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Clients ask me this question quite a bit.  The answer depends on many factors and it is different for each client depending upon the current market parameters and their unique circumstances. Right now, the California commercial real estate market for retail, office and industrial properties for sale and for lease in which I specialize in is pretty hot and has been for many years.  Prices for both sales and leasing have exceeded all-time highs historically in most California cities especially in Southern California where most of my transactions take place.  So, when prices are high it means that it’s not a good time to buy or lease, right?  Not necessarily.  And what if you have a business and have to do one or the other, which one do you choose? I define businesses that can occupy at least 51% of a building as “owner/users”.  Many times owner/users can pay more for a building because they can get a better loan than investors buying properties not occupying at least 51% of the building.  They also usually get better tax treatment when owning rather than leasing.  Owner/users have been buying quite a bit in the last couple of years.  They are buying even though prices are high, because of low interest rates and preferential tax treatment. The draw for these types of buyers is that it is better compared to leasing and, many times, that proves to be the case.  If they don’t occupy the entire building, but at least 51%, then they can lease out the rest of it which can also add to the positive bottom line. Whether you are an owner/user, or a business that can’t qualify as an owner/user, you have to compare the costs of leasing versus buying.  You have to take into consideration not only the loan and down payment costs, but also the tax implications.  This is where your unique circumstances come into play. Here are some common reasons why you shouldn’t or can’t buy.  In these situations, leasing is better:  If you don’t have enough money for a down payment, if you... Read Original Article
Although the answer might seem obvious to some, this question is asked of me quite a bit in my role as a commercial real estate broker in California.  Generally in California for retail, office and industrial properties (and I am going to focus only on these since these are the ones I specialize in), the landlord or seller of a commercial property pays your broker a commission for your broker bringing you to the property. Many people believe that commissions are negotiable. This is true to some extent in theory and legally. In reality, about 99% of the time there is a market standard commission in the commercial real estate industry for a particular type of commercial property lease or sale that everyone agrees to. The total commission usually paid by a landlord or seller is 5-6% of the total rent over the lease term or the sale price.  This commission amount can vary.  This is especially true for more expensive properties for sale in excess of 10 million dollars. In those cases, the commission total is usually less and can instead be a set fee of say $200,000 as an example.  The landlord/selling broker enters into a contract with the landlord/seller for the entire commission, but then has to split that in some fashion with a tenant/buyer broker unless the landlord/seller broker also represents the buyer. (This latter scenario is called a dual representation and something I strongly recommend against ever doing as a tenant/buyer for many good reasons; more here on this subject.  In Southern California, the splits vary between the two brokers depending upon whether the deal was retail, office, industrial or other type of property. Let’s assume a 6% leasing and sales commission for our examples that follow.  Retail and industrial deals usually split the leasing/sales commission evenly (3% to each broker). Office deals usually pay 4% to the tenant’s leasing broker with the remaining 2% going to the landlord’s broker. But, for sales, the commission is split evenly.... Read Original Article
There is a shortage of medical space and an increase in retail vacancies in southern California right now.  So, why don’t medical tenants lease space in retail centers as compared to an office or medical building that they traditionally lease space in?  Doesn’t this solve some of the problems for both types of spaces? Some medical tenants such as optometrists, dentists, physical therapists, chiropractors, and a handful of others do lease space in retail centers.  Why do they lease space in a retail center?  Because they probably make more money when their businesses are in a quality retail center with good parking, signage, and retail visibility from shoppers at the retail center.  The main criteria for any business is usually the bottom line so, if being in a retail center increases your net income, wouldn’t you want to be there?  This is rule #1. Sometimes the rent, improvements and other costs can be higher in a retail center, but not always. If you make enough additional income leasing at a retail center to offset this cost, then this objection isn’t a good one.  Another objection might be that medical providers get more referrals from other medical providers that lease in the same medical building.  This can also happen in a retail center if there are other medical providers there. They can still get referrals from outside the retail center from these medical providers that lease in the medical office buildings if they develop a relationship with them. It might not be the same, or potentially as many, referrals as the medical building scenario, but again, see rule #1 above. At which location are you making more net income?  The referrals might not be the same as in the medical building scenario, but there might actually be more referrals in a retail setting because of the other retail tenants now referring you and the amount of potential customers a retail center has. This is especially true in comparison to a traditional medical building scenario which is... Read Original Article
