Contracts exist for the protection of all parties so that the price, terms and conditions can be agreed to in writing without misunderstanding. The best contracts are those that are written in plain English where nothing is left to ambiguity or misinterpretation.

Often problems arise when one party misses a deadline and fails to inform the other side as to the reason for their tardiness. A lack of communication can lead to conflict and sometimes even litigation if the matter is serious enough.

It behooves everyone involved with any type of contract to maintain good communication with the other parties and meet every deadline.

The two most commonly used contracts are the listing agreement and the purchase agreement. Listing agreements are usually exclusive arrangements between the seller and the listing broker. Agents represent a broker but agents themselves do not own the listing per se. The terms of the listing agreement include the beginning and ending dates, price, showing instructions, whether furnishings are included, etc.

Purchase agreements are extremely lengthy documents that contain very detailed terms and conditions along with several pages of disclosure forms. There are deadlines for the performance of specific terms such as the earnest money deposit, inspections, contingency removals, etc.

In the event that one party is unable to meet a deadline they should always notify the other party in advance and try to work out an extension so the deal can move forward in good faith.

Leases are another very common form of real estate contract where having everything in writing is critical to avoid misunderstandings.

We still occasionally see people renting a property to a tenant without any written agreement. This can be a roadmap to disaster. No matter how well you know someone, it is absolutely critical to have a written lease when it comes to renting a piece of property. It makes no difference if we are talking residential or commercial real estate.

Only by having a well-crafted lease agreement can all parties ensure there will be no disagreements over the length, utilities costs, condition of the building or any other important matters.

From time to time we see various types of option agreements involving real estate. In commercial real estate sometimes a business person will purchase an option to lease a desirable space for a property that is under construction or going to be vacant in the future. The reason for doing this is that you are risking far less money than if you just signed a long-term lease.

What if something happened to your business prior to signing the option agreement and the occupancy date? With an option agreement you are limited to the cost of the option whereas if you had signed a five-year lease you would be obligated for 60 months of continuous payments.

The lease with option to purchase is something we see with residential property, especially when someone is renting a higher-priced home that they are contemplating buying. The prospective buyer gets a feel for the property and a portion of their monthly rent is sometimes credited toward the purchase price.

The buyer generally puts up a nonrefundable deposit which may or may not get credited towards the purchase price depending on the amount of money involved and the terms the deal.

Regardless of the type of contract, all parties need to adhere to deadlines and fulfill the terms and conditions of the agreement. The whole purpose of reducing everything to writing in the first place is to ensure that everyone is in agreement in regards to price, terms and conditions.

When someone breaches or defaults on a contract it’s up to the parties involved to try and work things out as quickly and amicably as possible before you wind up with an out-of-control conflict.


Disclaimer:

This article does not create an attorney-client relationship. This article is for general education purposes only and is not legal advice. You should consult with a qualified attorney before you rely on this information.

The commercial real lease should be customized to each Landlord-Tenant relationship through negotiations. The investment in commercial real estate should reflect the risk appetite and investment requirements of the investors. How do you know if it’s a good investment, based on your standards?  Commercial real estate investing should be a very tailored, customized to the investor, and the legal, regulatory landscape, as well as the economic marketplace, can affect the investment decisions. Certain information is required to be disclosed, and it’s done under GAAP standards in the United States. GAAP means Generally Accepted Accounting Principles.

 

How Do I Know If the Lease is a Good Investment?

 

Until December 2019, private companies can categorize a lease as a capital lease or an operating lease.  A capital lease is reported on the balance sheet, and an operating lease is in the footnotes.  This reporting loophole has been around about 40 years, and the powers that be have decided it needs to change, since it contributed (among other factors) to the Dark Times CRE endured during the early 2000s.

 

Investors didn’t have the information they needed to make truly good investment decisions regarding commercial real estate.  So they sometimes made bad ones, and that brings us to where we are today, and the need to close this loophole.

 

What Difference Does It Make to an Investor?

 

The updated standards now provide for financing (not capital) lease and operating leases.  Finance leases are treated pretty much like capital leases, though, and it all goes on the balance sheet, so all of the information is there.  But it costs time and effort to track all of this and account for it on the income statement, and, of course, it affects the amount of available cash on hand. Here’s the trick: if you lease is 12 months or less, it can be an operating lease and go in the footnotes.  Otherwise, it’s on the balance sheets.  You want to keep that lease expense in the footnotes and off the balance sheets, it’s gotta be no more than 365 days for the term.

