40 WAYS TO REDUCE OCCUPANCY COST/ RISK IN 2009 (Negotiating Tips for Commercial Tenants and their Brokers and Attorneys)

1. Eliminate Personal Guaranty - The landlord can only look to the tenant entity in case of default.

2. Eliminate Spouse from Guaranty - The landlord can look only to the individual guarantor, and may not be able to attach assets which are owned jointly between spouses.

3. Limit Personal Guaranty to a fixed time period - The guaranty expires after said period.

4. Limit Personal Guaranty to a fixed dollar amount - This creates a maximum cap for which the guarantor is liable.

5. Obtain a “kick-out” clause, giving the tenant the right to terminate the lease prior to the end of the term, by paying a penalty. While most landlords will be reluctant to grant “kick-out” clauses, they are more likely to be granted for triggering events which are detrimental to a tenant’s occupancy such as the loss of an anchor tenant or the reduction of parking areas.

6. Assignability. - Assigning the lease to a partner or purchaser should always be permitted, although the tenant may have to remain liable on the lease. Assigning or subletting the lease to another tenant, if it is no longer feasible for the original tenant to lease the premises should also be provided, but the tenant should expect (i) to need the landlord’s permission (and there should be provision in the lease for the landlord to not unreasonably deny permission for same) and (ii) the tenant should expect to remain liable on the lease.

7. Increase broadness of Use Clause. - Allows the tenant flexibility in how it operates its business, and its ability to add or delete products and services. A broad use clause will also allow greater flexibility for the tenant to assign or sublet the lease.

8. Use less lease length and more option periods. - Shortens the length of tenant liability while still giving the tenant the option to remain and operate tenant’s business.

9. Get as many options as possible with the longest terms possible. - Gives tenant more control over the space, and protects against increasing rents.

10. Re: Common Area Maintenance (C.A.M.) - Prepare a list of exclusions from the definition of CAM, which list should include: “salaries of executive personnel”, “capital expenditures” and “advertising expenses”.

11. Cap Common Area Maintenance, Taxes and Insurance increases. - Limits tenant’s costs.

12. Eliminate Space Substitution (relocation) Clause. - Relocating tenant will almost always, adversely affect tenant’s business during the relocation. If the clause cannot be negotiated out of the lease, the tenant should ensure that the relocation is at the landlord’s expense (including dismantling and re-attaching all equipment and trade fixtures) and the new space is completed prior to tenant having to vacate the old space.

13. Pay CAM % based on total rent only, without off-set for anchor tenants or vacant space. - Ensures tenant pays only tenant’s fair share (pro-rata) of operating expenses.

14. Eliminate administrative fees from CAM. - Reduces CAM and protects tenant from overcharges by landlord.

15. Cap management fees in CAM. (4%-6% is typical). - Reduces CAM and protects tenant from overcharges by landlord.

16. Obtain the right to audit CAM charges. - Protects tenant against landlord overcharges.

17. Increase Grace Period for late rents. - Gives tenant additional time prior to default and penalties.

18. Decrease Late Payment Penalty. - Lowers tenant’s potential costs.

19. Reduce Events of Default. - Lowers tenant’s risk of defaulting on Lease.

20. Increase time allowed to cure defaults. - Gives tenant more flexibility before landlord can enforce its remedies.

21. Define “Default” so that tenant is not deemed in default of lease until after the expiration of notice and cure periods. – Allows tenant to assign the lease and exercise options that are typically not permitted if tenant is “in default”.

22. Reduce landlord remedies upon default of tenant and subject landlord’s remedies to landlord’s obligation to mitigate damages. - Limits landlord’s options/reduces tenant’s damages.

23. Decrease required Insurance amount. - Lowers tenant’s cost.

24. Limit landlord’s ability to lease adjacent spaces to parking intensive neighbors, and/or demand a minimum number of exclusive parking spaces. - Prevents tenant from facing a parking problem.

25. Obtain a broad exclusivity clause. - Reduces tenant’s competition potential.

26. Retain ownership rights to interior furniture, trade fixtures and equipment (clearly defining such assets). - Allows tenant to retain more of its assets.

27. Shorten landlord rebuilding period after a casualty. - Forces landlord to put tenant’s space back in operable condition sooner.

28. Obtain tenant right to rebuild after a casualty. - Gives tenant the option to do its own repairs if landlord is too slow, and charge back expenses for same to the landlord.