You are a tenant leasing some kind of commercial space like retail, office, industrial or otherwise.  You were smart and negotiated at least one option to renew your lease.  But, should you exercise that option to renew?  Do you really understand what conditions in which it would be favorable or not to exercise this option? In my market in Southern California, most landlords will grant a tenant who is leasing commercial space an option to renew their lease for one additional lease term that is less or equal to their original term.  For example, if you leased for a 5 year term then you could usually negotiate a 5 year or less option to renew.  If you leased for 10 years, you might get one 10 year option to renew or perhaps two 5 year options to renew. But here is where it gets tricky.  It’s generally not in your best interest to exercise your option to renew. Instead, you should think of it as a last resort.  Option to renew language usually contains a certain minimum rent to the landlord. For instance, it may be no less than what you were paying at the end of you current term or maybe it has a 3% bump above what you are paying at that time.  I have found that market rents are usually lower than what your option to renew requires you to pay.  And what about current market tenant concessions like free rent, improvements, etc.?  You will most likely miss out on these. Another provision that option to renew language usually contains is that the lease (except for the rent) will be on the same terms and conditions.  So, if there is a clause in your lease that needs to be negotiated you may want to reconsider the option to renew.  These clauses could include receiving a new base year for operating expense increases for an office tenant or excluding unreasonable lease clauses from applying. For instance, certain Triple Net clauses could be excluded for a retail tenant if you negotiated your renewal instead, but these exclusions won’t apply if you simply exercise your... Read Original Article
Assembly Bill 1059 has been introduced to the California Legislature to ban commercial real estate dual agency relationships. Specifically, the bill “would prohibit an agent from acting as a dual agent in a commercial real estate transaction,” and also prevent different individuals in the same firm from “acting as an agent for both a seller and buyer in the same commercial real estate transaction.” There are many pro landlord groups opposing this bill like AIR CRE.  Why?  In my opinion, it’s because it will help the tenant and buyer and reduce the profit of the landlord and seller.  Just read some of the weak arguments made by AIR CRE here.  All of them primarily have to do with a landlord or seller making less money or not doing as well somehow.  Don’t you feel sorry for them? Dual Representation is not legally allowed in many states.  Why?  Because it can’t be done without violating ethical issues as there are simply too many conflicts of interest.  The tenant/buyer loses big time and the owners and their brokers gain big time. This is why so many brokers and owners are in favor of it. For 25 years I worked as a landlord and seller and directed some very large real estate companies that owned millions of square feet of commercial property across the US and even internationally.  Many brokers wanted my business because I could give them 5 or 6 figure salaries off some of my properties in any one region that I controlled.  As a landlord, I loved it when my brokers were able to do dual representations because I had a great amount of leverage over the brokers who worked for me.  If they, or anyone in their firm representing a tenant/buyer, pushed too hard for a tenant/buyer at one of my properties –all I had to do was hint that they might not be able to keep my listings.  Would a broker risk losing a 5 or 6 figure salary working for me over one deal where they also represented the tenant/buyer?  Not likely.  That is all it took for the tenant/buyer to not get as... Read Original Article
Many of my clients have stated, “I don’t want to sign a long term lease like 5 years or more because I’m not sure I will be in business that long or might need more or less space.”   My answer to them?  It’s usually in their best interest to sign a long term lease and there are ways to terminate a lease early. Signing a longer term lease between 5-10 years makes good sense for many reasons.  You normally get the best economic deal that way with lower rent, more free rent and more tenant improvements paid by the landlord.  You normally get more options like renewal options with more time.   You don’t have to worry about moving sooner either or having to pay a much higher rent in 1-3 years if the market rates increase.  Keep in mind that many landlords won’t agree to less than a 5 year term, especially for space in demand where another party will lease it for 5-10 years, so it will really limit your options for properties if you want to do less than a 5 year term. If you need to terminate a lease early, you have many options available to you.  You can request an early termination option of the landlord in your lease, but most landlords don’t like to grant them.   If they do, they want enough time to release your space so a 6-12 month notice from you might be required.  You might then have to pay back unamortized tenant concessions like free rent and tenant improvements.  But this is still a good option to have if you can get it. What if you can’t get the landlord to agree to an early termination option?  There are still other good options like having the right to relocate in the project to a larger or smaller location.  You also generally have rights to sublease or assign your lease to another qualified tenant. If none of the above options work out, then you can still legally terminate a lease in most states like California.  Courts usually require a landlord to mitigate a tenant’s damages.  This usually means the landlord has to take reasonable steps to re-lease... Read Original Article
Most commercial landlords that I deal with don’t seem to understand the relationship between leasing their office, retail or industrial buildings, and their reputation in the community.  It’s pretty simple really.  If a landlord has a poor reputation, it will make it harder for them to lease their building spaces. Here is a prime example.  Before I was a full time commercial real estate broker, I worked directly as the Director of Leasing and Property Management for a large landlord who owned more than 50 commercial buildings. There were many different types of commercial buildings -usually office, retail or industrial spaces.  Before I accepted this job position, I found out that the local brokers whom I knew well and worked with closely did not like working with this landlord -my new employer.  So, I convinced the landlord to let me leverage my relationships with the brokerage community for 6 months to see if it made a difference in our leasing.  Guess what?  In my first year, I negotiated and completed over 125 commercial leases!  This was more than double the number of commercial leases than anyone else that had the job before me. Another example is when I had just finished acting as an expert witness where I had to go into court and testify that the landlord had ripped off a tenant for over 15 years.  This included millions of dollars related to the tenant’s share of NNN/operating expenses.  Our side won the case.  But the landlord didn’t just lose this case and have to pay my client back for millions of dollars, he also lost the trust of my client going forward and the trust of the other tenants, brokers, attorneys, other people in the community, and so many more. Think about it Mr. Landlord.  If you treat your tenants poorly, and try to cheat them on their share of their operating expenses or add expenses that aren’t reasonable (even though maybe legally allowed), you are going to have poor relationships moving forward. If you don’t care about their... Read Original Article
