A Statement On Ukraine from Kevin Maggiacomo, SVN President and CEO

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Commercial Real Estate Retail Tenant Synergy

Tenant Synergy in Retail Commercial Real Estate

With ICSC’s annual RECon upon us, it’s about time to talk about retail tenant synergy. The original logic behind the large anchored mall was that people were unlikely to go out of their way to go to an in-line store, like a pretzel shop or a shoe store, but that they were willing to travel to go to a department store, like a Macy’s or a JC Penney. To take advantage of this, commercial real estate developers began building malls that had department store anchors at their corners and lots of little “in-line” shops in between. The department stores frequently got discounted rent, so it was a win for them, and the in-line stores benefited from having lots of “forced” traffic as people going between the department stores walked by. While the model of the mall has changed over the years, the concept of a synergistic relationship between tenants continues.

Retail Tenant SynergyLooking for more examples? Have you ever noticed that most neighborhood centers have a card store right near the supermarket? Or, for that matter, have you ever wondered why neighborhood centers typically have take-out focused restaurants like Chinese or pizza shops near the supermarket? It’s all about convenience.

What is going on here is that these commercial real estate owners have realized the benefit of synergy. Having tenants that fit well together is not only a way to keep their customers happy, but it is also a way to keep tenants happy. A dry cleaner located next to a supermarket, a card shop, a pizza parlor, a family haircut place and a day spa is very unlikely to leave. They benefit not only from their proximity to the supermarket but also from their proximity to other supportive businesses which make that center a one-stop shop. What could be a better place for them?

Retail Tenant Synergy Gone Wrong

On the other hand, commercial real estate landlords who get desperate can sometimes fail to achieve synergy. While this can be a way to keep occupancies high in the short term, it can generate greater vacancy down the line. Here’s a real world example of four tenants at a center in an overbuilt but demographically desirable eastern suburb of St. Paul, Minnesota:

  • High-end wine shop
  • Yoga studio
  • Gourmet food boutique focusing largely on cheese
  • Army recruiting center

I know of another center in an inner-ring northern suburb that has the area’s largest gun shop, a tobacco store, a rowdy drinking establishment and a large health clinic. It doesn’t have a pharmacy.

Over time, these centers will typically lose the tenant that doesn’t fit or will lose more tenants as their outlier tenant changes the nature of the entire center. While few commercial real estate marketing packages talk about this and many commercial real estate investment brokers are unaware of it, achieving tenant synergy is crucial for a retail center to be successful in the long term.

At SVN, creating synergy is a fundamental part of the principles that underlie our Shared Value Network℠. To learn more about how we help retail owners create markets for their properties, join us on our SVN | Live ℠ Open Sales Meeting.

[bctt tweet=”Achieving tenant synergy is crucial for a retail center to be successful in the long term #CRE” username=”svnic”]

Have Five Real Conversations a Day for CRE Success

Conversations Drive Commercial Real Estate Sales

Last night, I had to turn on my electric snow melting mats. Again. In March. So you’ll understand why I’m spending a lot of time this morning thinking about our Annual Conference in San Diego.

And what I’m thinking about is the challenge that our CEO, Kevin Maggiacomo, issued to everyone in the room: Have five real conversations a day, every day.

real conversations - lady on the phoneMany of you are reading this and thinking that this isn’t a challenge. After all, you talk to 10, 20, 30 people every day, right? As I write this, it isn’t even 7:30 am, I’ve already spoken to 3 people, and I’m not even in a direct sales position anymore!

Let’s look at what Kevin said one more time… “Have five REAL conversations a day, every day.” That one word – real – makes a big difference. A real conversation is one that you have with a person who is truly in a position to sign a listing, lease, or purchase agreement. Real landlords, real owners, real tenants or truly real buyers. To be clear, I define a real buyer as someone who already owns or leases commercial real estate.

And here’s another kicker… If you’re already doing a deal with someone and you have to talk to them anyways, they don’t count.

Now that we’ve narrowed down “real,” THOSE conversations are usually a bit more few and far between. So, if you aren’t talking to five of those people a day, starting to do that will revolutionize your business. And if you can talk to more than five (when I brokered, my goal was 10 and my average was 8!), you’ll do even better.

