Friday, May 30, 2014

Buzz kill for #CRE deals and ways to overcome it...


Image Attribution: www.sultanknish.BlogSpot.com
Regulations, compliance, city requirements, zoning ordinances, occupancy approvals, high pile storage permits, racking permits, ADA requirements, conditional use permits...the list is endless for an occupant in California these days moving from point A to point B.

It is difficult enough to get an owner and a occupant to agree to terms, negotiate a lease or purchase and make a deal.

Now, more than ever in the past, a whole new negotiation takes place...that of the occupant negotiating with the city to gain the "right" to occupy the building the occupant has committed to lease or purchase.

So, short of moving the company to a less regulated state such as Texas or North Dakota (which might be easier), what is an occupant to do? This post is designed to give some suggestions on how to navigate these waters, protect your occupant, appease the owner, and get the transaction done to every one's mutual benefit.

As a disclaimer, I provide Location Advice to owners and occupants of industrial buildings in Southern California...AKA I sell and lease commercial real estate for a living and have since 1984...that qualifies me as some sort of an expert...if I can only remember why...

If your occupant is concerned with ANY required approval...or even if he isn't he should be...I would suggest outlining the occupants concerns in the LOI and stating your and your client's desire to have any final agreement be subject to the concerns.

The type of transaction you are negotiating can really impact your occupant's position. A sale deal intrinsically has a "due diligence period" built into the structure of the agreement...in other words, your occupant has a period of time to independently figure out what he is buying...what a concept! If the occupant, during the contingency period, discovers some arcane regulation that will keep him from occupying the building...he is free to walk away from the deal for free OR approach the seller of the property with the issue for some financial remedy.

In the absence of a sale deal, you REALLY must work had to protect your occupant. I would suggest one or more of the following solutions:

Negotiate a contingent lease: You simply agree on economic points, lease points, and both parties sign the lease. Deposits are delivered to the owner. The full commencement of the lease is contingent upon whatever issue is outstanding...i.e.: city approval, health department approval, grant of entitlements, etc...AKA, if your occupant is unsuccessful in resolving the issue, he is not bound by the terms of the lease.

Create a walk away amount: You "negotiate a contingent lease" but if the issue is not resolved, there is a non refundable amount that is forfeited.

Wait until all of the issues are resolved before signing the lease: Risky in an owner's market...but it is a solution. This approach is risky (especially if your occupant has few options) as the assumption is that the building will be available when the issues are resolved. In the absence of this, your guy is out scout...after spending time and money to resolve the issues.

Use the AIR form entitled "binding lease offer with contingency": I've not used this form but I understand it is structured similarly to a purchase and sale agreement...with a contingency period, deposits, time frames, etc. I WILL check it out!

Agree to a month-to-month lease that converts to a term once certain things are accomplished: Self explanatory but the upside is that the owner receives rent, the occupant ties up the space but there is a mechanism is in place to cancel the lease or convert the lease to an extended term.

Let's face it, we want to do the best job for our clients and put our clients in the best possible position for success. Anticipating potential issues and structuring around them will certainly accomplish this.