"There's not any one magic formula. In recent years, a majority of clients conducting lease-buy analyses have discovered that leasing won out. The long-term appreciation of a real estate asset is unknown.
Risk-averse businesses opt to put dollars directly back into the company rather than real estate speculation.
For smaller companies, the initial outlay to purchase real estate may be prohibitive, particularly in comparing those costs against opportunities lost by not investing in the growth or expansion of the business. Owning real estate is another wealth creation vehicle. A company with multiple locations can sell the business, but retain the properties that it then leases to the new owner. In many cases, the long-term value of the properties exceeds that of the business itself.
One challenge to purchasing an existing building is to determine the actual cost of owning and maintaining it. A leaky roof, an undisclosed oil spill, plumbing problems -- all are potential liabilities that the seller may not represent in the sale. The cost for a significant remodel, particularly notable in Portland's active market for adaptive re-use of old properties, may lead to a minefield of ADA compliance issues, seismic upgrades and environmental cleanups.
Owners purchasing a building too large for current needs with the intent to lease excess space should consider carefully the cost and headache of moonlighting as a landlord, responsible for every flickering light bulb and backed-up toilet, while factoring in the hiring a property management firm for larger facilities. But through due diligence of inspections (and by using a good broker), an astute buyer can discover potential issues in advance while absolving him or herself from future liability. Would-be buyers should drill down in a building's operating costs, working from a baseline expectation of perhaps $1.50 per square foot for utilities. A facility in which utilities are running $2.50?
Tune up the HVAC system and save some money.
There is an emergence of office condos, a viable route for smaller businesses to purchase property (a portion of a building) in the city.
Investment in such limited space (at the expense of other business
needs) may backfire for companies such as high-tech startups, which may begin with 1,000 to 2,000 square feet and quickly evolve to greater space needs. The result would be a forced sale of the property regardless of whether its value has appreciated or not. Office condos have become more attractive as business owners look for ways to stabilize costs through a fixed-rate mortgage. Would-be buyers face additional expenditures up front, such as the price of building out unfinished condo space.
With many such purchases made through Small Business Administration
(SBA) loans (covering 90% of the purchase price), tenant improvements come out of the same pocket as the down payment -- a pocket buyers often find not deep enough, particularly when compared with lease agreements that can require little more than first and last month's rent."
for more information see ; www.houstonrealtyadvisors.net
or www.houstonrealtyadvisr.com
Thursday, July 19, 2007
To Buy or Lease?
"There's not any one magic formula. In recent years, a majority of clients conducting lease-buy analyses have discovered that leasing won out. The long-term appreciation of a real estate asset is unknown.
Risk-averse businesses opt to put dollars directly back into the company rather than real estate speculation.
For smaller companies, the initial outlay to purchase real estate may be prohibitive, particularly in comparing those costs against opportunities lost by not investing in the growth or expansion of the business. Owning real estate is another wealth creation vehicle. A company with multiple locations can sell the business, but retain the properties that it then leases to the new owner. In many cases, the long-term value of the properties exceeds that of the business itself.
One challenge to purchasing an existing building is to determine the actual cost of owning and maintaining it. A leaky roof, an undisclosed oil spill, plumbing problems -- all are potential liabilities that the seller may not represent in the sale. The cost for a significant remodel, particularly notable in Portland's active market for adaptive re-use of old properties, may lead to a minefield of ADA compliance issues, seismic upgrades and environmental cleanups.
Owners purchasing a building too large for current needs with the intent to lease excess space should consider carefully the cost and headache of moonlighting as a landlord, responsible for every flickering light bulb and backed-up toilet, while factoring in the hiring a property management firm for larger facilities. But through due diligence of inspections (and by using a good broker), an astute buyer can discover potential issues in advance while absolving him or herself from future liability. Would-be buyers should drill down in a building's operating costs, working from a baseline expectation of perhaps $1.50 per square foot for utilities. A facility in which utilities are running $2.50?
Tune up the HVAC system and save some money.
There is an emergence of office condos, a viable route for smaller businesses to purchase property (a portion of a building) in the city.
Investment in such limited space (at the expense of other business
needs) may backfire for companies such as high-tech startups, which may begin with 1,000 to 2,000 square feet and quickly evolve to greater space needs. The result would be a forced sale of the property regardless of whether its value has appreciated or not. Office condos have become more attractive as business owners look for ways to stabilize costs through a fixed-rate mortgage. Would-be buyers face additional expenditures up front, such as the price of building out unfinished condo space.
With many such purchases made through Small Business Administration
(SBA) loans (covering 90% of the purchase price), tenant improvements come out of the same pocket as the down payment -- a pocket buyers often find not deep enough, particularly when compared with lease agreements that can require little more than first and last month's rent."
For more information see: www:houstonrealtyadvisors.net
or www.houstonrealtyadvisor.com
www.houstonrealtyadvisors.net
Risk-averse businesses opt to put dollars directly back into the company rather than real estate speculation.
For smaller companies, the initial outlay to purchase real estate may be prohibitive, particularly in comparing those costs against opportunities lost by not investing in the growth or expansion of the business. Owning real estate is another wealth creation vehicle. A company with multiple locations can sell the business, but retain the properties that it then leases to the new owner. In many cases, the long-term value of the properties exceeds that of the business itself.
One challenge to purchasing an existing building is to determine the actual cost of owning and maintaining it. A leaky roof, an undisclosed oil spill, plumbing problems -- all are potential liabilities that the seller may not represent in the sale. The cost for a significant remodel, particularly notable in Portland's active market for adaptive re-use of old properties, may lead to a minefield of ADA compliance issues, seismic upgrades and environmental cleanups.
Owners purchasing a building too large for current needs with the intent to lease excess space should consider carefully the cost and headache of moonlighting as a landlord, responsible for every flickering light bulb and backed-up toilet, while factoring in the hiring a property management firm for larger facilities. But through due diligence of inspections (and by using a good broker), an astute buyer can discover potential issues in advance while absolving him or herself from future liability. Would-be buyers should drill down in a building's operating costs, working from a baseline expectation of perhaps $1.50 per square foot for utilities. A facility in which utilities are running $2.50?
Tune up the HVAC system and save some money.
There is an emergence of office condos, a viable route for smaller businesses to purchase property (a portion of a building) in the city.
