CRE Legal Strategies w/ Linda Leyba

[00:00:00] Welcome to the CRE Project Podcast, the show where we take a deep dive into the world of

[00:00:14] commercial real estate. I'm Clayton King, your guide through the complex environment

[00:00:19] of commercial real estate. So whether you're looking to invest, develop or simply understand

[00:00:25] how commercial real estate shapes our cities and economies, the CRE Project Podcast is your ultimate

[00:00:31] resource. Linda, welcome to the CRE Project Podcast. Well, thank you. This is a fun show

[00:00:54] for me because you and I have worked together for what? It's been years. I mean like 10 years now.

[00:01:00] It's been a long time. Yeah. And it's fun too because this is the inaugural show and

[00:01:05] I guess we'd call this a studio in the office. So thanks for making it happen. I appreciate it.

[00:01:10] Absolutely. And I think this will be a fun show. So I know you as my legal go-to comes to real estate

[00:01:18] and you're the powerhouse, very well known here locally for getting deals done. But this is actually,

[00:01:25] I was thinking about this this morning, it's actually fun because I don't really know a lot

[00:01:27] about your history. Give the listeners some background on who you are and like, I mean,

[00:01:33] I don't even know. How did you get to a point of being a solo, like have you worked for a bigger

[00:01:37] practice? What's your journey? Okay. So I'm from New Mexico. My family's from New Mexico. We've been

[00:01:45] here for 16 generations that I can actually count back. I went to school for undergraduate at

[00:01:53] Angelou State University in Texas for a couple of years and came back to UNM,

[00:01:57] finished up my degree here and then went on to law school here as well.

[00:02:00] After that, I tried to figure out what I wanted to do with myself and decided that I wanted to go on

[00:02:06] and get a master's degree in taxation. I really understand rules and regulations and things

[00:02:16] like that and I like it. And so I went and I did that for a year, got my master's of law at the

[00:02:21] University of Miami, met up with a lady there whose brother just happened to be the vice

[00:02:27] president for real estate for AutoZone. And she had invited me to go with her on the journey back

[00:02:33] from Miami to Memphis in order to help her to move back. Didn't have anything to do at the time.

[00:02:38] My plan was just to go to Mexico and hang out for a couple of months. And he said,

[00:02:43] well, come on down and work with me for a little bit and you'll make yourself some

[00:02:46] pocket money. Long story short, I got my second education, which happened to be in real estate.

[00:02:52] And just like a duck to water, I decided that that was the thing for me and that's what I started

[00:02:58] doing. I worked with AutoZone for a number of years, started out on the legal side and ended up going

[00:03:04] into the property development side and was one of their regional real estate managers for their

[00:03:09] biggest region in the country. And I did things in Texas, in Oklahoma, in California,

[00:03:15] and various other places. And that was a lot of fun. Wow. And then I worked with the

[00:03:20] gentleman there whose name was Frank Fawcett and he moved out to California to a different

[00:03:26] retailer, West Marine. And he called me out to work with him as real estate counsel for him.

[00:03:33] Ended up doing that for a number of years living in California and Santa Cruz. And, you know,

[00:03:38] there's not a bad place in Santa Cruz to live. So it was quite enjoyable time. Got to go out

[00:03:43] and find locations for West Marine while doing also real estate counsel work. Ended up doing

[00:03:49] a stint as their AVP of start development. Wow. So I've been on the legal side and I've also been

[00:03:54] on the development side. So that's been extremely helpful. And throughout my career, I've done

[00:03:58] both the landlord side and the tenant side and the buyer side and the seller side. So it's

[00:04:03] you know, kind of a well-rounded, you know, both sides of the fence type of experience.

[00:04:07] After working at West Marine, I decided that I wanted to do something different.

[00:04:12] And so I came back to New Mexico and started working with a developer here

[00:04:17] who I'm sure you're aware of, Steve Maestes. And worked with him for a couple of years and

[00:04:22] doing my thing there. Then we hit that wonderful dip in the economy in real estate and went out on

[00:04:29] my own. You know, did that for a few years, decided that I wanted to, you know, right after

[00:04:34] the pandemic go in and work in-house. So I worked for another developer this time

[00:04:40] doing housing. Decided that wasn't for me and wanted to come back into private practice

[00:04:45] and that's where I'm at. Interesting. So why, I'm just curious, like why did you never choose the

[00:04:51] path of going to like a bigger firm locally here? Well, you know, the bigger firm locally here

[00:04:59] was never one of those things that I wanted to do. I was offered a couple of positions

[00:05:05] some larger firms in Miami. And you know, had I taken that path, it would have been a very

[00:05:10] different outcome I think for me. But you know, I was never into the working, you know,

[00:05:16] 3000 hours a year type of thing with billables and all of that stuff. I wanted to do some of

[00:05:22] the more creative deals. I wanted to feel like I was actually helping my clients. And so I've,

[00:05:28] you know, gone down that path and it's all been great. Cool. Yeah. I love it too. It's

[00:05:33] just, I was wondering if you were by nature just an entrepreneurial type of spirit, if that's

[00:05:38] the reason that you kind of chose to go that path. I think you could probably say that. Yeah,

[00:05:43] yeah. Good for you. Oh, that's awesome. So I didn't know that you just kind of dove right into the

[00:05:47] corporate real estate side of things. That's interesting. You and I have never talked about

[00:05:55] little did I know. So well, cool. And you've been at it for 30 years. So that's impressive.

[00:06:02] Okay. So let's dive in because like I kind of mentioned, I want this to kind of be a meaty

[00:06:09] podcast on legal kind of strategy for a lot of the listeners out there. Let's just dive right in.

[00:06:17] Why is it important to hire a commercial real estate specific attorney versus obviously the

[00:06:24] residential component? And again, you're specialized in a certain component with

[00:06:28] our certain area within commercial real estate. Talk to us. Why is that important?

[00:06:33] It's important because there's various aspects of real estate. Let's differentiate between a

[00:06:38] real estate attorney and say an attorney that does probate wills and trusts. You know,

[00:06:42] they're very specialized portions of the law. I kind of liken it to a doctor. You wouldn't go

[00:06:49] to a brain surgeon in order to get your foot checked type of deal. They're specialized knowledge

[00:06:55] for doctors as there are for attorneys. Now I'm not saying that it's the same type of deal, but

[00:07:01] you want to go with somebody who has that knowledge specific to the field that you're in.

[00:07:08] And commercial real estate is one of those that has enough of a difference from other types of

[00:07:12] law that you really need to be able to understand it when you're negotiating with an attorney

[00:07:17] that doesn't have a real estate background. It's apparent in the first 30 seconds.

[00:07:21] I was going to say that. And that's not to say anything bad about their skills or anything like

[00:07:26] that. It's just different. There's a different language. There's different considerations

[00:07:31] that you have to be aware of. And most of this is just going in there and being prepared for

[00:07:36] the negotiation, being prepared for whatever comes up in the particular transaction.

[00:07:41] I think it's interesting too in the commercial real estate space specifically versus

[00:07:46] residential or other contract negotiations for that matter is vast majority of commercial

[00:07:52] real estate transactions have different contracts. Yes. Unless you want to get hurt,

[00:07:56] kind of makes having legal representation almost a given. It's a necessary to have.

[00:08:02] Well, just on the leasing side, I made myself a little list here so I wouldn't forget all of

[00:08:09] the particular leases that you could have. But there's every mutation you can possibly have.

[00:08:17] There's a shopping center lease, there's an inline lease, there's an out-person lease,

[00:08:21] there's a bill to suit lease, there's a special use lease, something that you would use for

[00:08:27] like a cannabis transaction where you have specific items that you need to address.

[00:08:32] In a purchase and sale agreement, there's raw land purchase and sale agreements. There's

[00:08:38] purchase and sale agreements that have a building on it, that have multiple tenants in it.

[00:08:45] There's every variation of mutation that you could possibly imagine.

[00:08:49] And the ideal would be to have the right document going into the program. I was

[00:08:54] reviewing a document yesterday and it was actually a property management agreement

[00:08:58] and the folks were using what was clearly a federal form in bringing that into New Mexico

[00:09:04] and trying to impose it on one of my clients. And the requirements in it were just,

[00:09:10] they were atrocious. So you want to go in with the right form to not only form the

[00:09:15] right relationship but also to have the best transaction to make sure that you're covered

[00:09:20] and to get the deal done. Yeah, it's always interesting to me,

[00:09:24] some people's perspective on using an attorney and legal fees because I'm like,

[00:09:29] in our business, you're signing 10, 15, 20 year, even a five year agreement or you're buying

[00:09:36] a million dollar piece of real estate and you're chinsing out if you will on paying

[00:09:41] legal fees to protect yourself on a potentially 20 year commitment. I don't know,

[00:09:46] sometimes it just doesn't add up to me a lot of the time.

[00:09:48] Well, I would say that the first time that you have an issue with your lease is actually

[00:09:54] going to cost you more than the attorney that you spent negotiating the lease with

[00:09:59] if you don't go with an attorney. So it depends on how you want to spend your money and it depends

[00:10:03] on how late in the game you want to find out that you're actually responsible for a roof

[00:10:08] or something like that. And it happens all the time. Correct. I mean, all the time. We'll get,

[00:10:13] we'll sign a lease and you'll get that call whether you're on the landlord side or you're

[00:10:18] not the broker. I've gotten the call sometimes saying, I have this issue and I'm like, well,

[00:10:23] I mean, it's in the lease. So you had ample time to review it. Did you review it? Did you read it?

