Real Estate

Commercial Leasing; Tenant's, Operating Expenses & The Simple NNN Lease.

     During my day to day, I draft and negotiate my fair share of commercial lease agreements.  They range from office leases, to retail leases and industrial leases but in almost every case, especially with new clients leasing their first space, the conversation begins the same; they say "I am going to send you a simple lease that my Landlord drew up, take a quick look and let me know it all looks good"; and I respond, "Send me the lease and I'll take a look."

     Most real estate lawyers are familiar with this elusive document, the simple lease, so often described by clients eager get their business up and running and turning a profit.  Unfortunately, Landlord leases are typically one sided at best and the clauses invariably tilt to the Landlord's advantage.  

     One example of a lease clause that can be surprisingly expensive for tenants is the clause governing operating expenses.  Most tenants understand the difference between a triple net lease and a gross lease; the former is structured so that in addition to base rent, tenants are responsible for a share of operating expenses (the landlord's real estate taxes, insurance and costs to operate the building in which the premises are located) and the latter is structured so that tenants pay a single rental payment that includes everything.  In the commercial setting, triple net lease forms are very common and tenants often sign these leases without legal review and counseling.  Operating expense provisions seem simple - the tenant pays its share of the operating costs, but, oftentimes the lease language is overly generous with what may be included in the operating costs.  An example of expenses that should be excluded or at least carefully limited are capital expenses.  Furthermore, its ordinary for tenants to ask for a cap on annual operating cost increases so they can budget for the worst case scenario during each lease year.  If there is no cap on operating expenses then they can expand and increase without limit and Landlords have little motivation to keep their costs down when they can be passed through to tenants without question.  Another important concept when it comes to operating expenses is language providing the tenant a right to audit the Landlord's books.  A good audit provision should provide that if the audit reveals overcharges exceeding a certain percentage, the Landlord will be responsible for paying the audit costs. A skilled real estate attorney understands which expense categories are inappropriate to pass through their clients and can help their clients limit ballooning expenses and excess expense pass throughs.

     The key to providing useful legal counsel to tenants in commercial lease negotiations involves picking one's battles.  A typical commercial lease agreement contains upwards of 50 clauses and its possible to negotiate each one, however sending proposed revisions to all or nearly all of the lease clauses is sure to cause delays (which neither side wants) and sometimes, it can blow a deal.  Evaluating which clauses will be most important to a client begins with understanding the nature of their business very well and then focusing on the clauses that relate to their business and those which may cost them additional money above and beyond rental payments.  The expense clauses in triple net leases certainly qualify there!  

     Before signing that next "simple lease" have an attorney take a look and help you try to balance the important terms.  Its very difficult to help a tenant after they've signed the document!

Real Estate 101 - Helping Residential Buyers and Sellers

     Most residential real estate transactions are handled by real estate brokers.  Traditionally, sellers execute a listing contract with a seller's broker who, in return for a commission of around 6% of the sales price, markets the seller's property on a multiple listing service (MLS).  Brokers representing buyers then show their clients properties of interest.  When a sale closes the brokers split the commission. One common exception to the standard process described above is when a "transaction broker" represents both parties. Today, to stay competitive, many brokerage firms are starting to offer flat fees for facilitating transactions.  Most straight-forward residential deals don't necessitate an attorney being involved on either side.  My opinion is that in most instances, competent brokers are more than capable of facilitating real estate transfers using the form contracts produced by the Colorado Real Estate Commission (CREC) for that purpose.  Also, brokers have access to resources such as the MLS, their own property databases and word of mouth intel on properties coming to market that real estate attorney can't provide.  The best brokers also bring marketing expertise and property staging expertise to their clients.   Therefore, until recently, my involvement in residential deals has typically been limited to helping buyers and sellers and their brokers in transfers involving high value, luxury class properties that involve significant changes to the CREC contracts, or in sales that have become contentious or involve some problem or extraordinary circumstance.  So far this year has been different noticeably different.

When parties use a broker, the higher the sales price, the larger the commission due from the seller

     While the bulk of my law practice remains focused on commercial real estate deals, finance and leasing, lately more buyers and sellers are asking me to get involved with their straight forward residential deals on the front end.  While I'm happy to help; I've also been curious why the volume of this work has increased so noticeably.  I perceive several reasons for this increase in residential deal work.  obviously, since leaving big firm life in January, I'm closer to the ground (both literally and figuratively) with office space in a building dominated by younger, dynamic entrepreneurs and tech oriented tenants so, I find myself talking to a variety of people and fielding questions about real estate throughout the days rather than talking to the same old people every day, and some of these conversations lead to residential work as these folks are looking for homes in a tight market.    Its no secret its a seller's market around Denver these days, with quality properties going under contract very quickly (often 24 hours or less) and commonly escalating into bidding wars.  Ready buyers abound and the higher the sales price, the larger the commission due from the seller at closing; consider that 6% of $400,000.00 is $24,000.00.  With buyers easier to find than ever and the supply of available properties at an all time low, I see sellers foregoing the MLS and coming together with buyers on their own through alternative means such as Zillow or most often, through word of mouth.  These sellers and buyers need someone to draft the contracts, deeds and other paperwork necessary to transfer the property and to coordinate closings with a title company - that is where I come in.  

these days I find myself drafting residential sales contracts between landlords selling condos or townhomes to tenants; and in seller-carryback deals.

