Evan Keith Langert

Over twenty three years, I have been involved in the negotiation of retail and office leases in over twenty states. I've negotiated with retailers such as Lord & Taylor, Circuit City, Starbuck's, and Outback Steakhouse, and with office tenants such as Met Life, Fed Ex, Clear Channel Communications, and many others. In all of those years, I have learned a few ways to provide value in a transaction that other brokers generally don't provide. I'm going to start bringing some of these up in my upcoming blogs. Hopefuly, these tips will help you set yourself apart from most of your constituents in the mind of your clients and prospective clients.

The first suggestion that I have is to cover as many issues as you reasonably can in the initial letter of intent. If you have specific language that you want included, go ahead and include it in the LOI. Even though most letters of intent are expressly non-binding, most parties treat the terms as if they are not changeable. If one party tries to revisit provisions in the LOI, then the other party has license to revisit the other terms. Most landlords and tenants don't want that to occur.

When I was a practicing leasing attorney, I would frequently get negotiated letters of intent from property managers, leasing brokers, etc. that had very undesirable provisions in them. In most cases, the broker or property manager simply didn't understand the import of the language that the other party had submitted, and that they had agreed to. On a fairly regular basis, these provisions were not something that we would ever approve. However, the brokers would say "it's already been negotiated", and management would reluctantly agree that we had to honor the bargain that we struck even if it was injurious to our position. In speaking with other leasing attorneys around the country, my experience is one that most of them share.

When I am engaging in real estate brokerage, I use those experiences to my advantage. I include provisions and language in my letters of intent that you often don't see until the lease stage. It is at that point that you have the best chance of getting these provisions, and the language that you want, approved and agreed to.

It won't always work. However, in many cases, the other side will feel compelled to accept the terms that their broker has already negotiated and agreed to.

Section 1031 of the Internal Revenue Code provides the limited opportunity for property owners to defer taxes on the sale of a property used in a trade or a business or an investment property. The property obtained as a replacement has to be "like kind" property, but that term often confuses people. You can sell an apartment building and buy and office building, for instance, and it is still a "like kind" property. The term does not mean that you have to replace an office building with an office building. It is important to note that 1031 exchanges cannot be accomplished with your residence or second home. The property has to qualify as either an investment property or a property used in a trade or a business.

If you (or your client) are contemplating a 1031 exchange (or a reverse 1031 exchange), you should obtain the services of a seasoned 1031 exchange intermediary early on in the process. You cannot actually or constructively receive the proceeds of your sold property. If you do, then you can disqualify yourself from 1031 status, and you will be taxed on the gain on your sold property. A qualified 1031 intermediary will guide you through the process, and will arrange for another entity to take title. There are a lot of nuances to the transaction that are not in this blog, and it is imperative that you obtain the services of a qualified 1031 advisor.

Once the property is sold, the 1031 exchange candidate generally has 45 days to indentify a property or properties to purchase to replace the sold property, and 180 days to close on it/them (the 45 days are included in the 180 day period).

This whole IRC 1031 provision is narrower than many think, and failure to strictly follow each subprovision can disqualify the transaction and result in your client getting taxed on the sale of their initial property. In a market like we had a year or two ago (when people were buying anything and everything), you couldn't always count on closing on your identified properties, as there was a lot of competition for those properties.

If I had to sum things up in one piece of advice, it's to get counsel on your exchange before you begin the process at all.

Real estate is a tangible, visible thing. Most people prefer to have their real estate investments nearby where they can drive by them and make sure that everything is as in good shape. They take comfort in knowing that their investments are in an area that they know, and that they are familiar with the contractors in the area, as well as the other service providers. Also, if they get an emergency call, they can drive over to the property and take care of whatever is wrong. However, depending upon where you live, there can be some significant tradeoffs to gain that convenience.

Here in the San Francisco Bay area, properties (like everything else) are more expensive than they are in the vast majority of the country. If you want a really safe investment, you might buy a freestanding Starbuck's location with a safe, high credit, NNN lease in place. The safest investment would be in a high traffic area with very little vacancy...let's say Fishermen's Wharf or the Financial District. You might have to buy that property at a 5.5% cap rate. That means that a Starbuck's paying $500,000 in annual base rent would cost you about $9.1 million.

Somewhere in Texas, or in St. Louis, or in any number of places, there is a Starbuck's that is just as well located, with the same multi-billion dollar credit on the lease. The area that it is in is just as crowded, and is just as safe a location as the Starbuck's in the financial district. However, that Starbuck's might sell at an 8% cap. So, for the same $500,000 rental income, you would only have to pay $6,250,000. That's a huge difference of more than $2.75 million in price just because the one property is located in a less expensive area. You have to wonder if the convenience is worth that much to you.

If you buy a very stable property, especially one with NNN leases, then it might make sense for you to consider investing out of the area. In a single tenant NNN lease, you may have almost no responsibility to take care of the property. Also, maybe there's an area that you like to go anyway. Maybe you are from Dallas, or you like to vacation in Miami, or your brother lives in Columbus, Ohio. In those situations, you may decide that you are comfortable buying in those areas. If you have to go check on the property every few months, and you enjoy vacationing in Miami, then it could make sense to buy a property there. You can even write off portions of your trip.

Some people will insist on having their investments within a two or three hour drive of home. However, for others, it may make a lot of sense to invest in other areas. I have proprietary lists of hundreds of available properties all over the country.

Part of my job is to keep up with the economic forecasts...both for the San Francisco Bay area and nationally. Most economists see the bottom of the real estate market occuring some time in 2009. That means that investors would be smart to begin looking for bargains out there. In real estate, as with any other investment, you ultimately want to buy at or near the bottom. Once you hear the tv commentators and the newspapers declaring that we've hit the bottom, many savvy investors will have already scooped up the best buys out there.

Whether or not you believe that we have hit bottom, now is a great time to start surveying potential investments. That way, you'll see what's out there. Then, when you have determined that you are comfortable with investing in a property, you will already be armed with the knowledge of the market, and will be poised to pounce in a timely manner when the right situation comes along.

If you aren't a leasing pro, you might hear terms get tossed around like "triple net" and "industrial gross", but you have no idea what they mean. Basically, they refer to the portion of the operating expenses of the property that the tenant reimburses the landlord for under the lease.

In the vast majority of leases, tenants pay their base rent or face rent. That's the amount that you find listed in the "Rent" or "Base Rent" section of the document, and is usually stated as a fixed amount or a dollar amount per sq. ft.

In addition to the base rent, however, tenants usually reimburse landlords for some or all of the expenses associated with operating the property. The type of lease where the tenants reimburse most or all of the operating expenses of the property is called a "triple net" or "NNN" lease. The three basic expense components that get reimbursed under a "NNN" lease are real estate taxes, insurance, and operating expenses. Operating expenses are also frequently referred to as CAM (common area maintenance).

Triple net leases are popular with investors because they know that they will "net" the base rent or fixed rent under the lease as a return on their investment. Whatever the expenses of the property are (unless they happen to be replacing structural items of the center or other limited categories), they know that those expenses are going to be reimbursed by the tenants to the extent of the occupancy of the property. So, if there is an exceptionally snowy winter that results in very hefty snow removal costs, it isn't going to cut deeply into the landlord's return on investment.