Commercial Property Herald

Eavesdrop on Howard's Conversations at ICSC Recon 2012 Recap

Well, we are back from this years Recon event in Las Vegas and we had a very successful show this year.  We spoke to a lot of attendees and potential sponsors for CRE Radio and in my typical fashion, we just talked to people.  After listening to the interviews, I felt like I was eavesdropping on myself and sneaking in a little listening here and there.  You can hear the show any time after 12:00 noon on Wednesday at www.creradio.com.

Our radio show, scheduled for initial airing on Wednesday, May 30, 2012 at 12 noon, California time, is an eclectic representation and commentary of this year's ICSC Recon, (you can listen as a podcast at anytime after that).  We try to present this show as if "You were there." We talk about what we saw and what we did as well as who we spoke to. We talked about new things and old things and the good, the bad and the ugly and I am not talking about a spaghetti western here.  How about some news and analysis as well as education on issues of finance and electric vehicle charging stations.  Not just reporting but commentary. 

Find out the latest from Betsy Laird on internet taxation and the Marketplace Fairness Act and other similar bills before congress.  How about Robert Thatcher's perspective on changes to the management of a nearly 700,000 square foot, enclosed mall over the last 17 years.

How about some fun as Ian Ritter from GlobeSt.com and I play dueling interviews and beg for a little deliverance.  Listen to the show. No, eavesdrop on my conversation with Ian and find out how I turn the tables on him as we interview each other at the same time and try to figure out who is going to ask what question first or dominate the conversation.

Our interview with Jon Mills, founder of Motion Loft is a perfect example of the advantage of radio and hearing things for yourself rather than second hand.  The way his sensors stream activity in real-time was first described to me by my staff, I first thought it was nothing more than a vehicular traffic sensor; those little boxes at the curb with the cable extending out into the street. As a result of my conversation with him, I understood that his sensor did a whole lot more. Jon's computerized sensor can measure "foot" traffic, not just vehicular traffic.   

Listen to our conversation on "crowdsourcing" for real estate professionals.  A very inexpensive way to get the help when you need it, where you need it and at a very affordable price.  Mark Fuller of "WeGoLook"  explains how you can get someone to inspect REO properties in disparate geographical locations, without having to hop on an jet.

This is the first of two shows reviewing this years Recon.  The second show will be made available as a podcast within the next two weeks.  The only reason why we covered Recon in two shows is that this year, we just had too many interesting interviews.  For example, on Recon Recap 2012, Part Deux, we will be learning about Sub Zero Ice Cream, a franchisor that can make ice cream, from scratch in less than 30 seconds.  Talk about fresh.  We will hear from Dan Jablons, Larry David's "Jewish Lawyer" on Curb Your Enthusiasm who also moonlights as one of the managing directors for The US Retail Group, a membership organization of independent retailers.  Very funny interview.  We will also be talking about green centers and alternative energy, including electric auto charging stations, including an equally funny interview with Arun Baskotya, president of EvGo, a subsidiary of NRG Energy, a large provider of electric energy.  

Finally, don't forget to listen to Douglas Curry, CEO of Exceligent a spinoff of the Loopnet/Costar merger.  Hear the inside scoop on the merger through the eyes of a survivor.

 

California Courts Take Another Budget Blow - Time for Collaborative Arbitration, Finally?

I know that this post relates to California courts, but it probably is equally applicable to courts in other states throughout the United States. If you live anywhere else other than California, think twice about how lucky you are not to be here.

Governor Brown has just proposed an additional $544,000,000 in budgetary cuts from the California Judiciary and Court System.  These cuts are on top of the cuts to our court budgets that have gone into effect over the last few years. 

We have already seen the effect of the existing budget cuts to our court system.  Long delays when filing documents, sometimes weeks before you can get conformed copies back, where just 5 years ago and as long as I have been practicing law, you could file your documents and get file stamped copies on the spot.  Issuance of Writs and other court orders take weeks, including those for evictions and that is after you have obtained your judgment.  I can remember the days, not to long ago, when I could go to court, get the judge to sign the judgment, walk it to the clerks office along with my writ documents and Sheriff instructions and the clerk would have all of my documents to the Sheriff the same or next day.  Back then, my landlords still complained that the process took to long.