How to Have Five Real Conversations a Day

If you aren’t having five real conversations a day, you probably have two questions at this point:

  1. How do I find these real people?
  2. What do I talk about when I get them on the phone or in front of me?

First question… The real people are in your database. Anyone that you aren’t working with today is someone that you need to talk to today. And if you don’t have a database, there’s no time like now to get started (take a look at the first couple of lessons in the SVN System for Growth course on “Encyclopedic Market Knowledge” for help getting started). We can give you all kinds of strategies for how to strategically segment your database and build smart call lists.  But for now, here’s a simple three-step rule:

  1. Find someone in your database that you haven’t spoken to in a while.
  2. Call him or her.
  3. Repeat until you’ve spoken to five different people.

Second question… What do you talk about? Dr. Dotzour nailed it at the conference… Owners and landlords care about two things – will my building stay full and will my value go up. Anything that can impact values (or net operating incomes) or occupancy is fair game, and a great way to start a conversation. It’s that simple.

To learn more about how SVN can boost your brokerage skills and business, click here.

[bctt tweet=”Have five real conversations a day, every day. #CRE”]

Finding the Perfect Apartment Building

Investing in Apartments Includes Some Benefits

Apartments are the hottest class of commercial real estate and are likely to continue being hot for a while. Independent of the unique demographic and economic drivers for their success in the current post-Great Recession economy, there are a few basic truths that make them attractive:

  • Housing costs usually move up and apartment rents can be adjusted on a regular basis.
  • Vacant units are easy to re-rent with little or no cost. In fact, tenant security deposits usually pay for cleaning and repairs.
  • Excellent financing with 80 percent leverage is readily available.
  • Relatively easy appreciation through making cosmetic upgrades to increase rents.

…But Apartments Also Include Some Downsides

For many investors, though, apartments have three key problems compared with other classes of commercial real estate. They have tenants that break things, complain and fail to pay rent. Apartments have kitchens that tend to start destructive fires. Finally, they have bathrooms that leak and cause damage to surrounding units. At the same time, many cities heavily regulate apartments and, in many cases, favor tenants over landlords. These problems make apartments challenging and time-consuming to own.

Imagine, for a moment, an apartment building without tenants, kitchens or bathrooms and with little or no government oversight. All that you would have are rooms with furniture, clothing and other items in them. If you have ever owned an apartment building, you know that a building like this one would be a dream to own!

The Solution: Self Storage Facilities

In fact, the perfect apartment building is a self-storage facility. Mini-storage facilities offer a similar ownership experience to apartments but without any of the drawbacks. Because they frequently serve apartment tenants, their performance tracks the apartment industry, as well. Furthermore, modern management systems make them much easier to own than many people realize.

Read more of Solomon Poretsky’s blog posts here.

[bctt tweet=”In fact, the perfect apartment building is a self-storage facility.”]

Five Traits of an Exemplary Property Manager

What Makes an Exemplary Property Manager

According to Rory Williams, Managing Partner at SVN/Demetree Real Estate Services

Owning a property designed to be leased or rented is a significant investment of time and money. These properties—including retail centers, office or industrial complexes, self-storage facilities and homes—also carry a number of inherent challenges. What if I can’t get a tenant? What if my tenant is behind in payments? How do I keep up with the maintenance demands of the property?

Enter, the property manager.

Just remember, you invested a great deal into your property. How can you ensure that you have the best property manager for the job? 

You can—and should—get references, check the person’s vacancy rate or ask the manager a battery of questions about tenant acquisition, maintenance, fee structure, etc. There are also personal traits you can discern by talking to a property manager. These are important markers that will help you make the right choice.

[bctt tweet=”How can you ensure that you have the best property manager for the job?”]

Look for these traits when hiring a property manager.