[00:10:30] So it's just a, yeah, it's just a dynamic in our business. So real estate council is

[00:10:35] absolutely necessary. Anybody listening highly recommend you getting representation or

[00:10:40] negotiating any type of commercial real estate documents. So let's dive into due diligence,

[00:10:45] kind of explain that to us from a legal mindset and what do you do for your clients

[00:10:50] and what is important during the due diligence process when you're buying a commercial asset?

[00:10:55] Well, you know, due diligence, I think starts when you decide that you want to buy an asset or

[00:10:59] you want to lease an asset. You need to find out, is that particular location going to be properly

[00:11:07] zoned for you? You need to find out, of course, who owns it, how much they're asking and things

[00:11:12] of all that nature before going into what's called a letter of intent. So you need to do

[00:11:17] some due diligence and work with a good broker that's going to help you prior to entering into

[00:11:22] that letter of intent, because that's the basis for your future document, whether it's

[00:11:27] an agreement to purchase or it's a lease. Then there's another aspect of due diligence that comes

[00:11:33] during the, you know, lease itself or during the purchase of the property, the inspection period.

[00:11:42] So things that I believe you must have include a phase one, and that's an environmental

[00:11:46] assessment report, which you know will go out and see if you have any recognized environmental

[00:11:51] concerns. I think you need to have a title search because you need to know whether or not the person

[00:11:56] that you're buying the property from, releasing the property from has proper title, you know,

[00:12:00] whether there's leans against it, whether there's mortgages, you know, how are those going

[00:12:03] to impact either your lease or your purchase of the property? You need to have a survey.

[00:12:08] The survey will show you whether or not there's encroachments, whether or not you have a

[00:12:12] legal lot and things of that nature that you need to know before entering into these types

[00:12:16] of agreements. Things that I think you should also have include a building inspection. If you're

[00:12:21] buying a building, you need to know whether or not that roof is, you know, on its last legs. You

[00:12:26] need to have an HVAC report. You need to know what you're getting into with regards to a particular

[00:12:31] building. You also need to do a little bit of research on if you're entering into a lease

[00:12:37] and you happen to be a landlord or if you're a tenant and the expectation comes from you,

[00:12:41] that you need to provide financials. You need to show them that you're experienced or inexperienced

[00:12:46] and how you're going to deal with that. You need to have a plan, you know, so these are some of the

[00:12:51] things that if you're purchasing a property or if you're leasing a property, the landlord or

[00:12:56] tenant you should be aware of with regards to due diligence. Have these basics. There's others

[00:13:00] that can be included as well, but those are just the basics that I think you need to have.

[00:13:05] Yeah, I agree. And I think in the due diligence period, at least with me personally,

[00:13:10] I always engage you when it comes to specifically title and survey. So I'd like to just have you kind

[00:13:19] of touch on that a little bit. When you have a client send you a survey along with a title,

[00:13:25] how do you view it legally and what are you looking for?

[00:13:28] So what I'll do is I'll get the survey and basically look at the four corners of the

[00:13:32] document. You kind of just go around from one side all the way around to the other and

[00:13:36] you look for encroachments. You look to see where the easements are. If your client has let

[00:13:41] you know that this is going to be redevelopment and you see whether or not a building is going

[00:13:44] to be placed in an easement and whether or not that's going to be an issue, you look for access.

[00:13:49] You look for anything that's going to impact the development of the property for your particular

[00:13:54] client and any other things that might actually affect title. The survey goes over to the title

[00:14:01] company and the title company can take exception to certain things that are located on the survey

[00:14:05] such as an encroachment, a sign that happens to be located in the middle of an easement area,

[00:14:12] a driveway that shouldn't be there that doesn't have a permit, things of that nature.

[00:14:17] So really quick not to interrupt you but for those listening what is an exception? What does

[00:14:22] that mean? An exception to title is basically something that the title company takes on your

[00:14:27] insurance that is an exclusion from coverage. So you buy title insurance in order to ensure

[00:14:33] that the title to the property is and I say this kind of loosely without fault.

[00:14:40] And when I say without fault there's exceptions to those particular items as well. One of those

[00:14:46] is an encroachment, an encroachment that's visible on a survey. A title company will say,

[00:14:51] you know, you're aware of it, we're not going to actually ensure for any issues regarding

[00:14:56] this particular encroachment. So that being said my job is to then go and see what I can do

[00:15:01] to get rid of that encroachment either by entering into an agreement with the other party

[00:15:06] that's doing the encroaching to alleviate the issue with regards to, you know, some sort of

[00:15:12] title exception. So you just kind of work through the survey and the title commitment,

[00:15:17] which is something that the title company gives you approximately 10 days after you order it,

[00:15:21] sometimes a little more, sometimes a little less. And you work with the title company as

[00:15:25] well. You work with your clients as well to see what you can do to resolve these things

[00:15:29] because the goal is to have clean title. Yeah. Where's the tell us a war story? Where's the

[00:15:34] biggest issues when it comes to this? You know, some of the biggest issues I'm seeing lately

[00:15:40] are folks that are transferring their assets into revocable trusts and then not actually

[00:15:48] transferring the property into the trust by deed. So they have a revocable trust and,

[00:15:53] you know, it says I transfer all my property into this trust, but they don't

[00:15:58] put a deed to that and they don't record that. You know, and especially if this happens several

[00:16:03] times, you know, and one of the folks happens to die, then you go back and you see that,

[00:16:07] you know, the first person three, you know, transactions ago was still entitled. And then

[00:16:12] you have to go back in and open probate for two or three or four people, depending on what the

[00:16:17] issue is. Nightmare. The other, especially here in New Mexico is deathbed transfers.

[00:16:22] You know, where grandma or grandpa, you know, says I'm going to transfer this property over to

[00:16:27] you. And again, a deed never gets recorded. You know, it's word of mouth and then you have to go

[00:16:32] back and, you know, open up a probate and all of these other things in order to get these things

[00:16:36] resolved. So clearing title is one of the bigger issues that I'm seeing. You know, and

[00:16:42] it happens more often than I would like to say it should. But we still, you know,

[00:16:48] to this day have people that are transferring properties that don't actually record a deed.

[00:16:52] Interesting. So what about encroach? I always seem to see encroachments and easements.

[00:16:58] Yes. What's a really bad, I know you had to have a ton. Like what's a bad story as it relates

[00:17:03] to that? You know, some of the bigger ones have to do with an encroachment for like an easement,

[00:17:08] like a gas line or a water line or something like that. And somebody builds their house into

[00:17:13] the easement, you know, happened to build over a water line or happened to build over something

[00:17:18] like that, you know, brand new house and it's in an easement. And, you know, it's touch and go

[00:17:23] whether or not the company is going to require that that building be, you know, removed, that

[00:17:28] the building be, you know, made smaller, you know, so those are some big touchy issues.

[00:17:34] Usually the banks will review encroachments and that'll end up messing up your lending.

[00:17:40] So there's things like that. Having to remove a sign, you know, you pay $15,000 for your commercial

[00:17:46] sign and you happen to put it into the gas easement gas company for some reason doesn't want that sign

[00:17:51] in there and you have to move the sign. It's a costly and costly endeavor.

[00:17:54] I'm just curious, like, okay, so you have an adjacent property owner or even you,

[00:18:01] like, you put up a brick wall and it's a foot on this other person's property

[00:18:09] and it's there for 10 years. This person goes to like what happens?

[00:18:14] So if it's there for over 10 years and they're paying taxes on it and it meets basically

[00:18:20] these certain criteria, legal criteria, they could claim right to that property.

[00:18:25] And so what you want to do is you want to break the timeline that they've had over that particular

[00:18:30] piece of property by entering into, like I said, a boundary encroachment agreement

[00:18:34] to show that that particular piece of property still belongs to your property.

[00:18:38] And it hasn't reverted to the other side because of their use of the property.

[00:18:43] So that's one of the reasons why encroachments were so important

[00:18:47] in dealing with them and trying to get them resolved.

[00:18:50] Could the new owner though come in and just tear the wall down?

[00:18:53] They could, some have and you end up being sued for that because it's not your wall.

[00:19:01] So it's a very delicate balance.

[00:19:02] So that's interesting.

[00:19:04] So they own the wall because they paid for the bricks to build the wall,

[00:19:09] but it's on your real estate.

[00:19:10] So if you go in there and demo it, you're essentially

[00:19:15] demoing their property.

[00:19:16] Correct.

[00:19:18] And what do they sue you for? The cost of the wall?

[00:19:20] You know, that's always open to what the attorney is pulling to work with them on.

[00:19:26] And you know, I'm not a litigator, but I would go after the cost of the wall.

[00:19:30] All these fun little scenarios.

[00:19:32] We could talk all day about stuff like that.

[00:19:34] So what about leases?

[00:19:36] Talk to us about that.

[00:19:37] What do you do in the due diligence period for your clients as it relates to leases?

[00:19:41] You know, it really depends again on the type of lease as well.

[00:19:45] You know, but I think that the initial items that we discussed,

[00:19:48] you know, the phase one, the survey, the title, those are all very important items.

[00:19:52] You know, depending on the particular tenant, the particular landlord,

[00:19:56] you know, the size of the deal, the duration of the deal,

[00:19:59] it might be almost like doing a purchase agreement.

[00:20:02] So you have to make sure that you, you know, do those types of things.

[00:20:05] One of the things in being a tenant is you really need to make sure you go in

[00:20:08] and you put your eyes on it and, you know, see if there's issues with the HVAC,

[00:20:12] see if there's issues with the roof, see if there's parking issues,

[00:20:15] see if you know, there's other things.

