How to Negotiate a Commercial Lease from a Small Business Perspective

A few weeks ago, I published an article called How to Lien Real Estate Using a Writ of Attachment, which was basically advice from a California real estate lawyer to commercial property owners on how to protect themselves from defaulting tenants. Today, I write about the flip side of that coin – how a small business can protect itself before signing a new, long-term commercial lease.

Small business owners don’t often realize it, but signing a long-term lease for a commercial or office space is often one of the most significant — and potentially dangerous — decisions you make as a small business owner. If the business fails part way into the lease, the owner can be held personally liable for the balance of the rent due for the duration of the lease – which can amount to hundreds of thousands of dollars.

If you don’t have the money to hire a California real estate lawyer before you sign the new lease (which is quite understandable given the economy and limited finances of most small businesses), then you can follow the following advice to protect yourself from potential financial ruin which can come when you agree to a commercial lease which is heavily one-sided in favor of the landlord.

Sign the Lease Contract in the Name of your LLC or Corporation Only

The first piece of advice is also the most difficult. If possible, you should try to sign the lease in the name of the form of your business entity only. In other words, if you formed a LLC for your business, you should sign the lease between the landlord and the LLC only.  However, the catch is most commercial property owners are savvy enough to require that a small business owner provide a personal guarantee for the lease.

The commercial property owner knows that most business owners would rather keep all obligations in the name of the LLC or corporation only, so that if there’s a worst case scenario and the business fails, the business owner can just fold up the business without jeopardizing any of the business owner’s assets.

Most commercial property owners will require that the small business owner sign a guarantee that puts the owner on the hook for all debts which the business entity (i.e. the LLC, Partnership or Corporation) is not able to cover. If the landlord insists on a personal guarantee, then there is not much you can do. You can either agree, try to negotiate some other security, or find a new space.

Limit the Total Amount of Damages

Another option is to limit the total amount of damages which the business or business owner would be responsible for under the lease. You can simply select a hard number, such as $20,000 or $40,000, and indicate in the lease contract that in no event shall the small business owner be liable for more than that amount, including any attorney’s fees, costs, repairs, or commissions to re-lease.

If the space you are seeking to lease is in demand, then the commercial property owner is probably not going to agree to this provision. However, if it is a tenant’s market, then you may have a good chance of getting the provision included.

Limit the Number of Years In The Lease Contract

The next option is to limit the number of years in the lease contract, and to use lease options instead to achieve long-term security. From a small business’ perspective, if you are investing a lot in tenant improvements, then you may want a long term lease to ensure the landlord doesn’t kick you out after a couple of years and you lose the value of your tenant improvement investments.

However, a long-term lease means you are on the hook for more damages in the event of a business failure. Therefore, you need to balance the need for a long-term lease with the potential damages you could be held liable for in the event your business collapses. Lease options can achieve the long-term security without the liability.

Ensure You Can Assign the Lease

Finally, you should ensure you have rights to assign the lease.  If your business is failing, or your life situation has changed and you don’t have the time to devote to your business, you may want to assign the lease to a new owner. The commercial property owner will no doubt want to approve any new assignment, which is fine. Just be sure that approval cannot be unreasonably withheld.

You should also be sure you do not provide a personal guarantee to back up the incoming business, because you could be left holding the bag after that business fails, which is something you will have absolutely no control over.

If you are fortunate enough to be in a position that your small business is doing well enough to need new commercial or office space, then congratulations are in order. You are one of the lucky ones. However, as with any expansion or growth, there are new challenges and new hurdles which will require ongoing vigilance and caution.

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John Corcoran is an attorney with Plastiras & Terrizzi in San Rafael, California (Marin County).  He advises clients about real estate/land use, general civil litigation, and small business matters.  He can be reached at             (415) 250-8131       or [email protected]

 

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Photo credit: Flickr/U.S. Army

How a Short Sale or Foreclosure Affects Credit Rating

credit ratingI frequently get asked how a short sale or a foreclosure will affect a person’s credit rating.

Although the true impact a short sale will have on your credit score will depend upon how it is reported to the credit bureaus, there are a few general guidelines which apply.

A foreclosure generally has a more severe impact on your credit rating than a short sale.