Some courts are so backed up that getting a hearing date some times takes longer than a trial date, making the motion and my arguments moot.  True, this happened to me once, down in San Diego.

Los Angeles County Superior Court will no longer automatically supply a court reporter for a hearing although you can make arrangement to have one on your own dime.  I am not sure how bad this is since I think the state courts should have gone to recorded hearings a long time ago like the federal courts did.  Nevertheless, unprepared lawyers and clients may find themselves unprepared when they need a court reporter.

My concern is that our civil court system is going to take such a hit to its operations that we will have trouble handling civil disputes in a timely fashion and efficient fashion. Ok, so it hasn't been so timely or efficient, but it is sure to get worse.

I know that I have written about this before and I am going to write about it again.  The time has come for Collaborative Arbitration where the evidence, issues, documents and arguments accumulate online for all parties to access and the dispute is resolved before an arbitrator. The other unique feature of Collaborative Arbitration is that not only do the parties exchange information in an online database shared by the parties and the arbitrator, but the arbitrator gets access to all of the information, issues and evidence from the get-go and can be in constant communication with the parties rather than only dealing with everything at the time of the hearing.  This will tend to get the parties to resolve the dispute much sooner.

CRE Radio Interviews Experts Who Are Real People from Real Share

To qoute from one of my lines as Daddy Warbucks in Annie, "...I am the luckiest person in the world."

Yes, because I am married to my wife Joanne............ but, also because I am so fortunate to speak to, inteview and get to know, some very, very bright, intelligent, articulate and nice people when doing my show for CRE Radio.

I make this very sincere statement following my review of interviews that I did at the RealShare Networking Conference in Los Angeles, this past March, which interviews are going to be aired on my show this afternoon, May 16, 2012 at 12 noon, California time. The live show will be converted to a podcast and made available at www.creradio.com.

What struck me most about my interviewees, which included Bob Kline, Ray Lepone, Kristina Raspe, Dennis Vaccaro, and Victor Coleman was not that these were experts in their respective specialties in commercial real estate, but that they were "real" people, in many cases, giving their person-on-the street perspective that may have been tempered by their expertise.  This is what my show is about and I think the listeners like to hear real world and real people talking at the same level as the listener, without the officious, "I am the expert and you need to listen to me," attitude.

It also hasn't escaped me that I have come to this realization while listening to interviews from "RealShare."  Couldn't have titled it better.  Now how is that for being poetic.

When the Tenant Stops Paying Rent - What Do I Consider First

When a commercial landlord or property manager first contacts me and advises me that a tenant is no longer paying rent, I first determine if the lease was terminated or not. Lease termination could occur: 

1. By mutual agreement; 
2. By the terms of the lease; 
3. By the foreclosure; 
4. By the landlord by service of a Notice to Quit, Pay or Quit, Perform Covenant to Quit, or Notice of Belief of Abandonment.

If the lease was terminated before the filing of the suit, the landlord's  claims to rental damages in California, are usually limited to Civil Code 1951.2 damages, if the lease so provides, which include: 

• Rents owing up to the date of termination; 
• Rents owing from the date of termination of the lease until the date of trial, less what the tenant can prove we could have reasonably avoided, (mitigation); and 
• Future rents, which are calculated by determining the present value of future rents owing from the date of trial through the end of the term of the lease, less what the tenant proves we can reasonably avoid, (mitigation).

Notice that of the three measures of damages above, only the second two involve issues of mitigation.

While in this post, I am referencing California law, many other states have similar statutes that allow a landlord to collect rents through the end of the term of a lease although the lease was terminated as a result of some act or failure to act by the tenant.  You should consult your own attorney who is qualified to give legal advice in the state that the premises are located.

If the lease was not terminated prior to the filing of the lawsuit, we have the option of terminating the lease and suing for Civil Code 1951.2 damages or, if the lease so provides, suing for rents as they accrue, in which case we are only entitled to collect rents and other charges owing up through the date of trial. Note, we do not waive rents owing after trial through the end of the term. As to those future rents, we would have to file a new lawsuit to collect those rents. While the requirement of filing a new lawsuit to collect those future rents seems daunting at first glance, based upon my experience litigating these matters, I have often found that the advantages of suing for rents up through the date of the trial far outweigh the disadvantages of getting a partial judgment.  I will explain.

