Commercial Property Herald

Give it Some Thought First

When meeting a new client or potential new client, I am often asked why they should hire me.  Of course I go through the list of my attributes that I believe the clients will recognize as the kind of attributes that they will want in an attorney.  Primarily, I try to point out how I can help them make money or save money and in any event make them better off after they hire me then before.  What I also try to do is to describe the kind of clients that choose to work with me and are loyal to me for years.  I do this because not all clients are motivated by the same things or are they looking for the same relationship with their attorney. And yes, it is a relationship. One that I believe is based primarily on trust.

The clients that seem to be the most attracted to me are the ones that like to think about what they are going to do before they do it.  They like to strategize and decide if they are better off serving a Notice to Quit or simply sue for rents as they accrue without terminating the lease; which strategy will make them more money in the short or long term or save them more money in the short or long term.  They are the kind of clients that do consider both the long and short term considerations. What is likely to happen if they enforce the continuous operation clause or choose to ignore it?  What will the effect of their decision be on the other tenants in a shopping center or their ability to later obtain a loan or attract new tenants to the shopping center.  Is the penalty provision in a lease enforceable and can the landlord ultimately rely upon that provision as part of its long or short term strategy? What are the costs associated with serving a Notice of Right to Reclaim Abandoned Property and are those costs warranted under the particular circumstances of the case? How can we move a case along faster and what would it cost to do so?  What is the likelihood of success and does success mean collection on a judgment?

I don't think that I am primarily used simply as an enforcer of contracts or a reciter of laws.  I like to believe that I have loyal clients because they use me to help guide them through the myriad of legal issues associated with their business, using not just my legal knowledge, but my practical common sense based upon over 33 years of business and legal experience

I do not think that someone looking for a cheap, thoughtless reaction would be interested in the services that I provide.  I give too much thought to what I say, do and recommend to be considered cheap.  That is not to say that I am expensive, particularly since I charge less than 1/3 of what most typical lawyers charge with similar experience.  I use paralegals and attorneys, not to do my work, but to do the work that doesn't require my gray haired experience and knowledge. I really don't have hair but I have now officially been referred to as a gray hair.  And yes, I was at Woodstock!

The clients who use me for years are the clients that look for an attorney who they can trust.  An attorney who is not afraid of telling them not to waste their money on emotional, non-productive lawsuits, but will also fight for their best interests with a passion.  An attorney who will give them the most bang for the buck.

Where are we heading on the Commercial Real Estate Market

It's now been more than a year that I have been predicting gloom and doom for the commercial real estate market and it is now time for me to update my take on things.  Actually, it has been more than a year since I was predicting that commercial real estate would follow the residential collapse as soon as I began to see signs of the residential collapse in early 07.

I still see a downward trend for at least another year or more.  However, it is clear that the big players, not overloaded in debt or those with available cash or financing are starting to get back into the market and are starting to take advantage of lower prices.  Reuters has an interesting article on the emerging availability of financing, including the availability of alternative methods of financing made possible by the Federal Reserve Lending program, US Commercial Real Estate Lending reemerging - Citi.I am having trouble getting a grip on these new alternative means for cash and what the ultimate effect on the market will be.  However, I do believe that if you are not too debt laden, there is never a bad time to buy real estate in Southern California, just a bad time to sell.

Anecdotally, it seems that evictions are up in my client's shopping centers but there is a surprising amount of leasing activity, so it doesn't look like there has been a total collapse, yet in retail and there appear to be signs of some stabilization.  With that being said, I am hearing stories of tenants unable to commence leases because they cannot get financing for their business or tenant improvements.

All-in-all, while the prognosis still appears to be uncertain, the market now bears closer scrutiny for opportunities, particularly for cash heavy investors, and perhaps in the smaller shopping center properties, left alone by the big players.

Stay tuned for a post that I will be publishing soon on what commercial landlord's should be doing to protect themselves when they offer to advance financing or tenant improvements for incoming tenants.

Retail Hit List

In what I would admit to overstating the obvious, I am providing my updated retail hit list of categories of retail business to be concerned about rent payments, evictions abandonment and overall survival over the next twelve months.  This list is not intended to be all inclusive but just the ones high on my list that I either seem to be dealing with a lot or expect to be:

1. Anything furniture related, both residential and commercial.  Anything surviving the next twelve months are likely to be in a good position after the shakeout. However, if experience serves me correctly, during the downturn of the early 90's, I was constantly evicting furniture tenants or representing landlords whose furniture tenants filed bankruptcy, constantly held going out of business sales and whose inventory mysteriously disappeared.
2. High End Restaurants
3. Electronics retailers.  Best Buy looks pretty good right now as long as it is not over leveraged and it can continue to provide a good shopper experience versus the internet and the big box stores such as the Walmarts and Costco's.
4. Tutoring and pre-schools
5. Specialty exercise like Curves;
6. Anything automobile except automated car washes and gas stations.  I am not sure about parts stores although my sense is that they should be doing alright.
7. Anything over leveraged.  Be wary of any tenant that needs to or within the last two years has spent a great deal of money on tenant improvements.
8. Jewelry and precious stones
9. Yogurt, at least in Orange County, California.  Actually, there is nothing wrong with this model, generally, it just seems way overbuilt and far to competitive in South Orange County.

Simon Property Group Seems to be doing Well

Going against the grain or not yet feeling the pain, Simon Property Group, major national owner of major malls, including Laguna Hills and Mission Viejo Malls in Orange County California, reports strong 4th quarter, 2008 funds from operations. The credit the good news from strong cost cutting measures over the last year, but admit that the retail environment has been difficult and they expect it to remain that way for at least this year.  With that being said, they expect their Premium Outlet NOI to increase by 5% over the next year. 

In a related note, based upon a recent IRS ruling allowing REITS to pay out a portion of their dividends in stock, Simon has reported that it will pay out 90% of its 4th quarter dividend in this fashion, thus preserving a huge amount of cash.  So this is where they are getting their "funds."  Wonder what the "stock-in-lieu," is being valued at?  Just for those of you who aren't aware, REITs or otherwise known, longhand as Real Estate Investment Trusts, are public companies that are required by law to pay out 90% or their income as dividends. This works ok in good economic times but may be pretty tough to handle in tough times like now, certainly limiting a REITs opportunities to preserve cash to survive an economic downturn.  By distributing their income as stock, they get to hold onto a lot of cash.  This could be a very smart strategy.

Sounds like they have been anticipating the war and they have been building the war chest to do battle over the next year or so. 

Keep in mind that the above report shows an increase in available cash, not revenues, which I would expect to drop over the next 6-12 months.