts fear if MBS defaults, it could spell losses for many and affect property recovery operations, potentially for years to come. It will also generate a huge spike up in CMBS delinquencies, expected to be reported this week or next. (Editor's Note: For a complete list of MBS properties, the CMBS they are associated with, and notes on their individual loan status see Watch List
For more information see: www.houstonrealtyadvisors.com
or www.houstonrealtyadvisors.net
For more information see: www.houstonrealtyadvisors.com
or www.houstonrealtyadvisors.net
Friday, December 7, 2007
Tax appeal
Make friends with tax assessors.
from Retail Traffic OnLine, September 28, 2006
"Retail property owners (and their lawyers and accountants) say that the key is not viewing the relationship with assessors as being adversarial. Explain things clearly. Be nice. Desk pounding doesn't lower assessments. Good information does. To a great extent, working on property assessment is about building a relationship with the assessors.
The important thing to remember is that assessors are public servants trying to do a job. With cities and states strapped for cash, property taxes are an obvious area to try and increase tax revenues. In 2002 for example, New York City officials jacked up property taxes 25%.
In most states, property owners have a small window — a few weeks — to work with assessors between the time they make their valuation and the day it is finalized.
A key is to be prepared ahead of time — to look through your own numbers, check trends in the market and be prepared to make a case for why the assessment may be too high.
Begin early and monitor things on an ongoing basis. It's much more productive to deal with issues early on an information basis, rather than waiting until it becomes confrontational or a litigation situation.
It comes down to a key change in the usual mindset: Most of the time, owners talk about how great their properties are. But tax time means outlining the flaws.
If a property is underperforming relative to other regional malls, explain that. A regional or super-regional mall may be the only such property that an assessor knows. It may not occur to the assessor that the local mall is a dog compared to the one a couple of counties over.
Even after the deadline, owners have recourse in getting assessments changed. They can take their case to a review board and then on to court. Litigation is a last resort, of course, and it is very expensive, both in money and time.
But tax bills can be cut without going to court. Compare the assessment with an assessor's prevailing ratios between market value and assessed value. What you look for is not whether the assessment has changed much, but whether that assessment is still fair."
The assessor will use existing leases to generate an income figure in deriving an assessed value. Have market rents fallen since leases got signed? A judge may decide that that assessed value should reflect a combination of existing leases and market rents.
Even in states with property-tax caps, it's important to watch assessments. California caps annual increases at 2% over a property's base year — when it was last assessed or upon completion of construction. Thereafter, assessed value rises at the annual statewide inflation rate up to a maximum of 2%. If a property is scheduled for redevelopment and underperforming and the value rises 2% anyway, an owner should go see the assessor.
Even sophisticated tax departments may miss some wrinkles, such as the effects of retenanting or a shift to gross leases. For example, if five shops paying $25 per square foot get replaced with a single Old Navy store paying $12.50 per square foot, the big new tenant looks pretty spiffy to the assessor — but it generates only half as much rent.
The assessor needs to know that.
For many landlords, such retenanting is defensive and therefore shouldn't lead to a higher assessment. It's maintaining what you have — stopping an erosion — not creating an increment of value. The center looks nicer, but you're not boosting your net operating income.
In the same vein, assessors' models may assume properties use net lease structures — in which tenants pay for taxes, insurance and common area maintenance. But if tenants have a gross lease — in which the owner pays those extras — an assessor may overestimate income. It's important to clarify that so the assessors' models are correct.
But owners using net lease structures need to be wary of assessments, even if they aren't bearing the brunt of the cost. Because the tax gets included in rent, letting assessments balloon means rents could be rising faster than the rest of the market. If your property is paying more taxes than a competitor it puts your leasing people at a disadvantage.
Assessments can also spike when properties change hands. Sale prices are an obvious guide for the value of property.
But property sale prices may include value beyond the worth of the real estate. Assessors won't make that adjustment unless you spell it out for them. At the time of a sale an acquiring company should break out real estate value from other items. Non-real estate items might include above-market leases such as often occur in sale-leasebacks, creditworthiness of tenants and build-to-suit improvements financed through the lease. Spell out those items in a purchase agreement that documents the number that you are happy with,that you believe is the true value of the real estate."
An independent study of regional and national capitalization rates for retail properties is also a useful tool. Such studies cost from $2,500 to $15,000. Having such a document on file helps the assessor fend off politicians who want to milk the mall. Such a study shows where a property fits income-wise in the framework of other similar properties regionally and nationally — and can buttress an owner's argument for a lower assessment.