For one thing, when you terminate the lease and seek rents accruing at any time after the date of termination, mitigation is always an issue and proving and disproving this fact is usually the most expensive part of the litigation. I have also found that in the face of a competent lawyer defending the tenant, the landlord's proof and brokers documentation is often very deficient. Some brokers document their files well and follow legal instructions well and some don't. For the most part, brokers participate in the litigation only to the extent that they continue to do work for the landlord but otherwise see little payoff by cooperating and doing a good job in litigation. Even when the landlord can expect cooperation from the broker, brokers, as a whole are not well known for the type of detailed record-keeping that is necessary to be convincing in court. As a consequence, I try to avoid dealing with mitigation issues. A suit for rents as they accrue is far easier and quicker to win, in most cases. There are very few, if any defenses.

When the lease is not terminated, in essence, the tenant is treated as if they continue to have control of the premises and thus, the landlord's efforts to mitigate are unnecessary. This is so, even when the tenant voluntarily abandons the premises and turns over the keys. The tenant usually cannot unilaterally terminate the lease, unless the lease allows for it, so the landlord can refuse to terminate the lease, in which case the lease continues to run and rents continue to accrue. When the tenant abandons the premises and turns over the keys unilaterally, most leases allow for the landlord to take possession only for the purpose of releasing the premises for and on behalf of the tenant, clean up the premises for re-leasing, secure the premises and for the purpose of safety. This usually puts the landlord in a perfect position of mitigating its damages since it is usually the most common sense and practical approach, without giving up any rights.

Other reasons why I tend to favor avoiding terminating a lease and just suing for rents as they accrue, include: 

1. Because there are so few defenses to a suit for rents as they accrue, the landlord has a much better chance of winning a Motion for Summary Judgment (avoiding a trial and just getting judgment by a motion), avoiding the longer process; 
2. Even if you get to trial, the damages are often very substantial, forcing a quicker resolution. For example, if the tenant owes $20,000.00 per month and it takes you 12 months to get your judgment, you will get a judgment for at least $240,000, plus interest, late fees and attorneys fees in addition to any other damages that you can prove. This is nothing to sneeze at in a breach of lease action. That judgment can get entered and you can file a UCC Judgment lien which, if properly perfected and seasoned, can be a secured lien if the tenant files for bankruptcy protection. 
3. In many instances, the landlord can immediately, upon filing of the complaint, obtain a pre-judgment Writ of Attachment whereby the court, if it is convinced that the Landlord will probably win the suit, can allow the landlord to attach any or all of the tenant's assets in an amount equal to what the court anticipates the tenant will owe up to the anticipated date of trial, plus anticipated attorneys fees and costs of suit. This is a very effective way to force a quick settlement; and
4. After you get your first judgment, it is relatively simple to get a judgment for rents accruing after the date of the first judgment and even another pre-judgment Writ of Attachment. That's because in the second suit, you do not have to re-prove anything that you had already proven in the second suit. We lawyers use the latin term for this as "Res Judicata." All of the facts proven and issues resolved in the first suit are taken as admitted and proven in the second suit and a pre-judgment Writ of Attachment is almost guaranteed.

It is important to note that additional factors that I consider are the type of property, i.e. retail vs. office, industrial, warehouse, etc., the financial resources of the tenant, (to what extent we believe they can pay on a judgment) and the state of the economy, (the ease of re-leasing the premises at a rental rate equal to or greater than the rate owed by the tenant in accordance with their lease.

 

Troubled CRE Assets Take Down Another Six Banks - CoStar Group

I read this article, Troubled CRE Assets Take Down Another Six Banks - CoStar Group, from CoStar, feeling a bit like Michael Corlioni from the Godfather.  "Just when you think that you got out of it, they keep dragging you back" or words to that affect.  I haven't heard much about bank failures lately only to hear that 6 more banks were taken down by the FDIC in the past two weeks. Analysts suggest that many of the failures are due to the CMBS and commercial mortgage issues. I guess bank failures are alive and doing well, back in the US.

Earlier in the week, Costar also reported that there has been a significant increase in CMBS defaults in the office sector.   There can be no doubt that my law practice, which currently focuses on post-foreclosure representation of lenders and buyers has seen a significant uptick in office properties as compared to the last 3 years in retail.  I will add that I have also seen a significant increase in new lease work and not just tenant collections.

