Grubb & Ellis\BRE Commercial (“Grubb”) is one of the leading commercial real estate brokerage companies in the area representing landlords and commercial building owners. They put out research reports quarterly on the commercial real estate market. Their first quarter of 2009 report on the industrial market covers all of San Diego, but I’m most interested in what is going on in North County.

The Grubb Report indicates that there is a total of 14,255,418 square feet of industrial space in Carlsbad, 5,331,920 square feet in Escondido, 8,498,851 in Oceanside, 7,642,154 in San Marcos, and 12,971,905 in Vista.

The total vacancy factor in each community, which includes some space available for sublease, is: Carlsbad – 19% (with 4% sublease vacancy); Escondido 6.2%; Oceanside – 14.8%; San Marcos – 8.5%; and Vista – 7.5%.

To get a copy of the full report, go to http://is.gd/wCYP

With the high vacancy factors in Carlsbad and Oceanside now is a good time to acquire new space or renegotiate your lease at favorable terms. If you’d like assistance in that regard call me at 760-230-1492 or email me at Lee@LeeSterling.com for a no cost consultation.

General Growth, the owner or manager of more than 200 malls in 44 states, which also owns office buildings and is involved in the management and development of master planned communities, filed the LARGEST real estate bankruptcy in U.S. history. So, what happens to its thousands of tenants in those malls and office buildings?

The bankruptcy code (Code) allows the debtor-in-possession (the landlord, for example) or the trustee of the bankrupt estate (hereinafter we’ll use Trustee to indicate either) to accept or reject executory contracts and unexpired leases (Sec. 365). As a result, the Trustee will usually affirm leases that are at or above market rent and reject those that are below market rent. Of course, the lessee of a below market rent would like to make sure it continues to have the right to occupy that space, and the lessee may want to retain the space even if it’s at market rent because of significant improvements the lessee may have made or the cost of moving may be prohibitive. Fortunately, if the lease is rejected, Section 365 provides that the lessee’s possessory rights are protected. However, the Trustee may be relieved of other provisions of the lease, such as the duty to provide services to the lessee.

What if the Trustee wants to sell the property that you have leased? Section 363 of the Code allows the Trustee to sell the real property “free and clear” of any “interest,” in the property, and a lease has been held to be an “interest.” One case, in the Seventh Judicial Circuit, with its particular facts, has held that the right of the Trustee to sell the property free and clear of the lease under 363 of the Code trumps the rights under section 365 of the Code that gives the lessee the continued right to possession. The lessee, for some reason, had not objected to the sale; perhaps counting on the provisions of Section 365. The lessee lost the possessory rights to a warehouse they had built on the bankrupt’s property. In the First Circuit, in a different case, where the lessee had objected to the sale, the Court held that the lessee’s right to retain possession was not trumped by Section 363! If you’d like more information, an interesting discussion of the cases can be found at: http://is.gd/u8Sm and http://is.gd/u8qA

As soon as you hear that your landlord has filed bankruptcy or is contemplating filing bankruptcy, immediately contact competent bankruptcy counsel to protect your rights!

Read the lease before you spend any money on the new space you’ve found! It’s not uncommon to start spending money on inspections, space and decor planning, communications planning, furniture planning, and your time and staff time planning for the new space. Landlords sometimes count on your becoming so invested you’ll be forced to accept lease terms that you might not otherwise agree to. After there is agreement to the basic terms of a Letter of Intent (subject of another post to come) be sure to ask for a copy of the propsed lease! Then you can be sure that the terms are acceptable before you’ve spent your time and money!

I received this video from a long-time friend from high school days. It was so interesting that I wanted to pass it on to my friends here in Carlsbad and Encinitas:

Thomas Bisacquino, the president of the National Association of Industrial and Office Properties, was quoted in the www.washsingtonindependent.com warning that a commercial loan crises was possible, but not because of irresponsible lending as we face in the residential market, but because of the way commercial loans are structured. Most commercial loans run five to seven years at which time the borrower typically refinances. In today’s difficult financing arena it is going to be difficult to find funds for refinancing. Several major investors have already felt the sting of inability to refinance, including Donald Trump! In the event of a landlord bankruptcy tenants are sometimes at risk of losing their lease rights if they haven’t protected themselves in their lease negotiations. That will be the topic of another post.

Commercial leases usually contain a cluase concerning whether or not the lease, or a memorandum thereof, can be recorded.  As a Tenant you should always request the right to record a short form memorandum of the lease. You don’t want to record the whole lease because that would let the world know all the terms of the lease. But, you do want to record the short term memorandum because that will protect your rights in the event a lender attempts to foreclose on the leased property. You’ll have to be given notice because of the recording.

Sometimes the lease will provide for the unfettered right for either party to record a short form memorandum, other leases provide that either party has to get permission of the other party before recording,  and some absolutely prohibit the recording.

Check with your attorney and discuss this clause before signing a lease that prohibits the recording of a short form memorandum of lease!

This morning, as I was getting ready to go to a meeting, I was listening to NPR (89.5 fm here in Carlsbad). One of the lead articles was the pressure on General Growth, the second largest shopping center company in America. The largest is The Simon Company, and, from Australia, we have the Westfield company, which owns the Westfield Mall in Carlsbad. You can hear or read the article at www.npr.org .

The gist of the article was that shopping center developers borrow money just like homeowners do to acquire properties. There’s a big difference, however.  A homeowner can usually obtain a 30-year mortgage, but shopping center developers, commercial office and industrial developers, and buyers of that kind of property often find they can only get a five to seven year mortgage, and then they have to refinance. Well, commercial property owners are now going through the same crunch that homeowners are facing. Lenders aren’t willing to lend!

In order to justify commercial building mortgages, landlords have to project income. They want spaces filled. Now is a great time to be negotiating for new space or renegotiating your lease as a tenant. The balance has shifted so that the pressure on landlords now favors commercial tenants!

There are some significant differences in the laws that apply to renting or leasing commercial space compared to the laws applicable to renting a home. As a Colorado real estate attorney (not licensed to practice law in California) I negotiated leases for commercial space and for residential space, and, sometimes, had to litigate evictions or other tenant-landlord issues. In each instance we had to make sure that we were applying the right standards to the issues.

Whenever a tenant is deliquent in paying the rent due, the landlord has to give a 3-day notice to pay or vacate. If the tenant of a home offers to pay a portion of the rent due, and the landlord accepts the partial payment, the right to evict for the noted non-payment will be terminated. In the commercial lease, the partial payment of the rent due, even if accepted by the landlord, may not terminate the landlord’s right to evict. Most commercial leases provide that the acceptance of partial performance does not negate the landlord’s right to terminate occupancy for default.  Landlords and tenants that we dealt with always made sure that there was an agreement about the effect of partial performance!

Because it’s not unusual for a commercial lease to be 30-50 pages in length, it’s a good idea to deal with a real estate agent who can advise you properly on negotiating the lease and can refer you to competent legal counsel. And, if you’re thinking about renting a home, the same advice applies. Leases, in either situation, are complex legal documents that require good counsel. If you have any questions of a general nature about lease law or real estate law you can write me at: Lee@LeeSterling.com.  I can’t give specific legal advice, but I can address general questions that might be of interest to a number of people.