29. Obtain right to make repairs if landlord defaults in its maintenance/repair obligations and offset rents against such tenant repairs. - Allows tenant to do repairs when needed, and offset the cost (often, lower than what landlord would have charged) against rental payments.

30. Obtain right of first refusal to lease adjacent space. - Allows tenant to expand into adjacent space.

31. Obtain option or first right of refusal to buy. - More relevant to smaller properties, this gives tenant the option to purchase the property, or the right to purchase the property at the same price and terms that a third party offers.

32. Make joining a Merchant’s Association an option, not mandatory. - Reduces tenant’s expenses.

33. Have landlord guarantee HVAC, electrical, plumbing, etc. for an initial time period, or commit to paying a threshold amount. - Will reduce tenant’s overall expenses.

34. No percentage rent (or establish a “break-point” before percentage rent accrues). - Reduces tenant’s expenses.

35. Detail permitted signage. - Assures tenant can obtain the signage it requires.

36. Make sure the property’s rules and regulations cover potential problems such as neighboring businesses who use too much parking, make too much noise, create obnoxious fumes, operate non-synergistic businesses (pawn shops, bingo parlors, strip joints). - Makes tenant’s occupancy more trouble-free. However, also make sure such rules and regulations are not too overbroad, restricting tenant’s use of the premises.

Prior to signing a lease:

1. Use a good mapping system to determine the demographics and competition in the surrounding area. - Insures that tenant is selecting the right site, and there will be plenty of business. Also, check applicable zoning to ensure that tenant’s use is allowed by the municipality the premises is located in.

2. Talk to existing tenants about sales activity, parking, crime, management practices etc. - Makes sure tenant is not getting into a bad situation.

3. Research the rental market for information on past and current deals. Makes sure tenant is getting a fair rental rate and terms.

4. Check with State Fire Marshall, Ohio EPA and US EPA databases for any environmental history at the site or surrounding area. Especially for industrial leases, consider a “tenant environmental audit” – Identifies problem sites and establishes an environmental baseline which helps ensure that tenant won’t be held responsible for prior problems.
This information was provided compliments of The Schenk Company, Inc - Greg Schenk SIOR (614)-496-2715- www.irepthetenat.com -greg@irepthetenant.com and supplemented/edited by Stephen Richman, Esq, of Kohrman, Jackson & Krantz, PLL- sdr@kjk.com

Selling a Home Out of Season

Selling a home these days is a challenge, and selling one "out of season" even more so. The Wall Street Journal published an article on December 23rd by June Fletcher titled, "Tips for Selling a Home Out of Season."

Ms. Fletcher, in response to a reader's question, writes about things to do to make a listing more appealing in the winter. She states that you can turn the season to your advantage if you emphasize the qualities that make your house more inviting than the competition.

Some tips are:

Keep up with the maintenance.--Buyers will notice icicles that form when gutters aren't cleaned and will feel the drafts from windows that haven't been weather-stripped.

Take down holiday decorations.--You want your house to have mass appeal, so if you live in a diverse area with many different religious beliefs, forego the Christmas decorations and stick to hot cider and a roaring fire (if you have a fireplace) during an open house.

Emphasize energey efficiency.--Buyer's are always interested in a home's operating costs, but that issue is even more on their minds in the winter. List out everything that's been done to the home to make it more energy efficient.

Lighten up.--Make your house as bright as possible. Have the windows cleaned and get rid of heavy draperies.

Show other seasons.--Help buyers visualize what your house will look like in other seasons. Hang or arrange photos of your house with the plants in full bloom, etc.

Update Web photos regularly.--Buyers can immediately spot a stale listing if the photo is out of season.

Click here for the link to Ms. Fletcher's story at the Wall Street Journal. Please note, the link will only be good for about a week.

If You Promise To Do Your Best, You Need Only Be Reasonable (Watch Your Language With Best efforts Clauses)

(Say what you mean, precisely, or a Judge will tell you what you meant #4)

True or false: using best efforts to accomplish a goal means that you are required to do everything in your power to accomplish the goal. My mother always answered this question as “True”, when it came to my studying in school. Many lawyers and contracting parties agree with my Mother’s definition of “Best Efforts” when applied in a legal contract context, even if accomplishing the goal requires a contracting party to spend its last dollar to accomplish the goal. My passing the Ohio Bar Exam indicates my mother was right regarding best efforts and studying, but case law indicates that most lawyers would be wrong regarding the interpretation of “best efforts standards” in real estate and business contracts.

