Posted by Lonnie on June 10, 2006 at 18:18:19:
I have just signed an agreement for a piece of commercial property and am having second thoughts. Do I have three days to back out?
Commercial Investment Questions - Posted by Ryan
Posted by Ryan on June 07, 2006 at 07:09:59:
Need a bit of clarification.
The post was http://www.creonline.com/commercial-real-estate/wwwboard5/messages/20161.html. The main situatution was the buying of a property and then partnering in a spa leased within the property. I am asking for an in depth explaination of the normal landlord protections - an arms - length tenant? “go-dark” default clause (all lease payments due and payable if dark > 30-60 days? Could someone give me a list of what expenses are included in Cam charges? How does the above aformentioned make it a triple-net lease?
Writing the lease as if you were planning to sell the building? Please explain. Is there some where I can see an example of a lease like this to better understand the concept? Another question is the crafting of a cross-default clause between the lease and the operating conditions for a partnership. What is a cross-default clause? Why between the lease and the operating conditions?
Re: Commercial Investment Questions - Posted by ray@lcorn
Posted by ray@lcorn on June 07, 2006 at 12:24:43:
Ryan,
I often use way too much industry jargon, and I’m glad you asked for clarification.
Some of what I wrote is in reference to that specific deal, in which the building owner owned 100% of the real estate, but less than that as a partner in the tenant entity. Most of my comments were targeted towards defining the relationship between the two entities, with the bias being toward giving the building owner more control. With that in mind, I’ll try to clarify.
>>normal landlord protections - an arms - length tenant?
“Arms-length” refers to an unrelated third-party. By this I meant the owner should write the lease on standard commercial terms as if he had no interest in the tenant entity. Typically when folks do related party deals that they skimp on the details, because “everyone knows what is agreed.” The problem is that in the course of events the parties and conditions often change, rendering prior understandings irrelevant. In my experience a party to a related party transaction needs more protection, not less, and the best way to do that is put it in writing.
>>“go-dark” default clause (all lease payments due and payable if dark > 30-60 days?
It is normal to include a clause that gives the owner the right to declare the lease in default if the tenant ceases operation for an extended time period. I suggested 30 to 60 days. This is to avoid a situation where a tenant closes shop, maybe files bankruptcy, and keeps the space tied up. Dark spaces in buildings can hurt the neighboring tenants, and it is advisable for the owner to be able to re-lease the space.
>>Could someone give me a list of what expenses are included in Cam charges?
Normally all maintenance and operating expenses are included in the CAM (Common Area Maintenance). That can include parking lot lighting and cleaning, shared water and sewer, landscaping, janitorial services, etc. Management fees are usually excluded, but that can differ from one area to the next.
>>How does the above aformentioned make it a triple-net lease?
Triple-net refers to the tenant being responsible for all maintenance expenses (CAM), plus all property insurance costs and real estate taxes. By constructing the lease as a triple net lease the owner passes through all operating expenses.
>>Writing the lease as if you were planning to sell the building? Please explain.
Because of the situation of the owner being a partner in the tenant entity, the possibility exists that it may be in his best interest to sell the building, yet remain a partner in the tenant entity. In that case it would also be to his favor to have a standard commercial lease to improve the marketability of the property. I can see that the way I wrote the comment is confusing. I did not mean to imply the lease would also sell the building.
>>What is a cross-default clause? Why between the lease and the operating conditions?
A cross-default clause links two agreements for purposes of triggering the remedies available to the non-defaulting party in the case of default. That means defaulting on the terms of one agreement (such as the lease) would automatically trigger a default on the other (the partnership). The remedies might be crafted to grant control of the partnership to the building owner in the event the tenant entity fails to perform on the lease agreement. I suggested that as a way to retain more control of the tenant entity and protect both investments. I suggested it be included in the operating agreement for the partnership rather than the lease because in the event of a sale (as explained above) there is no need for a cross-default for a new owner because they would not own the tenant entity.
Now, to quote an old Dell ad… have I put that in terms no one can understand? (smile)
ray
Re: Commercial Investment Questions - Posted by Ryan
Posted by Ryan on June 07, 2006 at 13:38:55:
Ray,
I appreciate the response. Well put and understandable. I know the original explaination was specific for that investor but I’ve read from your posts and learned from your posts…we beginners will not move toward greater advantages without asking for explanations. Thanks for the input.
Ryan