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FREQUENTLY ASKED QUESTIONS: LEGAL MARIJUANA AND RENTERS

On behalf of Michael Brooks of Law Offices of Michael A. Brooks posted in commercial real estate on Thursday, March 15, 2018.

With the growing legal acceptance of marijuana on a state-by-state basis, there’s a lot of confusion about how the owners of multi-unit rentals need to address the issue.

Here are some of the most commonly asked questions about rental properties and marijuana in states like California:

1. Can you bar tenants from smoking marijuana in your rental units?

Yes. In fact, if your lease already bans smoking, you don’t need to add anything.

2. If a lease bans illegal drug use, is marijuana covered?

No. In order to avoid a legal issue, you need to amend the lease to state that drugs that are illegal under federal law are prohibited. Marijuana is still considered illegal under federal law.

3. What should you do about medical marijuana?

This is a complicated question that doesn’t have an easy answer. If you ban smoking, you can still allow edibles, oils and other forms of medical marijuana.

On the other hand, if you ban illegal drug use and the manufacturing or cultivation of drugs on the property, medical marijuana can still be an issue. State laws and the laws in your municipality can also conflict. It might be wise to seek the advice of an attorney who handles real estate and landlord-tenant issues.

4. Do you have to allow tenants to cultivate marijuana if you do allow smoking or marijuana use?

No. You can restrict grow operations, even though it is legal for some people in California to have six adult plants or 12 immature ones. They take up a tremendous amount of electricity and water, which can cause your expenses to skyrocket. The humidity required for proper growth can also cause problems with mold. That can damage your units and lower the value of your property. Insurance is unlikely to cover any damage done as a result of growing the plants because growing them is still illegal under federal law.

It’s difficult to keep up on the changing nature of the laws regarding marijuana — but it’s necessary if you want to keep your real estate investments profitable and in good shape.

Source: www.irem.org, “Marijuana in Property Management,” accessed March 15, 2018

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ASK FOR A BETTER LEASE FOR YOUR GYM

On behalf of Michael Brooks of Law Offices of Michael A. Brooks posted in commercial real estate on Friday, February 23, 2018.

How much room you have to negotiate your gym lease depends a lot on who has leverage — and how much of it — in the situation.

You’ll obviously have more room to negotiate for what you want if you have great credit or there are a lot of open commercial properties available. However, you won’t get anything if you are too afraid to negotiate. In order to get the best available lease for your gym, below are three important and highly negotiable matters to address.

1. Competitors

Your gym can help liven up an otherwise dull retail strip mall. However, there is such a thing as “too much of a good thing.” Negotiate for the right of review and refusal toward competitors in the fitness industry. That’s the only way to keep your landlord — whose primary concern is keeping the available spaces filled and appearances thriving — from renting to a competitor that could steal your clients away.

2. Common area charges

It’s easy to forget about the issues that come up with common tenant areas when you’re focused on a great usable space. However, issues with common areas affect your bottom line. Maintenance charges, in particular, can be costly. Make sure that you negotiate exactly what services your landlord will provide in terms of cleaning, insurance, maintenance and repairs. Take the opportunity to ask for more in terms of what your landlord will provide or less in terms of what you’ll pay toward those services.

3. Insurance demands

You’ll doubtless have to provide your landlord with proof of your insurance — but how much insurance you have to have depends a lot on the terms of the lease. You can ask for a reduced minimum coverage insurance amount. That can significantly help reduce your operating costs.

4. Noise issues

While it may seem counter-intuitive to draw your potential landlord’s attention to a possible issue, the reality is that gyms are usually noisy. People shout instructions, offer loud encouragement to each other, play music for inspiration and clank weights together. The goal in bringing up the issue is to get your landlord’s assurances now about how noise complaints from other tenants will be handled.

There’s a lot to address in any commercial real estate lease — but good negotiations now can make for a great business relationship later.

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HOW COMMERCIAL REAL ESTATE ATTORNEYS HELP NEW BUSINESS OWNERS

On behalf of Michael Brooks of Law Offices of Michael A. Brooks posted in commercial real estate on Saturday, February 17, 2018.

Commercial rental agreements are nothing like residential rental agreements — they’re vastly more complicated and something that many new business owners are unprepared to navigate on their own.

In addition, commercial leases aren’t granted the protections guaranteed under the law to those taking out a residential lease — business professionals are generally expected to fend for themselves. If you get stuck in a bad deal, you’re generally stuck with that bad deal — even if it’s grossly unfair.