The good news is that the pace of bank failures has gone down to an average of 5.5 per month over the first 4 months of 1012 as compared to an average of 7.7 in 2011 as reported by CoStar.

The bad news is that some analysts believe that some of the reduction in failures is attributable to giving banks more time to get the financial house in order rather than pulling the plug as fast as they did in 2010.

So what does this say about the state of commercial property and the economy.  Well, what I see is continuing economic pressure in both directions leading me to believe that we are close to the bottom, with slight blips in both directions but no real clue in which direction will be sustained.  Bottom line for me is that I really don't see a sustained major dip but a slow gradual improvement with some slight hiccups along the way.

Freedom of Speech Rights in California Shopping Centers

I have found much confusion by property managers relating to any requirement to allow picketers, protesters or the handing out of leaflets in shopping centers in California.  While both the United States and California Constitutions guarantee freedom of speech, that right is not an unlimited right nor does it necessarily give anyone access to or the right to picket, hand out fliers, circulating petitions, distributing pamphlets or protest in every and all shopping centers.

Current California law focuses on the size of the shopping center and where the center may "functionally step into the shoes of a municipality or exercise municipal functions of power."  The US Supreme Court in upholding a California Supreme court decision, held that large shopping centers have essentially replaced public spaces that have traditionally been used for the purpose of public protest.

The cases however, do not draw a fine line and complete guidance on what centers are considered large and which ones are not.  This determination must be made on a case by case basis and in consideration of all factors.  Furthermore, even if those instances in which a shopping center is considered large enough to protect freedom of speech rights, the centers are allowed to enforce reasonable restrictions, particular when the expressive activity is unrelated to the commercial purpose of the center.  Finally, it should be noted that this posting relates only to shopping centers located in California.

Special recognition is given to Sean W. Southard and Kecia R. Felton for their article, "Private shopping Malls - The "Not-So-Private" Private Property," published in the California Real Property Journal.

 

Commercial Foreclosure Basics in California - Part 2 An Update

I am often asked by borrowers whether of not a lender can sue the borrower for any amount that is owed on the loan, over and above the sale price received at a private sale.  Well, there are many, "it depends."  The first depend is, "it depends what state the property is located in."  First and foremost, you have to be aware that each state has different rules and procedures and I am not qualified to advise in any state other than Califonia, so this post is limited to property and laws in California.  However, while I am only referening certain laws and rules in California, the are many similarities from state-to-state.

In very short summary, if the lender proceeds with a NJF, (non-judicial foreclosure), a procedure provided by California law and the property is sold as a result, the lender cannot proceed against the borrower if there is any deficiency.  By deficiency, I mean that the property sold for less then what was owing on the secured loan.

In California there are two procedures generally used by lenders and trustees when foreclosing on the collateral given by a defaulting borrower, (1) judicial foreclosure, and (2) non-judicial foreclosure.  In a commercial context, in California both procedures are used.

Often, the lender proceeds with a non-judicial foreclosure to begin the statutory process allowing the lender to foreclose on the property, usually without the involvment of an attorney.  The non-judicial foreclosure process is relatively quick and inexpensive as compared to a judicial foreclosure and is also typically used in residential foreclosures.

Concurrently with or a short time after the commencemnet of the non-judicial foreclosure process, a lender will often file with the court, a judicial foreclosure lawsuit, seeking an immediate appointment by the court of a receiver.  Usually, the main purpose of the receiver is to manage the property and collect rents during the pendency of and until the sale of the property as a result of the non-judicial foreclosure.  This will preserve and protect the lender's collateral, to the extent possible. Usually, the judicial foreclosure lawsuit remains open and active for a period of time beyond the sale of the property at a non-judicial foreclosure in order to allow the receiver to finalize the administration of the property while the receiver was responsible for managing the property and upon the final report of the receiver, the lawsuit is usually dismissed.

However, there are some occassions where the judicial foreclosure lawsuit is not dismissed and the lender can continue to proceed with a lawsuit, seeking damages against the borrower and, in some cases, a guarantor.  A lender will continue to proceed against the borrower and/or the guarantor including instances in which the lender believes that the borrower or its principal was involved in some sort of fraud relating to the loan or missapropriation of rents that part of the lenders collateral.  Continuing actions may also include action against guarantors who fully or partially guaranteed the loans or were otherwise subject to certain carve-out rules.t

Following posts will address The Bird Rule and carve-out exceptions to limited guarantees.

