Friday, October 3, 2014

"How to" handle OTHER #CRE leasing issues

Image attribution: www.apartments.about.com
This week we concluded a rather complicated "shuffle" of an existing tenant and a suitor within a multi tenant project. I believed the journey was blog worthy.

We represent(ed) the owner of the project, handle the new leasing, renewal of the existing tenants, and "other" leasing issues.

My partner, marketing associate and I work in close conjunction with a professional property management firm, Essex Realty Management.

Essex collects the rents, pays the bills, deals with repairs and maintenance on the property and prepares the year end accounting.

Ownership: The ownership is a seven member LLC that must approve any new leases, renewals, or "other" leasing issues. Currently, the managing member of the LLC is recovering from a lung transplant so we are seeking approval from designated family members.

Is that complicated enough?...stay tuned!

Before I forget, 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. I love the "other" leasing issues that occasionally arise as they add a challenge to a somewhat mundane leasing assignment. The below qualifies as "other".

OK, now the "other leasing issue" I promised before the break...

The existing tenant:
An existing tenant within the project
  • Had a space full of special purpose improvements and equipment, all of which were tenant created and funded
  • A little over two years remaining on an over market lease obligation, and
  • A brand new location that she purchased...before settling with our owner on the remaining term of the lease...in effect she now had two spaces for one business
The good news is that she also had a suitor, in a similar business, who wanted to buy the special purpose improvements and equipment in the space. Her business deal (the improvements and equipment sale) with the suitor depended on a new lease or an assignment of her existing location's lease...easy right? Ummmm, not really.

The challenge:
  • The existing tenant wanted out of the lease, with no recourse, at the rate she was paying.
  • The suitor wanted a new five year lease at the market rate (approximately $.35 psf below the rent the exiting tenant paid).
  • The owner was unwilling to do a market deal today because he had a tenant obligated to pay rent for an additional 26 months...a classic stand-off.
The solution: We did three things...
  • We wrote a new five year lease with the suitor at a market rate.
  • We convinced the existing tenant to pay the difference between her rent and the new rent for the balance of her term in a lump sum we called a termination fee.
  • Because the new lease and termination were subject to the business deal closing, we made a demand to escrow that all of the monies due the owner would be due at closing AND in the event the business deal didn't close, the old lease was still in effect.
A win for everyone: The suitor got his new five year lease, the existing tenant relieved herself of the excess location and the owner was made whole and got three years of additional term.