Texas Real Estate Blog

Exhibit “C” Says What?

May 17, 2011
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Yes, I have heard this lament many times by unsuspecting contractors who agree to perform tenant improvements but fail to coordinate the terms of their construction agreement with the work letter. Oh, and yes, I have heard the same lament from landlords and tenants who failed to consult with the contractor before they signed the lease. As you can imagine, it raises some real interesting issues and conflicts; hence, my children are fed for yet another day. This is just one example of why I continually preach  about the complexity of all real estate transactions let alone those involving construction. In this scenario, either the landlord or the tenant has simply agreed,under the terms of the “work letter” (attached as a long forgotten addendum to the lease)  to take on the construction of the tenant’s leasehold improvements. Simple, right? Well, the problem is that neither the landlord or the tenant is going to perform the actual work. The party agreeing to perform the task is going to hire someone (the contractor) who actually knows how to construct something. Ergo, it makes perfect sense to let the contractor in on just what work , and under what terms and conditions, it is going to perform. Simple things like time of performance, price, scope, change orders and the like, are things the contractor may want to know about. You would be surprised how often we have to try and revise the work letter post execution of the lease. Depending on who has the leverage in the transaction makes for a lively discussion! So, this articleSP-#3396770-v1-COORDINATING_WORK_LETTERS_WITH_CONTRACTOR–… deals with the key provisions that landlords, tenants and contractors must address in the context of  tenant improvements. It gives a retail scenario as an example but it applies to every lease that has a work letter. Oh, did I mention that these mistakes are expensive?

Speaking of expensive–on this date in 1918, the US Postal Service issued it’s first “airmail stamps”. They came in 6,16 and 24 cent denominations. On the second day of the sale, a man by the name of Bill Robey bought a 100 sheet of the 24 cent variety and noticed, as he headed for the door, that the Biplane-Curtiss Jenny that was on each stamp was printed upside down. Robey knew he had a hot item and assumed hundreds of similar sheets would be shortly running off the presses. (In fact, the USPS caught the mistake and destroyed the faulty ones leaving Robey with the only sheet). He quickly sold his sheet to a stamp collector for $15,000 who had already pre-sold it to another stamp collector for $20,000. About 60 years later, one single stamp sold for $198,000 which would make Robey’s sheet worth $19.8 million. Even more interesting, when airmail service actually started, the inaugural flight featured a Curtiss Jenny Biplane with the same markings as the stamp. Shortly after take-off it crashed—-upside down.  Coincidence–I think not!


Don’t Fence Me In (Or Out)

March 21, 2011
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Whenever I represent a landlord or a tenant in a retail lease matter, I always come away with a better understanding of the “bottom line”, “end of the day”, “crux of the matter” perspective of each party in the transaction. In fact, while lease negotiations can be tedious and complex, the real fun comes into play when the parties get down to the “lick log” on what they really want and need for their respective operations. This always comes into play when we get past the mundane insurance and work letter provisions and launch right into exclusivity and radius clauses. These issues get very sticky because the parameters of these restrictions and covenants can, literally, make or break either party. For example, if a tenant is not protected by some form of exclusivity, it may very well find itself with a direct competitor in the center which would potentially dilute it’s customer base. On the other hand, if the landlord does not restrict the tenant from opening another operation within a certain radius of the center, it could risk the loss of valuable percentage rents or, worse yet, base rent it the tenant fails and opts to focus it’s efforts on the sister store.  This article Exclusive_Covenants_and_Radius_Clauses is a basic, but great summary, of the issues  landlords  and tenants must consider and address in this area. My point, at the beginning of this post, is  when we get to this part of the lease we really find out where the “rubber meets the road” because it is at this point we delve into the pure economics of the relationship and determine pretty quickly who has the leverage and who is just “blowing smoke”.  One of the best examples of the importance of these provisions has to be Subway. Subway just became the largest (in numbers of units) fast food chain in the world. http://online.wsj.com/article/SB10001424052748703386704576186432177464052.html Think about it. The next time you take your kids to a Subway, notice the make-up of the tenant mix in a center where a Subway is located. See many, or any, other sandwich shops? On the other hand, how far do you have to go to find another Subway if you don’t happen to like the decor of the one you are patronizing? See where I am going?  Therein lies the importance of these provisions. Eat fresh!!

10 Key “Yawn” Insurance Questions For Leases (and other Contracts)

February 22, 2011
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I absolutely dread reading, and dealing with, the insurance provisions of leases and other contracts. My disdain for these provisions probably stems from the fact that I don’t understand them and have no standard by which to compare them to what is typically required or needed for the premises in question. However, I recently ran across an article that hits the high spots and gives good, practical and measurable ways to address the issues inherent in these provisions Insurance Basics for Landlords and Tenants As a practical matter, one of the first things I always do when reviewing a lease or other contract for a client (other than making them read the darn thing) is to copy the insurance section and have them forward that section to their own insurer for review and comment. Generally, their insurer will be able to shed some light on whether the provisions are reasonable, necessary and/or standard and, hopefully, offer a sensible and  economical solution for the client. In more complex real estate transactions such as those involving construction, I always lean on our construction/surety lawyers (and clients) for direction as these areas always seem to be in flux.

I can’t let this week go by without paying homage to “President’s Day”. I don’t care if you are politically liberal, conservative or somewhere in between  or otherwise, this is pretty funny3915_20110222_102410970


February 14, 2011
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A “Subordination, Non-Disturbance and Attornment Agreement” is an agreement that is executed between a lender, landlord and tenant as part of a lease transaction whereby, essentially, the tenant is protected from the termination of it’s lease upon a foreclosure of the lender’s lien (landlord’s loan). I address the SNDA in detail in my article found at SP-#3328973-v1-Visiting_and_Re-Visiting_Subordination__Non-Disturbance_and_Attornment_Agreements It’s an extremely important document because if the lease is subordinate (later in time) to the lender’s lien, a foreclosure will, in most states, extinguish the lease. While it’s always been an important document, it has received much more attention in our struggling real estate market due to the tenuous financial condition of many landlord’s. In fact, most leases simply require that the landlord deliver this agreement to the tenant at some point after execution of the lease. The problem with scenario is that this obligation is often an easily forgotten post closing item which does not raise its ugly head until there is a foreclosure of the tenant’s premises. In fact, I just finalized a lease transaction where we heavily  negotiated the SNDA because we were dealing with a Special Servicer.  Ergo– the landlord’s loan was in the process of re-structure and the potential for foreclosure in the near future was a real possibility. Best case is to get the SNDA executed and delivered by all three parties concurrently with the execution of the lease. That way everybody can go forward with warm and fuzzy feelings!

Speaking of warm and fuzzy feelings, today is a very special day in the hearts and wallets of every couple in love and CEO’s of greeting card companies and confectionery vendors (sorry for the image above–I could not resist!) The importance of this day, aka, “Saint Valentines Day” was hammered into my head over 20 years ago when, on the eve of a closing for one of my largest clients, I was forced to contact my bride and attempt to move our romantic dinner date to another night. She immediately informed me that I was to tell this “bell weather” client to go to “H-E double toothpicks”, because today was Valentine’s Day! Needless to say, I got the message.  Actually, V-Day was originally a religious holiday established by the Pope in 496 AD in honor of one or more Christian martyrs (Saint Valentine being the most notable). It was eventually deleted from the Roman calendar in 1969 by Pope Paul VI (unmarried of course) but remains a popular (to some) day on which lovers express their love for each other by presenting flowers, offering confectionery and sending greeting cards. Frankly, I celebrate V-day every day—just ask my wife!

    Steve Watten

    Real Estate News& Views

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