What is a Reset Clause in A Commercial Real Estate Lease?

Reset clauses are typically used in long-term ground leases to provide landowners with a mechanism for capturing increases in the market value of the land they lease to a tenant for a period that can be as long as 99 years. In other words, they enable investors to lock in periodic rent increases at predetermined rates based on the land’s fair market value at any given point. Those rates may be fixed over the life of the lease or they may be based on an existing metric, such as the consumer price index (CPI).

For tenants, however, reset clauses can be troublesome due to the future uncertainty they create. A tenant may not know today the economic environment and financial pressures they will face 20 years from now nor will they know if they will be able to abide by rent increases that far down the round. To avoid these challenges, landowner should ensure that lease agreements include specific language that provides explicit details about what exactly will be valued in the future for purposes of determining rent increases. For example, will future valuations be based on just the land or will it also include the structures the tenant added as improvements to the land? Will it recognize the value of the lease or should it be valued based on a vacant building?

With offices in Miami, Orlando, New York City and Geneva, the team at Orion works with investors, developers, property owners and brokers through all phases of real estate transactions, from strategic planning and analysis to financing, negotiation, property management and disposition. For more information, call (305) 278-8400 or email info@orionmiami.com.

What’s Next for Retail, Dining and Entertainment Property?

The COVID-19 pandemic is generating renewed predictions about the death of commercial retail property. While there has been a staggering number of store closings and many landlords are struggling to fill those vacant spaces, the longer-term outlook may not be so dire.

Truth be told, the retail, restaurant and entertainment landscape has been changing for quite some time as consumers’ buying and dining preferences have shifted to prioritize convenience and the experiential nature of those activities. Those tenants that pivoted and adapted their business strategies and physical locations to meet consumers’ demand are better positioned to ride out the long-term impact of the COVID-19 health crisis. Survival will also depend on the underlying fundamentals of specific properties. For example, location will always play an important role in real estate, and those properties in high traffic locations within stable communities will continue to thrive over the long-term. This has already been evidenced by the increasing number of e-tailers and online businesses that are continuing to open brick-and-mortar locations to connect with customers in person.

With offices in Miami, Orlando, New York City and Geneva, the team at Orion works with investors, developers, property owners and brokers through all phases of real estate transactions, from strategic planning and analysis to financing, negotiation, property management and disposition. For more information, call (305) 278-8400 or email info@orionmiami.com.

Is Now the Time to Buy Commercial Property?

During the last recession, U.S. commercial real estate prices fell 35 percent more and then doubled over the next decade, providing substantial returns to patient investors. Now, as the financial impact of the COVID-19 health crisis disrupts commercial property pricing and distressed assets begin to hit the market, investors face similar circumstances and the decision of whether it makes financial sense to expand their commercial property portfolios. Like most investments, the answer can be found only after individuals assess the strengths and weaknesses of a particular property against their unique risk tolerance and short- and long-term goals.

With all the uncertainty surrounding the pandemic’s long-term impact on commercial properties and how a recovery may look, investors should be careful to work with experienced real estate professionals with deep market knowledge to evaluate deals and determine whether it is worth their time and money to buy distressed assets now or in the near future.

With offices in Miami, Orlando, New York City and Geneva, the team at Orion works with investors, developers, property owners and brokers through all phases of real estate transactions, from strategic planning and analysis to financing, negotiation, property management and disposition. For more information, call (305) 278-8400 or email info@orionmiami.com.

COVID-19 Crisis Presents Commercial Real Estate Buying Opportunities

Many parts of the commercial real estate sector are continuing to suffer amid the economic fallout of the COVID-19 pandemic. However, when taking a longer-term look at CRE investments, those with ample cash reserves have tremendous opportunities to take advantage of declining prices and scoop up distressed properties with strong fundamentals.

According to Real Capital Analytics, during the last financial crisis, commercial real estate prices fell by 35 percent within the first two years, and prices have more than doubled over the past decade. Private equity firms that successfully raised cash over this period are well-positioned to jump in now, ride out the storm as businesses reopen and benefit from the eventual rebound.

With offices in Miami, Orlando, New York City and Geneva, the team at Orion works with investors, developers, property owners and brokers through all phases of real estate transactions, from strategic planning and analysis to financing, negotiation, property management and disposition. For more information, call (305) 278-8400 or email info@orionmiami.com.

Historically Low Interest Rates Make Now Prime Time for Sales-Leasebacks

Despite all the uncertainty created by the COVID-19 pandemic, one thing is sure: businesses are looking for ways to improve cash flow and strengthen their capital reserves to maintain their ongoing operations. While asset sales are one way to generate immediate cash, sales leasebacks are another option.