[00:20:17] Do you have the ability to be able to operate in that particular location?

[00:20:20] Is the zoning correct for you?

[00:20:22] And then the big thing is also looking at the title because you want to make sure

[00:20:26] that there's no title restrictions that are going to prohibit your particular use in that

[00:20:31] center.

[00:20:31] And this happens to be from a landlord perspective and a tenant perspective.

[00:20:35] You know, some landlords will purchase a shopping center and not fully get into

[00:20:39] these shopping center restrictions if they're part of a bigger one.

[00:20:43] You know, and not know that they're, you know, trying to lease out to a, you know,

[00:20:48] chicken restaurant and there's a chicken restriction on the property.

[00:20:51] So you need to have somebody that's going to help you to look at those documents.

[00:20:55] And, you know, some of these restrictive covenants, they can be anywhere from,

[00:20:58] you know, 80 to 150 pages long.

[00:21:01] Yeah, brutal.

[00:21:01] And they're really small print and, you know, they're single space and things

[00:21:05] like that.

[00:21:05] So if you don't have somebody helping you to look at that,

[00:21:08] you know, you're going to two or three pages into it, just cross your eyes

[00:21:11] and say, I don't know what I'm doing.

[00:21:13] So you need to have somebody who, you know, is good at looking at these types

[00:21:17] of things help you with those.

[00:21:18] Yeah.

[00:21:18] Devil is in the details when it comes to that stuff for sure.

[00:21:22] And I mean, that's like a nightmare scenario you do and build out for a

[00:21:26] certain restaurant or certain type of concept.

[00:21:29] And then all of a sudden you get a letter from the group in the CCNRs

[00:21:33] that says, well, you know, it's a restricted use.

[00:21:36] So yes, then you kind of all feel like it.

[00:21:39] Yes.

[00:21:40] That's not when you want to find out about them.

[00:21:41] Hello, kid.

[00:21:43] So, so yeah, let's dive into purchase agreements specifically.

[00:21:49] So I kind of want to do purchase agreements and then Lisa.

[00:21:51] So with purchase agreements specifically, let's talk about kind of your top three

[00:21:56] legal points to really pay attention to when you're negotiating and

[00:22:01] working with the commercial real estate purchase agreement.

[00:22:04] So I really, the first thing I look at is timelines.

[00:22:08] Can you make sure that within the constraint of the timelines that you have in

[00:22:13] that particular document do all the things you need to do?

[00:22:16] You know, is this a land deal or is it an existing building because each one's

[00:22:20] going to have a different timeline?

[00:22:22] You know, when does the contract start?

[00:22:25] When does the earnest money get deposited?

[00:22:27] You know, of course, if you happen to be the seller you want it deposited

[00:22:30] when they sign the document.

[00:22:32] When you're the purchaser, you want to sign, I mean, you want to put the earnest money in,

[00:22:36] you know, two or three days after to make sure that you have time to get that done.

[00:22:39] When does the seller deliver the deliverables that the seller has,

[00:22:44] you know, existing survey, existing phase one and things like that?

[00:22:47] How is that going to impact your timeline for your due diligence period,

[00:22:50] your feasibility period?

[00:22:51] Do you have a permitting period?

[00:22:54] You know, and like I said, it really depends on is this a redevelopment?

[00:22:57] Is it raw land?

[00:22:58] What's going to be happening?

[00:23:00] Are there extensions?

[00:23:01] Are there extensions for money?

[00:23:02] What's the timeline with regards to closing?

[00:23:05] What are the cure periods for default?

[00:23:07] What are the other timelines that are important in this particular transaction

[00:23:12] that you need to be aware of?

[00:23:13] Is the seller going to be doing some work prior to closing?

[00:23:16] Is the seller doing work after closing?

[00:23:19] You know, is there a replat that needs to happen?

[00:23:22] There's all of these timeline items that you just need to get a really good handle on

[00:23:27] to make sure that your contract addresses all of these timelines

[00:23:31] and the timely performance under those timelines as well.

[00:23:34] So do you typically put together the timelines?

[00:23:37] Because it's interesting in transaction.

[00:23:39] Sometimes I see the title company do it,

[00:23:40] other people want the brokers to do it,

[00:23:42] sometimes the attorneys do it.

[00:23:45] I do it as a matter of course for myself

[00:23:49] and for some clients who want that information,

[00:23:52] I provide it to them as well.

[00:23:54] The first person that I ever saw do them was a broker

[00:23:58] and I thought he had just hung the moon.

[00:24:00] It was the most wonderful thing ever because I didn't have to do it.

[00:24:04] But since I'm writing the contract in a lot of instances,

[00:24:06] I'll actually put the timelines together

[00:24:08] and if the client wants the timeline,

[00:24:11] then I will provide it absolutely.

[00:24:12] Yeah, I mean, I'm heavily in favor of always having your legal do stuff

[00:24:17] because timelines can cost you 100 grand with earnest money

[00:24:22] if you miss it by a day.

[00:24:24] So it's important to make sure.

[00:24:25] I know I've reached out to you in the middle of the weekend

[00:24:29] because it comes to my minds and what's the date on that?

[00:24:32] So it's important to make sure that you have your timelines

[00:24:38] definitely buttoned up when it comes to a purchase agreement

[00:24:40] that could cost you a lot of money,

[00:24:41] which leads us to our next point.

[00:24:43] What about money?

[00:24:45] Well, money, you need to make sure that you understand

[00:24:47] what's going on with the money in a particular contract

[00:24:50] and in this case, a purchase agreement.

[00:24:53] What's the purchase price?

[00:24:54] How is that determined?

[00:24:55] Is it on a per square foot basis?

[00:24:57] Is it a deemed amount?

[00:24:59] What's the expectation of the client with regards to that?

[00:25:02] Earnest money, how much earnest money is going to get put down?

[00:25:06] As a broker, you have a rule of thumb.

[00:25:09] My rule of thumb is how much does it cost in order to make sure

[00:25:13] that they comply with the terms of the agreement?

[00:25:16] Is that a 10% or 20%?

[00:25:17] How much can you ensure that they will put down to comply with the terms?

[00:25:22] Who pays for what at closing?

[00:25:23] Who's going to be paying for the phase one survey?

[00:25:25] Who's going to be paying for the title commitment?

[00:25:27] Who's paying for the title insurance?

[00:25:29] Who's paying for the replat?

[00:25:30] Who's paying for what are these other things that happen to be costs?

[00:25:34] I don't want to call them nickel and dimes,

[00:25:36] but you want to make sure that you understand this

[00:25:38] because at the time that you put your settlement statement together,

[00:25:41] all of these things add up.

[00:25:42] And you'll see that your contract price,

[00:25:45] which is what you thought you were getting,

[00:25:47] is not going to be what you're getting.

[00:25:48] So you need to be aware of all of these costs

[00:25:50] and keeping track of them as well.

[00:25:52] Yeah, definitely good to know where your pennies are going.

[00:25:56] That's for sure because it can add up real, real fast.

[00:25:58] So the next point, I think you're the one that told me this

[00:26:02] or I heard it from somebody,

[00:26:03] but it said agreements are not made for times that are good.

[00:26:06] They're made for times that are bad.

[00:26:08] Absolutely.

[00:26:08] So I've always kind of remembered that.

[00:26:11] So talk to us about defaults.

[00:26:14] So default is where, and I always try and say this

[00:26:18] in a positive spin, despite the best intentions of the party,

[00:26:21] somebody doesn't do what they're supposed to do.

[00:26:23] And how do you deal with that?

[00:26:25] I'm a big believer like in puppy training

[00:26:27] that if something happens, address it immediately,

[00:26:31] address it swiftly, address it so that you can move on.

[00:26:34] If somebody is in default, don't wait five or six days,

[00:26:37] don't send texts, don't send emails, don't send phone calls,

[00:26:40] send them a letter as required under the particular agreement

[00:26:43] and then work it out.

[00:26:45] You need to be able to get through these items.

[00:26:47] Default under purchase agreement can be anywhere from

[00:26:50] three days to 30 days, depending on the length

[00:26:53] of the particular agreement

[00:26:54] and how egregious the default happens to be.

[00:26:56] Sometimes a default will lead to a termination of an agreement,

[00:27:00] but a lot of instances it is basically a missed date

[00:27:06] or a misunderstanding.

[00:27:08] And those items hopefully you can resolve

[00:27:10] because I believe the two willing people who want to actually

[00:27:13] get a deal done will get a deal done.

[00:27:15] You know, there's some instances where you just can't

[00:27:18] and that's fine too and you need to walk away from those.

[00:27:21] So a default, you want to make sure that on the buyer side,

[00:27:26] you get your earnest money back if there's a default

[00:27:28] on the side of the seller.

[00:27:30] You want to have specific performance

[00:27:33] if you can get specific performance

[00:27:35] and you'd like to have damages in New Mexico.

[00:27:38] A lot of instances you don't get that,

[00:27:39] but specific performance and earnest money back

[00:27:42] are generally things that you can get.

[00:27:43] And what specific performance for those that may not know?

[00:27:47] Specific performance is where the seller has decided

[00:27:50] or not decided they've just not sold you the piece

[00:27:53] of property and you could take them in the court

[00:27:54] in order to enforce the sale

[00:27:56] of that particular piece of property.

[00:27:58] So if they get cold feet and say,

[00:28:00] I don't feel like doing this anymore.

