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BUYING COMMERCIAL PROPERTY? CONSIDER ALL USES

On behalf of Michael Brooks of Law Offices of Michael A. Brooks posted in blog on Tuesday, April 24, 2018.

If you are thinking about buying commercial property, you probably have a very specific plan in mind. You have your own business or want to have an investment that you know will pay good dividends.

Whatever your plans, however, commercial real estate is inherently more complex than buying a home. You have to consider all possible uses for the property now and in the future to decide if it is a good investment. For this and many other reasons, an expert in commercial real estate can give you a lot of advice to help you make the right decision before you buy.

Due diligence

There are many things to consider in a commercial property. What is the condition of the building? Is it up to code? What is the permitted zoning? Many of these considerations are going to be outside of your expertise to evaluate well.

The checklist of all the items that you need to understand is a part of your “due diligence,” or complete understanding of the property that you are considering. It often takes a team of experts, including construction and legal help to complete the checklist and be sure that you have looked at everything.

Types of buyers

You may have a specific plan in mind for a property that you have your eye on. If you have your own business, for example, you may be looking for a space that fits the business you already have operating or plan to open. Restaurants and many retail establishments prefer to own rather than rent space, for example, simply because of the investment required in fixtures and decoration.

The value of your property, both now and in the future, depends on its attractiveness to other kinds of buyers, however. There are three main types of buyers in commercial real estate:

  • Investors, who are buying a property for the purpose of being a landlord and collecting the rent on it
  • End users, who want to put their own business into the property
  • Developers, who are more interested in the location and its potential re-use

All of these potential approaches have an influence on the value of a property. Before making an investment, you have to consider each of them as ways that your property can gain value. This is true even if only one of them interests you at this particular moment.

Expertise is critical

No matter what you might be considering, the other potential uses are going to be important. For example, it may not seem to matter to you that a property is zoned in a highly restrictive way if your potential business meets the requirements. But it does mean that redevelopment potential is limited, and that limits your potential gain further down the road.

As part of your due diligence, a thorough review of the entire potential value of the real estate is essential. It takes an expert in commercial real estate to walk through all of these scenarios and arrive at a good understanding of the potential value of your planned investment before you buy.

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COMMERCIAL LEASES CALL FOR ATTORNEY ADVOCACY

On behalf of Michael Brooks of Law Offices of Michael A. Brooks posted in blog on Saturday, March 17, 2018.

Embarking on the search for the perfect commercial property to lease is more than about finding the right location for your business. Here are some important points that an attorney can make you aware of that can make an impact on your lease agreement.

Go Beyond the Starting Line

The first lease agreement that the landlord presents to you is just the start of the negotiations. Make sure that you have a lawyer representing you that is comfortable and experienced with lease negotiations. Working out a deal that you and the landlord can live with does not need to be a protracted process when you have expert advice on your side.

Review with due diligence

Since a lease is a legal contract, it makes perfect sense to hire an attorney to do a thorough review of the lease agreement both during negotiations and after the final document is finished. Your lawyer will plow through the whole agreement with an expert’s eyes, which will reveal any subtleties in the clauses and enable you to know exactly how much you will pay for your space.

Curb in Financial Liability

Legal consult can review the proposed agreement thoroughly to ensure that there are no surprises hidden in clauses that can get you in over your head financially. An example would be a provision that you as a tenant would have to pay for a landlord’s improvements on the property.

Know When to Bail

Your attorney can negotiate a bail-out clause for your lease. This clause protects you if your sales do not make it up to a pre-determined level. Your liability exposure to the full lease amount is limited.

There are multitudes of details in a commercial lease agreement that matter for your bottom line. Protect your interests and ensure that you get the best deal possible with a lease review and representation during the lease negotiation process.

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SHOULD I CHOOSE A NEIGHBORHOOD WITH A HOMEOWNERS ASSOCIATION?

On behalf of Michael Brooks of Law Offices of Michael A. Brooks posted in blog on Thursday, February 15, 2018.

California is home to some of the most beautiful neighborhoods in the world. Many of these neighborhoods, particularly in newer suburbs or planned unit developments, are maintained by a homeowners association (HOA). If you are house-hunting, you may be wondering whether you should purchase a home in a neighborhood that has an HOA.

Defining HOAs

A homeowners association is a group that manages a neighborhood’s common spaces and enforces certain rules for community residents. HOAs are composed of several volunteers as well as a board of elected residents. Anyone who resides in the neighborhood presided over by the HOA is able to participate in it. Living in a neighborhood that has a homeowners association generally requires monthly fees to cover maintenance and other expenses. Every homeowners association is slightly different regarding its rules and how stringently it enforces them. Some HOAs are very strict, while others tend to be relaxed.