A short sale is like a “D-” grade while a foreclosure is an “F” grade, or a fail.

More importantly, a short sale is often preferable to a foreclosure because of other negative legal and tax consequences involved in foreclosure.

Late Mortage Payments Affect Rating

Usually, people who complete a short sale are at least 2 or 3 months behind on their mortgage payments. The late mortgage payments will have a negative impact on the borrower’s credit rating in addition to the short sale itself.

So it’s not just the short sale itself, but the history of late payments leading up to the sale that affects the person’s credit rating.

When you do a short sale, your mortgage lender may report the short sale to the three credit bureaus in different ways.

The most favorable way of reporting the short sale is if the mortgage lender reports that the account was “Paid,” which is equivalent to you paying off the account in full.

However, unless you only had a small amount of debt to forgive, most lenders will report the short sale as “Settled” to the credit bureaus. A “Settled” account is equivalent to a 30-60 day late payment in most cases, and can put the homeowner in a position to purchase a new home as soon as two years later.

The worst means of reporting a short sale from a credit rating standpoint is if a bank lists the short sale as “Closed but not paid in full.” This designation could have dramatically devastating credit repercussions for as long as seven years, or as many as ten.

If a borrower’s goal is to repair their credit so that they can buy another house in the future, then this particular language could severely jeopardize the borrower’s chances of buying a home for as long as they would with a foreclosure.

Sign Up for Credit Monitoring Service

I often recommend that people who do short sales sign up for a credit report monitoring service for 6-12 months after a short sale.

Trust me, this is money well spent. These services will send you alerts whenever a report is made on your account.

If there is an incorrect report to the credit bureaus, you will know about it immediately and be able to jump into action to try to get the reporting party to remove the report.

Without the reporting service, it could be months or years before you discover the mistake and by then the damage is done.

I have had clients who have been alerted by their credit monitoring service that their former lender reported their short sale as “closed but not paid in full” even though the client had specifically negotiated for the lender to report the short sale as “settled.”

There are numerous companies that provide credit report monitoring. I have recommended TrueCredit.com to many of my clients (affiliate link), which a service run by TransUnion, one of the three major credit bureaus. TrueCredit.com offers a free credit score and a free 30-day trial. For $9.95/month, you get unlimited access to your 3 credit scores, 24-hour notification of critical changes to all three reports.

The bottom line is it’s really not possible to paint a complete picture of how a short sale will affect a credit rating years into the future, because we don’t know what lending standards will be in the future.

On the one hand, banks may view this time period as an anomaly, when many otherwise creditworthy homeowners got caught up in a bad recession and had to do a short sale or had a foreclosure.

On the other hand, banks may continue their rigid lending practices in place today for many years in the future, still licking their wounds from the mortgage meltdown.  Only time will tell.

 

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Photo credit: Flickr/rinkjustice


How to Sell Your House Without a Real Estate Agent

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For more information on buying and selling without a real estate agent, I suggest For Sale by Owner by Nolo Press.

You do not need to have a realtor or a real estate agent to sell your home in California.

Although rare, thousands of buyers and sellers purchase or sell a home without a real estate agent every year.

In California, home buyers and sellers typically are represented by a California Department of Real Estate-licensed agent or broker.

However, in other states real property sales are commonly handled by a lawyer.  This is less common in California.

You can also market the home on your own (i.e. handle all the advertising, open houses, and private showings yourself), but use an attorney to process the paperwork, while paying a flat fee to have the house put on the Multiple Listing Service (MLS), which nearly every real estate agency website uses for its listings.
There are numerous advantages and disadvantages to selling a home without an agent, which must be weighed by anyone considering selling a home on their own.

How to Take Title to a New Property in California

Congratulations! You’ve just purchased a new home or investment property in California, and you’re wondering how you should take title to that new property.

Unmarried New Owner

If the property is being transferred to one person who is not married or in a registered domestic partnership, then the answer to the question of how to take title is easy.  You simply put down the recipient’s name on the grant deed. You may also want to point out on the deed itself that the new owner/recipient of the property is unmarried so no one later has to wonder if there was a spouse who had a community property interest in the transferred property at the time it was transferred.