[00:28:02] Well, it's generally not cold feet.

[00:28:04] It's they've got a better deal on the line

[00:28:05] and they decided to kick you to the curb.

[00:28:08] Got it.

[00:28:09] And this is the way that you can bring your dad

[00:28:12] with a shotgun to the wedding to make sure it happens.

[00:28:15] On the other side, if the buyer defaults,

[00:28:17] the seller definitely wants to keep the earnest money.

[00:28:20] Again, like I said before,

[00:28:21] determine what the earnest money is

[00:28:22] to keep everybody honest and keep the deal moving forward.

[00:28:25] Sometimes it's a very painful way to part ways,

[00:28:28] but sometimes you have to give it up.

[00:28:31] And also a seller wants to have damages.

[00:28:34] Generally in New Mexico,

[00:28:35] you're not going to get much damages.

[00:28:36] You might get some,

[00:28:38] but that's a trade-off generally for the earnest money.

[00:28:41] So what's the most common default that you see

[00:28:45] in all the transactions that you work on?

[00:28:47] Most common is just date slip.

[00:28:50] Yeah, that's what I figured.

[00:28:51] Yeah.

[00:28:51] And in particular, a certain item are just in general.

[00:28:55] Just in general.

[00:28:56] I mean it typically gets,

[00:28:58] I don't know what the right word is,

[00:29:00] aggressive when one,

[00:29:02] it seems like they both go under contract,

[00:29:04] they're happy.

[00:29:05] And then like you said,

[00:29:06] a better deal comes along,

[00:29:07] or they're getting a change of heart.

[00:29:10] And then all of a sudden there's one little slip

[00:29:12] and then that's when you see a lot of this conflict happen.

[00:29:15] Yes.

[00:29:16] Yes.

[00:29:17] Not a fun time.

[00:29:18] No.

[00:29:18] Unfortunately.

[00:29:20] But it happens.

[00:29:21] So and again,

[00:29:22] that's why it's important to have legal representation.

[00:29:25] Absolutely.

[00:29:27] Cool.

[00:29:28] Well, thanks for sharing those top three with us.

[00:29:30] What about leases?

[00:29:32] Which are, man, I mean,

[00:29:35] you want to talk about, you know,

[00:29:37] needing representation when it comes to a commercial lease,

[00:29:40] especially with different lease structures,

[00:29:42] which we can talk about that.

[00:29:43] But what are kind of your top items

[00:29:45] when negotiating a commercial lease agreement?

[00:29:49] So I kind of break leases down into three categories.

[00:29:53] One is the responsibilities of parties.

[00:29:55] One is the,

[00:29:57] and that's how financial responsibilities.

[00:29:59] One is the repair and maintenance responsibilities.

[00:30:02] And then you have an allocation of risk.

[00:30:04] And, you know, most things can actually go into those three categories.

[00:30:09] So the financial responsibilities of the parties are,

[00:30:12] you know, is this,

[00:30:14] and I'm going to use a whole bunch of terminology here.

[00:30:16] Is this a gross lease?

[00:30:17] Is it an absolute net lease?

[00:30:19] Is it a triple net lease,

[00:30:20] a double net lease,

[00:30:21] a single net lease?

[00:30:22] You know, what type of lease is this

[00:30:25] and who's responsible for what?

[00:30:27] The fun thing about those particular terms

[00:30:30] is that they're not universal terms.

[00:30:32] And you need to ask the other side

[00:30:34] what they believe the definition to be.

[00:30:35] Amen to that.

[00:30:36] It's like vanilla shell.

[00:30:37] Yeah.

[00:30:38] You know, there's certain things

[00:30:39] that everybody has an idea of what they are.

[00:30:41] They just don't have all the same idea.

[00:30:43] So the financial responsibility of the tenant

[00:30:46] is the tenant going to be responsible

[00:30:47] for paying the rent plus operating costs,

[00:30:50] plus insurance, plus taxes,

[00:30:52] you know, is the tenant going to be responsible

[00:30:55] for, you know, only a portion of that.

[00:30:57] So who has the financial responsibility?

[00:31:00] In a single net lease, a tenant is going to be paying for,

[00:31:03] usually taxes, sometimes insurance,

[00:31:06] and the landlord is responsible financially

[00:31:09] for the rest of the items.

[00:31:10] The tenant will pay always, of course, the rent.

[00:31:13] So it really is who is going to be responsible

[00:31:16] for paying what?

[00:31:16] And that's one of the big aspects.

[00:31:18] That's the most important aspect

[00:31:20] for anybody entering into a lease

[00:31:22] on the landlord side,

[00:31:23] because that's where you get your money

[00:31:25] and on the tenant side,

[00:31:26] that's where all their money leaves.

[00:31:28] The next item is repair and maintenance responsibilities.

[00:31:31] Huge.

[00:31:32] Who is going to be responsible for what?

[00:31:34] Is the landlord responsible?

[00:31:35] Is the tenant responsible?

[00:31:36] Is it a capital cost?

[00:31:38] Is it, you know, a non-capital cost?

[00:31:42] I also look at this from a very practical standpoint.

[00:31:46] Who has the greater risk

[00:31:48] in a particular repair and maintenance obligation?

[00:31:51] Is it the landlord or is it the tenant?

[00:31:53] And I would say that a landlord

[00:31:54] that puts the responsibility

[00:31:56] for a tenant to fix a roof

[00:32:00] is asking for trouble at some point,

[00:32:02] because the risk of having that roof, you know,

[00:32:06] go out at a certain point

[00:32:07] and the tenant not being able to deal with it

[00:32:09] is just in my opinion too much risk.

[00:32:11] And so I'd like to have the landlord

[00:32:13] to take care of those

[00:32:14] and the tenant to be responsible

[00:32:15] for reimbursement if that's the deal.

[00:32:17] I was going to say,

[00:32:17] so like a good remedy to that

[00:32:19] is just as a landlord,

[00:32:20] you can charge it reserve on a pass through

[00:32:23] or what's your thoughts on that?

[00:32:25] It depends on the particular tenant.

[00:32:27] The bigger the tenant, the less chance of you

[00:32:30] passing reserve onto a tenant.

[00:32:33] So it depends on the particular deal,

[00:32:36] but it's just a risk versus responsibility.

[00:32:39] Also one of the things, again, with practicality is

[00:32:42] is the tenant actually able

[00:32:43] to take care of these types of things?

[00:32:45] You know, you get some smaller tenants

[00:32:47] who could be their first lease

[00:32:50] and the landlord wants to put HVAC responsibility on them.

[00:32:54] Well, you know, do so at your own risk

[00:32:55] because they may not know

[00:32:56] how to get the HVAC guy out there

[00:32:59] or there's going to be a lot of education

[00:33:01] that's going to be involved

[00:33:02] in these things as well.

[00:33:04] So, you know, from a practical perspective,

[00:33:06] being an attorney,

[00:33:07] you need to understand,

[00:33:09] you know, the strengths and weaknesses

[00:33:10] of not only your particular landlord

[00:33:12] if you're representing the landlord

[00:33:14] but your tenant

[00:33:15] if you're representing the tenant

[00:33:17] and vice versa.

[00:33:18] So you kind of have to look at it holistically

[00:33:21] who's responsible for what

[00:33:23] and how are they going to deal with it?

[00:33:24] So I'm going to kind of have a little fun

[00:33:26] little side note here.

[00:33:27] So I want you to wear two different hats here

[00:33:30] because HVAC always comes up all the time.

[00:33:34] So from a landlord's perspective,

[00:33:38] how do you negotiate putting that responsibility

[00:33:41] on the tenant?

[00:33:43] What's your position on that?

[00:33:44] So from a maintenance perspective,

[00:33:47] it's pretty easy,

[00:33:48] you know, require the tenant

[00:33:50] to maintain a contract for maintenance.

[00:33:52] From the repair's perspective,

[00:33:54] it's the same type of deal.

[00:33:55] You know, the person who's doing your maintenance

[00:33:57] occasionally call them out there

[00:33:58] and do whatever repair it happens to be.

[00:34:00] Now where you have an issue

[00:34:02] is trying to negotiate with a tenant

[00:34:04] to do a replacement.

[00:34:06] Correct.

[00:34:06] Yeah.

[00:34:07] You know, so one of the things

[00:34:08] that you can start off with as a landlord

[00:34:10] is you put in new HVAC units

[00:34:12] and you tell them, you know,

[00:34:13] hey, these are brand new,

[00:34:16] you know, your lease is for five years

[00:34:17] with three five-year options.

[00:34:19] You may squeak by with not having to put one in

[00:34:21] but you know, you're responsible

[00:34:23] for repairing maintenance.

[00:34:24] So you're going to be responsible

[00:34:25] for replacement as well.

[00:34:27] And you know, a lot of tenants

[00:34:29] will look at that and say,

[00:34:30] okay, I'm willing to do that.

[00:34:31] You know, on the on the tenant side,

[00:34:35] you always want to see what you can do

[00:34:37] to make the landlord do as much as possible

[00:34:39] for the rent that you're paying

[00:34:40] and not additional rent.

[00:34:42] You know, so you point out,

[00:34:44] hey, this is my first store.

[00:34:45] I, you know, I don't have the experience

[00:34:46] in HVAC.

[00:34:48] You're probably as a tenant

[00:34:49] still going to be responsible

[00:34:50] for doing minor repairs and maintenance,

[00:34:53] you know, changing belts

[00:34:54] and you know, changing filters

[00:34:56] and things like that.