Investment in such limited space (at the expense of other business
needs) may backfire for companies such as high-tech startups, which may begin with 1,000 to 2,000 square feet and quickly evolve to greater space needs. The result would be a forced sale of the property regardless of whether its value has appreciated or not. Office condos have become more attractive as business owners look for ways to stabilize costs through a fixed-rate mortgage. Would-be buyers face additional expenditures up front, such as the price of building out unfinished condo space.
With many such purchases made through Small Business Administration
(SBA) loans (covering 90% of the purchase price), tenant improvements come out of the same pocket as the down payment -- a pocket buyers often find not deep enough, particularly when compared with lease agreements that can require little more than first and last month's rent."
For more information see: www:houstonrealtyadvisors.net
or www.houstonrealtyadvisor.com
www.houstonrealtyadvisors.net
Thursday, July 12, 2007
$278.00 PSF for medical property; Sugarland, TX.
Triple Net Healthcare/Office REIT Inc. acquired the properties at 205 Hollow Tree Lane in Houston, TX, also known as Triumph Hospital Northwest, and 1550 First Colony Blvd. in Sugar Land, called Triumph Healthcare Southwest. The asking prices for the properties totaled $37.5 million. Reportedly, there were two sale transactions: 205 Hollow Tree was sold for $17.75 million, or $201 per square foot, and 1550 First Colony Blvd. was sold for $18.75 million or $278 per square foot. Triumph Hospital Northwest in Houston was built in 1986. It consists of 88,213 square feet on a 12-acre land parcel close to Interstate 45 and FM 1960. The property at the 1550 First Colony in Sugar Land has 67,500 square feet and was built in 1989 on an 8-acre land parcel. Triumph Healthcare currently occupies these two buildings with another five years left on its lease and two more five year-options. Reportedly, Henry Hagendorf, CCIM and Brian Hines of Sperry Van Ness represented the sellers, Hollow Tree LLP and First Colony Investments LLP. The buyer represented itself. For more information see: www.houstonrealtyadvisors.net or www.houstonrealtyadvisor.com
Tenant protection
During the last five years, the pendulum of commercial leasing has begun to swing. At common law, the doctrine of caveat emptor governed commercial leasing.
from the New York Law Journal <http://www.nylj.com/> , August 30, 2006
"By the 1970's, New York courts, relying on equitable principles, began to carve out exceptions to caveat emptor. Equity gained greater currency and judicial decisions softened commercial lease provisions that potentially endangered or evicted tenants. Recently, New York courts at all levels have moved away from finding equitable solutions to prevent harsh results or evictions and have applied the terms of negotiated lease provisions. Past judicial activism by judges protecting tenants' rights has now evolved into a consistent enforcement and implementation of commercial leases. In many cases, no matter how draconian the lease provision, New York courts have been enforcing the contents of commercial leases.
Too many tenants' businesses have suffered severe financial consequences or lost leases as a result of poorly drafted provisions. Although temporary tenant victories providing endless delays as a result of technical mistakes and jurisdictional defect defenses are still alive and well, a recent case has caused tenant attorneys to think twice before using and relying on such tactics. In this case, the court found a holdover commercial tenant liable to the third-party incoming tenant for damages for failing to vacate after its term expired.
Therefore, it is imperative that tenants negotiate better leases in order to protect their interests. The suggestions in this article provide proposed remedies for a few of the harshest lease provisions.
Although market conditions always play a factor in providing negotiating leverage to a landlord or tenant, some of these proposals should survive scrutiny in any real estate market.
Mitigation by Landlord
Since the Court of Appeals decided the seminal case of Holy Properties v. Kenneth Cole (87 N.Y.2d 130, 637 N.Y.S.2d 964, 1995), landlords have not been required to mitigate damages when a commercial tenant defaults on its lease and surrenders or is removed from the premises. As the tenant of record remains liable for all rents due during the remainder of its term of the lease, a landlord has no incentive to even attempt to re-rent or alleviate a defaulting tenant of its duty to pay rent.
Landlords are not obligated to mitigate prospective losses in the event of default on rent payments. This has produced exceedingly harsh results.
Hence, every lease should contain a clause which provides that, upon a default in the lease that results in the surrender or eviction from the premises, the landlord agrees to mitigate its losses and to use reasonable efforts to re-lease the demised premises. If it can be negotiated, such a clause should include a requirement by the landlord to advertise weekly and to employ a qualified real estate broker to find a new tenant to lease the premises. This clause should also include a duty by the landlord to attempt to rent the premises for at least the same rent to reduce any remaining tenant liability.
When one contemplates the potential amounts that could be owed without a mitigation of damages clause, it is clear that negotiating such a simple clause may provide a tenant a life preserver in an ocean of financial devastation.
A Prevailing Party Clause
Most commercial leases include a provision that a tenant must pay a landlord's legal expenses and attorney fees in connection with any default in the lease. Although state law mandates that such an attorney fees clause in residential leases is deemed to be reciprocal, this statute does not apply to commercial leases. Despite many failing arguments to the contrary, attorney fees provisions providing payment to the landlord in connection with a legal proceeding will not provide the same rights to a tenant unless specifically stated in the lease.
Hence, a prevailing party clause should be negotiated into the commercial lease agreement. The provision should read that the losing party to any legal action shall pay the prevailing party's legal fees and expenses. Such a clause should prevent, or at least lessen, the number of frivolous and harassing lawsuits initiated by both parties. As neither party will be able to commence legal action without the threat of having to fund the victorious party's legal bill, parity should prevail and thereby preclude attempts to exploit any inequitable leveraging positions.
Right of Expansion Clause
An expansion clause is the right or option to lease a specific additional space in the demised premises for a defined term in the future. Such an option becomes significant when a company has outgrown its space and wishes to avoid having to move to a new location and save the cost and inconvenient time delays that relocation necessitates.
Financially, it saves the tenant from being forced to lease additional space if its financial situation does not dictate growth when the option becomes available.
The expansion clause allows a tenant the flexibility of either:
(a) taking an entirely new and larger space in the building without any financial
consequences for vacating its present space, or
(b) permits the tenant to simply expand its tenancy by taking additional floor space or additional square feet.
The expansion option also benefits the landlord by allowing it the flexibility to deliver different floors or rental space to the tenant at different times. The expansion clause also requires communication between the landlord and tenant at certain fixed times which might not otherwise occur without a lease provision dictating such contact.
As the landlord knows when existing leases expire, it will be able to determine vacancy dates before the execution of the initial lease. As such, the negotiated expansion clause should address different possibilities for potential expansion. The expansion clause should be expressly negotiated to include:
(a) a detailed description of specific potential
expansion spaces,
(b) the yearly rent due or an agreement to use
the fair market rent, and
(c) any increases in taxes and/or operating
expenses.