More Than One Unmarried Recipient

When there is more than one unmarried individuals who want to take title jointly, then there are three basic ways: tenancy in common, joint tenancy, or partnership (in the name of the partnership). The main two forms are tenancy in common and joint tenancy, as you must be in business together to take title as a partnership.

Tenancy in Common vs. Joint Tenancy

Tenancy in Common (aka a “TIC”) is similar to taking title by Joint Tenancy. Each co-owner has an “undivided interest” in the whole property.  In other words, each co-owner may use the whole property and each is entitled to income from the whole property in proportion to his or her ownership share.  Neither co-owner has the exclusive right to use or transfer a specific physical part of the property.

Tenancy in Common is best when the new co-owners want to leave their interests in the property to someone other than the other co-owner(s), or the new owners want to own the property in unequal shares.

For example, Jim and Adam are good friends in their late 20s and want to buy a duplex together. One side of the duplex is slightly larger than the other, and Jim is willing to pay more for a larger share.  They could take the property by Tenancy in Common, with Jim taking 60 percent and Adam taking 40 percent, and Jim could live in the larger unit. Both Jim and Adam can leave their interest in the property to different beneficiaries in their will.

If two owners have a falling out and one co-owner can’t sell their separate share and they want to sell the entire property so they can both go their separate way, that co-owner cannot force the other co-owner to sell their interest.  The co-owner who wants to leave must bring what’s called a “partition action” from the local county Superior Court for the right to sell or divide the property.

TIC is the right form of ownership for most co-owners unless they are in a close family relationship, in which case joint tenancy is probably preferable.

One drawback of the TIC form of taking title is one co-owner could find him- or herself co-owning a piece of property with the children of their original co-owner after the original co-owner passes away. Also, when one co-owner dies, unlike joint tenancy, probate is necessary. However, probate can be avoided by holding property in a living trust or in joint tenancy.

In California, Tenancy is Common is the presumed form of holding title when two or more people automatically take title unless the deed specifies another form of holding title.

Joint Tenancy

The most significant feature of Joint Tenancy is when one joint tenant dies, then his or her interest in the property goes to the surviving joint tenant or tenants. Probate is not necessary, and if the deceased co-owner’s will provided otherwise (say the will gave their portion of the property to another relative), the joint tenancy trumps the will. Joint tenants also must own equal shares.

Joint Tenancy is useful for unmarried co-owners where the co-owners want the property to go automatically to the surviving co-owners, without the time and expense of probate.

To transfer a property by joint tenancy, the deed must specify that the co-tenants hold title as joint tenants “with right of survivorship.”

Married Co-Owners

If a married couple is going to be taking title to new property, they can take title as joint tenants or as tenants in common. However, there is also a better option.

Community Property With Right of Survivorship

Married couples will most likely want to take title to the property as “community property with right of survivorship.” Property held in this form goes directly to a surviving spouse or domestic partner, and need not go through probate. The survivor only records a basic document with the county recorder where the property is located.  The other advantage over Joint Tenancy is unlike Joint Tenancy, both partners must agree to any termination or transfer of the property. One co-owner cannot transfer their interest to someone else, and one owner cannot get a partition order from Superior court.

There are also special tax benefits. I am not a tax attorney, so a discussion of the special tax benefits of Community Property with right of survivorship is beyond the scope of this article.

In order to transfer property into community property with right of survivorship, you write into the deed, for example,  “to Carol Smith and George Smith, husband and wife (or domestic partners), as community property with right of survivorship.”

Married couples can also hold title to property separately, as their own separate property. If you are planning to do so in California which is a community property state, I encourage you to consult a real estate attorney.

No matter what form you choose, be careful with real estate transfers. The process of choosing a form, drafting deeds, and recording deeds is fraught with peril and the consequences of mistakes can be severe. Take your time to consider your options before choosing the correct form to take title.  Then work closely with your title company or attorney to make sure the correct deeds are recorded properly.

