Friday, June 21, 2013

"FREE" can be VERY expensive!

I provide Location Advice to owners and occupants of industrial buildings in Southern California. As I have mentioned in previous posts, my advice to occupants is generally free advice to the occupant...the owner of the location pays my fee.

I have uncovered some recent situations, however, that appear to be free but are in fact VERY expensive. A couple of situations I have discovered are: Free vs abated rent and free listing services.

Free vs Abated Rent: Owners beware here! How many of us as CRE practitioners have fallen victim...or worse yet, advised our clients the wrong way. As an owner of a building who is negotiating a lease with a tenant, the terms free and abated seem synonymous. In reality free can be very costly. In the event of a tenant default, "abated rent" may be rent is not. According to Jayson Javitz, a corporate attorney and business manager for River City Petroleum in Sacramento, California in a recent LinkedIn conversation on Five "Gotcha" Clauses That All Occupants Should Negotiate:

Me: Thanks for that very in depth commentary, Jayson! As I see you are a corporate attorney, I am curious about "free" vs "abated" rent. My understanding is that free rent is not recoverable in the case of a tenant default (assuming the tenant has any money) whereas abated rent is. Your take would be helpful.  
Jayson Javitz: "You're welcome, Allen. Yes, free rent is free rent. You can't sue the tenant for not paying it. Unless it's part of an agreed-upon fee for early termination. Technically rent abatement is in the nature of deferred rent or reallocated rent. Upon default, unless the lease otherwise provides, you can sue the tenant for it. The other point is that with free rent the tenant doesn't get to choose any sort of allocation. They just don't pay rent. With abatement, however, typically the tenant has the option of applying it as a credit against rent or allocating it towards tenant improvements. If you're the tenant you want the ability to apply rent abatement towards rent or for tenant improvements, entirely at your option. If you're the landlord you want to cap abatement towards rent or to steer those monies towards tenant improvements in the nature of fixtures; that way if you're not getting rent then at least you're improving your asset and adding to its book value."
Free listing services: Occupants beware, here! Let's face it, almost 8 of 10 CRE searches start online. MLS aggregators have fine tuned their SEO to catch unsuspecting occupants searching for commercial real estate. If you doubt what I am saying, google or bing "commercial real estate" and see what pops up. I will bet you that the first three or four search items will be Loopnet, City Feet, Zillow, etc. All of these purportedly "free" CRE searches can be costly to an occupant. These services route you to an owner's representative...the listing broker who's sole purpose in life is to lease or sell his client's your expense, potentially. The less educated the occupant, the better...that means you as the occupant will pay more than you should...very costly indeed. The answer is to engage a competent location advisor to represent "your" interests as the occupant. As I have written before, this advice is FREE to you as the occupant, the owner pays our fee...AND in most cases, the rental rate is not increased to compensate for the fee. In the rare exceptions where the fee is not built into the rental rate, concessions can be negotiated to offset the up charge.
Be careful. As my grandmother told me...well you know the old saying!