[00:34:58] But see what you can do

[00:34:59] to get out of having to do the actual replacement

[00:35:02] because that's a huge cost for a store.

[00:35:04] Yeah, it's always a touchy subject

[00:35:08] and always an interesting one to negotiate

[00:35:10] because what I always see

[00:35:12] from the landlord's perspective

[00:35:13] is they always say, well,

[00:35:14] I'm not the one using it daily.

[00:35:16] I don't, I'm not the one that's,

[00:35:18] you know, actually handling

[00:35:20] how it's being used

[00:35:21] and to your point,

[00:35:22] how it's being maintained.

[00:35:24] So I don't feel like it should be

[00:35:25] my responsibility as a landlord

[00:35:27] to replace it.

[00:35:28] You know, I think when it comes

[00:35:30] to HVAC what I always tell everyone

[00:35:32] you touched on this,

[00:35:33] I think there's the legal aspect of it

[00:35:35] and I think there's also

[00:35:36] the practical aspect of it.

[00:35:38] I mean, when you're dealing

[00:35:39] with local tenants,

[00:35:41] they don't have, you know,

[00:35:43] 14, 16 thousand dollars

[00:35:45] to replace HVAC units

[00:35:46] on a unit or, you know,

[00:35:48] on a space a lot of time.

[00:35:49] So it's just interesting to see that dance

[00:35:52] and that one always comes up

[00:35:54] always.

[00:35:54] And the new one actually

[00:35:56] is storefront glass

[00:35:58] seeing that a lot too.

[00:35:59] Since we're on this item

[00:36:00] and I don't think you're,

[00:36:02] you may touch on this later too,

[00:36:03] but right now just where we're at

[00:36:07] I don't know if you want to call this a cycle

[00:36:08] just where are the markets at right now

[00:36:10] and everything that's going on

[00:36:12] with inflation and operating expenses.

[00:36:15] How are you negotiating that right now

[00:36:17] as it relates to caps on OpEx?

[00:36:20] If I put my landlord hat on,

[00:36:22] I never want to have a cap on OpEx

[00:36:25] because the cap leads to this wonderful term

[00:36:27] called leakage,

[00:36:28] which is when you sell the property.

[00:36:31] If the next purchaser of the property comes in

[00:36:34] and sees that the OpEx is not being covered

[00:36:36] by the tenant,

[00:36:37] that's called leakage

[00:36:38] and they want to discount

[00:36:39] the price on a sale for that.

[00:36:41] So it's very, very hard.

[00:36:43] We were extremely stable

[00:36:44] for a number of years

[00:36:45] and we didn't have these inflationary numbers coming in,

[00:36:48] driving up all of our costs.

[00:36:50] And so it was very easy to say,

[00:36:53] okay, well, we're going to start off

[00:36:54] with an initial cap of whatever it happens to be

[00:36:58] and then we're going to go up 3%, 5%, 2%,

[00:37:01] whatever it happened to be negotiated at per year.

[00:37:03] Those were fine,

[00:37:04] but now because we have the potential

[00:37:06] of having much greater increases

[00:37:10] from 3% to 8% to 15%

[00:37:13] to, you know,

[00:37:16] Sanneval County right now is doing some tax lightning

[00:37:18] and I have a client who had 100% increase in her taxes.

[00:37:23] And that was a small one.

[00:37:24] I had another client who had a 400% increase in the taxes.

[00:37:28] Do caps at your peril

[00:37:30] because this is not the time to be doing those.

[00:37:32] There's going to be a lot of things tied now to CPI increases.

[00:37:36] We hadn't done that for a number of years,

[00:37:38] probably 10 or 15 years, maybe 20.

[00:37:41] But now you're going to see a lot of leases now tied to CPI increases as well

[00:37:45] as a way to hedge against the inflationary.

[00:37:47] And you're getting that done.

[00:37:48] You're getting some of those done.

[00:37:50] Not yet, but they'll be coming.

[00:37:51] I'm curious because yeah, I haven't seen it.

[00:37:53] I've seen a few try,

[00:37:55] but haven't been successful yet.

[00:37:57] Everything is cyclical in this business.

[00:37:59] You know, if you've been around long enough,

[00:38:00] you'll see, oh yeah, we did that about 20 years ago.

[00:38:04] Oh yeah, we did that about 15 years ago.

[00:38:06] You'll see the cycle come back through

[00:38:08] and I anticipate seeing things like CPI increases.

[00:38:12] I anticipate seeing things such as operating expenses

[00:38:15] tied to higher numbers as opposed to anything else.

[00:38:19] A tenant always wants to make sure that they can control

[00:38:21] the amount of money going out.

[00:38:23] And so they try and put these caps on.

[00:38:25] The landlord does everything that they can to ensure

[00:38:27] that basically they're able to cover their expenses.

[00:38:30] They'll be fighting against that.

[00:38:31] So that's an interesting dance.

[00:38:33] What's your opinion on this?

[00:38:34] What do you think is reasonable?

[00:38:37] It depends on what side I'm on.

[00:38:38] I know.

[00:38:40] I don't know.

[00:38:40] I always feel like, again, I mean, I always tend to lean.

[00:38:46] The problem with this specifically is that

[00:38:50] we're paying for certain people's sins of the past

[00:38:54] and certain landlords have taken advantage of tenants.

[00:38:57] Absolutely.

[00:38:57] Which is the reason that caps exist on the landlord side of things.

[00:39:02] It's like guys, I mean, if we're managing the costs

[00:39:06] or the costs, so I mean, we're not taking advantage of you.

[00:39:09] It's not right for us to really eat that cost either.

[00:39:13] So it is an interesting dance to always negotiate.

[00:39:18] And it's a tough one, especially in today's environment

[00:39:20] because there's a lot of landlords out there

[00:39:21] that their cash flow has been substantially hindered

[00:39:25] because of these caps year over year.

[00:39:28] So for a long period of time, again, back in the dark ages,

[00:39:32] basically there was a saying that the base rent paid for your mortgage

[00:39:38] and your operating expenses was your profit.

[00:39:40] If you look at that mentality, a lot of especially the larger landlords,

[00:39:46] I don't blame the tenants for coming in

[00:39:47] and wanting to control some of the costs.

[00:39:50] It's one thing to own a piece of property

[00:39:53] and to be able to pay your bills and things of that nature.

[00:39:55] But in order to be your landlord's profit center,

[00:39:59] there's got to be a reasonableness to that as well.

[00:40:01] Again, it depends on what side you're negotiating on.

[00:40:03] I think the most common agreement that happens in this situation

[00:40:08] is typically there's a cap on controllables.

[00:40:10] And then you have to decide what is a controllable,

[00:40:13] what is a controllable expense.

[00:40:15] With a landlord who has a good track history

[00:40:19] and a good property management group,

[00:40:21] they're able to predict and they're able to budget

[00:40:23] for each particular shopping center with pretty good accuracy.

[00:40:27] The problem is where you have a brand new shopping center

[00:40:29] and you're trying to negotiate a cap on a brand new shopping center

[00:40:32] because most of the costs are not mature

[00:40:34] until after the second or the third year.

[00:40:37] So if you start off with an abnormally low rate

[00:40:40] with regards to your triple nets,

[00:40:42] the landlord's going to eat it after the third year.

[00:40:45] So you have to be careful about a mature shopping center

[00:40:48] versus a brand new shopping center in agreeing to these caps.

[00:40:52] Yeah. Anyway, it's a fascinating...

[00:40:54] I mean, it's something that we deal with daily,

[00:40:56] but you see both sides of it and it's tough too

[00:40:59] because I've talked to some local tenants in shopping centers

[00:41:02] and their cam will go up five, 10 grand a year.

[00:41:06] And it's like...

[00:41:07] I mean, they're barely making it as it is.

[00:41:10] And like I always say from a landlord's perspective,

[00:41:12] you're not helping yourself doing that

[00:41:14] because you're going to just end up with a vacant center.

[00:41:16] So you may have the ability to do it,

[00:41:18] but it's eventually going to catch up to you.

[00:41:20] Well, and a lot of tenants need to be protected

[00:41:24] when the shopping center gets sold

[00:41:25] because if they have the language

[00:41:27] that basically allows the landlord to come in

[00:41:29] and charge anything and everything,

[00:41:30] including the kitchen sink.

[00:41:32] And the prior landlord was a good landlord

[00:41:34] and managed all of the costs and things like that.

[00:41:36] Again, from a tenant perspective,

[00:41:38] they could see these huge increases

[00:41:41] when the new landlord comes in.

[00:41:42] That being said, that's one of the biggest reasons

[00:41:45] why you need an attorney

[00:41:46] to help you negotiate these types of agreements

[00:41:49] to point out, hey, you have kind of a kitchen sink provision

[00:41:53] here where a landlord could sell the shopping center.

[00:41:55] You have a good landlord now,

[00:41:57] but could sell the shopping center

[00:41:58] and you could end up with increases that put you out of business.

[00:42:03] Scary.

[00:42:04] I literally just read about that on Reddit the other day

[00:42:07] that happened to a center up in Utah.

[00:42:09] It happens all over.

[00:42:10] New ownership came in that tripled the cam

[00:42:14] and every tenant in the center is talking to each other

[00:42:16] saying, I don't know what we're going to do here.

[00:42:20] So again, that's why it's important to have

[00:42:23] legal eyes on these documents when you're agreeing to.

[00:42:28] You're committed for five years.

[00:42:30] The other thing I want to touch on really quick

[00:42:32] because this is just a highly negotiated topic

[00:42:36] and it's a heavy piece of the lease is the guarantee.