 

Tenant Flexibility

Short term leases are hip, trendy, and oh-so-in. Tenants like the ability to sign up for a lease that’s as agile and nimble as they are.  Plus, short-term commercial real estate leases are usually gross leases.  The rent payment is a premium price, but it’s a predictable.  There are no pass-through expenses that fluctuate and are beyond the control of the Tenant, even though the Tenant has to pay for some or all of them. Co-working, shared space and pop-shops with curated, ever-changing content are really focused on these short-term “novelty” leases.

 

Now there’s even more incentive to have a short-term lease; it’s advantageous to the balance sheet reporting requirements, and the Tenant can leave if Landlord won’t negotiate a reasonable lease amount and incentivize Tenant to remain and renew.

 

Landlord Uncertainty

Landlords only have rent income to cover their expenses, including building maintenance and attracting and keeping Tenants. Instead of passing through the additional expenses to Tenant, and keeping rent as income, and doing this for years, Tenants are looking for competitive rental rates. Landlord has to budget, plan, and forecast carefully to keep gross rent rates at a competitive amount in the market but enough to cover the operating expenses.  Shorter-term leases mean higher expenses, as Landlord has to recoup the expenses over a less-predictable lease duration, and higher potential turnover means higher potential costs, such as advertising and marketing the now-vacant space.  The long-term capital expenses and building improvements, which need to take place, won’t be predictably recaptured, because the tenant might not stick around.

 

The entire valuation model for a commercial building could be altered as a result. The gross lease means rent payments are going up, which further encourages shorter-term leases for tenants, who can move at the end of the term to a less-expensive space, or the Landlord has to offer financial inducements to keep Tenant in place after the expiration of the year lease ,OR there will have to be some sort of financial break for Tenantto take the hit to the balance sheet to stay in a longer-term lease.

 

The Landlord has less certainty.  An absolute triple net lease is now more expensive to Tenant, which means less money to pay in rent to Landlord, especially when the NNN expenses, are high.


Disclaimer:

This article does not create an attorney-client relationship. This article is for general education purposes only and is not legal advice. You should consult with a qualified attorney before you rely on this information.

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Do you need a commercial real estate lawyer for your lease transaction?

Choosing your commercial real estate lawyer before the transaction is the key to success.

Choosing the right commercial real estate lawyer for your transaction involves a lot of factors. A wise client will ask about the lawyer’s commercial real estate transaction experience and the costs of the lawyer’s services. This should be done BEFORE the commercial real estate lease contract has been signed. The time to negotiate and ask questions about the commercial lease terms and agreement is before you sign!

Commercial Real Estate Transaction Experience

The commercial real estate lawyer should have lots of experience and focus on your particular business space, so he or she can advocate for you and protect your interests. The lawyer needs to be familiar with the type of property (the “asset”) class and the client base. A retail client will have different needs than someone purchasing raw land or leasing an office or industrial space.

Ask what kind of experience the attorney has in reviewing and drafting documentation, like commercial office leases or triple net leases. Find out what percentage of their practice is commercial real estate leasing. You don’t want someone who lists this as one bullet point among many- commercial real estate is complex and evolving, and a general practice law firm won’t have the experience necessary to negotiate in your best interest.

How many commercial real estate leases has the attorney negotiated? You want someone with enough experience to make sure you’re not leaving anything on the table at negotiation, and who can give you an unbiased view of the deal. The deal must be evaluated for risk appetite from a financial and legal perspective.

Commercial Real Estate Lawyer Costs

Contact your commercial real estate lawyer BEFORE you sign!!

Don’t try to save money by using a family or friend’s lawyer or Google to help you negotiate your lease. The intricacies of commercial real estate leasing and negotiations are not taught in law school. Only a commercial real estate lawyer, practice and experience, will be advocate for your interests. A web search will not substitute for a lack of knowledge. Commercial real estate is a complex and expensive transaction, and it’s worth it to invest in a knowledgeable lawyer.

Hopefully, the commercial lease transaction goes smoothly. The real estate lawyer will be working behind the scenes with Landlord’s representatives and brokers to secure your legal assets and your peace of mind. A real estate broker can’t provide legal advice, and the more complex the deal, the more legal items there will be. The broker is only paid if the transaction is completed, but the commercial real estate lawyer will advocate for your interests first.

Your Commercial Lease Transaction Is Unique

The commercial lease agreement is Landlord’s first offer, not an agreement uniquely tailored to your specific business. The commercial lease terms need to reflect the exact agreement between the Landlord and the Tenant. A good commercial real estate lawyer will take you through the lease document and explain the risk and reward of the negotiated lease agreement to you.

This article does not create an attorney-client relationship. This article is for general education purposes only and is not legal advice. You should consult with a qualified attorney before you rely on this information.