In addition, a provision requiring the landlord to use reasonable efforts to recover possession from a holdover tenant in the chosen expansion space should be included. Tenants should also attempt to negotiate a Right of First Refusal to protect their long term interests in the premises.
The Option to Renew
The option to renew has been in practice for hundreds of years. It is not the option itself, however, that led to its discussion in this article but the methodology of negotiating such a right on behalf of the tenant and the tremendous benefits provided to a tenant. The option permits a tenant to sign on for another five or ten years at a negotiated rent. The renewal rent negotiated at the time of the initial lease is often only three to five percent above the rent for the last year of the original lease period. Since the tenant is not required to exercise the option, it can vacate the space without any liability after the initial lease term. Furthermore, after investing heavily to turn raw space into an office or store, a tenant will be more comfortable signing a lease with a shorter term with the knowledge that, at its option it can remain for one or more renewal periods. In fact, a shorter term with option periods may be beneficial for a smaller company without the ability to forecast financial success. Finally, if the market calls for a lower rent than the renewal option specifies, negotiation may result in a decreased rent when it is time to renew.
The option to renew is beneficial to the landlord as a result of the incentives supplied and its importance as a negotiating tool. By making the option contingent on the tenant's good standing with its lease obligations during the current term, the tenant shall have an important incentive to be on its best behavior, and to comply with all its lease obligations to avoid losing the right to renew. Granting the option can also give the landlord an important negotiating tool that may overcome any stalemate that has impeded the lease negotiations.
Ownership and Use
The Worldwide Web has provided a cost efficient way to provide additional protection for a tenant for the most basic foundations of the tenancy. First, when receiving a draft of a landlord's lease, the ownership interests of the entity or person listed in the agreement should be investigated. Property ownership and tax information should be checked by visiting the proper Web site. Second, investigate whether the tenant's anticipated use for the premises is permitted by law by searching the relevant government Web site. For example, in New York City, the legal use for the premises and the certificate of occupancy can be viewed by searching the Department of Buildings Web site. In New York City, any premises constructed after 1938 or where significant renovations resulted requires a certificate of occupancy.
The certificate of occupancy will report the legal uses for the premises, and, if a tenant's proposed business is not listed, a competent expediter or architect should be able to determine whether legalization is possible. To legalize a new use for the premises, the architect or expediter must have all building violations corrected, and then proceed with an application for an amendment to the certificate of occupancy approving the new use.
Every tenant should attempt to garner for its intended utilization of its business the catch-all phrase "any lawful use" in its lease.
However, obtaining a favorable use clause will not guarantee that the business will be able to function as such.
If any doubt lingers, a provision should be negotiated giving the tenant the ability to cancel the lease upon a determination that the planned use of the premises cannot be legalized or that it cannot be made so within a reasonable time after submitting a proper application. During this waiting period, the lease should require that no rent become due.
To facilitate the process, a provision requiring the landlord to complete any necessary forms to legalize the use or proposed alterations should be drafted. If the lease is cancelled the landlord should be required to return all monies forwarded to the landlord as well as to reimburse any expenses incurred by the tenant in attempting to legalize the premises.
A tenant should also retain the ability to cancel the lease if the tenant is unable to take possession on the move-in date or soon thereafter. A representation should be added whereby the landlord agrees to make a good faith effort to complete, and legalize the premises, as well as to evict a holdover tenant. In an alternative to canceling the lease, the tenant should be granted a rent abatement for each day that the landlord fails to deliver possession. Upon the delayed commencement of the lease, the expiration dates of the lease should be extended, and the commencement date should be contingent on the issuance of the various approvals and permits necessary to complete construction.
Signage and Alterations
A disproportionate amount of commercial leasing litigation derives from disputes over signs and alterations. In an attempt to decrease the amount of litigation involving such items, attorneys should learn a tenant's business needs and carefully adopt them to the lease. In addition, the following suggestions may prevent litigation and provide a tenant with greater freedom in its space. Before the lease signing, negotiate the advance or pre-approval of any alteration changes and signage requests as well as any foreseeable alteration changes during the term of the lease. Specific plans, measurements, drawings and pictures should be provided and attached to the lease agreement. If possible, obtain the right to make non-structural alterations without the landlord's approval, including any alterations that are insignificant or do not require building permits. Also, draft a representation by the landlord to remove any existing violations against the premises, so that any permit applications needed to perform work will not be rejected. For all other alterations necessitating permission, ensure that such authorization will not be unreasonably withheld.
Repairs and Self Help
Regarding repair responsibility, tenants should attempt to make the landlord liable for all structural repairs to the demised space and to the building, as well as nonstructural repairs occasioned by the landlord's negligence.
One of the most useful tenant-friendly clauses is the tenant's self-help provision. Such a provision permits a tenant to complete any repairs that the landlord neglects to complete within an allotted time period after notification from tenant. Under this clause, a tenant shall seek reimbursement by obtaining a rent credit for the cost of the repair or by obtaining reimbursement from the landlord. Besides vitiating the tenant's dilemma of whether it can withhold rent until the repairs are done, it will provide a mechanism that should assist in keeping the premises free of necessary repairs. The self-help clause will also resolve the independent covenant dilemma, where any rental amounts due to the landlord are deemed independent of the landlord's obligation to do repairs. Any lease provision specifying that each provision in the lease is independent of every other provision should be modified to include the tenant self-help provision.
Conclusion
Dozens of other provisions exist that would be helpful to a tenant; however, this article has recommended a few of not only the most essential, but those that have a decent chance of being negotiated into the lease." ForMore information see: www.houstonrealtyadvisors.net
or www.houstonrealtyadvisor.com
from the New York Law Journal <http://www.nylj.com/> , August 30, 2006
"By the 1970's, New York courts, relying on equitable principles, began to carve out exceptions to caveat emptor. Equity gained greater currency and judicial decisions softened commercial lease provisions that potentially endangered or evicted tenants. Recently, New York courts at all levels have moved away from finding equitable solutions to prevent harsh results or evictions and have applied the terms of negotiated lease provisions. Past judicial activism by judges protecting tenants' rights has now evolved into a consistent enforcement and implementation of commercial leases. In many cases, no matter how draconian the lease provision, New York courts have been enforcing the contents of commercial leases.