[00:42:40] Yes.

[00:42:41] Talk to us about a personal guarantee

[00:42:44] and what that means and all the fun things involved

[00:42:48] with a personal guarantee

[00:42:49] and why a tenant should be willing to sign one

[00:42:52] and why it's reasonable for a landlord to sign one.

[00:42:54] Give us an overview.

[00:42:56] So a personal guarantee is basically done

[00:43:00] by the principle of the company.

[00:43:02] Most of these leases are entered into

[00:43:04] by a limited liability company

[00:43:06] and the landlord wants to have somebody else on the hook

[00:43:10] and they generally will request that the principles

[00:43:13] of the company one, two, three, however many

[00:43:15] that they have sign a guarantee

[00:43:17] and it is just a backstop to ensure that

[00:43:20] generally this single asset entity

[00:43:23] does not, you know, up and up and leave and not pay their rent.

[00:43:28] They'll have the personal guarantee of the principles

[00:43:32] in order to guarantee sometimes it's just payment of rent.

[00:43:35] Sometimes it's performance of the obligations.

[00:43:38] Sometimes it's both under a particular guarantee.

[00:43:40] It is a legally binding document.

[00:43:42] It is one that if the tenant is not paying rent,

[00:43:46] the landlord can come after you personally.

[00:43:50] You want to have a guarantee if in the state of New Mexico

[00:43:53] signed not only by the principle but also the spouse as well.

[00:43:56] If you're going to be using that and if you're going to be needing

[00:43:58] to go after those folks.

[00:44:00] And what's the importance behind that?

[00:44:03] New Mexico is a community property state

[00:44:05] so you want to be able to reach all assets of the community.

[00:44:07] I'm just curious how do you know if your state

[00:44:10] is community property?

[00:44:11] How can you just type it in Google or what's the,

[00:44:13] just type it in Google?

[00:44:15] Interesting.

[00:44:15] Okay.

[00:44:16] And it's always just husband and wife get that.

[00:44:18] That's been a little interesting on a few lease negotiations.

[00:44:22] I'm sure.

[00:44:23] Yeah.

[00:44:23] It's always fun when you get,

[00:44:25] I mean a pretty substantial individual that has multiple

[00:44:29] different units and you're saying,

[00:44:30] hey, by the way, I need your wife to sign this as well.

[00:44:35] It's a fun conversation.

[00:44:37] I've heard lots of excuses why the wife or the husband,

[00:44:40] depending on who it is, will not agree to sign it.

[00:44:43] And sometimes if that's just something you're willing

[00:44:46] to kill a deal on, you just say no.

[00:44:48] Yeah.

[00:44:49] I mean, why is it important for a landlord to have a personal guarantee?

[00:44:54] It's important because the LLC could decide that they're going to go bankrupt,

[00:45:00] could decide that they're just not going to pay you

[00:45:01] and you just need to have another pocket to dive into if you need to.

[00:45:05] Yeah.

[00:45:05] I mean, it's a scary document, right?

[00:45:07] It is absolutely.

[00:45:08] You're signing personally on this document.

[00:45:10] Yes.

[00:45:11] But I do feel like there is justification

[00:45:15] a lot of the time as to why the landlord would want that,

[00:45:18] especially if they're putting in a substantial amount of money and TI into the deal.

[00:45:24] Yeah.

[00:45:24] And one of the things you have to be certain of,

[00:45:27] especially working as a broker is that the guarantee,

[00:45:32] it is a major deal, put it into an LOI, a letter of intent.

[00:45:36] You need to flag that for the tenant on the front end

[00:45:39] that, hey, this is going to be a requirement

[00:45:41] because it is a real big bummer if at the end of the negotiation,

[00:45:46] which could take anywhere from a week to six months,

[00:45:49] you decide to pop a guarantee on a particular tenant and it kills the deal.

[00:45:53] Yep.

[00:45:53] You know, so you want to negotiate things that are major items on the front end,

[00:45:58] especially in the LOI and let them know that this is coming.

[00:46:01] Yeah.

[00:46:01] It's a big one.

[00:46:02] Yeah.

[00:46:03] Got to get that one up front.

[00:46:04] There's a deal I'm involved in right now that, yeah, that kind of happened.

[00:46:08] So it's not fun to have that conversation like in the game.

[00:46:11] So talk to us about what are the common pitfalls in commercial lease

[00:46:15] that you typically see?

[00:46:16] What's the top three that you typically see?

[00:46:19] Agreeing to a cap on the landlord side,

[00:46:22] as we discussed before, that leads to leakage.

[00:46:24] It leads to other things.

[00:46:26] I don't think it's currently realistic in this environment

[00:46:28] for a landlord to agree to a cap.

[00:46:30] A tenant is going to fight in order to get one

[00:46:33] and I think that they should,

[00:46:34] but I don't think the landlord's perspective,

[00:46:36] you don't want to agree to it.

[00:46:38] What are you seeing typically right now?

[00:46:40] I'm just curious.

[00:46:40] Or what, I mean, maybe not right now,

[00:46:42] but like historically, what has it been?

[00:46:44] You know, what I'm seeing is that a tenant will come in and say,

[00:46:47] okay, you know, you've told me and we'll just use round numbers.

[00:46:51] 350 is the triple nets right now

[00:46:54] and I want that to be for the first year of the term.

[00:46:57] Mostly landlords will agree to that.

[00:46:58] You know, first year of the term,

[00:46:59] you know, give the tenant a little bit of slack.

[00:47:01] It's not a problem.

[00:47:02] But then coming in and saying,

[00:47:04] I don't want the triple nets to increase by more than 3%

[00:47:07] per year on a non-cumulative basis.

[00:47:10] That really basically ties your hands,

[00:47:12] especially if you have a new shopping center.

[00:47:14] Like I said before, historically,

[00:47:16] the costs for a new shopping center are very low

[00:47:19] in the first year.

[00:47:20] They get a little bit better in the second year

[00:47:22] with regards to increases.

[00:47:24] But in the third year is when you really start

[00:47:26] seeing mature costs for a particular shopping center.

[00:47:28] If you limit yourself to 3%

[00:47:30] and you're already in the second year with,

[00:47:32] you know, 5% and 10%,

[00:47:34] you're going to have some issues with regards to that.

[00:47:36] And I want you to touch on,

[00:47:37] because this comes up quite a bit,

[00:47:38] the difference between cumulative and non-cumulative.

[00:47:43] So cumulative means that if in the first year

[00:47:45] you have a 3% cap and the increases are only 2%,

[00:47:50] you can carry the 1% to the next year

[00:47:53] so that you actually have 4%

[00:47:55] in the following year to be able to increase your cap.

[00:47:59] Non-cumulative basis is that if in the first year

[00:48:02] you have a 3% cap

[00:48:04] and the costs only increased 2%,

[00:48:07] that 1% goes away

[00:48:08] and you start fresh with the new 3% for the following year.

[00:48:11] Got it.

[00:48:13] Okay.

[00:48:13] Yeah, that comes up a lot.

[00:48:14] A lot of people ask me that,

[00:48:15] so I'm like,

[00:48:16] that's an important one to clarify on quite a bit.

[00:48:21] What else?

[00:48:22] You know, some of the things as well

[00:48:24] is negotiating a bad or an incomplete LOI.

[00:48:28] What?

[00:48:28] No.

[00:48:30] Our favorite broker term is

[00:48:33] to be further defined in the lease.

[00:48:35] So I love that term by the way

[00:48:37] because that means I get to spend a lot more time on your leases.

[00:48:41] Yeah.

[00:48:42] You know, it's one of those things where

[00:48:44] if you're going to actually address something

[00:48:46] in the LOI, address it

[00:48:49] because the other side is going to have an attorney

[00:48:52] that's very astutely looking for those particular items

[00:48:54] and saying, oh no, see at the bottom here

[00:48:56] it says to be on our form

[00:48:59] and our form language is this

[00:49:00] and it wasn't addressed in the LOI.

[00:49:03] So therefore it's our form language.

[00:49:05] So you want to make sure that

[00:49:07] whatever you're going to address,

[00:49:08] you need to address

[00:49:09] and there are certain items

[00:49:10] that you do need to address

[00:49:11] that go into a lease agreement.

[00:49:14] Again, the three things that I talked about before

[00:49:16] financial responsibility,

[00:49:18] you know, repair and maintenance responsibility

[00:49:20] and things of that nature.

[00:49:22] So you want to make sure you get those items

[00:49:24] into the LOI

[00:49:26] and you also want to make sure that

[00:49:28] you don't put bad terms in there as well.

[00:49:31] If you have agreed to a 3% cap, guess what?

[00:49:35] That's going in the lease.

[00:49:36] You can't come back and say, you know,

[00:49:37] I'm going to trade that back

[00:49:39] because it doesn't go well with the other side.

[00:49:41] And we see that happen quite often.

[00:49:44] It happens all the time

[00:49:45] because letters of intent right now are not binding.

[00:49:49] We put language in them that says

[00:49:50] that they're not binding

[00:49:51] and so the other side,

[00:49:53] depending on if you're a landlord or tenant,

[00:49:54] we'll always use that against you and say,

[00:49:56] well, we really didn't agree to that in the LOI.

[00:49:58] It was just for the purposes of discussion, you know?

[00:50:02] Like, well, okay, no, it wasn't discussion.

[00:50:04] So was the right number.

[00:50:05] No, but I'm just kidding.

[00:50:06] We had an agreement there I thought we had.

