Government Controls Over Property Rental Rates

On November 6, 2018 voters went to the polls, and Proposition 10 was defeated which keeps the current laws effecting residential rental rates to remain somewhat constant.

The City of Los Angeles Rent Stabilization Ordinance protects tenants from excessive rent increases on multi-family apartments built before1979. However, it lets landlords increase the rents every year to a reasonable amount.  The rent increases are determined on the consumer price index, according to the Los Angeles City website.  The rent increase caps on rent stabilized apartments in Los Angeles City is currently 3% this year and has been 3% for about the last 10 years, according to the website.

The City of Los Angeles cannot cap rental rates when a tenant moves out of a building built before 1979.  The Costa-Hawkins Act of 1995 made it illegal for cities to enforce caps on multi-family rental rates when a new tenant moves in.  

The owner can rai...

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Alternatives for a 1031 Tax Deferred Exchange

Many of our Segal Commercial clients own commercial income producing properties.  These properties include but are not limited to shopping centers, industrial, office buildings and free standing retail properties.

A good sound commercial income producing property with positive cash flow is a difficult asset to replace.  Positive cash flow is the crown jewel of owning an income producing property.  Why would someone sell a property that is generating a positive cash flow?

Reasons for Selling a Cash Producing Property

There are numerous reasons for selling a successful income producing property.  I have listed a few reasons below:

•    The area has changed demographically
•    The property is not consistent with the marketplace
•    Death of an owner
•    Cash flow is not consistent with the size of the equity in the property
•    Depreciation has been depleted which can cause income taxes to rise
•    One or more tenants are a nuisance

The seller should do his or her own due diligence on the property and examine why they want to place the property up for sale.  The seller’s legal counsel or real...

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Industrial Real Estate Shortage

The lease length of typical industrial real estate buildings was an average of five years in Los Angeles County in the past.  However, today it is common to have a three year lease.  As a result, the property owner can take advantage of rapidly rising lease rates with a shorter lease term.  Frequently, the lease rate is also increased annually in accordance with the consumer price index or at a low flat annual fixed rate.  

Unexpectedly, Industrial real estate rents have increased 12% per annum in Los Angeles County in the past three years.  This phenomenon is partly due to a greater demand for industrial buildings from the rise in ecommerce in addition to many other factors.  The low construction rate of development after the Great Recession caused a lack of supply.  There is a shortage of construction labor, the trade tariffs are increasing material costs and the rising interest rates are making it harder for developers to secure loans.  In addition, there is no available land in Los Angeles County to build industrial buildings.    

Industrial vacancy rates in Los Angeles County are at an all-time low of 1%, according to AIR CRE.  Consequently, there are no vacan...

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Creative Office No Panacea for Landlords

There is so much information in the news regarding the major tech companies leasing large quantities of creative office and Research & Development (R&D) space. However, what we don’t hear about is all the creative office space available. For example there are many large beautiful creative office space buildings that are sitting empty in Santa Monica, El Segundo, Playa Vista, downtown and all over Los Angeles County.

The Pen Factory located at 2701 Olympic Boulevard in Santa Monica opened in 2017 with 222,000 square feet of creative office space. They leased 90,000 square feet when it opened; however, they still have a 132,000 square-foot building sitting empty. The available space divides into two units.

The Los Angeles Times reported “Growth among Los Angeles-area companies, especially those in fields related to technology and entertainment, kept the office rental market stable last quarter,” according to Journalist Roger Vincent on April 13, 2018.

The article went on to say; “data shows that El Segundo is a popular city for technology companies to move into office space. In 2011 the vacancy rate in El Segundo was almost 20%; however, it had fallen...

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The City of El Segundo is Finalizing the Smoky Hollow Specific Plan

Smoky Hollow Historical District is a light industrial area on a120 acres located one mile East of Dockweiler Beach.   The major streets surrounding the 329 mid-century industrial buildings and office buildings are Sepulveda Boulevard, El Segundo Boulevard and Main Street.  Residential property is located on the North side.  The City of El Segundo announced they are finally nearing the end of the Smoky Hollow Specific Plan process after six years of research.  The City of El Segundo Planning & Building Safety Department created the Specific Plan to update the area to provide new zoning laws.

The last Specific Plan was created in 1986 when there were mostly aerospace contractors in the area. The area has declined in the past 30 years with functionally obsolescent buildings. 

Due to the recent influx of hi tech companies into Los Angeles County, the plan sets a regulatory and planning framework that focuses development efforts on revitalizing buildings for attracting and retaini...

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Rising Interest rates worry commercial real estate investors

The Federal Reserve Bank raised interest rates for the first time this year by a quarter of a percentage point on March 21st.  If the Feds raise interest rates too aggressively in the next two years, the commercial real estate industry could stagnate.  The higher the interest rates in commercial real estate, the deeper the industry will fall.