That’s where a commercial real estate attorney can often help. The attorney’s job is to be familiar with the laws and the potential drawbacks of any terms in the lease — and to advise you when to negotiate and when to run. Among other things, a real estate attorney can help you:

  • Understand what type of commercial lease you are taking (since there are several options) and how that can affect your business
  • Determine whether rental escalation clauses are tied to a reasonable figure or are likely to leave your business struggling
  • Make sure that you have a reasonable right to sublease, if necessary
  • Make sure that any failure of the building to meet the accessibility requirements of the American’s With Disabilities Act doesn’t become your problem
  • Determine what right you have to terminate the lease
  • Make certain that you know who is responsible for the maintenance of the grounds and any common areas shared between tenants
  • Determine what would happen to your lease if the landlord sold the property
  • Advise you about the wisdom of accepting a lease that holds you to mediation or binding arbitration instead of allowing you to take a claim to court

In addition, because the laws surrounding commercial leases are often tied to the location of the lease, they can vary highly — even inside the same city. Part of an attorney’s job is to make certain that the lease is compliant with the law.

While not everyone needs help understanding the complex world of commercial leases, many new business owners can benefit from an attorney’s guidance. It helps to have a clear vision of the potential for future problems — that way, they can’t take you by surprise.

Source: Inc., “Understanding Commercial Leases,” accessed Feb. 16, 2018

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LOOK AT TENANTS WHEN DOING DUE DILIGENCE ON COMMERCIAL PROPERTY

On behalf of Michael Brooks of Law Offices of Michael A. Brooks posted in commercial real estate on Thursday, January 25, 2018.

Every buyer of multi-unit commercial property has (or should have) an extensive list of items that he or she wants to see as part of the due-diligence process.

However, when you’re focused on examining leases, warranties and records of repair, it’s easy to overlook one key item: the existing tenants. There’s information that you shouldn’t overlook if you want to make sure that the income from the property is really as stable as it seems on paper.

Here are two questions you need to ask.

1. Are there any chronic late-payers among the tenants?

This is an important factor that may not be readily apparent if you aren’t looking for it. It is something, however, that the owner will likely know — but don’t expect him or her to offer up the information unless you ask.

If there are chronic late-payers among the tenants, you need to adjust the anticipated cash flow from the property downward automatically. This is true even if the money is always eventually turned over. A chronic late-payer affects your bottom line when it comes to a secure and stable income.

2. Who makes up the property’s tenant base?

It’s also important to look into who makes up any significant portion of the property’s tenant base. Then you have to take into consideration any external political or economic factors that may impact those tenants in the foreseeable future.

There’s a certain amount of guesswork that goes into this part of the due diligence because you have to gauge how serious a threat those external factors are at the time you purchase. That means having a fair idea of market conditions and other factors both here and in the global market.

For example, if your tenant’s business depends a lot on the local Hispanic community, the current political atmosphere surrounding immigrants in the United States could dampen that tenant’s business if the community takes a serious hit from the Department of Immigration and Customs Enforcement (ICD).

Similarly, if you have a tenant whose business relies on the stability of the market in Venezuela, economic conditions in that country could suddenly throw them into bankruptcy. That, in turn, would make the property less profitable for you — just as suddenly.

Commercial real estate can be wonderful investment — but your due diligence has to be thorough to know a good deal from a bad one.

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ZILLOW IS SUED FOR VIOLATING ANTI-TRUST LAWS

On behalf of Michael Brooks of Law Offices of Michael A. Brooks posted in commercial real estate on Friday, January 19, 2018.

Is Zillow unfairly letting some of its partner brokers drop the “Zestimate” values of certain pieces of real estate in order to scare buyers away from the competition?

A New Jersey group thinks so. It’s suing Zillow for what is essentially a violation of anti-trust laws and unfair competition.

Zillow’s brand is reliant on its marketing itself as a transparent tool that any buyer or seller can use to get a somewhat realistic value of a property. It does, however, offer the disclaimer that its prices aren’t necessarily accurate. Yet, buyers who are looking for houses often see the Zestimate immediately below a home’s list price.

When the discrepancy is small, that might not be any big deal. When the discrepancy is thousands — or even millions — of dollars apart, that is likely to make buyers run the other direction.

Which is exactly what the New Jersey group says happened when it listed a mansion overlooking a cliff at around $7.8 million. Zillow valued it at less than $4 million instead.

Zillow was the first website to give consumers the ability to see real estate values for themselves, granting easy access to things like recent sales in a neighborhood and current listings. However, the Zestimate algorithm that computes a home’s value can be easily skewed — and there are real estate professionals who believe that Zillow is a nightmare to their trade.

If a real estate broker is a Zillow partner, he or she can move the Zestimate or alter it if it reads too low. Nonpartner brokers don’t have that option. That’s the basis for the unfair competition suit because Zillow allows those who partner with the company a competitive edge with consumers who take the site’s property value estimations as gospel.