     One fact that many people outside the real estate world don't realize is that brokers don't actually draft contracts.  While they offer many services a lawyer can't (see above), when it comes to drafting they simply fill in the blanks on CREC form contracts.  They are actually forbidden by law to make changes to these forms other than filling in the blanks and their forms are locked.  I use the same CREC form contracts as the brokers but, as a licensed attorney I have access to alterable MS Word versions.  That makes these deals  fun for me since I can make some changes to these contracts that benefit my clients!   Since I can draft contracts and coordinate a straightforward residential closing for in between 4 to 8 hours of total attorney time, regardless of the purchase price, the sellers I work with are usually very happy that my legal fees are substantially less than the brokerage commission would have been!  Buyers can also benefit from that fact and sometimes use it to bargain for a price reduction.  The two most common situations where I find myself drafting residential contracts for sellers and buyers these days are: when a landlord wants to sell their condo or town-home to their tenant; and when a seller is providing the financing for the buyer and taking back a note and deed of trust at closing.  I'm always happy to help sellers and buyers close residential property sales.

End of the Wild West In Denver's Short Term Rental Market?

Cheeseman Park Winter Morning:  Copyright David C. Uhlig 2016

Tonight city council votes on two ordinances legalizing (and regulating) strs in primary residences.

     Did you know that operating a private home as an Air BNB, VRBO or as a similar short-term rental property, is currently illegal in the City of Denver? Denver’s zoning code specifies the types of uses that are allowed as accessory to residential use and in almost all cases, short term rentals of 30 days or less (“STRs”) aren’t listed.  The city’s position is that currently, these short term rentals are not allowed under most residential zone districts but the city also does not enforce the prohibition.  According to an April 7, 2016 letter to the city from the Denver Short Term Rental Alliance, to date the city has only received six (6) complaints about STRs.     One exception is that in mixed use commercial zone districts, an STR may be allowed as a “lodging accommodation” if the owner obtains a zoning permit and complies with relevant parking and building ordinances.   

     Tonight the Denver City Council is scheduled to vote on two bills: one would revise Denver’s zoning code (CB16-0261) to permit short term rentals in an owner’s primary residence; and the other, a companion bill (CB16-0262) would enact a licensing and regulatory framework for short term rentals in primary residences.  As drafted, the zoning code amendment is expressly conditional upon passage of the companion bill.  As drafted, the proposed zoning code amendment legalizes STRs in primary residences.  By preventing owners from using investment properties and vacation homes as STRs, Denver’s zoning ordinance limits owners to a single STR.  The intent to prevent investors and businesses from operating STR portfolios or STR investment properties in residential neighborhoods underlies the proposed ordinances which expressly forbid STRs operated by entities such as corporations or LLCs, joint ventures or associations.  While owners may be absent during the short term occupancy, as drafted the proposed zoning amendment expressly requires that owners live in the residence.  The companion bill would delegate authority to the Denver Department of Excise and Licensing to license and regulate STRs.  In addition to numerous other requirements, under the proposed licensing ordinance STR owners will be required to apply for a license, register with Denver Excise and Licensing and obtain a lodging tax identification number.  Lodging taxes on STRs would be the same as for a hotel room (10.75%).  Additionally, if the bills are passed, STR owners will be required to maintain fire, hazard and liability insurance at levels set by Denver Excise and Licensing, maintain a minimum level of life safety systems in a residence used as an STR, and include the STR license number in all advertisements.  The fee for the STR license will be $25.00 per year and fines for advertising without a license and/or operating without a license will be up to $999.00 per incident.

some groups think the primary residence requirement is anti small business.

     In the two-year run up to the vote, council members and staff received varying input from numerous parties running the gamut from individual homeowners and neighborhood associations to property investors and short term rental industry groups.  Much of the feedback received by the city characterizes the primary residence requirement as anti-small business and complains about the increased regulation of private property, increased taxes and favoritism toward the hotel industry.  The Denver Short Term Rental Alliance’s letter states that the primary residency requirement will effectively lock VRBO (Vacation Rentals by Owner) out of Denver and the city will be deprived of a significant tax revenue stream.  Proponents of the primary residence requirement feel it is appropriate in that it limits STRs to small businesses that generate supplementary income for homeowners and cite concerns about investors buying up entire blocks or apartment buildings and operating them as STRs in otherwise primarily residential neighborhoods.  In general, they  feel such operations would pose a risk to public health and safety and detract from the quality and vibe of Denver neighborhoods; the obvious concern being strange cars and stranger people steadily coming and going.

     A seemingly simple issue on its face, legalizing STRs in Denver has broader implications.  If the council votes in favor of these bills tonight, individual owners renting out a room or garage apartment on a short term basis, as a means of earning supplementary income will be permitted to continue doing so and now, legally, although now subject to applications, annual reporting and taxation.  Owners operating investment properties as true STR businesses, or desiring to do so, have been kicked out of the pool in the interest of protecting neighbors who own or who are traditional renters. The STR game in Denver may be more exclusive and predictable by the end of the day; and also more expensive to play.  One cannot help thinking that many STR owners will miss the days of the wild west.