The pros and cons

For many people, HOAs are a love-it-or-hate-it topic. Some residents love having a neighbor-run association that can regulate other residents’ behavior, home appearance and responsibilities. Others balk at the thought of a regulatory body that can restrict their decisions as a homeowner. These are some of the pros and cons of living in an HOA:

Pros

  • Less maintenance required of residents
  • Attractive-looking homes and lawns
  • Many nearby amenities
  • Association management can handle disputes

Cons

  • Monthly fees required
  • Less personal choice for homeowners
  • Rules and regulations may feel too restrictive
  • Subject to fines for violating rules

Dealing with HOAs

Every once in a while, a resident may run into an issue with their homeowners association. Disputes can arise because of maintenance issues, HOA contract disputes, liability issues and boundary disputes, to name just a few examples. These issues are usually resolved through private discussion, but they can sometimes become contentious and complicated enough to necessitate legal counsel.

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SUBLEASING COMMERCIAL SPACES

On behalf of Michael Brooks of Law Offices of Michael A. Brooks posted in blog on Thursday, January 18, 2018.

A sublease is a rental agreement between a tenant and a subtenant who will be renting out a portion, or all, of an already rented space from the current tenant. The subtenant pays rent to the tenant, now the sublessor, who is responsible for the rent payments to the original landlord. For small business owners looking to rent a small space, subleasing can be a more affordable option. However, as with any lease, there are pros and cons which the renter should consider carefully before signing a lease.

Pros of subleasing

Subleasing a space can be cheaper than renting an exclusive space and the affordability makes it appealing for new business owners. A sublease can be easier to obtain, without all the credit requirements of a standard commercial lease. Generally, sublease rates are a flat rate fee and more straightforward.

Renters only looking to rent a small space may be drawn to a sublease, allowing them to only rent the amount of space they need. If the sublessor wishes to move before the original lease is up, the tenant has the option to rent the entire space. Also, most sublease spaces are turnkey ready.

Depending on the building location and set up, subleases can provide access to common areas, storage rooms and other shared spaces at a reduced cost. Tenants may also be able to use existing office technology, such as a fax machine or copier. Additionally, a sublease may also give you access to internet service and security systems.

Subleasing pitfalls

Some of the issues with subleasing arise simply because you must go through the sublessor, who then must reach out to the landlord. This can cause delays for any maintenance needs. Going through an unresponsive middleman can be frustrating when you need something fixed.

Also, when subleasing a space you sacrifice privacy. You are limited by however the space is decorated and laid out. Subleasing from similar professionals can help with this problem, since they likely have similar needs.

When reviewing a sublease, make sure to ask to review the original lease as well. The sublessor may attempt to pass along unfavorable lease terms, such as fees, to you. You will also want to make sure the original lease permits subleasing. If the sublessor defaults on their loan, you could lose the leased space even if you were paying the sublessor.

A lease, even a sublease, is a binding legal document. Before signing, review all the terms and get clarification on anything you do not understand. Don’t get stuck in a subpar sublease simply because you didn’t understand what you were signing.

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FIVE COMMON MISTAKES IN COMMERCIAL LEASING

On behalf of Michael Brooks of Law Offices of Michael A. Brooks posted in blog on Tuesday, January 9, 2018.

When signing a lease for a commercial property, it’s important to be as prepared as possible. You’re making a significant financial commitment, and in order to achieve a deal that best suits your business interests, you need to know what you’re getting into.

As crucial as due diligence is to signing a commercial lease, however, it can also be helpful to know what not to do. Here are five commonly made mistakes in commercial leasing:

1. Getting locked into a long-term deal

Depending on your line of business, a long-term lease may not be a practical solution. For example, a high growth company would be ill-served to be locked into a multi-year lease for a space it’s outgrown. Conversely, many businesses will end up underusing their space for portions of their lease term, so in many cases, longer leases simply don’t make sense.

2. Failure to consider the tenant improvement allowance

Before you put ink to paper, be sure that you’re satisfied with the landlord’s tenant improvement allowance. This is the amount they’re willing to spend in order to prepare the space for your business. You’ll want to consult with contractors and IT specialists to make sure that this budget aligns with your vision.

3. Absorbing build-out costs

It’s possible that the space you’re leasing is in a bare, minimalist state. Landlords will often strip down commercial properties once a tenant vacates, and while it gives you something of a blank canvas to work with, the build-out costs can be exorbitant if you’re shouldering a portion of them.