While it remains to be seen how this suit will turn out, so far Zillow has weathered previous claims of unfair play because it has always been clear that it is only one data point out of a whole consumers should consider.

Perhaps the best lesson that can be taken from the whole thing is that there’s simply no replacement — for now — for professional real estate advice.

Source: GeekWire, “Zillow sued over how it displays Zestimate home valuation tool in some partner listings,” Nat Levy, Jan. 16, 2018

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CALIFORNIA TENANTS WIN CLASS-ACTION STATUS OVER LATE FEES

On behalf of Michael Brooks of Law Offices of Michael A. Brooks posted in commercial real estate on Thursday, December 28, 2017.

Equity Residential is the name of the company that controls numerous rental properties throughout California. Nationally, it’s the third-largest rental company in the United States.

Now, the company faces a class-action lawsuit in federal court from both former tenants and current ones. Considering that the company owns around 36,000 apartments, the number of litigants involved is bound to be sizable.

At issue is Equity’s policy of charging “stacked” fees to tenants who missed their rent-due dates.

Equity charges tenants who are late on their rent either 5 percent of the late rent or a $50 late fee. These fees are not defined in the leases renters sign. In addition, even if the rent is paid, unpaid late fees are assessed additional late fees. Tenants are allegedly charged these fees automatically and not notified.

In other words, if a tenant forgets to pay his or her rent by its due date, the tenant could incur a 5 percent penalty. If the tenant unwittingly drops the rent off the next day, the landlord cashes the check and then charges an additional $50 penalty for the missing late fee. If the tenant isn’t aware of the late fee and penalty or can’t afford to pay it on top of the following month’s rent, another penalty is assessed.

This sort of action is, at least according to the plaintiffs and some legal experts, a violation of anti-profiteering regulations in the state of California — although attorneys for Equity insist that late fees are the industry norm and legit.

While it remains to be seen how this case will play out, the class-action status will help plaintiffs pool their legal expertise and firepower — which may not bode well for Equity. A single tenant, or even a handful of tenants, might be overpowered in court by the rental giant. An entire class of tenants, including those who no longer live on the properties, could prevail.

This is one of the reasons its wise to have good legal advice regarding your contracts with tenants in any commercial real estate transactions. Clear leases often lead to less litigation.

Source: The Real Deal, “Equity Residential faces class-action suit in California for “unlawful” late fees,” accessed Dec. 28, 2017

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SHOULD YOU LEASE TO A CANNABIS BUSINESS?

On behalf of Michael Brooks of Law Offices of Michael A. Brooks posted in commercial real estate on Friday, December 15, 2017.

Are you thinking about leasing some property to a business that deals in cannabis?

If so, there are a few key points that you want to keep in mind when dealing with this potentially lucrative business:

Mitigate your risk

Since cannabis is still illegal under federal law, you want to put a clause in any commercial real estate contract that will allow you to terminate the lease if there is any federal action or interest in the renter’s business.

The goal is to prevent you from losing your property in a federal raid, should that happen.

You also want to include a clause that requires the tenant to notify you if there is any federal involvement, investigations or interference in the business of which you are unaware.

Otherwise, it may be too late by the time you find out to keep your property from being seized.

Enforce policies regarding insurance and licenses

Depending on the type of cannabis business (grower vs. dispensary) you want to make certain that the business is properly insured. You also want to make sure that the tenant carries additional insurance that will reimburse you if your property is damaged as a result of their grow operation or other activities.

Weed killer and pesticides, for example, can become explosive under the right circumstances. If stored improperly, they can damage the water table. You don’t want to be financially liable for any environmental or hazardous cleaning that has to be done.

You also want written into the lease a requirement that the cannabis business have all the state-required licenses for its operation. Include a requirement that they have to provide you with the documentation of those licenses and any updates.

This is merely the tip of the complex world involving cannabis businesses. It is a high-risk kind of deal, but it can also be a very lucrative one. If you have property that hasn’t been profitable in a while but happens to have the right makeup for the cannabis market, it is definitely something you should explore. Just keep good legal and financial advisers at your side to help you do a thorough examination of the deal before you commit.

Source: cascadebusinessnews.com, “Cannabis Commercial Leases: Not Your “Run-of-the-Mill” Commercial Lease,” Jennifer J Clifton, accessed Dec. 15, 2017

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CELL TOWER LEASE AGREEMENT ISSUES

On behalf of Michael Brooks of Law Offices of Michael A. Brooks posted in commercial real estate on Tuesday, December 5, 2017.

If you agree to rent your land out to be used by a cell tower company, you’re signing a very unusual sort of lease. For one thing, you’re going to sign a lease that the tenant is writing, instead of the other way around.

