Essential option terms

The issue of what an option contract must contain to be enforceable has been subject to litigation.


from Negotiating and Drafting Office Leases, Law Journal Press


"The court must assure itself that there was a definite meeting of the minds between the option parties, and that the essential terms were not left to future negotiations. [Drost v. Hill, 639 So.2d 105 (Fla.
Dist. App. 1994)]


An option clause is a provision that gives a party, usually the tenant, a right within the specified time of carrying out a transaction upon stipulated terms. The instances for which options are typically given
are:


a. Renewal;
b. First refusal;
c. Expansion or contraction;
d. Cancellation; and
e. Purchase rights.


All the material and central terms must be stated in the option contract before a court may grant an order for specific performance. There must be clear and convincing evidence that leaves no doubt as to the option terms. [Kruse v. Hemp, 853 P.2d 1373 (Wash. 1993)]. In Kruse v. Hemp, the court outlined the following material terms:


(1) Time and manner of transferring title;
(2) Procedure for declaring forfeiture;
(3) Allocation of risk regarding damages or destruction;
(4) Insurance provision;
(5) Responsibility for taxes, repairs, water and utilities;
(6) Restrictions, if any, on capital improvements, liens, removal or
replacement of personal property, and types of use;
(7) Time and place for monthly payments; and
(8) Indemnification provisions.


Landlords may want to use the following renewal option checklist provisions applicable to office lease renewals:


· No renewal options if tenant is in default. Tenant
compromise: minor nonmaterial defaults should not prevent renewal.


· No renewal by tenant with health, safety or building code
violations. Violations place owners at risk for fines. Compliance with law provisions should provide that tenant's failure to comply with any law, order, ordinance or regulation will be a default under the lease, preventing tenant from renewing its lease.


· Retain right to reject renewals for financially risky
tenants.


· Require representation by tenant that it will continue the
same use during the renewal.


· Structure the renewal option so that it can be exercised
only by original tenant, and not by assignee or subtenant.


· Make renewal contingent upon guarantor's reaffirmation
of the guaranty.


· Required time for renewal notice should provide landlord a
reasonable time period to find a new tenant if tenant does not renew, usually at least 6 months.


· Obtain tenant's written renewal notice by certified
mail.


· Do not promise to send pre-renewal notices to tenants.


· Keep flexibility to renew using a new lease form or lease
amendment.


· Provide for an increase in the security deposit if the rent
is going to increase.


· Exclude any concessions landlord does not want available
during the renewal term.


· Specify a definite method in the option to determine
renewal rent. Do not use vague language such as at a rate, acceptable to both parties or that the parties agree to agree on the renewal rent when the tenant exercises its renewal options."

For more information see: www.houstonrealtyadvisors.com
or www.houstonrealtyadvisors.net

REITS looking for a great 2008

After a decidedly up and down 2007, executives with many of the nation’s real estate investment trusts (REITs) may breathe a sigh of relief when 2008 draws to a close, according to a report by Steve Sakwa, research analyst with Merrill Lynch in New York.
Sakwa and his analytic team are forecasting high single-digit returns for REIT stocks when December 2008 rolls around, quite a turnaround from the dismal 21.6% drop in returns just registered for 2007 by the Dow Jones U.S. Real Estate Investment Trusts Index.
But that good news comes only after a challenging first six months. Sakwa is cautioning REIT investors to hold their money on the sidelines through the first half of the year, which he predicts will be rocky. “We expect to see cap rates move higher over the next six months, and real estate values to decline on the order of 10% to 15%,” he notes.
In the apartment sector, the growing risk of a recession, coupled with increased competition from the high volume of renters in single-family households, has Sakwa generally “cautious” on the group. His top stock picks include Aimco (AIV), Home Properties (HME), and American Campus Communities (ACC), while pans include Avalon Bay (AVB), BRE Properties (BRE) and Camden Property Trust (CPT).
In the closely watched retail sector, while mainstream investors are busy checking out holiday sales figures, Sakwa believes a better barometer of retail’s health is found in the pace of store closings and new store openings in early 2008. The reasoning is that store closings have an immediate impact on retail real estate, while slower revenue growth does not lead to immediate earnings reductions for retail landlords.
“We expect companies with lower quality assets – CBL & Associates Properties, Glimcher Realty Trust, Pennsylvania Real Estate Investment Trust, Cedar Shopping Centers – to be impacted to a greater degree than upscale retail owners,” says Sakwa. That explains why his top retail REIT picks include Federal Realty Trust (FRT) and Regency Centers (REG) in the shopping center sector, and Simon Property Group (SPG) and Taubman Centers (TCO) in the mall sector. Sakwa believes their strong balance sheets can best weather the financial storm and deliver consistent earnings growth.
When it comes to the office market, the nation’s largest office center, New York City, will be a closely watched barometer. Sakwa believes Big Apple office rents will decline by 10% this year, but rents could soften further if Wall Street job losses mount in the coming weeks.
Office space absorption nationwide is expected to slow to 50 million sq. ft., versus an estimated 59 million sq. ft. in 2007. And while the investment sales market has come to a screeching halt, foreign investors continue to aggressively source deals, particularly in New York.
“We expect well-capitalized investors to selectively pick off deals, while foreign capital could provide a floor to pricing across trophy markets such as New York City, Boston, Los Angeles and San Francisco,” says Sakwa.
His top stock picks are SL Green Realty Corp. (SLG) and Vornado Realty Trust (VNO), while pans include “suburban operators” HRPT Properties Trust (HRP), Mack-Cali Realty Corp. (CLI) and Brandywine Realty Trust (BDN) due to their concentrations in high-vacancy, low-job-growth, non-supply-constrained markets.
Industrial REITs were a shining star in 2007, returning 2.3% on a total return basis, more than 1,900 basis points higher than the broader REIT universe. But given the slowing U.S. economy, projected slowing in shipping volumes, and already high stock valuations, Sakwa is cautious on the entire sector.
So what company is Merrill’s shining star among top stock picks for 2008? Guess again, it’s Digital Realty Trust (DLR) which owns data centers and internet gateways in the U.S. and in Europe. Sakwa expects DLR to grow its funds from operations by 19% in 2008 on top of 25% growth in 2007. For more infomation see: www.houstonrealtyadvisors.com
or www.houstonrealtyadvisors.net

Simplified lease documents aid the need for speed, better tenant

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

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

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

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

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