I'm ready to sign my lease - do I need an attorney?

I think I’m getting screwed on my lease!

It’s that time again.  You just got a call from the leasing agent who got you your space and he wants to chat about re-upping your lease.  Are you ready?  Your first cause of concern comes when you realize that the agent also represents the landlord and your first question rightfully is, “who is this guy looking out for, me, the landlord or himself?”  First and foremost it’s usually himself, then the landlord and last and certainly least – you.

You’ve always toyed with the idea of having an attorney look over the lease but you always assumed they were just too expensive right?  Consider this recent example of a pharmacy client who I helped with in the negotiation of his lease. 

Same scenario as above – the leasing agent called, the lease was coming due.  The agent represented both the landlord and my client.  Low and behold, my client called me asking if I could look over the amendment drawn up by the agent.  Well, typos aside, the amendment didn’t do my client any favors.  In the end, it proved to be a very profitable call that my client made to me.

After consulting with the client, I contacted the broker to discuss the lease. He was a little skittish at first because he thought he was going to lose the duel representation.  When I assured him that wasn’t the case he quickly started revealing information – regarding what the landlord would and wouldn’t do.  To my client’s amazement, the information was very useful to his negotiation – or rather my negotiation on his behalf. 

Just as a matter of reference, the space is less than 1000 square feet in a medical building.  The initial amendment offered 5 years, 5 months free rent, rent increase of 10% over what he was paying currently (below market) and a tenant improvement allowance of $4000.  Not bad but certainly not great.

Enter the attorney.  There was no bullying or cajoling or threats or coercion.  It was simply a matter of asking questions of what could be done and what couldn’t.  It was a give and take.  In the end, we bumped up the term to 10 years with an escape clause built in for an exit anytime after 3 years.  The rental rate decreased by 10%, frozen for 3 years and then increased by 2.5% each year thereafter. There was 12 months free rent – 6 months in year one and 6 months in year 2.  And TI’s went from $4000 to $28,000 with any unused portion applied towards rent.  The other give back was a pro-rated return of any TI’s and free rent if the escape clause kicked in. 

The client’s been in the same location for 10 years.  The likelihood that he’s going to leave is not great but it gave him peace of mind.  In the end, instead of getting about $10,000 in concessions, I got him closer to $50,000.  Cost to him for the attorney – less than $5000.  My client did the math, and low and behold, it really did make sense to hire a business attorney.  Lesson learned. 

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Greg Royston is a licensed attorney in California as well as a licensed real estate broker. His transactional law practice caters to individuals and small businesses with particular emphasis on business law, tax and real estate matters including leasing, acquisitions, dispositions and commercial loan and lease restructuring.  Before practicing law, Mr. Royston was in public accounting (formerly part of the Big 8, now the Final 4) for eight years offering tax, estate planning and benefits consulting services specifically to high net worth clients and small and medium sized businesses.   For consultation, he can be reached at 310-525-3713 or greg@sbaylaw.com.

   

Commercial Real Estate Tax Bill - NOT!

Commercial Foreclosure – Net Leasing

Never heard of net leasing before?  Not surprising – most people haven’t.  If you are facing a commercial foreclosure and you have any tax deferred gains (i.e. 1031 money) in the property being foreclosed on, chances are you’ll wish you had heard of the net leasing before the foreclosure was done.

In a nutshell, when there is a commercial foreclosure on an underwater property that an owner has tax deferred money in,  the owner will realize three guaranteed things: 1. Loss of equity. 2. Lose of the property. 3. Tax bill.

While a buyer may expect the first two, they don’t expect the third.  Low and behold though, when there is cancellation of debt, it is considered a deemed sale.  A deemed sale of property, especially one with 1031 money, generally means a tax bill.  Buckle up.

There is a solution to this vexing problem though, and it is called net leasing.  While there are millions real estate agents out there pitching their next listing to you or asking you to list your property with them, there are very few who know the ins and outs of net leasing and how to get around the tax bill problem resulting from the commercial foreclosure.

An example of sample situation:

Owner acquired building in 1990 - $5,000,000

By 1999, building appreciated to $11,000,000 – owner refinanced property leveraging 80% non-recourse debt – draws $3,800,000 tax free.

Shortly after cash-out refinance, market plummets – values are down, leases are renegotiated down. By end of 2003, fair market value of building is $5,500,000 and income generated only 60% of debt service. 

Owner in default for over a year and faced foreclosure.  His adjusted basis was $2,000,000. 