That means that you want to be particularly careful that you don’t fall into certain traps that are commonly slanted to favor the company over time. It’s often wise to have a lease reviewed by someone experienced in commercial real estate before you commit to any agreement.

Whatever you ultimately decide, here are some tips to follow:

1. Watch out for low payments for the “option” to rent.

Sure, the land may be sitting there doing nothing, but do you really want to take $100 or even $1,000 to let someone have the “option” of leasing your property for the next five years? Some other opportunity could come along worth far more, but you’d be stuck waiting out the option.

2. Remember that expenses go up over time.

As living costs increase, the value of the dollar goes down. What cost $1 five years ago might cost $2 now. You want to build a cost-of-living increase into the lease so that what you are being paid for the use of your land remains at current market value (CMV) over time. Otherwise, you’re cheating yourself out of money in the future.

3. Don’t lease more than what they need.

It’s unlikely that you need to lease all of your land, so don’t. You probably didn’t anticipate finding this use for your land, so you have no way of knowing what other uses you may find for it in the future.

While it’s exciting to get paid for the use of land that’s doing nothing for you, don’t cheat yourself by not keeping an eye on the future. Make sure the lease you sign leaves you plenty of options if your situation changes.

Source: Airwave Advisors, “Cell Tower Lease Agreement 7 Items To Look Out For,” Nick Foster, accessed Dec. 05, 2017

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IS YOUR GYM SOCIAL-MEDIA READY?

On behalf of Michael Brooks of Law Offices of Michael A. Brooks posted in commercial real estate on Wednesday, November 8, 2017.

When your customers are ready to “get swole” (work on fitness) they’re going to want access to social media to share their workout routines and successes. A quick browse through the #fitness hashtag on Instagram shows exercise enthusiasts posing with workout equipment, on machines or outdoors. Our ever-growing need for connection and social sharing doesn’t end when we start sweating.

Once you’ve chosen a commercial property to lease for your new facility, one of the first things you should work on is establishing good cell coverage. Here are a few tips for providing the coverage your clientele needs on your property.

1. Set up a strong WiFi network

Many cell phone users don’t have unlimited data and rely on WiFi to get on social media. Make sure you find a WiFi provider who can set up a strong network that can withstand the bandwidth of your clientele.

2. Protect your WiFi with a password – but make it easy to find

Password-protecting your business’s WiFi will keep nearby individuals from accessing and slowing the connection for your loyal gym members. But from a customer’s perspective, there is nothing more frustrating than being at a business with a password-protected connection and no easy way to find it. Employees are busy with other customers and you can’t see it anywhere, but you want to get on WiFi.

Include your WiFi password in any entry packets you give new gym members. Put up signs in visible places with the password, such as the locker room, for one-time users or those who forgot the password.

3. Consider leasing a cell phone tower

For possible instances when the WiFi network is down, having strong cell coverage will make your customers happy. Consider leasing a cell phone tower that can provide this coverage for your business. If you choose to take this route, relying on an expert to look over the terms of the lease who can spot issues you may not foresee will help you and your customers get the coverage you need at a fair rate.

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NEGOTIATING A COMMERCIAL REAL ESTATE LEASE: WHAT TO KNOW

On behalf of Michael Brooks of Law Offices of Michael A. Brooks posted in commercial real estate on Wednesday, November 1, 2017.

Commercial leases do not usually follow a standard arrangement. Rather, the terms of commercial leases can vary widely depending on the real estate market. In a hot rental market, for example, the property owner may have the upper hand in negotiations. In a stagnant market, the renter may have more power.

That’s why it is common for both parties to negotiate the terms of a commercial lease. When negotiating a commercial real estate lease, there are a few important things to take into consideration.

Rent and potential rent increases

The price of rent for a space is determined by the landlord, who takes into consideration the square footage, cost of maintenance, and other costs associated with the property. The cost of rent and potential annual rent increases will be important factors in a commercial lease, and can frequently be negotiated.

Term length

The length of a lease—otherwise known as the term—will be another crucial detail. The length of the term usually depends on how long the tenant foresees keeping their business in the space. Property owners tend to prefer a long-term lease because it circumvents the costs of trying to find a new renter.

Improvements

A commercial rental space may sometimes need improvements, depending on what the renter needs it for. The landlord and tenant can negotiate on who pays for improvements, how they will be implemented, and who will oversee them.

Permitted use

Commercial leases usually include restrictions regarding what the space can be used for. Negotiating broad usage terms can be beneficial in case the business expands or the occupant wants to sublet the space.

Subleases

Finally, in the chance that the business fails or moves to another location, a commercial real estate negotiation can determine whether the space can be sublet to another tenant.

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