The keys to a successful appeal are establishing credibility with the assessing authorities and proving your case."
for more information see: www.houstonrealtyadviosrs.com
from Retail Traffic OnLine, September 28, 2006
"Retail property owners (and their lawyers and accountants) say that the key is not viewing the relationship with assessors as being adversarial. Explain things clearly. Be nice. Desk pounding doesn't lower assessments. Good information does. To a great extent, working on property assessment is about building a relationship with the assessors.
The important thing to remember is that assessors are public servants trying to do a job. With cities and states strapped for cash, property taxes are an obvious area to try and increase tax revenues. In 2002 for example, New York City officials jacked up property taxes 25%.
In most states, property owners have a small window — a few weeks — to work with assessors between the time they make their valuation and the day it is finalized.
A key is to be prepared ahead of time — to look through your own numbers, check trends in the market and be prepared to make a case for why the assessment may be too high.
Begin early and monitor things on an ongoing basis. It's much more productive to deal with issues early on an information basis, rather than waiting until it becomes confrontational or a litigation situation.
It comes down to a key change in the usual mindset: Most of the time, owners talk about how great their properties are. But tax time means outlining the flaws.
If a property is underperforming relative to other regional malls, explain that. A regional or super-regional mall may be the only such property that an assessor knows. It may not occur to the assessor that the local mall is a dog compared to the one a couple of counties over.
Even after the deadline, owners have recourse in getting assessments changed. They can take their case to a review board and then on to court. Litigation is a last resort, of course, and it is very expensive, both in money and time.
But tax bills can be cut without going to court. Compare the assessment with an assessor's prevailing ratios between market value and assessed value. What you look for is not whether the assessment has changed much, but whether that assessment is still fair."
The assessor will use existing leases to generate an income figure in deriving an assessed value. Have market rents fallen since leases got signed? A judge may decide that that assessed value should reflect a combination of existing leases and market rents.
Even in states with property-tax caps, it's important to watch assessments. California caps annual increases at 2% over a property's base year — when it was last assessed or upon completion of construction. Thereafter, assessed value rises at the annual statewide inflation rate up to a maximum of 2%. If a property is scheduled for redevelopment and underperforming and the value rises 2% anyway, an owner should go see the assessor.
Even sophisticated tax departments may miss some wrinkles, such as the effects of retenanting or a shift to gross leases. For example, if five shops paying $25 per square foot get replaced with a single Old Navy store paying $12.50 per square foot, the big new tenant looks pretty spiffy to the assessor — but it generates only half as much rent.
The assessor needs to know that.
For many landlords, such retenanting is defensive and therefore shouldn't lead to a higher assessment. It's maintaining what you have — stopping an erosion — not creating an increment of value. The center looks nicer, but you're not boosting your net operating income.
In the same vein, assessors' models may assume properties use net lease structures — in which tenants pay for taxes, insurance and common area maintenance. But if tenants have a gross lease — in which the owner pays those extras — an assessor may overestimate income. It's important to clarify that so the assessors' models are correct.
But owners using net lease structures need to be wary of assessments, even if they aren't bearing the brunt of the cost. Because the tax gets included in rent, letting assessments balloon means rents could be rising faster than the rest of the market. If your property is paying more taxes than a competitor it puts your leasing people at a disadvantage.
Assessments can also spike when properties change hands. Sale prices are an obvious guide for the value of property.
But property sale prices may include value beyond the worth of the real estate. Assessors won't make that adjustment unless you spell it out for them. At the time of a sale an acquiring company should break out real estate value from other items. Non-real estate items might include above-market leases such as often occur in sale-leasebacks, creditworthiness of tenants and build-to-suit improvements financed through the lease. Spell out those items in a purchase agreement that documents the number that you are happy with,that you believe is the true value of the real estate."
An independent study of regional and national capitalization rates for retail properties is also a useful tool. Such studies cost from $2,500 to $15,000. Having such a document on file helps the assessor fend off politicians who want to milk the mall. Such a study shows where a property fits income-wise in the framework of other similar properties regionally and nationally — and can buttress an owner's argument for a lower assessment.
The keys to a successful appeal are establishing credibility with the assessing authorities and proving your case."
for more information see: www.houstonrealtyadviosrs.com
Thursday, December 6, 2007
Automatic renewal
"The lease provided that it would renew automatically for an additional five years, provided that landlord was obligated to give a thirty day notice to the tenant of the pendency of the renewal and that tenant thereafter had the right to refuse to renew, all more than six months prior to the end of the term.
The landlord sent timely notice. The tenant responded with a notice that stated that
it would be my intent to renew the lease
but asking for a rent reduction because tenant improvements were complete. After the time for rejection of the automatic renewal had passed, the landlord responded with a letter stating that there had been an automatic renewal and stated the rent at an increased amount, apparently according to the cost of living adjustment.