Too many tenants' businesses have suffered severe financial consequences or lost leases as a result of poorly drafted provisions. Although temporary tenant victories providing endless delays as a result of technical mistakes and jurisdictional defect defenses are still alive and well, a recent case has caused tenant attorneys to think twice before using and relying on such tactics. In this case, the court found a holdover commercial tenant liable to the third-party incoming tenant for damages for failing to vacate after its term expired.
Therefore, it is imperative that tenants negotiate better leases in order to protect their interests. The suggestions in this article provide proposed remedies for a few of the harshest lease provisions.
Although market conditions always play a factor in providing negotiating leverage to a landlord or tenant, some of these proposals should survive scrutiny in any real estate market.
Mitigation by Landlord
Since the Court of Appeals decided the seminal case of Holy Properties v. Kenneth Cole (87 N.Y.2d 130, 637 N.Y.S.2d 964, 1995), landlords have not been required to mitigate damages when a commercial tenant defaults on its lease and surrenders or is removed from the premises. As the tenant of record remains liable for all rents due during the remainder of its term of the lease, a landlord has no incentive to even attempt to re-rent or alleviate a defaulting tenant of its duty to pay rent.
Landlords are not obligated to mitigate prospective losses in the event of default on rent payments. This has produced exceedingly harsh results.
Hence, every lease should contain a clause which provides that, upon a default in the lease that results in the surrender or eviction from the premises, the landlord agrees to mitigate its losses and to use reasonable efforts to re-lease the demised premises. If it can be negotiated, such a clause should include a requirement by the landlord to advertise weekly and to employ a qualified real estate broker to find a new tenant to lease the premises. This clause should also include a duty by the landlord to attempt to rent the premises for at least the same rent to reduce any remaining tenant liability.
When one contemplates the potential amounts that could be owed without a mitigation of damages clause, it is clear that negotiating such a simple clause may provide a tenant a life preserver in an ocean of financial devastation.
A Prevailing Party Clause
Most commercial leases include a provision that a tenant must pay a landlord's legal expenses and attorney fees in connection with any default in the lease. Although state law mandates that such an attorney fees clause in residential leases is deemed to be reciprocal, this statute does not apply to commercial leases. Despite many failing arguments to the contrary, attorney fees provisions providing payment to the landlord in connection with a legal proceeding will not provide the same rights to a tenant unless specifically stated in the lease.
Hence, a prevailing party clause should be negotiated into the commercial lease agreement. The provision should read that the losing party to any legal action shall pay the prevailing party's legal fees and expenses. Such a clause should prevent, or at least lessen, the number of frivolous and harassing lawsuits initiated by both parties. As neither party will be able to commence legal action without the threat of having to fund the victorious party's legal bill, parity should prevail and thereby preclude attempts to exploit any inequitable leveraging positions.
Right of Expansion Clause
An expansion clause is the right or option to lease a specific additional space in the demised premises for a defined term in the future. Such an option becomes significant when a company has outgrown its space and wishes to avoid having to move to a new location and save the cost and inconvenient time delays that relocation necessitates.
Financially, it saves the tenant from being forced to lease additional space if its financial situation does not dictate growth when the option becomes available.
The expansion clause allows a tenant the flexibility of either:
(a) taking an entirely new and larger space in the building without any financial
consequences for vacating its present space, or
(b) permits the tenant to simply expand its tenancy by taking additional floor space or additional square feet.
The expansion option also benefits the landlord by allowing it the flexibility to deliver different floors or rental space to the tenant at different times. The expansion clause also requires communication between the landlord and tenant at certain fixed times which might not otherwise occur without a lease provision dictating such contact.
As the landlord knows when existing leases expire, it will be able to determine vacancy dates before the execution of the initial lease. As such, the negotiated expansion clause should address different possibilities for potential expansion. The expansion clause should be expressly negotiated to include:
(a) a detailed description of specific potential
expansion spaces,
(b) the yearly rent due or an agreement to use
the fair market rent, and
(c) any increases in taxes and/or operating
expenses.
In addition, a provision requiring the landlord to use reasonable efforts to recover possession from a holdover tenant in the chosen expansion space should be included. Tenants should also attempt to negotiate a Right of First Refusal to protect their long term interests in the premises.
The Option to Renew
The option to renew has been in practice for hundreds of years. It is not the option itself, however, that led to its discussion in this article but the methodology of negotiating such a right on behalf of the tenant and the tremendous benefits provided to a tenant. The option permits a tenant to sign on for another five or ten years at a negotiated rent. The renewal rent negotiated at the time of the initial lease is often only three to five percent above the rent for the last year of the original lease period. Since the tenant is not required to exercise the option, it can vacate the space without any liability after the initial lease term. Furthermore, after investing heavily to turn raw space into an office or store, a tenant will be more comfortable signing a lease with a shorter term with the knowledge that, at its option it can remain for one or more renewal periods. In fact, a shorter term with option periods may be beneficial for a smaller company without the ability to forecast financial success. Finally, if the market calls for a lower rent than the renewal option specifies, negotiation may result in a decreased rent when it is time to renew.
The option to renew is beneficial to the landlord as a result of the incentives supplied and its importance as a negotiating tool. By making the option contingent on the tenant's good standing with its lease obligations during the current term, the tenant shall have an important incentive to be on its best behavior, and to comply with all its lease obligations to avoid losing the right to renew. Granting the option can also give the landlord an important negotiating tool that may overcome any stalemate that has impeded the lease negotiations.
Ownership and Use
The Worldwide Web has provided a cost efficient way to provide additional protection for a tenant for the most basic foundations of the tenancy. First, when receiving a draft of a landlord's lease, the ownership interests of the entity or person listed in the agreement should be investigated. Property ownership and tax information should be checked by visiting the proper Web site. Second, investigate whether the tenant's anticipated use for the premises is permitted by law by searching the relevant government Web site. For example, in New York City, the legal use for the premises and the certificate of occupancy can be viewed by searching the Department of Buildings Web site. In New York City, any premises constructed after 1938 or where significant renovations resulted requires a certificate of occupancy.
The certificate of occupancy will report the legal uses for the premises, and, if a tenant's proposed business is not listed, a competent expediter or architect should be able to determine whether legalization is possible. To legalize a new use for the premises, the architect or expediter must have all building violations corrected, and then proceed with an application for an amendment to the certificate of occupancy approving the new use.
Every tenant should attempt to garner for its intended utilization of its business the catch-all phrase "any lawful use" in its lease.
However, obtaining a favorable use clause will not guarantee that the business will be able to function as such.