David Massie of DJM Commercial has been busy lately successfully negotiating commercial real estate deals on behalf of his clients.  Here is a list of just some of the recent commercial real estate transactions completed by David: Sales: Sale of a 26,000 sf industrial building in Oxnard, CA. Office/Medical Leases: 11,700 sf medical lease for National Research Institute in an office/medical building in Los Angeles. 5,900 sf office lease for Liden, Nestle and Soden in an office building in Westlake Village, CA. 3,254 sf office for Bill Barry/Mike Anton of Ameriprise Financial in an office building in Woodland Hills, CA. 2,455 sf office lease for the Bensamochan Law Firm, Inc. in an office building in Agoura Hills, CA. 1,200 sf office lease for Griff entertainment in an office building in Encino, CA. 988 sf office lease for Westlake Investment Advisors in an office building in Westlake Village, CA. Retail Leases: 6,000 sf retail lease for The Open Book in a retail shopping center in Santa Clarita, CA and 5,000 sf lease renewal at The Oaks Mall in Thousand Oaks, CA. 4,775 sf restaurant lease for Amri Cafe in a retail shopping center in Oxnard, CA. 2,940 sf retail lease for Express Employment Professionals in a retail shopping center in Oxnard, CA. 1,600 sf retail lease for a second location for PrideStaff in a retail shopping center in Oxnard, CA. 1,200 sf retail lease for Overall Brazilian Jiu Jitsu & fitness Academy in a retail shopping center in Agoura Hills, CA. 900 sf restaurant purchase and lease for Origin Cafe in a retail space in Los Angeles. Legal Expert Witness: Acted as an expert witness appearing in court on behalf of a retail tenant regarding a landlord/tenant legal dispute regarding a landlord overbilling the tenant for about $1.5 million dollars where my client prevailed primarily due to my testimony. Acted as an expert witness to successfully settle a landlord/tenant dispute regarding percentage rent for a retail tenant where the landlord was... Read Original Article
You are a busy tenant running your business.  You receive your annual reconciliation of your share of expenses from your landlord about April each year.  These expenses go by different names, but are usually called NNN in retail and larger industrial spaces and operating expense increases for office and smaller industrial spaces. The landlord reconciliation usually just shows the breakdown of each expense category, what your percentage share is, and how much you owed for the year.  You usually have been paying estimates all year so you might owe some or actually might receive a credit if you have overpaid. Can you tell if this reconciliation is correct on your own?  I doubt it.  Most tenants that even think they can really can’t and don’t know what they are missing.  Landlords usually don’t send you enough information on the reconciliation to tell if it’s correct.  You need someone that specializes in understanding your lease and also that knows how to properly audit this reconciliation.  It’s kind of a combination between a real estate attorney and a CPA, but even having both of these on your side will probably not cover all of your bases in this area and it would be costly to use both.  There is a better way to do, it in my opinion. I just finished acting as an expert witness in a legal matter related to a tenant vs. a landlord where the landlord overbilled the tenant for over a million dollars for their share of NNN expenses.  The tenant who I represented won the case and this has happened many times where I have been involved as an expert witness.  In my experience, I have found that landlords commonly overbill tenants and have many profit centers in their expenses that should not be there.  There are also other things in a lease beyond these types of expenses that give you financial exposure that you probably don’t even know are there.  These need to be understood and you need to be ready for them if and when they happen. My background preparing these types... Read Original Article
In my last three articles on operating expense and NNN pass throughs in a lease, we looked at how expensive it can be for a tenant to pay its share of unreasonable insurance deductibles, property management fees, and landlord employee salaries.  This month we dive into how to do a landlord audit of these types of expenses. First of all, a landlord should be sending you an annual operating expense or NNN reconciliation each year that compares the actual expenses incurred versus the estimated ones that they budgeted and based your estimated payment on. Second, you should always make the landlord provide reasonable records for each of the expense categories on this reconciliation as I have found that landlords typically don’t give a tenant enough information to determine if the numbers are correct or not.  These back up records usually require the landlord to, at a minimum, send you a general ledger showing the payments for each of the expense accounts that make up the total expenses.  Many times landlords will also send you supplemental spreadsheets that give more information about how and why they billed the expenses in a certain manner so you understand it better and can make sure that it matches what the landlord is allowed to bill you for in the lease or even to just make sure the expense is reasonable. I have successfully negotiated many landlord expense audits where, in almost all cases, my client receives a refund and sometimes for many years in the past so the refund can be quite sizable.  The ones that go the best for my clients are the ones that have someone like me that understands this area to negotiate their lease before they sign.  Having a fair lease, especially in this area of a tenant’s share of expenses, is critical.  Deleting unfair expenses, capping other expenses, and much more are necessary to make the lease fair for a tenant. Again, every tenant and landlord should have their operating expenses audited annually by someone that understands... Read Original Article
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