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Business attorney Yasir Billoo explains how brokers can negotiate better leases for tenants in an increasingly tight commercial real estate market.
It’s typical for a broker or agent to negotiate the business terms of a commercial lease with input from prospective tenants. But as commercial leases become lengthier and more complex, it’s important that real estate practitioners retain an attorney to review lease provisions before clients enter into an agreement.
As an attorney experienced in the areas of business and commercial law, Yasir Billoo can help you get a leg up on current trends in commercial leases. In this Broker to Broker Q&A, Billoo discusses potential ramifications from certain provisions, from personal guaranty to relocation.
During the recession, the market saw high vacancies, which gave brokers representing commercial tenants the upper hand in negotiations. What’s changed today?
Based on my experience with commercial tenants, it is clear landlords currently have leverage over most commercial tenants. Landlords are demanding higher rent, indefinite personal guaranties, and unilateral relocation and termination provisions. The larger, institutional landlords are most difficult to deal with because they have form leases from which they don’t want to deviate on the most objectionable issues. However, difficult does not mean impossible, and if prospective tenants don’t request a change to the lease, they will certainly not get it.
When representing a tenant client, why is it better to negotiate personal guaranty—which makes the business owner personally liable for debts and obligations—out of a lease in place of a larger security deposit or extra limitations?
People create corporate entities and obtain liability insurance to protect themselves from personal liability. But, after going to those lengths, they sign personal guaranties that bind them for the life of the lease, which in some cases spans 10 or more years. It is not only counterintuitive, it is counterproductive to all efforts small business owners put in place to otherwise protect themselves individually.
Why are relocation provisions popping up more and more in commercial leases?
Landlords want flexibility, plain and simple. They want the benefit of a long lease, but they also want to be able to move a tenant if they are offered higher rent payments. This is not only unfair, but it creates a terrible trend of overbidding by prospective tenants for prime space. National businesses, often referred to as anchor tenants, never agree to relocation provisions. The small businesses are hurt most by these provisions.
What is a reasonable exit strategy in a commercial lease?
The best exit strategies provide tenants with certainty for the worst-case scenarios. The best way to do that is to have a buyout provision written into the lease so that the tenant can terminate at any time, paying a specific amount of money for the option to terminate. For example, the tenant could offer to pay four months’ rent if he or she chooses to terminate the lease. Such a provision balances the scales where the landlord has termination and relocation provisions of its own.
When should a lease be renegotiated between an owner and long-term tenant? 
Lease renegotiation is a highly case-specific issue. Generally, if the amount of rent exceeds the amount of net sales produced by the tenant company, that is a good indication that something has gone wrong and the business terms of the lease should be renegotiated. Obviously, if the tenant isn’t making money, but the landlord is profiting, the lease should be renegotiated. However, a tenant who takes the provision advice discussed above will have leverage to renegotiate. A landlord who knows the tenant can leave or is insulated from personal liability will be more amenable to listening.
By: Erica Christoffer (REALTORMag)
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Commercial Properties + Smart Leaders + Optimism = A New Round of Growth for Albuquerque
ABQ The Magazine Article May 2015
Featuring 2015 CARNM President Carl Grending and 2015 CCIM NM President Scooter Haynes
With a push from retail, office and industrial needs for space, the ABQ commercial building market has taken on a new buzz in 2015. To get a clearer picture, we sat down for a Q&A discussion with six of the industry’s top local figures to get a sense of what’s real, what’s new and what’s exciting – and what’s to come in the years ahead for the skylines, thoroughfares and byways of our growing city.
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By: ABQ The Magazine
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Introduction
NAR’s Commercial Real Estate Market Trends report summarizes sales and rental activity based on a quarterly survey of commercial REALTOR® practitioners[1].  A second report, NAR’s yearly Commercial Lending Survey report provides information on commercial real estate financial issues addressed by REALTORS®.[2]  Both reports present commercial real estate information generally not available elsewhere: the average commercial transaction size in markets served by REALTORS® has been reported as in the neighborhood of $1.6 million, significantly below the $2.5 million threshold typically used by major databases in providing information on commercial transactions.  Although many REALTORS® participate in transactions above the $2.5 million threshold, in general REALTORS® report that they serve a segment of the commercial real estate market for which data are generally not reported—Small Commercial Real Estate transactions(SCRE) under $2.5 million, in contrast to Large Commercial Real Estate transactions(LCRE) over $2.5 million.
Size of the Commercial Market
Commercial space is heavily concentrated in large buildings, but large buildings are a relatively small number of the overall stock of commercial buildings.  Based on Energy Information Administration data approximately 72 percent of commercial buildings, accounting for 20 percent of commercial floor space are less than 10,000 square feet in size.  An additional 8 percent of commercial buildings, accounting for approximately 9 percent of commercial space are less than 17,000 square feet in size.  Most of these buildings would typically sell for under $2.5 million.  The buildings provide the types of commercial space that the average American encounters on a daily basis—e.g., strip shopping centers, warehouses, small offices, supermarkets, etc.  These are the types of buildings that are important in local communities, and REALTORS® are appearing to be quite active in serving these markets.
In short, the commercial real estate market is bifurcated, with the majority of buildings (81 percent) relatively small (SCRE), but with the bulk of commercial space (71 percent) in the larger buildings (LCRE).  Data are readily available for transactions in excess of $2.5 million; however, there is in general a lack of data for smaller transactions—many of which are handled by REALTORS®.  For example, the Urban Land Institute has reported an average yearly volume of commercial sector transactions for 2012-14 at approximately $360 Billion[3]; however, this estimate appears to exclude much of the 28 percent of SCRE commercial space located in relatively small buildings.
Data for a precise estimate of the level of sales associated with SCRE are unavailable. The commercial real estate sector lacks the equivalent of a residential Multiple Listing Service.  The limited information available leads to the conclusion that SCRE commercial buildings tend to sell for significantly less per square foot than do larger buildings.  Arbitrarily assuming a 50 percent price discount relative to large buildings along with the assumption that smaller buildings turn over at a lower rate, one could estimate yearly sales for SCRE to be in the neighborhood of $50 – $70 Billion annually.
Some Comparisons: Small vs. Large Commercial Real Estate Sectors
Based on NAR’s Commercial Real Estate Market Trends one can compare the two market segments—SCRE properties valued below $2.5 million vs. LCRE properties valued above $2.5 million:

• Sales: In 2014 REALTORS® reported SCRE sales volume up 10% from a year ago for the less than $2.5 million sector.  In comparison, data for the LCRE segment showed a sales volume increase of approximately 17 percent for 2014 vs. 2013. The contrast between the two markets is sharper when taking into account a longer time horizon, and it underscores the post-recession difficulties experienced in sales of smaller buildings and buildings located in secondary/tertiary markets. Over the 2009-14 period, sales volume for LCRE markets averaged 35 percent growth. For the same period, sales volume in SCRE markets averaged a negative one percent growth.

• Prices: REALTORS® reported that commercial sales prices increased 4% year-over-year during 2014.  Data for the LCRE market segment indicated an overall weighted average of transaction price increase of approximately 7 percent. Taking a longer horizon approach, the differences in price growth remain wide apart. Averaging year-over-year price growth rates for the two markets during the 2009-14 period illustrates the steep decline in valuations for assets in the SCRE markets. Even with the recovery of the past two years, sales prices in the SCRE markets from 2009 to 2014 are still down 7.6 percent. Prices in the LCRE markets are up 1.1 percent.

• Cap Rates: REALTORS® reported that SCRE cap rates averaged 8.0 percent during Q4.14.  Data for the LCRE segment for recent cap rates averaged 7 percent.  Whereas steady cap rate compression characterized the past six years in major markets, capitalization rates in SCRE markets exhibited higher volatility.  Moreover, data from SCRE markets clearly display the yield premium associated with secondary/tertiary markets. Averaging the cap rates in LCRE markets over the 2010-14 period, results in a 4-year cap rate of 6.9 percent. Applying the same procedure to data from SCRE markets, produces a 9.4 percent yield.

• Vacancy Rates: REALTORS® reported that vacancy rates in the SCRE markets were mixed across property types. For apartments, the national average vacancy rate rose to 6.8 percent (compared to rates in the 4 percent level for LCRE properties).  Office vacancies declined to 14.9 percent (roughly comparable to LCRE markets), while industrial availability rose to 11.6 percent (compared to approximately 9 percent for LCRE properties).  Retail availability decreased to 12.5 percent (compared to 9.7 for LCRE properties).  Overall, the vacancy rates showed that at the SCRE end of the markets were somewhat slower than was the case for buildings at the LCRE segment.

• Loan Availability: REALTORS® reported regional and local banks as major sources of mortgage money.  In comparison, the LCRE segment focuses heavily on insurance companies, national banks and commercial mortgage backed securities for mortgage availability.

• Sales Composition: REALTORS® reported a significant level of warehouse and suburban office sales; in comparison, the compiled data for LCRE properties indicates more of a focus on central business district and retail properties.

• International Sales: Approximately 18 percent of REALTORS® reported having international commercial clients, substantially greater than the approximately 9 percent of international sales generally reported for larger buildings.  On an anecdotal basis, some REALTORS® involved in international sales also report being engaged in commercial sales—generally small apartment buildings, possibly accounting for some of the discrepancy.

Conclusions
The bulk of commercial space appears to consist of small buildings, the SCRE segment for which many REALTORS® have reported transactions.  Some REALTORS® report working on sales of larger transactions, but the majority of REALTORS® appear to be focused on serving the enterprises in their local communities—the types of businesses and places visited daily.
Sales and price growth have been lower for the smaller types of buildings in comparison to buildings valued in excess of $2.5 million.  Rental rate growth has, however, exceeded that of larger buildings, possibly due to the use of shorter term leases and the location of properties in secondary and tertiary markets, where recent economic growth may have had a greater impact than has been the case in primary markets.  For properties under $2.5 million the major sources of financing have been in local, community, and regional financial institutions.

[1] www.realtor.org/reports/commercial-real-estate-market-survey

[2] http://www.realtor.org/sites/default/files/reports/2014/commercial-real-estate-lending-survey-2014-10-08.pdf

[3] Anita Kramer, ULI Real Estate Consensus Forecast, April 2015, Center for Capital Markets and Real Estate.
By: Jed Smith (Economists’ Outlook)
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