As a general rule, courts have not required that a party under a duty to use “best efforts” to accomplish a given goal, make every conceivable effort to do so, regardless of the detriment to that party. (See Kenneth A. Adams, Understanding Best Efforts and its Variants, Practicing Lawyer, August 2004, and cases cited therein). In spite of the intent of the parties, courts across the United States have, for the most part, suggested that the phrase “best efforts” (as well as variants of this phrase including “reasonable efforts”, “commercially reasonable efforts”, “reasonable best efforts”, and “diligent efforts”) mean with respect to a given goal: “the efforts that a reasonable person in the position of the promissor would use so as to achieve that goal as expeditiously as reasonably possible”. Id at 18. In other words, an agreement to use “best efforts” merely requires that all reasonable efforts be made. This “watering down” of the meaning of the phrase “best efforts” in express contracts is also consistent with the Uniform Commercial Code’s treatment of same in the context of implied contracts. The official comment to U.C.C. Section 2-306(b) (2) states that the implied obligation to use best efforts requires that parties “use reasonable diligence as well as good faith in their performance of the contract”. See Id at 13; U.C.C. Section 2-306(b) (2) Official Comment 5.

We often see “efforts clauses” in two basic types of contracts. In commercial contracts, these clauses often appear when defining the efforts one is required to use to sell a particular product or to follow-up on leads provided by one’s employer. In real estate contracts, efforts clauses are often found in purchase agreements regarding the efforts required of a buyer to have a particular property rezoned, or to obtain financing, or to secure site and building permits. Efforts clauses are also usually found in the remedies section of a commercial lease, requiring that the landlord use a certain degree of effort to mitigate its damages and re-lease the premises after a tenant default.

Ohio follows the general rule of most jurisdictions in interpreting best efforts to mean merely requiring reasonable efforts be made (vs. the plain language definition of “exceeding all others in quality”). In Permanence Corporation v. Kennametal, Inc., 908 Fed. 2d 98 (6th Cir. 1990), the United States Court of Appeals for the Sixth Circuit best summarized Ohio’s view by providing: “[w]hile the phrase best efforts is used to describe the extent of an undertaking, this has properly been termed an extravagant phrase…a more accurate description of the obligation owed would be the exercise of “due diligence” or “reasonable efforts”. In Castle Properties v. Lowes Home Centers, 2000 Ohio App. Lexis 1229 (7th District 2000; an “efforts to rezone property case”), the Court concluded that the buyer was not required to use all efforts to have the property in question rezoned, because the word “all” was limited by the words “commercially reasonable”. In Adams v. LCI International Telecom Corporation, 2000 Ohio App. Lexis 3220 (10th District 2000), the Court totally disregarded the use of the phrase “best efforts” in the context of obligating a sales agent to use best efforts to supply leads for business customers and organizations. The Court in Adams concluded that a “carve out” provision in the contract, specifically relieving LCI of any liability or responsibility for failure to pursue leads, negated the more general “best efforts” standards.

The practical moral of this story is a familiar one: “say what you mean, precisely, or a judge will tell you exactly what you meant”. The emphasis should be put on “precisely”. In other words, if you intend for a party to a contract to expend his or her last efforts and bottom dollar to accomplish a goal, don’t use the phrase “best efforts” because it will not be interpreted that way. The best (reasonable) approach when drafting contracts with an “efforts standard” is to specifically define the effort required, and add “carve-ins” or “carve-outs” to the defined standard. For example, in the afore-mentioned “efforts required to rezone real property example”, including objective standards such as: (i) a time deadline as to when applications need to be made; and (ii) the extent of zoning application required (such as appearing before a Board of Zoning Appeals, preparing a marketing campaign, and initiation of the zoning issue on a community ballot) would be much more advisable than using a general efforts standard. In the afore-mentioned lease example, a commercially reasonable efforts standard should be accompanied by specific carve-in requirements such as: retaining a broker, advertising the space for lease, offering the space to existing tenants, etc. The landlord in this example may want to negotiate for “carve-out facts”, essentially limiting the efforts the landlord will need to make to mitigate its damages, such as putting the property in the hands of a broker, and the right to reject tenants who don’t meet the tenant mix of the building.

As a practical matter, case law suggests that contracting parties and their lawyers should not spend a lot of time arguing whether or not reasonable vs. best efforts should be expressly required in a contract, because they have been essentially interpreted as the same. Rather, the parties should use best (I mean, reasonable) efforts to identify the specific efforts required to accomplish their goals.