If any doubt lingers, a provision should be negotiated giving the tenant the ability to cancel the lease upon a determination that the planned use of the premises cannot be legalized or that it cannot be made so within a reasonable time after submitting a proper application. During this waiting period, the lease should require that no rent become due.
To facilitate the process, a provision requiring the landlord to complete any necessary forms to legalize the use or proposed alterations should be drafted. If the lease is cancelled the landlord should be required to return all monies forwarded to the landlord as well as to reimburse any expenses incurred by the tenant in attempting to legalize the premises.
A tenant should also retain the ability to cancel the lease if the tenant is unable to take possession on the move-in date or soon thereafter. A representation should be added whereby the landlord agrees to make a good faith effort to complete, and legalize the premises, as well as to evict a holdover tenant. In an alternative to canceling the lease, the tenant should be granted a rent abatement for each day that the landlord fails to deliver possession. Upon the delayed commencement of the lease, the expiration dates of the lease should be extended, and the commencement date should be contingent on the issuance of the various approvals and permits necessary to complete construction.
Signage and Alterations
A disproportionate amount of commercial leasing litigation derives from disputes over signs and alterations. In an attempt to decrease the amount of litigation involving such items, attorneys should learn a tenant's business needs and carefully adopt them to the lease. In addition, the following suggestions may prevent litigation and provide a tenant with greater freedom in its space. Before the lease signing, negotiate the advance or pre-approval of any alteration changes and signage requests as well as any foreseeable alteration changes during the term of the lease. Specific plans, measurements, drawings and pictures should be provided and attached to the lease agreement. If possible, obtain the right to make non-structural alterations without the landlord's approval, including any alterations that are insignificant or do not require building permits. Also, draft a representation by the landlord to remove any existing violations against the premises, so that any permit applications needed to perform work will not be rejected. For all other alterations necessitating permission, ensure that such authorization will not be unreasonably withheld.
Repairs and Self Help
Regarding repair responsibility, tenants should attempt to make the landlord liable for all structural repairs to the demised space and to the building, as well as nonstructural repairs occasioned by the landlord's negligence.
One of the most useful tenant-friendly clauses is the tenant's self-help provision. Such a provision permits a tenant to complete any repairs that the landlord neglects to complete within an allotted time period after notification from tenant. Under this clause, a tenant shall seek reimbursement by obtaining a rent credit for the cost of the repair or by obtaining reimbursement from the landlord. Besides vitiating the tenant's dilemma of whether it can withhold rent until the repairs are done, it will provide a mechanism that should assist in keeping the premises free of necessary repairs. The self-help clause will also resolve the independent covenant dilemma, where any rental amounts due to the landlord are deemed independent of the landlord's obligation to do repairs. Any lease provision specifying that each provision in the lease is independent of every other provision should be modified to include the tenant self-help provision.
Conclusion
Dozens of other provisions exist that would be helpful to a tenant; however, this article has recommended a few of not only the most essential, but those that have a decent chance of being negotiated into the lease." ForMore information see: www.houstonrealtyadvisors.net
or www.houstonrealtyadvisor.com
Landlord's recovery of attorneys fees in bankruptcy court
When tenant declares bankruptcy, Bankruptcy Code §502(b)(6)'s cap on landlord's recoverable damages, although phrased in terms of rent, does not limit landlord solely to claims for rent reserved, but may support an additional claim for attorney's fees, so long as total claim is within the cap limits.
from DIRT, August 28, 2006
Landlord Wall Street was awarded a state court judgment for damages against lessee JSJF for breach of lease. Wall Street also prevailed on JSJF's counterclaim, obtaining a judgment of dismissal with attorney fees to be awarded later. A few days later, before the final entry of the order determining the attorney's fees, JSJF filed its Chapter 11 petition; Wall Street was its primary unsecured creditor.
Wall Street Plaza, LLC v JSJF Corp. (In re JSJF Corp.) 344 B.R. 94 (9th Cir. BAP 2006)
Wall Street filed three proofs of claim to which JSJF objected on various ground. One of the objections was that the claims for attorney fees, not rent reserved under 11 USC §502(b)(6), and that two were time-barred. The bankruptcy court disallowed all three claims and denied Wall Street's motion for reconsideration. When the state court ascertained the amount of the attorney fee award, Wall Street sought leave to file a fourth proof of claim, either as an amendment to the first timely claim or as late filed, which the bankruptcy court denied.
It also denied Wall Street's motion for reconsideration.
The 9th Circuit BAP held that the bankruptcy court's disallowance of the first claim because it was not for rent was an error of law. In re McSheridan (BAP 9th Cir 1995) 184 BR 91, 99, articulated a test to determine what charges are rent reserved and therefore capped under §502(b)(6).
As the court read this statute, it does not limit lessors' claims only to those items that fall within the cap. Thus, a lessor may have an uncapped claim for something other than damages resulting from the termination of the lease. The landlord's cap of §502(b)(6) may limit the amount of a lessor's claim, but it is not a criterion for its allowance; it becomes significant only if the claim otherwise allowable under nonbankruptcy law exceeds the cap calculated under the statute.
In the instant case, the landlord's claim for future rent was relatively small, and there was lots of room within the cap amount to support payment of some or all of the attorney's fee claim. In interpreting McSheridan in this way, the court appears to have departed from rulings by several other federal district court in California.
As the lower court had not based its opinion on the grounds that the landlord's claim exceeded the total allowable cap amount, but on the ground that the attorney's fees did not constitute rent, the court reversed and remanded for determination of whether the landlord's cap applied to some or all of the first claim under McSheridan and, if so, what that cap was.
The court further ruled that the trial court abused its discretion in disallowing the fourth claim as an amendment to the first claim. In the absence of prejudice to the opposing party, the Ninth Circuit has a liberal policy permitting amendments to a proof of claim to cure defects in the claim as filed.
The gravamen of the first claim was the assertion of all of Wall Street's rights vis-a-vis JSJF arising out of the lease litigation that resulted in the state court judgment. Because the total amount of attorney fees had not been determined, the amount stated in the claim was incorrect. The fourth claim corrected the error and set forth the proper amount of Wall Street's claim; it did not assert a new theory of relief. As to prejudice, nothing in JSJF's papers suggested any worsening of its position or bad faith or unreasonable delay on Wall Street's part. Prejudice requires more than simply having to litigate the merits of, or to pay, a claim, the mistaken legal premise on which the bankruptcy court denied the claim. There must be some legal detriment to the opposing party. The equities favored Wall Street because JSJF's own plan of reorganization included Wall Street's claim for lease damages. Indeed, Wall Street's successful assertion of these rights triggered JSJF's bankruptcy filing. The panel remanded for determination of the fourth claim and the extent to which it might be limited by the §502(b)(6) cap.