1. The property manager is an excellent communicator.

On the most basic level, this means he or she promptly follows up quickly on phone calls. If you leave a voicemail, and the property manager doesn’t get back to you, your tenant will probably be treated similarly. Additionally, if a property manager procrastinates, it could end up costing the property. You want a flowing pipeline of communication between all parties, so there are no misunderstandings – the root of so many conflicts with tenants. Being a strong communicator also means being transparent, upfront about everything that is going on in the working relationship.

2. The property manager is highly knowledgeable.

The industry is complex. There is much a property manager must know about the current market, screening tenants, legal considerations, preparing leases. Be sure the person you’re working with speaks with authority and conveys the clear impression of being an expert. A property manager should be able to answer questions easily about security deposits, tenant retention, rent—all facets of the business.

3. The property manager keeps the tenant relationship professional at all times.

The tenant/property agreement is a binding contract that needs to be maintained at a professional level. An exemplary property manager is trained to work with tenants on a professional, dispassionate level – as a business should operate. For this reason, the property manager is able to act as a wall of separation between property owner and tenant, relaying information and taking action as your official agent.

4. The property manager is good with numbers.

Must he or she be an accountant? Not necessarily. But again, you have a large investment hanging in the balance, so the more you reduce the margin of error, the better. A property manager should be math-savvy, able to quickly and accurately calculate your costs, extra fees, cash flows or whatever other numbers are involved in the transaction. Having additional accountant staff is an important hedge against any slips when punching out equations that affect your property. It’s also a big help at tax time. So be sure your property manager has this vital backup.

5. The property manager has appropriate resources.

A property manager should have the resources necessary to make your job easy and seamless. Accounting was already mentioned but you should also take a look at the accessibility to that accounting system and the reporting structure. If a property manager has a team of supporting individuals and the technology required for you to easily access that information, you are likely to maintain a more transparent relationship with him or her. Ask and be knowledgeable about the software capabilities to be sure you’re getting the most efficient and effective product.

To read more about property management, read our Sperry Van Ness Property Management Value Proposition here.

SVN PM Value Prop

The Dark Corners of the Commercial Lease: Part Four

The following was adapted from a lunch & learn presentation at Sperry Van Ness | RICORE Investment Management, Inc in Cincinnati, Ohio. This is part four in a four-part series. 

Demystifying the Commercial Lease: Part Four

A typical commercial lease is a comprehensive document that may be anywhere from 20 to 60 pages long. (Often with exhibits these things can be huge! So, reviewing new leases can be a real headache for an agent trying to sell or property manager taking on the management of a new multi-tenant property or shopping center.) When paging through a lease many provisions can seem irrelevant, extraneous, unimportant or rarely used. The fact is that every lease provision is drafted to address a specific event, need or situation that a landlord or tenant may face. Today, I was asked to address some of the more ‘legalistic’ provisions in the commercial lease in an attempt to try to ‘demystify’ them for you.

Also be sure to read part one of this series on Subordination, Non-Disturbance and Attornment Agreements and ‘SNDA Agreements’, part two on Tenant Estoppel Certificates, and part three on Indemnification.

IV. Notices Under Commercial Leases

A vague or unclear notice provision can prevent the parties from efficiently enforcing critical rights and remedies under the lease. Notice provisions should specifically identify the acceptable methods of delivery and clearly specify when notices will be deemed to be effectively given. Further, notices improperly given (that is, that do not follow the letter of the notice provision) may be deemed to be ineffective or as no notice at all.

If hand-delivery is an acceptable means of providing notice, the parties should consider whether that method is likely to be effective under their particular circumstances, taking account of the size of the entities involved and other practical considerations. In addition, the hand-delivery method must expressly require an acknowledging signature, receipt, or other documentation to evidence the actual delivery.

The parties should also consider whether to allow notice given by the more convenient methods of facsimile and email, which will depend, in part, on the term of the lease—facsimile numbers and email addresses will likely change over time. Also, the reliability of fax or email notices may be questionable. Sometimes, notice by fax or email will provide that they are not effective until confirmed by a more reliable method of notice, such as by certified mail, return receipt requested, or overnight delivery by national overnight courier service, capable to confirm delivery to a named recipient. Further, the notice provision should contemplate a method to change notice addresses and contact information, such as fax numbers and email addresses.