The tenant paid the rent and remained in occupancy for over three years.
Then, when it terminated occupancy, it took the position that there had been no automatic five year renewal because it had implicitly rejected such renewal when it proposed to renew only at a reduced rent.
The trial court granted summary judgment to tenant, but the appeals court reversed, finding that the lease was in effect for the full five year renewal term.
For purposes of reviewing the summary judgment motion, the court assumed that ambiguous notice sent by the tenant gave the tenant no more than an option to renew, and did not bind her to an automatic renewal. And tenant's letter certainly did not constitute the need for a definite and unqualified determination to exercise the option.
The court ruled that when there is a requirement for notice of exercise of an option to renew, and the tenant holds over, the landlord may waive the requirement for notice and deem the lease renewed.
Comments on DIRT:
Note that this case depends on the existence of the renewal clause in the lease. Otherwise, if a tenant holds over, the landlord can send notice proposing a new lease, and hold the tenant to that lease if tenant continues to hold over, but such new lease cannot exceed the period defined by the Statute of Frauds, since the new lease is implied, and not written.
Here, the tenant had signed a lease with a renewal clause. Arguably, it was an automatic renewal, but the court assumed that the tenant had validly rejected the automatic renewal, and that this flipped the renewal clause into an optional renewal
for five years, which the tenant accepted by holding over.
The court admits, however, that if the tenant had unequivocally indicated that her holding over was not an acceptance of the proferred renewal, there would have been no such renewal.
Friedman on Leases, Randolph Edition, at Section 14.2, text accompanying note 172 et seq, states that a tenant's notice claiming to invoke the automatic renewal in a lease, but proposing alternative terms, constitutes a rejection of an offer. But there is authority that the offer remains effective and can be accepted by later action of the tenant, absent estoppel (such as the landlord reletting in reliance upon an apparent rejection). That is apparently the approach taken by the court here. This strikes the editor as a common sense resolution of a tricky technical problem.
Nevertheless, it should be noted that notion that a holdover automatically can bind the tenant to an extended renewal term exposes the tenant to a gotcha."
For more information see: www.houstonrealtyadvisors.com
or www.houstonrealtyadvisors.net
The landlord sent timely notice. The tenant responded with a notice that stated that
it would be my intent to renew the lease
but asking for a rent reduction because tenant improvements were complete. After the time for rejection of the automatic renewal had passed, the landlord responded with a letter stating that there had been an automatic renewal and stated the rent at an increased amount, apparently according to the cost of living adjustment.
The tenant paid the rent and remained in occupancy for over three years.
Then, when it terminated occupancy, it took the position that there had been no automatic five year renewal because it had implicitly rejected such renewal when it proposed to renew only at a reduced rent.
The trial court granted summary judgment to tenant, but the appeals court reversed, finding that the lease was in effect for the full five year renewal term.
For purposes of reviewing the summary judgment motion, the court assumed that ambiguous notice sent by the tenant gave the tenant no more than an option to renew, and did not bind her to an automatic renewal. And tenant's letter certainly did not constitute the need for a definite and unqualified determination to exercise the option.
The court ruled that when there is a requirement for notice of exercise of an option to renew, and the tenant holds over, the landlord may waive the requirement for notice and deem the lease renewed.
Comments on DIRT:
Note that this case depends on the existence of the renewal clause in the lease. Otherwise, if a tenant holds over, the landlord can send notice proposing a new lease, and hold the tenant to that lease if tenant continues to hold over, but such new lease cannot exceed the period defined by the Statute of Frauds, since the new lease is implied, and not written.
Here, the tenant had signed a lease with a renewal clause. Arguably, it was an automatic renewal, but the court assumed that the tenant had validly rejected the automatic renewal, and that this flipped the renewal clause into an optional renewal
for five years, which the tenant accepted by holding over.
The court admits, however, that if the tenant had unequivocally indicated that her holding over was not an acceptance of the proferred renewal, there would have been no such renewal.
Friedman on Leases, Randolph Edition, at Section 14.2, text accompanying note 172 et seq, states that a tenant's notice claiming to invoke the automatic renewal in a lease, but proposing alternative terms, constitutes a rejection of an offer. But there is authority that the offer remains effective and can be accepted by later action of the tenant, absent estoppel (such as the landlord reletting in reliance upon an apparent rejection). That is apparently the approach taken by the court here. This strikes the editor as a common sense resolution of a tricky technical problem.
Nevertheless, it should be noted that notion that a holdover automatically can bind the tenant to an extended renewal term exposes the tenant to a gotcha."
For more information see: www.houstonrealtyadvisors.com
or www.houstonrealtyadvisors.net
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