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WHAT CLAUSES SHOULD YOU HAVE IN YOUR COMMERCIAL LEASE?

On behalf of Michael Brooks of Law Offices of Michael A. Brooks posted in commercial real estate on Friday, June 29, 2018.

One of the most valuable clauses you can get in a commercial lease is a “go-dark” clause. However, many commercial tenants aren’t even familiar with the term.

If you’re trying to figure out a good way to protect yourself in case the iproperty turns out to be a money pit, this is what you should know.

What’s a go-dark clause?

Most commercial leases require you to operate your business continuously for the duration of the lease. If you’re in a unit with multiple stores, like a retail mall, that means adhering to the mall’s hours of operations — even if it isn’t profitable for you. It also puts you in default and can make you subject to penalties if you have to close down entirely.

A go-dark clause gives you the right to shut down your store without penalties as long as you pay your rent.

What else can they do?

In conjunction with a co-tenancy clause, you can also gain the right to close your store down or take a significant reduction in your rental obligation if one of the anchor stores in the mall goes out of business.

For anybody who has witnessed what can happen when the anchor store in a mall suddenly fails, this clause is an obvious life saver.

What other options are there?

You can also negotiate a “right to recapture” with the landlord. This will give the landlord the ability to take the space back if you decide you can’t keep up with the hours. This is often seen as a win-win for both parties. However, it can become a problem for tenants if they need to close for a short period. An overeager landlord can leap onto an opportunity like that to recapture the space when there’s another tenant waiting.

It’s important to consider the possibility that your store isn’t going to be profitable — even if it isn’t pleasant to consider. That’s the best way to manage your losses before they happen.

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WHAT CAN YOU DO ABOUT THAT EMPTY COMMERCIAL SPACE YOU OWN?

On behalf of Michael Brooks of Law Offices of Michael A. Brooks posted in commercial real estate on Thursday, June 21, 2018.

An empty commercial space is a big problem for the owner. Aside from the obvious problems (losing money, having to pay a mortgage or overhead on an unused space), a space that stays empty too long can attract negative attention that ultimately makes it harder to rent again.

To keep that empty space from becoming a problem while you look for the right tenant, consider allowing a few short-term leases instead. It’s time to think about renting to a pop-up business.

What are they? You’ve seen them, even if you didn’t consciously realize that’s what you were seeing. Every year around tax time there’s a flood of temporary offices by companies like H&R Block or Jackson-Hewitt. Similarly, around the holidays, you’ll see pop-ups by Halloween USA and numerous Christmas supply stores and novelty gift shops.

However, these aren’t your only choices. The odds are good that right in your own community, right now, someone is looking for a short-term lease to stage an art sale by independent artists, introduce people to the wonderful world of bonsai trees, or maybe showcase their inventory of Celtic goods for the summer’s Irish Festival.

Even some local retailers and wholesale shops will look for temporary space to get rid of their excess merchandise when they’re overloaded. Some big-name companies, like Apple, may need space to handle the influx of customers when a new product is released simply because their regular stores can’t handle that much traffic at once. A lot of entrepreneurs with small budgets but big ideas can also use a short-term lease to introduce their latest product to the market. This gives them a chance to test the waters in a market without making a long-term commitment.

While rents for short-term leases tend to be lower, you can offset the lower rent by insisting that the pop-ups make do with the space “as-is” and not allowing any major modifications the way you would with a long-term lease. Plus, the foot traffic from an engaging pop-up helps make your property seem more attractive to potential long-term tenants and can keep the whole area from seeming economically depressed.

Since leases used in long-term rental agreements are so different, make sure that you get some solid advice on drafting a good short-term lease that won’t hamper your ability to find another tenant down the line.

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BE SURE TO GAUGE RISK TOLERANCE AS PART OF ANY REAL ESTATE DEAL

On behalf of Michael Brooks of Law Offices of Michael A. Brooks on Saturday, June 16, 2018.

True story: there once was an editor for a major news wire who, in trying to meet the constant demand for fresh news, informed the boss he was feeling overwhelmed. The boss’s response was, “I have every confidence your threshold for dealing with it will rise.” The editor survived but left the industry. The risks outweighed the rewards.

Nearly every venture we undertake involves a risk-reward trade off. This is certainly true for transactions involving the purchase or sale of real property. Whether a deal delivers what all that parties hope for depends on a lot of factors, including structuring deals to balance risk and reward in line with personal risk thresholds.

