May 2015

HOW TO POSSIBLY AVOID PARTNERSHIP DISPUTES - The Fiduciary

One of the best ways to avoid disputes with other partners is to communicate clearly and often. In fact as a fiduciary, you have the duty to report/disclose when you are the managing general partner. I like the phrase, "care and feeding of your partners". Partners need communications so that most surprises will be pleasant ones and not unexpected unpleasant events.

Your partners need to know what are the costs or expenses of the partnership. Items such as real estate taxes, insurance, maintenance and management must be disclosed. The more that the partners know about the expenses, the better understanding they will have in the event of a surprise. A surprise may be in the form of a loss of a tenant or even a break in the water main. Whatever the unexpected occurrence, the partnership should have adequate funds available or the ability to raise the funds easily.

A good suggestion is to provide the partners with financial statements prepared by a management company or an accountant at least annually. Transparency in partnership operations provides the partners with an understanding that real estate is a working business and not a bond. In the case of a partnership, the participants should be aware of the fact that distributions are not always constant and may be interrupted for long or short periods of time.

As a fiduciary, you must be aware of market conditions that may affect the value or use of the real estate. If a market is changing from industrial to offices uses, than the value of the property may be affected positively or negatively and that disclosure must be conveyed.

Most commercial real estate loans are not fully amortized and therefore, the partners must be aware of the fact that the property must be refinanced at the termination of the existing loan. Most loans on commercial properties are 10 years in length, and that rather short term, may leave a large percentage of the remaining balance unpaid. Why the fiduciary must disclose this fact to the partners is because of changing interest rates in the market place over the term of the loan may have dramatically changed. This change in interest rates for loans may have a positive or possibly negative effect on cash distributions. The managing partner must prepare the investors for this event.

In conclusion, real estate is not static and changes occur through the years. Most events should be positive if held for the long term. There is no guarantee that there will not be disputes in your partnership but reasonable reports may mitigate the damage and help the success of the partnership.

It’s an Industrial Real Estate Owners Market in Los Angeles

The Los Angeles Industrial Real Estate market is vastly improving with a 46.9% increase in occupancy rates and rising rents compared to 1st quarter reports a year earlier.

The greater Los Angeles area overall has the second lowest vacancy rate for Industrial space in the nation at 3.3% in the first quarter of 2015 compared to first quarter 2014. Almost 11 million square feet of industrial space were leased in the first quarter. San Francisco had the lowest vacancy rate in the nation at 2.3%, according to a Cushman & Wakefield report.

The L.A. area industrial vacancy rate this time last year was 1% higher at 4.3% overall. Leasing activity was up 31.7% in the first quarter from a year ago over all; however, North Los Angeles did see a decrease in industrial leasing activity due to the decline of film industry.

New development in the Los Angeles area was at only 0.2% of existing stock in the region due to a short supply of land to develop and the high cost of industrial land, the report said. As a result, rents have been trending up since 2010. Rents have risen 22% in the past 5 years which occurred mostly in the last 24 months.

Industrial real estate investment sales increased 66.7% in the L.A. region compared to the same time a year ago. However, first quarter user sales compared to investor sales were up only 21% from the same time last year due to the lack of inventory.

I have clients who have been looking for over a year for a certain type of industrial building to purchase and cannot find anything that suit their needs. Industrial sales only represent less than 10% of all transactions in the industrial market.

The South Bay had record high leasing activity for the first quarter and the second over- all highest leasing activity. The increase was 22.4 percent higher than the same time in 2014 with over 3 million square feet leased. “This is the highest recorded leasing activity since the 2nd quarter of 2013.”

The demand in the South Bay area is great. I just leased a building in the South Bay that had several offers which turned into a bidding war, and the highest bid won. It was well over the asking price. As a result, I would say that it is safe to say it’s an owners market especially in industrial areas close to major L.A. shipping and airports.

“I have known Lee Segal for more than 30 years, and I respect him enormously both professionally and personally. His unwavering honesty combined with his keen understanding of the nuances in the real estate field, has made him highly regarded by friends and colleagues alike. You can always count on him to be moral and upright in any circumstance.”   Sheldon Katzer, The Rosalinde and Arthur Gilbert Foundation
Sheldon Katzer, The Rosalinde and Arthur Gilbert Foundation