Please take care when using the above information.  As in most cases, the devil is in the details and the exceptions are what keeps lawyers employed.  A thorough analysis by your attorney should be done before you act on any of the advice contained herein.

 

Ready for Crowdfunding? Not so fast!

The following is a guest post from Gene Trowbridge, a noted author and expert on Commercial Real Estate Syndication. I love the quote at the end of the post, so read through.  By the way, Gene will be writing regular updates on the Crowdfunding topics.

Crowdfunding is a hot, new term that is being used to describe a method where a real estate syndicator could use social media on the Internet to raise small amounts of money from large numbers of investors.

The House of Representatives passed legislation which was then included in the JOBS Act called the Entrepreneur Access to Capital Act. This legislation created something commonly referred to as crowdfunding which provides that an issuer of securities could market their offering on the internet ,as long as:

• The total amount of securities sold in a 12 month period does not exceed $1MM, or $2MM if the issuer provides audited financial statements to the potential investors; and
• The aggregate value of securities sold by an issuer to any individual investor does not exceed the lessor of $10,000 or 10 % of the investor’s annual income.

This House’s version of the Act did not place a limit on the number of investors, did not prohibit advertising and general solicitation and did not require extensive disclosure be made to investors.

The JOBS Act was sent to the Senate and was passed on March 22, but an amendment, related to crowdfunding, was attached that will cause the bill to go back to the House. The amended Senate version limits the amount an individual could invest to $2,000 or 5% of their annual income or net worth, depending on which is less than $100,000. In addition, the Senate version would require that investors receive tax returns of financial statement of the companies attempting to raise funds prior to raising any money from an investor.

While this legislation proceeds through the reconciliation process we still see problems for its use by real estate syndicators. The major ones would be:

• The limitation of the $1MM funding limit in a 12 month period;
• The management of large number of small investors, each with a maximum of $2,000 invested; and
• The requirement that the SEC issue rules and regulations that will inevitable be structured under their primary purpose of protecting unsophisticated and non-accredited investors.

The SEC and the states should act swiftly to put protections in place for unsophisticated investors, as it is likely the start-up companies that take advantage of crowdfunding will be unsophisticated and the degree of risk to investors is potentially high.

 As one state security regulator has said “Any fraudster who does not use the internet for marketing should be charged with malpractice!”  

I will keep you informed as this legislation moves to passage.

Don’t forget to go to www.groupsponsor.com to see about our gift MP3, our workshops and self-study course, and my book about real estate syndication “It’s a Whole New Business.”

Gene Trowbridge, Esq., CCIM

Gene@GeneTrowbridge.com

 

 

Commercial Rent Collections - Do your Due Diligence Up Front

In the first of a series of articles on collecting rents from commercial tenants, I thought I would start, "in the beginning."  This may sound a bit, post-facto or late for those landlords now in the position of considering action against late or "no longer paying tenants," but should be of value when considering lease re-negotiations and tenant workouts.

1. "In the beginning," get as much information as you can from the tenant.  Bank accounts, properties, other assets, social security number, family and business references, loans and credit reports.  Just as important and where I see many landlords fail is follow up and verify the information before the lease is signed.  Included with the factual information provided by the tenant should be a representation, under penalty of perjury, that the facts and information provided by the tenant is true and accurate.
2. Make sure that the lease requires the tenant to provide an updated financial information report on a regular basis along with a renewed representation under penalty of perjury.  On a short term lease, such as a 3 year lease, I would require it at the 1 1/2 year mark but the lease should leave it at the option of the landlord but no often then once a year.  Again follow up and verification is the key to the value of this process.
3. Finally, any tenant or lease workout or modification should include an update of information and if not already included in the lease, a lease provision requiring regular updates of financial information.

Not only will this information give the landlord its best opportunity to decide what course of action it may take in the event of a threatened tenant default, but will give the landlord more effective options to insure collection.  The representation by the tenant may also be of value in a potential tenant bankruptcy if the representations by the tenant were/are false.