Related War Story: What constitutes an effective amendment of a commercial lease?

The landlord and tenant have had ongoing discussions about the tenant’s placement of a sign on the roof of an office building shared by the landlord, tenant and other tenants. The tenant had frequent email exchanges with the landlord on a weekly or monthly basis about its tenancy in general, including discussions about the sign. The tenant had been after the landlord for several months to consent to allowing the tenant to install an illuminated sign on the roof of the office building located downtown in the CBD and with significant expressway exposure. The landlord finally consented by email to permit the tenant to install the sign after reviewing renderings of the proposed sign prepared by the tenant’s sign vendor. The tenant had the sign constructed at the cost of $30-40,000 +/-. When the tenant had the sign delivered to the building for installation, the landlord refused to allow access to the roof for installation. A lawsuit ensued. The tenant’s claim to permit installation of the sign was determined by the court to require an amendment to the lease. The lease expressly stated that any amendment to the lease was to be in writing and signed by the landlord and tenant. The email ‘amendment’ was unenforceable, and in fact, was no amendment to the lease at all.

Further, under Ohio law, any material amendments to the lease must be signed with the same formalities as a lease, that is, in writing and with each party’s signature acknowledged by a notary public.

To read more on property management, click here.

SVN PM Value Prop

 

The Dark Corners of the Commercial Lease: Part Three

The following was adapted from a lunch & learn presentation at Sperry Van Ness | RICORE Investment Management, Inc in Cincinnati, Ohio. This is part three in a four-part series. 

Demystifying the Commercial Lease: Part Three

A typical commercial lease is a comprehensive document that may be anywhere from 20 to 60 pages long. (Often with exhibits these things can be huge! So, reviewing new leases can be a real headache for an agent trying to sell or property manager taking on the management of a new multi-tenant property or shopping center.) When paging through a lease many provisions can seem irrelevant, extraneous, unimportant or rarely used. The fact is that every lease provision is drafted to address a specific event, need or situation that a landlord or tenant may face. Today, I was asked to address some of the more ‘legalistic’ provisions in the commercial lease in an attempt to try to ‘demystify’ them for you.

Also be sure to read part one of this series on Subordination, Non-Disturbance and Attornment Agreements and ‘SNDA Agreements’, and part two on Tenant Estoppel Certificates.

III. Indemnification.

Since a tenant of a commercial lease has both possession and control of the premises owned by the landlord (and the landlord does not), a landlord will generally require the tenant to indemnify the landlord in connection with any incident or event occurring on the premises or arising from the tenant’s occupancy or use of the premises. On the one hand, because the landlord is the owner of the space, if the tenant or its property is damaged, or if a customer is injured in the space, the landlord is likely to be sued for the damage or injury. On the other hand, frequently, landlords have little practical control over a parcel of property or interior store space after it is leased to a tenant. Further, landlords also do not wish to bear the cost of insuring for accidents in the tenant’s leased space.

A typical indemnification provision from a pro-landlord lease is as follows:

Indemnity. Tenant agrees at all times to indemnify, defend and save harmless Landlord and its members, officers, employees, agents, contractors, successors and assigns from and against any and all claims, actions, damages, liabilities and expenses, including, but not limited to, attorneys’ and other professional fees and expenses, in connection with loss of life, personal injury and/or damage to property occurring on the Premises or arising from the occupancy or use by Tenant of the Premises, or arising from any breach or default in the performance of any obligation on Tenant’s part to be performed under this Lease, or resulting from or arising out of the act or omission of Tenant, its agents, employees or invitees.

An indemnity provision is a contractual obligation of the tenant to pay for something (claims, damages, liabilities or expenses…) and it is separate and apart from other contractual obligations and damages under the lease or any other agreement. Therefore, an indemnity obligation by the tenant can be of great benefit to the landlord, since the landlord does not have to prove that its damages or expenses flowed directly from the tenant’s default under the lease in a court of law in order to get an order by the tenant to pay to the landlord.