5. Signing the demolition clause

If your landlord decides to tear down and redevelop the commercial property you’re leasing, your agreement could go up in smoke, provided you signed a demolition clause. By agreeing to certain demolition and relocation terms, the landlord can terminate your lease, which could be an expensive headache for your business.

4. Poor negotiation tactics and not using the leverage available to you

A commercial lease can be a lengthy, nuanced contract, and in order to reach a satisfactory agreement, proper negotiation is a must. Aside from things like not taking the bait of a better rate for a longer lease, there are concessions you can get from your landlord, and if you’re a novice at these deals, using a broker or experienced attorney can be of great help.

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UNDERSTANDING THE CAM FEE IN YOUR COMMERCIAL LEASE

On behalf of Michael Brooks of Law Offices of Michael A. Brooks posted in blog on Friday, December 29, 2017.

Before signing a commercial lease, understand that you may be paying for more than just the square footage your facility will occupy. Your lease may have common area maintenance (CAM) fees. These can also be referred to as load factor.

CAM fees are common when you lease in a multi-tenant business park. You are not leasing the whole property, just a portion, so the CAM fees represent the cost of a portion of the building to be maintained. The only guaranteed way to avoid CAM fees is to lease a single tenant property, but then you can be responsible for all the operation expenses instead of just a portion.

What do CAM fees cover?

CAM fees can cover all kinds of expenses that the landlord must pay for basic upkeep and to maintain premise functionality. These can include repairs, insurance, property maintenance, trash removal, lawn care, and any utilities not separately metered. The fees can also be used to create reserves for future large scale maintenance and repairs, such as repaving a parking lot.

How are CAM fees calculated?

CAM fees are pro rata, meaning the allocation of fees is proportionate to the amount of space. If you rent more square footage, your CAM fees will be higher to correspond with the larger space.

There are two types of CAM fees, flat and variable. A flat CAM fee will be a fixed amount, whereas with variable CAM fees the amount the tenant must pay increases with different factors. CAM fees can be paid monthly, quarterly, annually or other ways depending on the lease agreement.

When considering a commercial lease with CAM fees you may want to make sure to ask what you will be paying for and request an itemized list of the expenses if possible. Any expenses you will be paying for in CAM fees need to be verifiable, so asking for an inventoried breakdown of the expenses is reasonable. Also, you may want to ask about potential CAM fee increases. Having all the facts upfront can allow you to make an informed decision before signing a lease.

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5 COMMON ZONING ORDINANCES EXPLAINED

On behalf of Michael Brooks of Law Offices of Michael A. Brooks posted in blog on Tuesday, December 12, 2017.

Zoning is a means of dividing up land into separate areas for specific purposes or development types in a way that keeps the individual areas detached, meaning it would be improbable that land zoned for schools would be next to property zoned for aircraft manufacturing.

Zoning originated in New York City in 1916 as a way to help with urban planning and development in such a densely populated city. The practice has been widely adopted throughout the nation, particularly in large urban locations.

Residential Zoning

This category includes single family dwellings, duplexes, townhomes and land planned for future residential development. Residential zoning can overlap with commercial residential zoning in areas designed for rental properties. Keep in mind that land will typically only be zoned for one type of residence, meaning land zoned for single family residences would be unlikely to support townhomes. An exception would be land planned for future residential development where single family homes, duplexes or townhomes could be next to one another.

Commercial Zoning

Commercial zoning includes land designated for business and related services. Commercial retail, such as shopping malls and big box stores, is most prominent. Scattered throughout are plots for community and financial services, including city centers and banks. Tracts designated for commercial manufacturing and assembly plants are frequently regulated to an industrial park. Golf courses, tennis courts and amusement parks would fall into this category.

Industrial Zoning

Land selected for manufacturing is considered industrial zoning. This includes light and heavy manufacturing. Light manufacturing includes food, beverage and products for personal and home care. Heavy manufacturing includes steelmaking or chemical production. Industrial zoning also includes land for curbs, parking lots and general landscaping.

Agricultural Zoning

While self explanatory, there are subcategories for agricultural zoning with distinctive differences. Light agriculture refers to crop land and raising any animal except hogs. Heavy agriculture is allocated for hog ranches, feed lots and fertilizer plants, which have a significant ecological effect, and may have a home on site.

Special Purpose Zoning

Properties with this designation can be used for institutions, such as a school or university, or even for public art, like a sculpture garden. Plots in this category are often used for civic and municipal purposes, like watersheds and drainage reservoirs.

Purchasing property can be exhilarating, but before jumping headfirst into a new prospect understand what you are buying.

Related Posts: Buying commercial property? Consider all uses, Commercial leases call for attorney advocacy, Should I choose a neighborhood with a homeowners association?, Subleasing commercial spaces