The Risk of 1031 Exchanges in Today's Financial Climate

LandAmerica Financial Group, Inc. and a subsidiary, LandAmerica 1031 Exchange are both in Chapter 11. Section 1031 of the Internal Revenue Code lets investors delay capital gains taxes on the proceeds from the sale of property if (1) the proceeds are reinvested in a new property within 6 months and (2) a third party (a "qualfied intermediary") holds the funds in between the sale and new purchase.

Holding funds as a qualified intermediary has been a very lucrative business. The third party serving as the intermediary charges a fee and pays minimal interests while it invests the funds in higher yield paper, such as auction-rate securities backed by federally insured student loans (one of the now frozen markets). In order to charge lower fees for one's services as the qualified intermediary, the funds being held would be aggregated into one large pot of money so as to more effectively seek out those higher yields on investments. Unfortunately, when the intermediary ends up in bankruptcy, how do you determine what funds belong to whom.

There are certain problems an investor faces when the intermediary holding the investor's funds goes bankrupt:
If the sale proceeds were not held in a segregated account by the intermediary, but instead comingled with all the other proceeds, the bankruptcy court will have a devil of a time figuring out who owns what with respect to the funds.
If an investor is running up on the 6 month deadline for reinvestment on the funds, the delays caused by the bankruptcy will likely blow that deadline and cause the investor to incur taxes on the sale.
Obviously such delay hinders an investor being able to close at all on the property identified for the purchase transaction.
If the assets purchased by the intermediary with the 1031 exchange money are sold for less than 100 cents on the dollar, how short will the investor be and when will that be determined?

Requiring that the proceeds be held in a segregated bank account is certainly a more prudent approach for an investor. Be prepared for higher fees being charged as a result since an intermediary will not realize the higher yields it can obtain from comingling into a large investment account. However, it is well worth it to better ensure that all the funds will be there when needed to close timely on a purchase.

At the risk of stating the obvious, checking out the financial soundness of the 1031 intermediary prior to selecting one is vital as well. In response to these recent events, First American has been emphasizing its financial stability in marketing its title and 1031 services. There are still financially sound 1031 exchange companies out there. An investor just needs to take the time to seek one out.

Real Estate Fraud - A Growing Problem

I contemplated naming this post "How to Steal a Building" but didn't want to hear the lectures that I am putting ideas into people's minds. I read an article in the New York Daily News titled "It took 90 minutes for the Daily News to 'steal' the Empire State Building." The newspaper wanted to demonstrate the loopholes that exist in many local government systems for recording deeds, mortgages and other transactions, which is the systems frequently do not require clerks to verify information.

The deed recorded by the Daily News included the original "King Kong" star, Fay Wray, as a witness and the notary on the deed was bank robber "Willie Sutton." The grantee on the deed was "Nelots Properties LLC", Nelots being "stolen" spelled backwards.

It's not that difficult to obtain a notary stamp and if the deed is in proper format, I doubt most clerks in any recorders/registrar office would question it. Con artists swipe buildings right out from under their owners. Armed with the fraudulent deed, they take out a large mortgage and simply disappear, leaving a huge headache for the property owners, lenders and bureaucrats.

The FBI states that financial institutions filed 31% more Suspicious Activity Reports involving mortgage fraud in 2007 than in 2006. Nationwide, lenders' losses total in excess of $813 million .

The best point to verify and check for forgeries and frauds is with the lenders and title companies. I spoke with a contact that I have at a local title company. In the case of a mortgage transaction, if the buyer is a company, the title company requests for all sorts of verification, such as copies of the articles of formation, good standing certificates, authorizing resolutions, incumbency certificates and a copy of any bylaws or operating agreement. However, except for the articles of incorporation/organization and a good standing certificate, these documents are internally prepared and could also be fraudulently created. It's even more difficult to verify when dealing with individuals.

A title agent or loan officer needs to know the customer and to listen to his/her gut, as the red flags may be evident. One red flag is the mortgagor being in an inordinate hurry to get the deal done. We've all experienced customers or clients that want things done 'yesterday.' However, we should listen to our instincts when the customer appears to be pushing a deal to close rapidly for no logical reason and dig a little deeper into the transaction.