A pro-landlord indemnity provision will seek to cover not only claims arising from events or incidents occurring within the premises but also those of invitees, such as customers, suppliers, employees and vendors of the tenant, occurring outside of the tenant’s premises, for instance, on the sidewalk in front of an office or storefront or in the parking lot of an office or shopping center. A landlord believes the tenant should be responsible for such claims since these persons are coming to the tenant’s premises for the purposes of conducting business with the tenant. However, if the area is a common area such as a sidewalk or parking lot under the landlord’s control and a business invitee slips and falls on accumulated ice, the landlord is likely responsible for some or all of the claim. Further, a tenant can be responsible for the negligent or intentional acts of its employees, agents or invitees under the indemnity clause. [Keywords indicating coverage for negligence: claims… arising from the acts or omissions of the tenant, its agents, employees or invitees… ]. Lastly, a pro-landlord indemnity provision will protect the landlord from liabilities, damages and expenses arising from the tenant’s breach or default under the lease.

Ohio Law – Premises Liability:

“Occupation [or] control… is necessary as [a] basis for liability of such party for personal injuries resulting from the condition of such premises.” See Cooper v. Rose, 151 Ohio St. 316 (1949).

“One having neither occupation nor control of premises is ordinarily under no legal duty to an invitee of another with respect to the condition or use of those premises.” Brown v. Cleveland Baseball Co., 158 Ohio St. 1 (1952). Shump v. First Continental-Robinwood Associates, 71 Ohio St. 3d 414 (1994) (citing each of the above cases with approval).

Protections for Landlord from Claims (Order of Recourse):

1. Tenant – obligations under lease, includes an indemnity obligation to the landlord (solvency of the tenant and its business);

2. Tenant’s Insurance – the tenant’s coverage should be ‘primary;’

3. Tenant’s Guarantors – always require (or ask for) guarantors;

4. Landlord’s Insurance – the landlord’s coverage should be ‘secondary’ to the tenant’s which is primary; and

5. The landlord’s limitation of liability in the lease itself (liability of the landlord shall be limited to the landlord’s interests in the property and any judgments shall be satisfied solely out of the proceeds of sale of the landlord’s interest in the property. No personal judgment shall be taken against the landlord or its partners, shareholders, directors, officers…).

In summary, an indemnity clause is an important ‘catch-all’ protection for the landlord, providing protection and an obligation of the tenant to pay for all sorts of claims arising from the tenant’s use and occupancy of the premises, including the negligence [acts or omissions] of the tenant, its agents, employees or invitees, as well as for damages, liabilities and expenses arising from breach or default in performance of the tenant’s obligations under the lease.

To read more on property management, click here.

SVN PM Value Prop

 

The Dark Corners of the Commercial Lease: Part Two

The following was adapted from a lunch & learn presentation at Sperry Van Ness | RICORE Investment Management, Inc in Cincinnati, Ohio. This is part two in a four-part series. 

Demystifying the Commercial Lease: Part Two

A typical commercial lease is a comprehensive document that may be anywhere from 20 to 60 pages long. (Often with exhibits these things can be huge! So, reviewing new leases can be a real headache for an agent trying to sell or property manager taking on the management of a new multi-tenant property or shopping center.) When paging through a lease many provisions can seem irrelevant, extraneous, unimportant or rarely used. The fact is that every lease provision is drafted to address a specific event, need or situation that a landlord or tenant may face. Today, I was asked to address some of the more ‘legalistic’ provisions in the commercial lease in an attempt to try to ‘demystify’ them for you.

To read part one of this series on Subordination, Non-Disturbance and Attornment Agreements and ‘SNDA Agreements’, please visit here.

II. Tenant Estoppel Certificates

Estoppel: A legal bar to alleging or denying a fact because of one’s own previous actions or words to the contrary. Merriam-Webster Dictionary online.

An estoppel certificate is a document designed to give a third party critical information on the relationship between the landlord and a tenant. The third party is frequently a prospective purchaser of the landlord’s real property containing the tenant’s premises, or a lender who will be secured by an interest in that property. Typically the deal that the landlord is making requires the landlord to obtain such certificates from its tenants and present them to the third party for use in its “due diligence” review of the property. Estoppel certificates are a significant issue in a sale or refinancing because they provide independent verification to the buyer or lender of the cash flow from the tenant’s rent payments. They also help the buyer or lender identify any lease defaults or disputes with tenants that could cause a problem after closing.