[00:50:09] Yeah, it's always fun when

[00:50:11] people try to deviate away from the LOI.

[00:50:14] It's never a good conversation for sure.

[00:50:18] And the other part of that is also,

[00:50:19] you know, assuming that all parties agree

[00:50:21] to a definition of certain terms.

[00:50:24] You know, one of the things that, you know,

[00:50:27] my job revolves around is making sure

[00:50:28] that everybody understands what the terms are.

[00:50:31] You know?

[00:50:31] And if you have, like you said before,

[00:50:34] a definition for vanilla shell

[00:50:36] and how a landlord's supposed to deliver it,

[00:50:38] define it, you know,

[00:50:39] write out what the specs are for that particular item.

[00:50:42] If you have a definition for,

[00:50:44] you know, what is a triple net versus an absolute net lease.

[00:50:47] And that's my favorite distinction of all

[00:50:49] because some folks, you know,

[00:50:51] don't understand a triple net lease

[00:50:53] to be anything other than taxes, insurance and camp.

[00:50:56] And some folks will treat it as an absolute lease,

[00:51:00] you know, meaning that the tenant is responsible

[00:51:03] for payment of anything and everything.

[00:51:05] So always come up with a definition,

[00:51:08] agree to the definition,

[00:51:09] and then use that definition

[00:51:11] in your document appropriately.

[00:51:12] Yeah, I know in our deals,

[00:51:14] and I encourage everyone out there

[00:51:15] that's negotiating this.

[00:51:17] I mean, I have the structure, like bolded and underlined

[00:51:21] in the lease, so it's abundantly clear.

[00:51:23] This is the structure that we're agreeing to.

[00:51:26] There's no ans-ifts or buts or questions.

[00:51:29] And it always seems like it comes around,

[00:51:30] you know, on the lease structure

[00:51:32] as it relates to expenses.

[00:51:34] And the other item is as is.

[00:51:36] Yes.

[00:51:37] And that's always the comical one.

[00:51:39] Again, you sign the lease two weeks later,

[00:51:42] there's an issue and it's, you know,

[00:51:44] a tenant will call you,

[00:51:46] hey, we want to get this repaired

[00:51:47] and it's an as is deal, you know.

[00:51:49] So, I mean, and then again,

[00:51:51] it comes legal versus relational.

[00:51:52] And probably there's a lot of different things

[00:51:54] that go into your response

[00:51:55] when it comes to that, but you know,

[00:51:57] just make sure like Linda said,

[00:52:00] you make it clear how you're delivering the property

[00:52:03] and what type of structure.

[00:52:05] Because like you said,

[00:52:06] conflicts always come from expense

[00:52:08] and money, the vast majority of the time.

[00:52:10] Let's pivot a little bit to emerging trends.

[00:52:14] And you're in the business,

[00:52:15] what do you kind of see?

[00:52:17] We kind of talked about it a little bit

[00:52:19] with again, caps.

[00:52:20] I mean, what do you see evolving

[00:52:22] in the next couple of years,

[00:52:23] just with the pandemic?

[00:52:24] I know for a while we had, you know,

[00:52:26] pandemic force majeure and I mean,

[00:52:28] is there any like specific legal trends

[00:52:30] that you see happening right now

[00:52:34] and in the next three to five years?

[00:52:36] Well, you know, the big thing

[00:52:37] is higher interest rates

[00:52:38] and how that's going to be impacting,

[00:52:41] you know, not only the rent

[00:52:43] for a particular location,

[00:52:44] but also the lending on a particular location.

[00:52:49] And the costs and expenses

[00:52:51] for a particular location,

[00:52:52] whether you're happening to be

[00:52:53] the landlord or the tenant

[00:52:55] and just really dealing with

[00:52:56] these higher interest rates

[00:52:57] and how they're going to be addressed.

[00:52:59] As I said previously,

[00:53:00] we're probably going to tie them to the CPI

[00:53:03] or do something that's going to be able

[00:53:05] to hedge against inflation

[00:53:07] and some of these numbers.

[00:53:09] Now, I'm not old enough to remember,

[00:53:11] you know, way back in 18% rate land,

[00:53:15] but I've heard of it

[00:53:17] and hopefully we never get there.

[00:53:19] You just have to deal with some of those things.

[00:53:22] The pandemic taught us a lot of lessons,

[00:53:25] not only from a force majeure standpoint,

[00:53:27] but also from a lending standpoint,

[00:53:30] from a relational standpoint,

[00:53:32] from a, you know,

[00:53:33] how do we keep each other a float standpoint?

[00:53:36] So it did teach us a lot of things,

[00:53:39] default, how the government can step in

[00:53:42] and basically put a moratorium on suing people

[00:53:46] and getting them out of their spaces.

[00:53:47] They taught us a lot of lessons.

[00:53:49] The impact of things like, you know,

[00:53:51] Amazon and Walmart and Target on bricks and mortar

[00:53:54] and how that's going to impact

[00:53:56] basically the leasing, the sale,

[00:53:58] the development of stores in the future.

[00:54:00] I don't think that Amazon is actually

[00:54:03] going to put stores out of business,

[00:54:05] you know, en masse.

[00:54:06] There's a lot of retailers out there

[00:54:07] who needed to be closed because

[00:54:09] of poor business practices

[00:54:11] and not being able to pivot in the DAP.

[00:54:13] But I think there's always going to be

[00:54:15] room for people to be able to go out

[00:54:17] and to shop in stores.

[00:54:18] There's certain things that you just want to look at.

[00:54:20] You want to feel, you want to touch,

[00:54:22] you want to put in your hand

[00:54:24] and you just have to make sure that you deliver

[00:54:26] as a bricks and mortar retailer

[00:54:29] to those folks that you need to address.

[00:54:31] I'm curious, have you,

[00:54:32] this is going back 2017

[00:54:34] when e-commerce was just like hockey

[00:54:37] and everybody was, you know, panicking?

[00:54:39] Have you, in the more corporate leases,

[00:54:42] have you negotiated from a kick out clause standpoint

[00:54:45] with reaching a certain sales threshold?

[00:54:48] Have you ever seen Click and Collect

[00:54:50] be a contribution towards the sales revenue?

[00:54:55] You always try and include it

[00:54:57] if you happen to be the landlord.

[00:54:58] You always try and exclude it

[00:54:59] if you happen to be the tenant.

[00:55:00] Yeah, yeah.

[00:55:01] Have you seen it?

[00:55:02] I'm curious.

[00:55:02] Yeah.

[00:55:03] Yeah.

[00:55:03] And that's actually been around since,

[00:55:05] you know, the dawn of the internet sales,

[00:55:09] especially with some of the larger tenants.

[00:55:12] You know, they don't want to include that in the revenue,

[00:55:15] you know, on a percentage rent lease or otherwise.

[00:55:18] Yeah, it's just interesting because I heard that.

[00:55:20] It's like why you're using the real estate

[00:55:22] to have the consumer come and pick up the good.

[00:55:25] Yeah.

[00:55:25] Anyway, it's just an interesting item.

[00:55:29] So let's talk a little bit about AI too

[00:55:32] in the future because I think this is a hot topic

[00:55:35] and everyone's always asking me about it.

[00:55:37] I mean, as it relates to legal counsel and chat GPT

[00:55:43] and all these software programs that are coming out,

[00:55:46] is it helpful or is it hurtful to the legal industry?

[00:55:49] So, you know, I actually thought about this a good deal

[00:55:52] last night and I discussed it with my husband as well.

[00:55:54] You know, I said, you know, AI,

[00:55:55] how does that impact my business?

[00:55:57] How does it impact commercial real estate?

[00:55:59] How does it impact, you know,

[00:56:01] legal analysis and things like that?

[00:56:03] You know, and the big thing that always kept coming

[00:56:05] to the front of my mind was garbage in, garbage out.

[00:56:08] AI can be used in a multitude of, you know, scenarios.

[00:56:12] AI can be used to generate contract documents.

[00:56:16] You know, it was kind of funny.

[00:56:18] I actually sold something on eBay the other day

[00:56:20] and it asked me if I wanted to use AI

[00:56:22] to give the description for the particular item I was selling.

[00:56:25] You know, so I put in, you know, my wording

[00:56:27] and I consider myself to be a decent wordsmith

[00:56:29] and AI came back with this fabulous, you know, text

[00:56:34] and I was like, wow, that's really, really cool.

[00:56:36] You know, and so he said, well, don't you have concern

[00:56:39] that in the future your job is going to be taken over by a,

[00:56:43] you know, a robot, by a computer, by something like that?

[00:56:46] And I said, you know, garbage in, garbage out

[00:56:48] and what I meant by that was AI means learning,

[00:56:52] means that you have to give it some inputs

[00:56:55] in order to be able to come out with some outputs.

[00:56:58] So you need somebody that has the skill

[00:57:00] and the knowledge to be able to put

[00:57:01] the initial information in and to be able to monitor

[00:57:05] how that information is being used to give you the contract.

[00:57:08] In the future, am I excited about not having

[00:57:10] to type 87 pages of a document?

[00:57:12] Absolutely. You know, I was an early adopter

[00:57:15] of things like DragonSpeak and things like that.

[00:57:17] That would help me actually to work at optimization

[00:57:19] that's going to be helpful with lease renewals,

[00:57:22] with sales forecasting that's going to be helpful

[00:57:24] with space optimization for a particular retail

[00:57:27] to see where they can have better use of their space

[00:57:30] to generate more sales and be able to pay more rent.