Gauging risk tolerance

In the context of residential property buying, you need to be aware of the many elements that could throw a wrench into your dream works. Consulting with an attorney experienced in identifying and addressing variables can give you confidence that you can deal with whatever happens. Experts generally agree the process starts with knowing what you can afford. This is done by getting a handle on four factors:

  • Your current income: In California, property prices run high. How much do you make and how much of that income will go to paying the mortgage? If you are a high-income earner, you will have more leeway to be aggressive in your borrowing.
  • Your income stability: This involves looking at the nature of your income. If you are salaried and receive no other compensation, your risk tolerance would likely be low to moderate. Individuals who make bonuses, commissions or receive stock options, might be able to tolerate greater risk. If you’re self-employed, many advisers urge maintaining a low-risk attitude.
  • Saving habits: From lenders’ perspectives, the greater your saving history the more confidence they have in your ability to accept greater debt risk, making them willing to stretch normal debt percentages. The more important perspective is yours and whether you want to take on that risk.
  • Your age: Youth has its advantages. If you anticipate solid career growth for years, you might be able to handle more risk and be more aggressive on borrowing. If you’re nearing retirement, your debt capability depends on post-retirement income which is typically lower and growing only minimally. Planners suggest keeping risk low.

One way to sum it up might be to say, buyer, know thyself.

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LAWSUIT AGAINST ZILLOW QUASHED AGAIN: BUYER BEWARE

On behalf of Michael Brooks of Law Offices of Michael A. Brooks posted in commercial real estate acquisitions & dispositions on Thursday, June 14, 2018.

A class-action lawsuit against Zillow was tossed out of federal court for the second time. The plaintiffs had alleged that Zillow’s home-valuation tool was misleading and the company’s practices were intentionally deceptive.

According to the complaint, which was filed by a group of property sellers near Chicago, Zillow has hidden relationships with realtors that put private owners who try to sell their properties on their own at a serious disadvantage. The online valuation tool provided by Zillow was the first to give property buyers and sellers access to the type of value comparisons that had traditionally been available only to realtors.

Since so many people look at Zillow when shopping for a property, an incorrect value on the site can damage the chance of a sale before it even gets started. Owners claim the company ignores challenges to inaccurate estimates and purposefully lowers the value on properties not listed with the company’s affiliated agents. They say the company has a financial incentive — 71 percent of its revenues — to manipulate the figures because the affiliated brokers pay for ads and leads on the site.

For its part, Zillow maintains that its estimates use millions of pieces of public data that are put through its private algorithms to produce an approximate value. It also claims that its values are fairly accurate — and that users are warned from the start that the figures they see are merely estimates.

The judge in the case stated that Zillow’s warning to consumers is sufficient. Its arrangements with realtors who pay for advertising on the site doesn’t create a conflict of interest.

Buyers who are looking for property — whether they plan to change residences or want to invest in rental property — should keep Zillow’s warnings in mind when they use the tool. Instead of relying on an estimate provided by the site, use it as just one piece of information as you seek to determine the true value of a property.

Source: The Real Deal, “What to make of the dismissed class-action lawsuit over Zestimates,” Kenneth Harney, May 27, 2018

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UNDERSTANDING ZONING’S GOALS CAN HELP YOU AVOID CONFLICT

On behalf of Michael Brooks of Law Offices of Michael A. Brooks posted in land use & zoning restrictions on Thursday, June 7, 2018.

Zoning codes exist for a reason. So do the rules imposed by homeowners associations. Even if you don’t like them, or outright hate them, they are often designed for one major underlying purpose: to keep property values stable in the area.

Why are zoning regulations so important to a property’s value?

In essence, it comes down to that old real estate saying that “location is everything.” Owning a beautiful home is wonderful — and proximity to things like a school, a grocery store, a nice coffee shop and a couple of restaurants is great. However, if you happen to have a beautiful home that’s located downwind from something like a pig farm, for example, you could see the value of your real estate plummet.

Similarly, zoning laws often prevent things that could cause significant amounts of noise pollution around both businesses and homes. Airports and highways, for example, can cause major damage to a property’s overall value when they get too close. Similarly, power plants and facilities that use hazardous chemicals can also deeply damage the value of nearby properties.

You may also encounter zoning regulations that restrict everything from the color of paint you put on your building to the types of signs you use for a business. In certain towns and cities, for example, there are old sections of town that have a certain local color or allure based on their vintage appearance. Businesses that move into the area often have to comply with highly-detailed rules about what colors they can use on advertising, the size of their signs and more. Even new buildings may have to be designed to fit in with the vintage look of the place.

While you are considering buying any commercial or residential property, one of the first things you should look at carefully is the neighborhood. The more distinctive the “look” or feel of an area, the higher the odds that zoning regulations are strictly enforced. That can sometimes make it easier to decide if a property will work for your purposes. You can save a lot of aggravation if you’re willing to work within the rules, rather than fight them.

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