Most commercial or retail leases have provisions which require the tenant to prepare and sign estoppel certificates (or estoppel letters as they are sometimes called) upon the landlord’s request. To avoid disputes about the content of the estoppel certificate, a good practice is to attach the actual form of estoppel certificate as an exhibit to the lease. Typically the tenant is required to certify that as of the date of the document certain things are true, or to specify in some detail why they are not true. Topics usually covered include:

(i) the date of lease commencement, the dates of the current term and any options to renew;

(ii) the amount of current rent and the date through which rent has been paid;

(iii) whether the tenant’s lease is in full force and effect and has not been assigned, modified, supplemented or amended;

(iv) whether all conditions under the lease to be performed by the landlord have been satisfied;

(v) whether any required contributions by the landlord to the tenant on account of the tenant’s improvements have been received by the tenant;

(vi) whether there are any existing defaults by either party or claims, defenses or offsets which the tenant has against the enforcement of the lease by the landlord;

(vii) whether any rent or related payment obligation has been paid more than one month in advance; and

(viii) whether any security has been deposited with the landlord.

The tenant is usually required to state that its disclosures in the estoppel certificate may be relied upon by the specified third party or parties. The tenant’s knowledge that the landlord, purchaser and/or lender are relying on the estoppel certificate means that the tenant could be held liable to the third party if the certificate contains untrue statements. By signing the estoppel certificate, the tenant “estops,” or prohibits, itself from taking a position contrary to what it stated in the certificate. The danger in certifying to something that is not accurate is that the tenant may be giving up the right to contest it at a later time. For example, a tenant who signs an estoppel certificate stating that there are no landlord defaults may have a difficult time later if it comes to light that there was a landlord default, even if it was unknown to the tenant at the time, during the period covered by the estoppel certificate. One way that tenants try to lessen the possible harmful effect of an inaccurate estoppel certificate is to qualify the statements “to tenant’s actual knowledge” or “to the best of tenant’s knowledge.” Leases usually require the tenant to prepare and sign the certificate within a relatively short period, and authorize the landlord to prepare and sign the certificate in the tenant’s name if the tenant does not respond within the allowed time. Further, failure to timely provide the estoppel often constitutes a default by the tenant under the lease.

Note: There can be estoppel certificates of various types, including landlord estoppel certificates.

To read more on property management, click here.

SVN PM Value Prop

The Dark Corners of the Commercial Lease: Part One

The following was adapted from a lunch & learn presentation at Sperry Van Ness | RICORE Investment Management, Inc in Cincinnati, Ohio. This is part one in a four-part series. 

Demystifying the Commercial Lease: Part One

A typical commercial lease is a comprehensive document that may be anywhere from 20 to 60 pages long. (Often with exhibits these things can be huge! So, reviewing new leases can be a real headache for an agent trying to sell or property manager taking on the management of a new multi-tenant property or shopping center.) When paging through a lease many provisions can seem irrelevant, extraneous, unimportant or rarely used. The fact is that every lease provision is drafted to address a specific event, need or situation that a landlord or tenant may face. Today, I was asked to address some of the more ‘legalistic’ provisions in the commercial lease in an attempt to try to ‘demystify’ them for you.

I. Subordination, Non-Disturbance and Attornment, and ‘SNDA Agreements.’

The first topic is Subordination, Non-Disturbance and Attornment. These are separate concepts and may appear, separately or together, in a commercial lease. There are also Subordination, Non-Disturbance and Attornment Agreements, commonly called ‘SNDA Agreements.’ However, it is important to understand that the three concepts do not always exist together.

A. Subordination.

1. Priority of Interests in Real Estate. Any discussion involving ‘subordination’ necessarily involves an understanding of how priorities of interests in real estate are determined. (I am speaking of such items as deeds, leases, mortgages, mechanics liens, and so on.)

a. For an interest in real property to receive priority it must be properly executed, acknowledged and recorded.

b. As a general rule, first in time is first in right unless there is an agreement to the contrary.