John Corcoran is an attorney with Plastiras & Terrizzi in San Rafael, California (Marin County).  He advises clients about various real estate and land use matters.  He can be reached at (415) 250-8131 or [email protected]

Photo credit: Flickr/Brian Teutsch

5 Tips on Working Well with City and County Planners

Neighbors often fight neighbors. It’s a fact of life.  When neighbors do get into a disagreement over a boundary line, a tree, or one neighbor’s expansion proposal, it often means city or county planning staff are going to get involved.

Planning division staff is the link to necessary rules and regulations, official city or county policy, internal practices and key documents and guidelines. A good working relationship with planning staff can make the difference between getting the information you need, and being lost in a sea of confusion.

As both an attorney who works on land use and real estate disputes, and a Planning Commissioner who has had to weigh in and decide on contentious projects, I have found that working well with planning staff creates the best outcomes.  The vast majority of planning professionals are honest, dedicated, and committed to serving the public interest, and are a valuable resource no matter where you come down on a particular project.

Unfortunately, today’s economic climate hasn’t helped. Cities and counties across California have been cutting back hours and staff and/or doing layoffs, leaving those who continue to work in the public sector busier than ever. Many planners don’t have the luxury of being able to spend a lot of time on projects which require a lot of attention. As a result, I have found that those who do continue to work for cities in this difficult economic climate often do so out of a commitment to serving the public and their community.

Based on my experiences, I’ve found the following five tips will go a long way towards creating a strong working relationship with planners throughout your project:

  1. Meet Face to Face. Relationships are often better after you have met someone face to face. Whenever possible, set up a time to meet with the planner working on your project at City Hall of the county offices. Even if you make up an excuse to stop by and pick up a document or to look at some plans, your quick face-to-face can improve relations in the long run.
  2. Value Planners’ Contributions. It helps to keep in mind that when it comes to disputes between neighbors or interest groups, planners’ goals are to create lasting and strong communities.  Most planners did not go into the profession because they loved being a sheriff, regulating and restricting applicants’ projects. In fact, cities benefit through increased property values from reconstruction and remodel projects, so most planning departments want to help shepherd projects to completion.
  3. Realize that a call from an Attorney Can Be Intimidating.  As attorneys, we often don’t realize how intimidating a phone call from an attorney out of the blue can be to a non-attorney. For planners who work all day with architects, neighbors, community groups, and developers, it can be a bit of a shock when an attorney suddenly gets involved. Sending threatening signals (even if not intentional) can be detrimental to the collaborative process.  Whenever you first become involved in a project, you should be aware of the effect your involvement can have and the message it can send. It can also often be more valuable to have an architect be the public face of a project at Planning Commission hearings, unless it is absolutely necessary for an attorney to speak.
  4. Ask for Planners’ Advice. You will be surprised how much information you can get by just asking for a planners’ opinion or recommendation.  Even if they may disagree with your client’s position, their response may be insightful. After all, no matter how much experience an attorney has with real estate and land use issues, planners have their own education, skills, and set of experience, so they may have valuable advice.
  5. Trust, But Verify. A valuable approach in working with planning department staff is to trust planners’ contributions and analysis, but to also verify all assumptions.  In high value property regions such as Marin county, most real estate projects attempt to maximize allowable square footage, heights, and floor area ratios.  In an era of limited public sector staffing, it is important to make sure that a planner’s analysis of what may be built within the local zoning framework is accurate.

No matter how contentious the project, having a good working relationship with planning staff can make a major difference between a very difficult planning process, and a collaborative, successful project.

John Corcoran is an attorney with Plastiras & Terrizzi in San Rafael and Vice Chair of the Town of Tiburon Planning Commission in Marin County, California.  He advises clients about various real estate and land use matters.  He can be reached at (415) 250-8131 or [email protected]

A similar version of this article appeared in The Marin Lawyer.

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How to Do a Property Title Search For Free

Need more help with a property title search? I recommend you purchase a copy of Real Estate Title Search Abstracting – this article provides a general overview, but that book will give you the next steps in doing your own property title search.

 

In today’s economy, every dollar needs to count.  That is especially true for land use or neighbor disputes, which can rack up thousands of dollars in legal bills very quickly. money

However, by utilizing efficient title and deed research techniques and taking advantage of numerous free Internet resources, it’s possible to save money when doing property title research, especially early in a dispute before active litigation.

How to Find out Who Owns a Property
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