If lender foreclosed, amount realized by owner = $11,000,000 which was amount of outstanding non-recourse debt plus accumulated interest and penalties.  Owner faced taxable gain of $9,000,000 – the resulting tax consequence – Fed=$1,350,000, CA=$830,000 = total of $2,180,000.

Solution:

Through a qualified intermediary, owner acquires replacement property of investment grade asset with 20+ year absolute net lease which has self-amortizing, non-recourse debt in place.  The average loan to value is an astounding 87% with an all-in cost of approximately 13-15% including closing costs, legal and qualified intermediary expenses.

Bottom line – if you’re facing foreclosure on an asset that has low basis but is underwater because of market conditions and/or prior cash-out refinancing, there is still a way out.  Talk to a professional today about net leasing.  If your broker doesn’t know about it, that’s not surprising.  Contact us for an evaluation today.  We have ready access to a pool of investment grade product and can get the deal done.

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Greg Royston is a licensed attorney in California as well as a licensed real estate broker. His transactional law practice caters to individuals and small businesses with particular emphasis on business law, tax and real estate matters including leasing, acquisitions, dispositions and commercial loan and lease restructuring.  Before practicing law, Mr. Royston was in public accounting (formerly part of the Big 8, now the Final 4) for eight years offering tax, estate planning and benefits consulting services specifically to high net worth clients and small and medium sized businesses.   For consultation, he can be reached at 310-525-3713 or greg@sbaylaw.com.

Commercial Loan Modifications

With all the bank bailouts going on, can’t I at least get my commercial loan modified – I’m dying here!

It seems that almost every S&P1000 company is doing it.  It goes right to the company’s bottom line.   Most banks are more than willing to entertain the conversation.  It’s time to see if you can get your commercial loan restructured.

The scenario is very common these days: company sales are down; they just went through another round of layoffs.  There’s no telling what’s in store for the future. What’s next?  Have you considered trying to get your bank to restructure your loan?

Most people assume that the contract they signed when they bought their building housing their business is iron clad and cannot be changed and that the only time you can renegotiate is when you are re-upping the lease via an amendment or signing a new one altogether.  Nothing can be farther from the truth!  It’s in the bank’s best interest to restructure commercial loans BEFORE they go bad.

Banker’s are not stupid - possibly a bit greedy, but definitely not stupid.  If given the choice of having a non-performing loan on their books or trying to renegotiate a loan for a client who is facing difficulty – well, it’s an easy choice.  This has been my experience, particularly with banks that are/were NOT subject to the special pay czar established under TARP –(yes, you can read into this that small banks are significantly easier to deal with than bigger banks).

Banks are under increasing pressure from the government at all levels –local, state and federal.  They have no desire to be on anyone’s watchlist or be in the crosshairs of anything remotely negative about their business.  That said, consider trying to get your loan restructured.

It’s been my experience that banks really do want to talk with their customers and help them solve the predicament that they are in.  Case in point: I have a client that has a 57-unit apartment building in a distressed area.  My clients, try as they might, can’t seem to catch a break between high vacancy and deferred maintenance. They purchased at the height of the market in 2006 and for the most part it’s been downhill ever since.  Values have lost more than 50% - all my client’s equity is long gone and the bank is underwater something fierce.  The key here is that my client has kept in contact with the bank.  The bank knows this and has shown great willingness to try to work out a deal.  So far we have two options on the table – either modify the loan or sell the property to an all cash buyer so the bank can exit and have some closure.  Truthfully, there’s really only one option – the sale, but we are running through the exercise.

At the end of the day, my prediction is that my client will part with some minimal amount of money and then my client and the bank will part ways. No messy lawsuits, liens or dings on their credit.  Nobody is happy, but hey, it could’ve been a whole lot worse.  Moral of the story – keep talking with your bank and get someone to help you negotiate with them.  It’s an ugly situation but getting a seasoned pro in to help can make it a lot better than what it would have been otherwise.

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Greg Royston is a licensed attorney in California as well as a licensed real estate broker. His transactional law practice caters to individuals and small businesses with particular emphasis on business law, tax and real estate matters including leasing, acquisitions, dispositions and commercial loan and lease restructuring.  Before practicing law, Mr. Royston was in public accounting (formerly part of the Big 8, now the Final 4) for eight years offering tax, estate planning and benefits consulting services specifically to high net worth clients and small and medium sized businesses.   For consultation, he can be reached at 310-525-3713 or greg@sbaylaw.com.