Note: The lease had designated the attorney's fee claim as rent"
but the trial court concluded that it was not rent because it was not regular and periodic and the appeals court did not disturb that finding.
It simply stated that the claim did not have to constitute rent to be payable as damages on account of the termination of the lease so long as there was room under the cap.
Comment from Roger Bernhardt Bernhard of the Golden Gate Law School in San Francisco.
It seems clear that a nonperiodic award of attorney fees entirely unrelated to the value of the premises is not rent, even when it is designated as such in the lease. The BAP here, however, read McSheridan to apply only to capping the recovery, and having nothing to do with allowability; attorney fees that do not constitute rent are merely not subject to the cap, they are not therefore disallowable.
Thus, one court [the bankruptcy court] read §502(b)(6) to deny the attorney fee claim entirely, while the other read it to permit it completely. It's not that I like compromises, but I don't know why the section wasn't construed to allow the attorney fee claim, even though it was not for rent, but to subject to the cap, even though it was still not for rent.
Section 506(b) provides that the court shall determine the amount of such claim ... and shall allow such claim in such amount except to the extent that ... 6) if such claim is the claim of a lessor for damages resulting from the termination of a lease of real property, such claim exceeds - A) the rent reserved by such lease ... for one year.
Thus, while one needs to determine what was rent reserved for capping purposes, what is capped is not that item, but rather the damages resulting from the termination of a lease. Damages resulting from termination seem to me to include related attorney fees, whether or not they are characterized as rent by the lease or by a court.
These attorney fees were awarded in an action brought by the lessor (1) for breach of the lease and for lost rent because the tenant abandoned, as well as (2) in defending against the tenant's cross-complaint for constructive eviction. All of that seems to perfectly qualify as damages resulting from the termination of a lease. If so, the syntax of the section seems to require their capping.
Comment from Patrick Randolph, University of Missouri, Kansas City, School of Law.
The court concluded that the attorney's fees did have to fit under the cap, but that there was room under the cap in this case because the claim for damages for breach of the lease - future rent - did not exceed the cap. e are not told what the term was, so we don't know whether the one year limit or the 15% limit applied; but the rent was $7,000 per month and the total claim for future rent was $80,000. So obviously there was some room for additional claims for attorney's fees." For more information see: www.houstonrealtyadvisors.net
or www.houstonrealtyadvisor.com
from DIRT, August 28, 2006
Landlord Wall Street was awarded a state court judgment for damages against lessee JSJF for breach of lease. Wall Street also prevailed on JSJF's counterclaim, obtaining a judgment of dismissal with attorney fees to be awarded later. A few days later, before the final entry of the order determining the attorney's fees, JSJF filed its Chapter 11 petition; Wall Street was its primary unsecured creditor.
Wall Street Plaza, LLC v JSJF Corp. (In re JSJF Corp.) 344 B.R. 94 (9th Cir. BAP 2006)
Wall Street filed three proofs of claim to which JSJF objected on various ground. One of the objections was that the claims for attorney fees, not rent reserved under 11 USC §502(b)(6), and that two were time-barred. The bankruptcy court disallowed all three claims and denied Wall Street's motion for reconsideration. When the state court ascertained the amount of the attorney fee award, Wall Street sought leave to file a fourth proof of claim, either as an amendment to the first timely claim or as late filed, which the bankruptcy court denied.
It also denied Wall Street's motion for reconsideration.
The 9th Circuit BAP held that the bankruptcy court's disallowance of the first claim because it was not for rent was an error of law. In re McSheridan (BAP 9th Cir 1995) 184 BR 91, 99, articulated a test to determine what charges are rent reserved and therefore capped under §502(b)(6).
As the court read this statute, it does not limit lessors' claims only to those items that fall within the cap. Thus, a lessor may have an uncapped claim for something other than damages resulting from the termination of the lease. The landlord's cap of §502(b)(6) may limit the amount of a lessor's claim, but it is not a criterion for its allowance; it becomes significant only if the claim otherwise allowable under nonbankruptcy law exceeds the cap calculated under the statute.
In the instant case, the landlord's claim for future rent was relatively small, and there was lots of room within the cap amount to support payment of some or all of the attorney's fee claim. In interpreting McSheridan in this way, the court appears to have departed from rulings by several other federal district court in California.
As the lower court had not based its opinion on the grounds that the landlord's claim exceeded the total allowable cap amount, but on the ground that the attorney's fees did not constitute rent, the court reversed and remanded for determination of whether the landlord's cap applied to some or all of the first claim under McSheridan and, if so, what that cap was.
The court further ruled that the trial court abused its discretion in disallowing the fourth claim as an amendment to the first claim. In the absence of prejudice to the opposing party, the Ninth Circuit has a liberal policy permitting amendments to a proof of claim to cure defects in the claim as filed.
The gravamen of the first claim was the assertion of all of Wall Street's rights vis-a-vis JSJF arising out of the lease litigation that resulted in the state court judgment. Because the total amount of attorney fees had not been determined, the amount stated in the claim was incorrect. The fourth claim corrected the error and set forth the proper amount of Wall Street's claim; it did not assert a new theory of relief. As to prejudice, nothing in JSJF's papers suggested any worsening of its position or bad faith or unreasonable delay on Wall Street's part. Prejudice requires more than simply having to litigate the merits of, or to pay, a claim, the mistaken legal premise on which the bankruptcy court denied the claim. There must be some legal detriment to the opposing party. The equities favored Wall Street because JSJF's own plan of reorganization included Wall Street's claim for lease damages. Indeed, Wall Street's successful assertion of these rights triggered JSJF's bankruptcy filing. The panel remanded for determination of the fourth claim and the extent to which it might be limited by the §502(b)(6) cap.
Note: The lease had designated the attorney's fee claim as rent"
but the trial court concluded that it was not rent because it was not regular and periodic and the appeals court did not disturb that finding.
It simply stated that the claim did not have to constitute rent to be payable as damages on account of the termination of the lease so long as there was room under the cap.
Comment from Roger Bernhardt Bernhard of the Golden Gate Law School in San Francisco.
It seems clear that a nonperiodic award of attorney fees entirely unrelated to the value of the premises is not rent, even when it is designated as such in the lease. The BAP here, however, read McSheridan to apply only to capping the recovery, and having nothing to do with allowability; attorney fees that do not constitute rent are merely not subject to the cap, they are not therefore disallowable.