 

What Happened to a Good LOI and Why are Brokers Drafting Lease Documents?

I suppose the fact that I am now doing more new leases and lease extensions than I have done in the last 3 ½ years is anecdotal evidence that the economy has at least stabilized or is improving.  That is, of course, a good thing.  I am still handling, predominantly rent collection cases and commercial evictions and my caseload is ever increasing, but there seems to be a bit of a transition going on with my law practice at the moment. I am not terribly convinced that we are quite out of the woods yet or that we are about to experience a meteoric improvement in the economy.  To the contrary, my indicators lead me to believe that the recession is leveling off at this point and with some good luck and frugal economic policies, we will see some gradual improvement over the next year or two while attaining some sense of normalization some time in mid to late 2013 through the 1^st half of 2014.

So much for trying to predict the future of our global and national economy. I wanted to address, however an interesting phenomenon, that I am experiencing with increased leasing activity; requests for new leases or lease extensions from brokers who:

1. Prepare the leases or lease amendments themselves and submit these legal documents to my clients; or
2. Do not obtain a signed LOI.

This may sound like a “Howard Rant,” and to some extent it is, but for the life of me, I cannot understand why a broker would risk the significant liability that comes with the drafting of legal documents. Over the short term it may seem like a good strategy to keep attorneys away from the deal, but over the long term, I have got to believe that it is a lose, lose strategy.

 OK, I get it.  As a broker, I understand the reluctance that many brokers feel about getting an attorney involved.

1. It causes delays, depending upon the attorneys workload and we all know that time kills all deals;
2. Some attorneys feel compelled to give the client as much understanding of the legal ramifications of the lease and the terms so that the client can make the best informed decisions.  This also takes additional time and as we all know, time kills all deals;
3. The attorney has to read all of the relevant documents to make sure that the attorney is giving the client the correct advice and is properly representing the client’s best interests.  This takes considerable focus and attention to detail, which takes time and as we all know……. Well, you get the idea;
4. Some times the attorney will meddle in the business terms and totally mess up the deal, turning the brokers ability to get the parties to agree on terms, into a total disagreeable mess.  Yes, this does happen sometimes; and
5. Sometimes, the broker is even thinking that they are doing the client a favor by saving the client legal fees by doing the legal work themselves. Yes brokers sometime do mean well.

And what ever happened to preparing and getting a comprehensive and thorough Letter of Intent, ("LOI"), signed by both parties?  It’s not just inexperienced brokers failing to obtain signed LOI’s, but experienced brokers who should know better.

Considering that this is a blog post and brevity is an important element of the blogosphere, I will try to keep my comments somewhat brief, but let me make myself abundantly clear:

• A broker should never, and I mean never, prepare or draft a lease, lease amendment or lease extension or any other legal document, for anyone!  In my opinion, this includes filling in blanks on a standard form lease.  Commercial leases are far too complicated to leave the analysis of the lease language up to a standard form that is intended to address most commercial lease issues but not likely to address the legal issues relevant to the particular property at issue or the wishes and desires of the particular parties to the lease.  This is an absolute recipe for disaster for the broker and the parties to the lease.  It is very short-term thinking.  Whatever benefit you may gain from avoiding the attorney, you will pay for in the end, ten fold.
• Always prepare an LOI or, at the very least, memorialize in writing the significant substantive deal points that the parties have agreed to.  This gives the attorney a guideline to follow when preparing the lease.  If the LOI says that base rent is $4.00 per square foot on a monthly basis, then the attorney has no business objecting to or even commenting on the base rent that was agreed to. A thorough LOI makes sure that the attorney cannot meddle in the business terms.
• Do not include in the LOI, terms that you do not understand.  If you need help with the language of the LOI, get help from a more experienced broker, an attorney or the client;
• A template or form LOI is a good place to start from, but not necessarily where you should end.  Pay attention to the language of the template and make sure that it addresses the particular transaction.  If you are dealing with a lease extension or amendment, make sure that the LOI says that it is a lease extension or amendment.  Let the client and the attorney figure out what type of document will best document the agreement of the parties.  

Finally, let me add that I prefer to receive an LOI signed by both the landlord and tenant.  That way, I know that my client has received and knows the substantive terms of the lease and I can feel more comfortable relying on the LOI.