2. In Ohio, a sale of property at foreclosure results in termination of any lease that was made subsequent to, and is subordinate to, the mortgage. A lease that is prior in time to the mortgage remains undisturbed by the foreclosure.

3. A lender or mortgagee may voluntarily elect to subordinate the mortgage to subsequent leases. Similarly, a lease may provide that it will be subordinate to any future mortgages. In any event, it is the party with priority who must consent to making another interest superior to its own. Simply inserting a provision into a lease or a lending agreement that such interest will be superior to all other prior and subsequent interests will not force a party with priority into a junior position.

B. Attornment. Many lenders will require that any leases entered into by the owner/borrower contain a subordination provision in favor of the mortgagee/lender. This agreement is often coupled with an attornment agreement. An attornment agreement is an agreement in favor of the lender in which the tenant agrees to recognize the purchaser at foreclosure as his new landlord. Such an agreement overcomes the obstacle of automatic termination of subordinate leases upon foreclosure by providing that, in effect, the tenant will enter into a new lease with the purchaser on the same terms as the old lease. Therefore, the lender is assured that at least some rental income will continue after foreclosure (i.e. rental cash flow is maintained). The attornment agreement may also provide that the attornment be at the lender’s option. In such an instance, the lender would then have the right to terminate the lease or hold the tenant to its obligations.

Attorn: Means to agree to be tenant to a new owner or landlord of the same property. Merriam-Webster Dictionary online.

C. Non-Disturbance. A lender may also execute a non-disturbance agreement in favor of one or more tenants. Under such an agreement, usually entered into directly between the lender and the tenant, the lender agrees that in the event of foreclosure, the lender will not terminate the tenant’s lease or otherwise disturb the tenant’s rights so long as the tenant complies with the lease. Such an agreement protects the tenant against risk of foreclosure, and usually is coupled with subordination and attornment provisions for the lender’s benefit. Thus, regardless of priority, the lease survives foreclosure and the tenant attorns to the lender or purchaser at foreclosure. As a practical matter, where the lease is long-term or the tenant intends to make substantial improvements to the leased premises, it is advisable for the tenant, as part of its lease negotiations, to protect its investment against the risk of foreclosure by obtaining a non-disturbance agreement from any existing mortgagee and by refusing to subordinate its lease to any future mortgagee unless the future mortgagee enters into a non-disturbance agreement for the tenant’s benefit.

Note: A lender or landlord does not have to offer an SNDA Agreement. A lender may only offer a subordination and attornment (at the lender’s option) agreement, a SA Agreement (if you will), since this is most in the lender’s favor. A savvy or well-represented tenant will know to ask for a non-disturbance agreement as a ‘quid pro quo’ for a subordination and attornment agreement.

[bctt tweet=”SDNA Agreements in a #CRE Lease: Don’t disregard it b/c you don’t understand it. Learn about it here:”]

D. SNDA Agreements. The Subordination, Non-Disturbance and Attornment Agreement (“SNDA”) is often misunderstood by landlords and tenants in a lease transaction, and consequently is frequently disregarded. The failure to obtain an SNDA for the benefit of a tenant may result in an unanticipated early termination of the lease. In the face of economic uncertainty, it is helpful to review the importance to a tenant of obtaining an SNDA from existing mortgagees of the landlord.

It may seem counterintuitive that a lender would consider terminating a lease upon foreclosure and forfeiting the associated income stream, but if the rent due under the lease is below-market at the time of foreclosure, or if the tenant occupies a small space or portion of a floor, or the successor landlord desires to use the space himself or for other purposes, it may be in the best interest of the successor landlord to extinguish the lease. If the lender is not bound by a non-disturbance obligation, the lender has all of the flexibility and bargaining power.

In conclusion, and at the risk of redundancy, it is important to stress the advantage to any tenant, and especially a tenant with a long-term lease or which has made a substantial investment in its tenant improvements (i.e. expensive buildout or ground lease with construction of the tenant’s own building) to have the right to secure a SNDA from all existing mortgagees of the property and a commitment by the landlord to obtain such an agreement from future lenders as a condition to granting subordination to future mortgagees.