At the end of the day, when a fraud like this occurs, the lender makes a claim on its title policy for the fraud and the title insurer covers the loss. That's why we pay for the title insurance, it can be worth its weight in gold. The buck stops at the underwriter's desk and 2008 has not been a good year for title insurers as mortgage fraud has been on the increase. I wonder what effect this will have on our title insurance premiums in the future?

To read the complete Daily News article, click here.

Hope for Homeowners

According to a Staff Report in the December 5, 2008 issue of The Cleveland Plain Dealer, average (30 yr) home mortgage rates dove down to 5.53% this week; reportedly the largest one -week drop in 27 years (from 6% last week). Rates were around 6.5% in October of this year.

Is there hope for (more good news for) homeowners? Hopefully. According to Jeannine Aversa’s (Associated Press) article in The Cleveland Plain Dealer today, Federal Reserve Chairman Ben Bernanke has recently outlined a number of “promising options” to reduce further foreclosures. The alternate plans include: (i) allowing certain homeowners to refinance into more affordable, federally insured mortgages; (ii) having lenders forgive portions of outstanding loans for certain borrowers; (iii) having the government purchase certain delinquent or at-risk mortgages; and (iv) reducing interest rates on certain loans to 3% for 5 years.

Let’s hope there is more help on the way soon.

Auction Provides Residential Development Opportunity for Developers and Investors

On December 18, Bambeck Auctioneers Inc., located in Dover, Ohio, will take bids for an unfinished $20 million residential development project located on the West Side of Cleveland, Ohio at W. 53rd and Walworth Ave. In 2004, construction commenced on a project known as Ashbury Towers, an Approved Planned Unit Development for 150 residential units consisting of 96 new townhouses and 54 rehab condominiums in former buildings of the Joseph & Feiss/Hugo Boss clothing manufacturing facility.

The Ashbury Towers auction will consist of two separately auctioned parcels. Parcel 2 provides for (3) six-unit and (2) four-unit townhouse structures. Two of the six-unit buildings are constructed and three townhouse units have been sold and are privately owned. Parcel 1 provides for the remaining new townhouses, rehab condominiums and 14 new one-story penthouse units.

Bids will take place on-site at Ashbury Towers at 11:00 a.m. The minimum opening bid for parcel 1 is $200,000 and for parcel 2 is $375,000. For additional information regarding the auction and the Ashbury Towers project, see

CLE Updates: Land Use Planning and Construction Law seminars

The National Business Institute (NBI) has the following new seminars scheduled in early 2009:

Construction Law Fundamentals: Managing Project Risk -- to be held in Cleveland, Ohio on March 2, 2009 at the Holiday Inn Independence, 6001 Rockside Road, Independence, Ohio. Registration is from 8:30am - 9:00am and the seminar begins at 9:00 am and ends at 4:30 pm.

Mastering Land Use and Planning Processes -- to be held in Akron, Ohio (Sheraton Suites, 1989 Front St., Cuyahoga Falls, Ohio) on February 2, 2009 and in Cleveland, Ohio (Holiday Inn Independence) on February 3, 2009. Registration is from 8:30am - 9:00am and the seminar begins each date at 9:00am and ends at 4:30pm.

For more information, visit NBI's web site at www.nbi-sems.com.

Encouraging Headlines on the Home Mortgage Front

I came across a couple of news stories that contained some good news on the home mortgage front, for a change. After a weekend of unbelievably bad news, any positive headlines are welcome.

The first, dated November 27, 2008, and published in The Sacremento Bee, titled "Homebuyers jump at falling mortgage rates" by Dale Kasler. The falling mortgage rates have led to potential homebuyers locking in rates, those on the fence to look in earnest and other homeowners starting to investigate a refinance. This won't help those who are behind in payments, although a workout may become more viable with lower rates. It does help reduce the glut of homes for sale on the market and maybe stablize falling home values. We can keep our fingers crossed. It is a step in the right direction.

Click here for the complete article.

The second, dated December 1, 2008, was published by MarketWatch (marketwatch.com) and captioned, "Record Number of Mortgage Workouts in October." According to Hope Now, an alliance of mortgage servicers, counselors and investors working to help homeowners avoid foreclosure, there were a reported 225,000 foreclosures prevented in October, 13,000 more than the previous record set in September. The workouts were a combination of loan modifications and payment plans. Hope Now reports that the number of modifications is up 24% and the number of payment plans is up 9.8% over the last three month.

In a separate release, mortgage insurer Genworth Financial stated it has helped more than 11,000 homeowners avoid foreclosure in the past year.

Click here for the complete article.