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Laws Continually Change Face of Real Estate Transactions

Experts Can Help All Parties Safeguard Their Interests

The commercial real estate industry is becoming increasingly complex due to the myriad of contractual documentation, disclosures and forms required for virtually all present-day real estate transactions. Long gone are the days of the 10-page Standard AIR lease and purchase forms.

Large real-estate investment trusts and institutional property owners with in-house legal teams have been buying shopping centers and commercial properties left and right, and are far more sophisticated than the property owner of 10 years ago.

The laws are changing so fast that for tenants, non-institutional property owners and developers, it is difficult to keep up as the contracts and requirements that govern commercial real estate transactions become more detailed out of necessity.

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These days, it is not uncommon to see lease contracts in excess of 50 pages in length, with numerous attached exhibits covering the spectrum of modern-day legal disclosures. Larger tenants generally have their own team of real estate attorneys to review lease agreements. The “mom and pop” and smaller tenants, however, aren’t as fortunate. These tenants frequently rely on their brokers to review and help them understand the lease.

Unfortunately, brokers are seldom equipped to provide this level of service, and by law are prohibited from advising their clients on legal matters.

Some tenants realize the necessity of getting an attorney involved. But they make the mistake of going to the same attorney that set up their corporation, or that got them out of their speeding ticket.

– Tenants Are Often Dealt

Bad Deals Or Advice

Brokers too often see situations in which a tenant signs a lease with no or inadequate legal representation. Six months later, the tenant finds out that there are hidden fees or other unfavorable lease terms.

In other instances, many viable deals are killed when attorneys, unfamiliar with the nuances of the commercial real estate industry, try to advise and represent their clients on the business aspects, rather than more appropriately focusing on the legal aspects of the lease.

For instance, a tenant, with the help of an experienced and knowledgeable broker, has negotiated a lease deal for $1.25 per square foot, with two months of free rent.

An attorney is subsequently hired by the tenant to legally review the lease document. The attorney, knowing very little about the current trends of business terms in the real estate market, instructs the client that he should only be paying $1 per square foot and should try to get more free rent. The tenant, relying on what seems to be credible advice from the attorney, tries to renegotiate the deal and loses the property. This scenario, unfortunately, happens all too frequently.

Another tricky area for tenants is the city permitting process, as it relates to the tenant’s proposed business use. As many tenants can attest, the process of obtaining city permits for certain uses can oftentimes be a time-consuming and difficult experience.

This is especially true when a conditional-use permit is required, as is the case with many fast-food restaurants and gas stations. Here again, most larger credit tenants have in-house divisions dedicated to dealing with city permitting issues. Smaller tenants or single-store franchisees that attempt to navigate the city process without the benefit of qualified representation, however, often become overwhelmed with the process and put their transactions in jeopardy.

– Updating Contracts Can

Protect Owners

Tenants aren’t the only party behind in the game. Owners, especially those without institutional backing, need to remain vigilant and be willing to continually revise their lease and purchase agreements to ensure that they are adequately protected. Constantly changing legal precedents necessitate that standard contract provisions , such as indemnity clauses, American with Disabilities Act disclosures and hazardous materials language , must be regularly re-examined and updated to protect property owners.

For example, hazardous materials language in modern real estate contracts is much more thorough and protective than the standard provisions found in many older contracts since property owners can face significant exposure in this area.

If a property owner is contemplating entering into a lease with a gas station, or another tenant whose business entails the handling of hazardous materials, an inadequacy in this area of the lease could result in serious monetary damage to the owner and potential loss of the property.

Another example is the insurance provisions in leases. Many real estate owners continue to use older leases with insurance limits of $500,000 to $1 million, which really doesn’t give the owner adequate protection anymore. Limits now should be around $2 million to $3 million.

Developers also need to be wary of the increasing complexity of the commercial real estate arena. As with tenants and property owners, it is critical that developers remain up to speed with respect to recent changes and legal requirements in real estate contracts.

In addition, today’s savvy developer should consider enlisting representation that includes municipal consulting capability, in order to expedite the process of obtaining city entitlements. This process, especially in California, is becoming much too complex for the average broker to handle, and can even confound experienced developers.

– Experts Can Help Navigate

Development Process

An out of state developer, who was new to the development process in California, for instance, purchased a piece of property and set out to develop it. The process , between dealing with the complex California Environmental Quality Act and environmental review requirements, traffic studies, the local Design/Review Board, the Coastal Commission, the Planning Commission, and the City Council , took far longer and was more costly than the developer had anticipated in his development proforma.

The interest carry on the property, combined with the unanticipated costs, eventually forced the developer to sell the property at a loss.

Some real estate brokerage firms offer experienced legal counsel on staff. This represents a good option for tenants, owners, and developers alike, because these attorneys process real estate transactions on a daily basis. They not only understand the business aspects of the deal, but are also intimately familiar with the ever-changing legal requirements and contractual nuances inherent within the commercial real estate industry.

Whether tenant, owner or developer, chances are each struggles to keep up on the increasingly complex and dynamic environment of real estate. Every participant of a real estate transaction needs to do homework, and is well-advised to obtain the help of a qualified expert.

Seek out a firm that can not only make the deal happen, but provide critical and expert advice in legal, contractual and municipal issues that can make the difference between success or remorse.

Malcolm is associate vice president and legal counsel of Retail Properties Group, Inc., a full-service commercial real estate firm.

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