Thus, one court [the bankruptcy court] read §502(b)(6) to deny the attorney fee claim entirely, while the other read it to permit it completely. It's not that I like compromises, but I don't know why the section wasn't construed to allow the attorney fee claim, even though it was not for rent, but to subject to the cap, even though it was still not for rent.
Section 506(b) provides that the court shall determine the amount of such claim ... and shall allow such claim in such amount except to the extent that ... 6) if such claim is the claim of a lessor for damages resulting from the termination of a lease of real property, such claim exceeds - A) the rent reserved by such lease ... for one year.
Thus, while one needs to determine what was rent reserved for capping purposes, what is capped is not that item, but rather the damages resulting from the termination of a lease. Damages resulting from termination seem to me to include related attorney fees, whether or not they are characterized as rent by the lease or by a court.
These attorney fees were awarded in an action brought by the lessor (1) for breach of the lease and for lost rent because the tenant abandoned, as well as (2) in defending against the tenant's cross-complaint for constructive eviction. All of that seems to perfectly qualify as damages resulting from the termination of a lease. If so, the syntax of the section seems to require their capping.
Comment from Patrick Randolph, University of Missouri, Kansas City, School of Law.
The court concluded that the attorney's fees did have to fit under the cap, but that there was room under the cap in this case because the claim for damages for breach of the lease - future rent - did not exceed the cap. e are not told what the term was, so we don't know whether the one year limit or the 15% limit applied; but the rent was $7,000 per month and the total claim for future rent was $80,000. So obviously there was some room for additional claims for attorney's fees." For more information see: www.houstonrealtyadvisors.net
or www.houstonrealtyadvisor.com
Friday, July 6, 2007
Hurricane Season Lessons
Lessons learned from last hurricane season.
From ALI-ABA CLE Review, August 25, 2006
"In the aftermath of 2005's tragic hurricane season, it became apparent that disaster preparedness needed improvement and thus spawned a wave of reflection on how better planning might have mollified the severe economic and human impact of the last year's hurricane season.
Those businesses that suffered the least during last year's hurricane season attribute their staying power in part to strong supply chain and logistical planning. Although no business can fully plan for defense against all contingent disasters, these minimal advance planning steps should be considered.
Establish a Disaster Team and Plan
In order to be better prepared for future disasters, companies must establish a Disaster Team and clearly identify its functions. This team should analyze your company's vulnerabilities and hazards, and develop a plan to respond to future catastrophes. Once developed, this plan should be distributed to management personnel and reviewed at least annually to make adjustments to allow for changes in your company's business model as well as to include lessons from most recent catastrophes elsewhere.
Elements of a Successful Emergency Management Plan
Critical elements include personnel training, clear communications procedures, life safety education and planning, security measures designed to protect work-product and property, and regular insurance evaluation to ensure maintenance of the most appropriate policies.
Develop and Maintain Proximate Business Locations
Prepare in advance to open or expand an office in the city physically closest to the disaster-impacted area.
Create and Implement Alternatives to Obtaining Supply and Satisfying Demand
Many businesses literally froze during last year's hurricane season and were unable to obtain necessary products and/or meet the increased (or ordinary) demands of their customers. Some, however, had established contingency plans and, although slowed, were relatively speaking able to continue business-as-usual.
Communication
Companies should establish and publish an Internet link or call-in telephone number for both employees and customers to call in another area code in the event of a disaster. Employees should be required to provide a landline telephone number of a relative or friend who is located out of state and who will know how that person may be reached after the disaster.
Computer Preparedness
If time permits, crucial hard files should be packed and carried out prior to the onset of the anticipated disaster. If time does not permit, consider boxing those files in locations away from windows. Ensure that your company's IT personnel maintain and update either modifications to the company's existing website and/or a new link with disaster updates and effective communications on how service providers can be reached and a timeline for the continued provision of services.
Adaptation
Maintain maximum flexibility, and adapt to unanticipated consequences after the disaster. Customers, clients, and even competitors, those directly impacted, and those less so, generally will understand and sympathize with your company's predicament and disaster-related challenges and working through those issues together may serve to strengthen the bond of trust." FOR MORE INFORMATION SEE: www.houstonrealtyadvisors.net
or www.houstonrealtyadvisor.com
From ALI-ABA CLE Review, August 25, 2006
"In the aftermath of 2005's tragic hurricane season, it became apparent that disaster preparedness needed improvement and thus spawned a wave of reflection on how better planning might have mollified the severe economic and human impact of the last year's hurricane season.
Those businesses that suffered the least during last year's hurricane season attribute their staying power in part to strong supply chain and logistical planning. Although no business can fully plan for defense against all contingent disasters, these minimal advance planning steps should be considered.
Establish a Disaster Team and Plan
In order to be better prepared for future disasters, companies must establish a Disaster Team and clearly identify its functions. This team should analyze your company's vulnerabilities and hazards, and develop a plan to respond to future catastrophes. Once developed, this plan should be distributed to management personnel and reviewed at least annually to make adjustments to allow for changes in your company's business model as well as to include lessons from most recent catastrophes elsewhere.
Elements of a Successful Emergency Management Plan
Critical elements include personnel training, clear communications procedures, life safety education and planning, security measures designed to protect work-product and property, and regular insurance evaluation to ensure maintenance of the most appropriate policies.
Develop and Maintain Proximate Business Locations
Prepare in advance to open or expand an office in the city physically closest to the disaster-impacted area.
Create and Implement Alternatives to Obtaining Supply and Satisfying Demand
Many businesses literally froze during last year's hurricane season and were unable to obtain necessary products and/or meet the increased (or ordinary) demands of their customers. Some, however, had established contingency plans and, although slowed, were relatively speaking able to continue business-as-usual.
Communication
Companies should establish and publish an Internet link or call-in telephone number for both employees and customers to call in another area code in the event of a disaster. Employees should be required to provide a landline telephone number of a relative or friend who is located out of state and who will know how that person may be reached after the disaster.
Computer Preparedness
If time permits, crucial hard files should be packed and carried out prior to the onset of the anticipated disaster. If time does not permit, consider boxing those files in locations away from windows. Ensure that your company's IT personnel maintain and update either modifications to the company's existing website and/or a new link with disaster updates and effective communications on how service providers can be reached and a timeline for the continued provision of services.