The “retail” real estate market is very sensitive compared to office and industrial real estate at this time.  The continued shuttering of retail stores due to online retail is hurting the investor.  The landlords have to repurpose the space to attract new types of businesses. The rise in interest rates can deter owners from remodeling, and sales will decrease leaving empty spaces for months or years.  In addition, the empty spaces could bring property values and rental rates down with them.

New uses for the existing empty department and small retail stores in malls and on Main Streets is imperative to keep these investors above water.  Consequently, higher interest rates will hinder landlords in their attempt to attract new entrepreneurs.  The higher cost of borrowing money will be passed from the lessor to the lessee.


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Effective Essentials of Subleasing Commercial Real Estate

Almost all preprinted commercial real estate lease forms in the state of California provide the tenant the ability to sublease the premises with the landlord’s prior written consent. The landlord cannot unreasonably withhold the consent to sublease. However, there are legitimate reasons to withhold consent for example change of use of the premises, financial ability and the tenant’s prior experience in the stated business.

A recommendation for the tenant is to have a meeting with the landlord to notify them of the intention to sublease the property. The landlord may be able to work with the tenant in releasing them from the lease early. Listed below are 3 reasons to meet the landlord:

1. The landlord may have a replacement tenant for the premises.
2. A less expensive financial settlement may be worked out between the parties rather than trying to sublease the premises which could be costly.
3. Provide the Landlord with evidence of decreasing revenues that demonstrate the Tenant’s lack of ability to continue to pay the rent.

The list below should be considered by the tenant if the landlord does not oppose subleasing the premises:

1. The tenan...

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The Commercial Real Estate Lease

A Lessor’s Perspective on the Option to Renew

 The option to renew a lease in a commercial real estate contract provides the tenant the right to continue leasing the property for extended periods of time.  This promise of continued occupancy has continued for many centuries; however, a landlord has no obligation to grant an option to extend the lease for any period of time.

There are times when the option is good for the landlord.  Below are examples of when an owner should consider providing language to extend a commercial lease in a contract to the tenant:

1.    The economy is bad and there is a high vacancy rate resulting in a slow leasing market
2.    The tenant wants to make significant costly improvements to the building
3.    An highly credited national company who attracts major tenants to the area is the te...

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Earthquake Insurance for the Commercial Real Estate Owner

The recent 7.3 magnitude earthquake in Iran on Sunday, November 12th was tragic. Pasadena based Jet Propulsion Laboratory (JPL) predicted a 99.9 % chance of a 5.0- magnitude or higher earthquake in Los Angeles by April 2018, according to a Los Angeles Times article dated October 22, 2015.

The commercial real estate owner usually carries the burden of paying for earthquake insurance if he is covered at all. The majority of commercial real estate owners don’t carry earthquake insurance, according to Erez Golomb an insurance agent at InTouch Insurance Services in Lake Balboa. Golomb said property owners don’t carry the insurance because it is normally expensive and the deductible is high.

Many insurance companies don’t cover earthquake insurance, because the risk is too high, Golomb said. Losses caused by earthquakes are usually excluded in typical commercial property insurance policies. The companies that do carry earthquake insurance usually use a “Difference in Conditions Coverage (DIC) form.”

The DIC can be used to write coverage for flood or earthquake insurance if the primary insurance carrier doesn’t cover it or to add more coverage if the primary insura...

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Why a Commercial Real Estate Attorney Should Work with an Expert Witness on a Litigation Case

An attorney dealing with a complex commercial real estate litigation case has to look at all angles of the case. He has to approach the matter from different sides to find the best way to fight the opponents and win the lawsuit. This is where the expert witness comes into the picture.

The opposing council may hire an expert witness first. As a result, the other side should immediately consider employing an expert provided the deadline has not passed. There are many areas of specialty in commercial real estate. Below are just a few examples:

• Development
• Finance
• Brokerage
• Valuation
• Construction
• Appraisal

One should only look for a forensic consultant experienced in the particular area of commercial real estate he or she is handling in the lawsuit. It is essential to locate a few expert witnesses who specialize in that particular area of commercial real estate. This may be challenging, because many experienced people don’t have websites. In addition, pinpointing their specialty could be difficult. There are some websites on the internet that may be helpful in finding the right expert witness for the case. Below are a few ex...

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“Lee has a tremendous breadth of knowledge in the real estate field. He assisted me with a case which involved combing through a great deal of information, and he was very thorough in navigating his way through the sea of documents with a good understanding of the facts. He was always mindful of trying to be as efficient as possible by focusing on the most relevant information rather than delving into every single document. I would absolutely work with Lee again in the future.”  
Eugene Kim, Attorney, Gresham Savage Nolan & Tilden, PC