In a sales-leaseback arrangement, a business sells the commercial property it owns and occupies to a third-party real estate investor(s) and enters into a long-term contract to lease back all or a portion of that property. Essentially, the owner/occupant divests itself of its real estate holdings and becomes the tenant of that property. This allows the business to unlock the underlying value of its real estate assets and provide it with immediate capital to deploy as needed, including investing those dollars to support future financial growth, enhance shareholder value and modify their operations in today’s socially distanced business environment.

For real estate investors, sales-leasebacks can place provide a steady stream of income and return on investment via long-term lease arrangements. Even if tenants do not survive the current period of economic uncertainty, well-located properties will continue to be in demand and potentially command higher rents than the previous tenants.

With offices in Miami, Orlando, New York City and Geneva, the team at Orion works with investors, developers, property owners and brokers through all phases of real estate transactions, from strategic planning and analysis to financing, negotiation, property management and disposition. For more information, call (305) 278-8400 or email info@orionmiami.com.

The Truth about Force Majeure Notices as a Basis of Withholding Rent

The COVID-19 pandemic has created a tidal wave of commercial real estate tenants seeking rent forbearance and abatement. While much news has been made over tenants issuing force majeure notices with the hope that the coronavirus will qualify as an act of God that will relieve them of their obligation to pay rent, the reality is that most force majeure clauses expressly state that these unforeseeable events do not excuse tenants from their contractual payment duties. It all depends on the language of the lease contract and whether it specifies pandemics or government-mandated business closings as a reason for tenants to modify their rental payment obligations.

This is not to say that tenants cannot negotiate with their landlords for rent relief. Rather, savvy property owners recognize that being flexible and making concessions to help tenants now will solidify their tenant relationships and provide them with leverage to clean up and improve their lease agreements and reduce their exposure to future risks. Some options may include temporary rent reductions, payment deferrals and use of tenants’ security deposits to cover their lease rent payments.

With offices in Miami, Orlando, New York City and Geneva, the team at Orion works with investors, developers, property owners and brokers through all phases of real estate transactions, from strategic planning and analysis to financing, negotiation, property management and disposition. For more information, call (305) 278-8400 or email info@orionmiami.com.

CRE Investors Find Safety in Triple Net Lease Properties

Government-mandated business closings and quarantine orders resulting from the COVID-19 pandemic emptied many multi-tenant commercial properties and put at risk the rental income investors rely on for cash flow. This may not necessarily be the case for investors in triple net lease (NNN) properties, especially those with single tenants considered essential businesses.

In general, NNN properties are less risky for investors because they typically involve longer lease terms with built-in rent increases. In this sense, triple net leases tend to be more permanent arrangements than apartment or office-space rentals. High credit-quality, investment-grade tenants bear the responsibility of paying for and managing the properties’ operating expenses, taxes, repairs and maintenance, relieving landlords/investors of the time and expense required to handle these obligations. Property owners/investors also have the leverage to work with tenants who are facing difficulties meeting rent payments, allowing them temporary forbearance, as needed, in return for extended lease terms or other value-added concessions.

With offices in Miami, Orlando, New York City and Geneva, the team at Orion works with investors, developers, property owners and brokers through all phases of real estate transactions, from strategic planning and analysis to financing, negotiation, property management and disposition. For more information, call (305) 278-8400 or email info@orionmiami.com.

CARES Act Provides Economic Relief to Commercial Property Investors

The Coronavirus Aid, Relief, and Economic Security (CARES) Act signed into law on March 27 provides individuals and businesses with much-needed economic relief from the financial challenges created by the COVID-19 pandemic. While much attention has been focused on government hand-outs to individuals and certain businesses, the law includes several provisions that provide specific relief to commercial real estate investors.

For example, the CARES Act amends existing law by repealing the 80 percent taxable income limit on net operating losses for tax years beginning before 2021 and allowing businesses to amend previously filed tax returns and carry back net operating losses (NOLs) from tax years 2018, 2019 and 2020 for up to five previous years. The law also allows partnership to deduct more business interest expense than was previously allowed. Partnerships, in particular, may deduct as business interest expense in 2020 up to 50 percent of adjusted taxable income (ATI), up from 30 percent. Any limited interest expense may be carried forward to future tax years. And, finally, the CARES Act provides a 15-year recovery period for qualified improvement property (QIP), allowing property owners to claim 100 percent bonus depreciation and immediately write-off costs incurred to improve the interior of nonresidential property.

With offices in Miami, Orlando, New York City and Geneva, the team at Orion works with investors, developers, property owners and brokers through all phases of real estate transactions, from strategic planning and analysis to financing, negotiation, property management and disposition. For more information, call (305) 278-8400 or email info@orionmiami.com.