Related War Story: A commercial bank had entered into a ground lease with a developer and constructed a branch bank in a popular shopping center development. The bank spent several million dollars to construct the branch bank and to enter into the ground lease (PV of long-term grounds rents was considerable). Although this development was a great success, the developer/landlord lost the property in a foreclosure action due to the fact that this development was cross-collateralized with another unsuccessful project that was in foreclosure. A review of leases revealed that the bank’s ground lease was subsequent to the developer’s mortgage loan and the bank did not have a non-disturbance agreement with the developer’s original lender. The purchaser from the lender realized the bank’s error and negotiated a handsome payment from the bank in exchange for a non-disturbance agreement with the new purchaser.

Lesson 1: A tenant in a long-term lease or that makes substantial improvements to its premises, such as construction of its own building, whether an IHOP restaurant, branch bank or Advance Auto Parts, should always negotiate a lease provision stating that in exchange for any subordination of the lease to the landlord’s mortgage and attornment by the tenant, the lender agrees not to disturb the tenant’s tenancy so long as the tenant complies with the lease.

Lesson 2: Landlords/developers should never allow their projects to be cross-collateralized; each project should stand on its own in terms of rental income and financing.

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SVN PM Value Prop

 

Five for Friday: A lesson in real estate taken from West Point

Learn how a West Point education is still helping John Snyder, CPM, SIOR, with his business at Sperry Van Ness/Investec Realty Services today in this week’s Five for Friday blog.

John Snyder, CPM, SIOR, managing director at Sperry Van Ness | Investec Realty Services
John Snyder, CPM, SIOR, Managing Director at Sperry Van Ness | Investec Realty Services

1. What is your geographic market and product specialty?

Our firm has offices in both Memphis and Nashville, Tenn., serving those regions as well as areas of Mississippi.  We service a variety of clients from large institutional owners of office parks to local investors and regional banks.  On the tenant representation side, our clients range from Fortune 100 firms with needs of 275,000 square feet to small not-for-profit organizations.  Due to our SVN affiliation, we have been able to partner with other SVN professionals to add value to our clients’ portfolios.  We also offer property management and consulting services.

 

2. What’s your latest best practice tip that you can share?

As referrals and relationships are the focus of our business, we strive to develop personal relationships with our clients.  Being in a smaller market and providing a wide range of real estate services, establishing that personal relationship is paramount to our business.  We also try to qualify our clients early in the process, following Patrick Lencioni’s Getting Naked business fable. When we match with our clients, our successes expand and referrals grow.

 

3. What’s been the biggest changeover on how you run your business in the past decade?

With the explosion of real estate information that is readily available to clients, we are faced with a re-education and prioritizing of data that is germane to a successful transaction.   The experienced, knowledgeable, ethical real estate professional who continues to study,  improve skill sets, and collaborate will remain a sought after advisor from the owners and users of real estate.

 

4. What business book do you like to recommend to your colleagues?

Napoleon Hill’s Think and Grow Rich is a basic primer for personal development and goal setting and it has never failed me! John C. Maxwell offers a library of leadership and team development education.  His latest, Everyone Communicates, Few Connect provides invaluable techniques for business practice improvement. Lencioni also has several books that help with improvements in teamwork, consulting, leadership, and personal development, including Death By Meeting.

 

5. What’s a fun fact that not everyone knows about you? 

Here’s a few.  I learned to accurately determine distances for measuring real estate (office buildings and golf courses) while walking more than 50 hours of punishment tours prior to graduation from the United States Military Academy at West Point.  As a U.S. Army Corps of Engineer officer, I was qualified to both jump out of perfectly good aircraft and deploy and detonate tactical nuclear devices.  For fun, I continue to officiate soccer matches at the collegiate, high school, and youth competitive levels.  With more than 2200 matches completed, I have run farther than Forrest Gump – and I appreciate all the unsolicited advice and expertise provided by the uninformed coaches, players, and spectators!

 

*All Sperry Van Ness® offices are independently owned and operated.