[00:57:34] You know, I was thinking also how things have evolved

[00:57:37] over my career and you know, I remember working

[00:57:40] with West Marine and being up in the Northeast

[00:57:43] with a broker named David Hatchberg.

[00:57:45] He's a friend of mine.

[00:57:46] I was in the car.

[00:57:47] He was driving me around looking for sites

[00:57:49] and I had a Rand McNally Atlas rolled up

[00:57:52] under my arm at a cup of coffee.

[00:57:54] And that's how I did real estate

[00:57:56] at that particular point in time.

[00:57:57] You know, when my sales forecaster introduced me

[00:58:01] to MapQuest, you know, which was on the internet,

[00:58:03] that was the big thing, right?

[00:58:05] And now I can regularly go online

[00:58:07] and do Google flyovers of places.

[00:58:10] And so, you know, evolution is important.

[00:58:12] Adaptability is important.

[00:58:14] You have to be able to change to survive.

[00:58:17] I agree. And that's a great summation.

[00:58:19] What I've told everyone when it comes to

[00:58:22] contracts specifically because these programs

[00:58:25] are pretty sophisticated.

[00:58:26] I go back to what I said earlier on in the podcast.

[00:58:28] When you're agreeing to a five, 10, 15,

[00:58:33] 1 million, 2 million, 10 million dollar purchase,

[00:58:36] do you really want to rely on language

[00:58:40] that's generated from a machine?

[00:58:42] I know my answer to that is no.

[00:58:44] They don't have experience

[00:58:46] and it's the critical thinking aspect of it

[00:58:47] that I think attorneys really provide

[00:58:50] in any type of situation.

[00:58:52] So I always think it's, I mean, small documents, okay,

[00:58:55] but I still have you review everything.

[00:58:58] You know what I mean?

[00:58:59] Because again, if there is a conflict, right,

[00:59:02] guess what's going to happen?

[00:59:03] Who drafted the document?

[00:59:05] Who's responsible for the document?

[00:59:06] Oh, and chat GBT wrote the document for me.

[00:59:10] Okay. It's interesting too.

[00:59:11] Like how's a court going to view that?

[00:59:14] You have any idea?

[00:59:15] I mean, is that TBD right now?

[00:59:16] Yeah, in commercial real estate,

[00:59:18] the court always tries to give as much

[00:59:20] deference to the document as possible.

[00:59:22] And if you put it into one of these AI form generator type of things,

[00:59:29] the assumption is that you've read it.

[00:59:32] That's what you wanted to enter into

[00:59:33] and you're going to be held accountable

[00:59:35] for that particular item

[00:59:37] that you're having a dispute over.

[00:59:39] So yeah, you do want to make sure

[00:59:41] that the information that goes in there is good information.

[00:59:44] You want to make sure that you review it afterwards

[00:59:45] and you want to make sure that you work with an attorney

[00:59:47] that's going to be able to point out

[00:59:49] things that are going to cause you issues in the future

[00:59:51] and hopefully fix them before they become issues.

[00:59:53] Yeah, yeah, agree.

[00:59:55] Interesting times that we live in for sure.

[00:59:57] I think it's exciting.

[00:59:58] I'm looking forward to something like that.

[01:00:01] Yeah, well, in a lot of things, like I said,

[01:00:02] there's a lot of like again,

[01:00:04] smaller little documents

[01:00:06] that are really kind of more of a pebble in a shoe

[01:00:09] for an attorney.

[01:00:10] It's like, okay, if we can draft that up

[01:00:13] within a matter of seconds

[01:00:15] and have it professionally reviewed,

[01:00:17] it just helps the process be that much more efficient.

[01:00:19] Kind of to wrap it up,

[01:00:22] I want to talk about two things

[01:00:23] just because of the space that you're in.

[01:00:25] But the first one is let's just talk about dispute resolution

[01:00:29] and just give us your quick take on

[01:00:32] what's the best way to resolve a dispute

[01:00:35] when you have a discrepancy in a lease?

[01:00:39] Call your attorney, get on the phone, talk it out.

[01:00:42] That's the best way to do it.

[01:00:44] A lot of documents have space for mediation,

[01:00:47] for arbitration, for litigation

[01:00:48] and things like that.

[01:00:50] Mediation between two parties

[01:00:52] that are willing to make a deal

[01:00:54] is always a good thing.

[01:00:55] Yeah, okay.

[01:00:56] But first is have the conversation.

[01:00:58] Actually, prior to that,

[01:01:00] if you think that you're going to run into trouble

[01:01:02] as a tenant and not pay rent,

[01:01:04] call your landlord up,

[01:01:05] see what you can do to negotiate that

[01:01:07] before it becomes an issue.

[01:01:08] Barring that again, like I said,

[01:01:10] have your attorney call up

[01:01:11] and see what you can do to negotiate.

[01:01:13] Go into mediation if you think

[01:01:14] the other party is willing to mediate with you.

[01:01:16] Arbitration is binding.

[01:01:18] It's almost as costly as litigation.

[01:01:21] Sometimes it's actually a pre-court diversion

[01:01:25] and you'll be required to go through arbitration.

[01:01:28] Litigation is probably where you end up

[01:01:31] with the most time intensive

[01:01:33] and cost intensive consequences

[01:01:36] of the entire program.

[01:01:37] A litigation attorney right now

[01:01:39] is probably going to cost you $25,000 as a retainer

[01:01:43] and it's going to take six months

[01:01:45] to two years to get a resolution.

[01:01:47] So you want to see what you can do

[01:01:49] to get on the phone and work it out.

[01:01:51] Yeah, yeah, great tip.

[01:01:52] And to wrap it up,

[01:01:54] what should a commercial real estate

[01:01:57] professional look for

[01:01:58] in a commercial real estate attorney?

[01:02:02] Somebody who you can have

[01:02:03] a good relationship with,

[01:02:05] I think relationship matters.

[01:02:06] Make sure that you spend time

[01:02:08] to really understand

[01:02:09] what that person's experience is.

[01:02:12] Are they a landlord,

[01:02:14] negotiator, are they a tenant negotiator,

[01:02:16] are they a buyer negotiator,

[01:02:18] are they a seller negotiator?

[01:02:19] Do they have business experience?

[01:02:22] So you want to have somebody

[01:02:23] who you're comfortable with

[01:02:25] and you want to be able to let them

[01:02:27] know all aspects of a particular deal

[01:02:29] so that it can best protect you.

[01:02:32] At the end of the day,

[01:02:33] you want to make sure

[01:02:34] that you can rely on that person.

[01:02:36] You want to make sure

[01:02:37] that that person has time for you

[01:02:39] and is willing to work with you.

[01:02:40] Having an attorney that is,

[01:02:42] that has a deal making mindset.

[01:02:45] I think that's important

[01:02:46] because there are so many

[01:02:47] egotistical attorneys out there

[01:02:49] that, I mean, they could really honestly,

[01:02:51] like half the time,

[01:02:52] I'm like, do you want to kill this deal?

[01:02:55] It's just,

[01:02:56] it's good to have an attorney

[01:02:58] that can make a deal.

[01:03:00] Yeah, you know,

[01:03:00] I think there's the legal aspect of it

[01:03:02] and I think there's the practical aspect of it.

[01:03:04] You know, if I let my clients know

[01:03:06] this is what happens if you do this

[01:03:09] and they're willing to take the business risk,

[01:03:11] I've done my job and they've accepted the risk

[01:03:13] and they know what they're doing

[01:03:14] and they can move on.

[01:03:15] I'm not here to tell you

[01:03:17] what to do with your deal.

[01:03:18] I'm here to help you make it.

[01:03:19] Yeah, I love it.

[01:03:20] So if people want to get in contact with you,

[01:03:22] what's the best way to get a hold of you?

[01:03:23] The best way to get a hold of me

[01:03:25] is to send me an email

[01:03:26] and that's linda.

[01:03:27] L-I-N-D-A at leibah.

[01:03:32] Awesome. Well, thanks so much for being here today.

[01:03:33] Absolutely.

[01:03:33] We appreciate it.

[01:03:35] Thank you for joining me

[01:03:36] on this episode

[01:03:37] of the Commercial Real Estate Podcast.

[01:03:39] I hope you found today's conversation

[01:03:41] with our guest,

[01:03:42] both insightful and inspiring.

[01:03:45] If you have any questions or comments

[01:03:47] or would like to connect with me

[01:03:48] or our guest,

[01:03:49] you can find all the relevant information

[01:03:51] and links in the show notes.

[01:03:53] I encourage you to reach out,

[01:03:55] share your thoughts,

[01:03:56] and continue the dialogue.

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[01:04:16] and improve.

[01:04:17] Before we part ways,

[01:04:18] remember this.

[01:04:19] In the dynamic world

[01:04:21] of commercial real estate,

[01:04:22] every experience is an opportunity

[01:04:24] to learn and grow.

[01:04:26] So keep pursuing your passions,

[01:04:28] stay curious,

[01:04:29] and continue your journey.

[01:04:31] Thanks for being

[01:04:31] a part of our podcast community.

[01:04:33] I'll be back soon

[01:04:34] with captivating stories,

[01:04:36] expert insights,

[01:04:37] and valuable knowledge

[01:04:38] to empower your path

[01:04:39] in the realm of commercial real estate.

[01:04:41] Until next time,

[01:04:42] always keep in mind

[01:04:43] that the world of commercial real estate

[01:04:45] is filled with endless possibilities.

[01:04:47] Keep building,

[01:04:48] keep investing,

[01:04:49] and keep dreaming big.