Adaptation
Maintain maximum flexibility, and adapt to unanticipated consequences after the disaster. Customers, clients, and even competitors, those directly impacted, and those less so, generally will understand and sympathize with your company's predicament and disaster-related challenges and working through those issues together may serve to strengthen the bond of trust." FOR MORE INFORMATION SEE: www.houstonrealtyadvisors.net
or www.houstonrealtyadvisor.com
RISING CONSTRUCTION CHARGES
Developers, distributors, contractors and subcontractors have suffered from horrendous increases in the cost of materials during the past few years.
from Sacramento Business Journal, August 25, 2006
"Although contractors absorbed the rising charges, driven mostly by global demand, when the trend began, they increasingly must pass the cost to the consumer or risk going down the tubes. That means tenants in office, industrial and retail space will often pay considerably more for the privilege of moving into new buildings.
One example of rents spiked by such costs is the four-story office building under construction by developer John Mourier in Highland Pointe business park, overlooking Highway 65 in Roseville. The new structure is the twin of a building finished at the beginning of this year. But it's not a twin in rents.
Almost entirely because of materials costs, rent in the new building will range from $2.50 to $2.60 per square foot, compared to $2.35 for the first building.
Another example is a 76,000-square-foot office building just completed in Vineyard Pointe Business Park in Roseville that has rents ranging 12 cents to 15 cents per square foot higher than its twin, which was finished in 2003. About 35% of the difference is the result of materials costs, and also rising municipal fees.
Sticker shock strikes twice
Material prices also are driving up tenant improvement costs for cubicles and the like. Builders have changed the way they negotiate those costs. In the past, landlords gave an allowance which was settled before the lease was signed. But the tenants didn't get cost estimates for the work from contractors until later. Because of rising materials costs, the sticker shock during the past 3 years could leave the tenants, stuck with the lease, to make up the difference between the allowance and the real costs.
Now some landlords are making sure the tenant improvement cost is known before the allowance is set and the lease signed.
Industrial building rent has also gone up, probably by at least 20% for new buildings, largely because of materials costs.
Some builders have decided to postpone construction until the market allows them to charge rents that warrant the increased construction cost. 9 out of 10 developers are saying lease rates have to go up.
The China Syndrome, Hollywood's 1979 nuclear-meltdown thriller, provides a handy label for one of the big reasons that materials costs have jumped. Builders in China, and similarly fast-growing economies elsewhere around the world, are voracious for ready-mix cement, steel, copper and other materials. We're in a global economy, competing with the whole world for materials.
From June 1999 through June 2003 materials rose 80%, to levels 613% higher than 1967 costs. In the 3 years from 2003 through this year, the rise was 131 points – 744% over 1967's costs. The combined cost of materials, labor and ancillary expenses charged by contractors to clients has increased very sharply during the past 3 years, reflecting a rise in demand for contractor services as well as hikes in materials costs. We had 20 years of annual 3-to-3.5% escalations in costs, and 2 years of about 20%, and now we're staring at 8-10% this year.
Among the materials typically thought of as construction related, the rising price of oil has dramatically increased the cost of plastics and asphalt, and has driven up the cost of transporting materials. Prices might slow their rise next year, and some items might even decline in cost. That's partly because China is increasing its own steel production. Also, some analysts say China probably can't maintain its current growth rate into next year.
Analysts also say the ebbing pace in U.S. home construction is easing materials prices. Also, more Mexican cement is expected in the U.S.
market, which should increase competition and lead to lower prices.
The hikes of the past few years have been so great that building will still be more expensive than in past years. And gas will still be $3 a gallon."
from Sacramento Business Journal, August 25, 2006
"Although contractors absorbed the rising charges, driven mostly by global demand, when the trend began, they increasingly must pass the cost to the consumer or risk going down the tubes. That means tenants in office, industrial and retail space will often pay considerably more for the privilege of moving into new buildings.
One example of rents spiked by such costs is the four-story office building under construction by developer John Mourier in Highland Pointe business park, overlooking Highway 65 in Roseville. The new structure is the twin of a building finished at the beginning of this year. But it's not a twin in rents.
Almost entirely because of materials costs, rent in the new building will range from $2.50 to $2.60 per square foot, compared to $2.35 for the first building.
Another example is a 76,000-square-foot office building just completed in Vineyard Pointe Business Park in Roseville that has rents ranging 12 cents to 15 cents per square foot higher than its twin, which was finished in 2003. About 35% of the difference is the result of materials costs, and also rising municipal fees.
Sticker shock strikes twice
Material prices also are driving up tenant improvement costs for cubicles and the like. Builders have changed the way they negotiate those costs. In the past, landlords gave an allowance which was settled before the lease was signed. But the tenants didn't get cost estimates for the work from contractors until later. Because of rising materials costs, the sticker shock during the past 3 years could leave the tenants, stuck with the lease, to make up the difference between the allowance and the real costs.
Now some landlords are making sure the tenant improvement cost is known before the allowance is set and the lease signed.
Industrial building rent has also gone up, probably by at least 20% for new buildings, largely because of materials costs.
Some builders have decided to postpone construction until the market allows them to charge rents that warrant the increased construction cost. 9 out of 10 developers are saying lease rates have to go up.
The China Syndrome, Hollywood's 1979 nuclear-meltdown thriller, provides a handy label for one of the big reasons that materials costs have jumped. Builders in China, and similarly fast-growing economies elsewhere around the world, are voracious for ready-mix cement, steel, copper and other materials. We're in a global economy, competing with the whole world for materials.
From June 1999 through June 2003 materials rose 80%, to levels 613% higher than 1967 costs. In the 3 years from 2003 through this year, the rise was 131 points – 744% over 1967's costs. The combined cost of materials, labor and ancillary expenses charged by contractors to clients has increased very sharply during the past 3 years, reflecting a rise in demand for contractor services as well as hikes in materials costs. We had 20 years of annual 3-to-3.5% escalations in costs, and 2 years of about 20%, and now we're staring at 8-10% this year.
Among the materials typically thought of as construction related, the rising price of oil has dramatically increased the cost of plastics and asphalt, and has driven up the cost of transporting materials. Prices might slow their rise next year, and some items might even decline in cost. That's partly because China is increasing its own steel production. Also, some analysts say China probably can't maintain its current growth rate into next year.
Analysts also say the ebbing pace in U.S. home construction is easing materials prices. Also, more Mexican cement is expected in the U.S.
market, which should increase competition and lead to lower prices.
The hikes of the past few years have been so great that building will still be more expensive than in past years. And gas will still be $3 a gallon."
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