What’s The Percentage In Paying Percentage Rent?

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First, we’ll define “heresy”: dissension, dissent, nonconformity, heterodoxy, unorthodoxy, apostasy, blasphemy, freethinking – opinions profoundly at odds with what is generally accepted. Now, we’re going to write a few things about “percentage rent,” beginning with a heretical view, “Why should a tenant pay percentage rent in the first place?”

Mind you, we’re not talking about a deal where the entire rent is a function of a tenant’s sales; we’re talking about the usual situation where the tenant has to pay rent even if it sells nothing. [We know of a mail order merchant maven who regales everyone with a story about the biggest flop item he ever handled. The story he tells is that he sold three units and got six returns.] Why should a landlord be a partner on the upside, but not on the downside? Ruminations has written about the concept that, in exchange for money paid as rent to a landlord, the tenant gets exclusive possession of the premises until an agreed-upon date. It’s like buying the premises with the obligation to re-convey it on that date. Further, think about a fairly common lease provision: “landlord and tenant are not partners, joint venturers, etc.” [Read more...]

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Ice Cream, Deal Making, The Law Of Diminishing Marginal Utility And Why It Matters To Real Estate Deal Makers

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We wanted to achieve two goals today: (a) to Ruminate about the negotiation process; and (b) to achieve record “shortness” [for Ruminations, that is]. When you reach the end, let us know “How’m I doing?” [see, Edward Irving “Ed” Koch].

The most essential economic concept affecting business negotiation is (or should be) what economists call “The Law of Diminishing Marginal Utility.” You and I love ice cream. You have a lot and I have none. But, I have money (or something else you’d like).

What is marginal utility? With apologies to Samuelson, Marshall, Krugman, Tirole, and others, we’re going to stick with our ice cream theme. Think how refreshingly delicious an ice cream cone would be on the hottest day of the hottest summer on record. “Ahhh… .” It’s so good, I think I’ll have a second. That was pretty good too. Not as good as the first bite of the first cone, but pretty good. To each individual, there comes a point where “enough is enough” [see, Streisand and Summers, No More Tears]. Yes, you would have paid a handsome premium for that first ice cream cone, but virtually nothing for the third, fourth or whatever is beyond your personal cut-off point. [Read more...]

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What Kind Of Help To A Tenant Is Self-Help? Part 3 (Whew, The Finale)

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Enough with the “self-help” already, but not before we address every reader’s favorite commodity – “money.” When a tenant does what a landlord is required to do, but didn’t  (or a landlord does what the tenant should have done, but didn’t), the motive isn’t charity. Whatever was “self-helped” has to be at the expense of the non-performing party.

Just because repayment is expected and deserved, no one should be expected to write a blank check, even if that signatory brought about the situation itself. The work that was done should be necessary and the cost of doing it should be reasonable under the circumstances. That’s a two-part test that needs to “passed” before the non-performing party should be obligated to pay up. One the test taker (the self-help exercising party) gets a passing grade, the non-performing party should make its payment within a short period of time. The amount owed should be treated as if it were an “extension” of credit; and the time for payment should be based on reasonable administrative needs. Ten to twenty days should be appropriate in all but the most unusual of circumstances. [Read more...]

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What Kind Of Help To A Tenant Is Self-Help? Part 2

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Last week, we opened the topic of tenant self-help rights. We’re not going to do much repetition. So, if you haven’t seen it yet or, if you are like us, you’ve forgotten most of what you’ve read, click HERE to see that posting.

In that posting, we gave some examples of when a tenant with the right to do what its landlord should have done, won’t. In short, a tenant occupying one percent of a property isn’t very likely to plow an entire parking lot or replace a lot of roof area. That caveat doesn’t make the tenant’s self-help right entirely useless. Not all tasks are so extensive or expensive. Here are easy examples: a manageable roof leak or a rooftop HVAC replacement (in each case, assuming the landlord had responsibility to take care of those items). [Read more...]

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What Kind Of Help To A Tenant Is Self-Help? Part 1.

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Here a mantra often heard by tenants all of their lives: “Make sure you get self-help rights. Make sure you get self-help rights.” It’s not a bad theme, but is it a cure-all? No, it’s not, and what it doesn’t cure depends on the relationship between the leased premises and the entire property. More about that in a little while. First, we’re going to list the kinds of landlord obligations that tenant might want to fulfill if the landlord doesn’t: [Read more...]

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How To Turn A Holdover Tenant Into Not A Holdover Tenant

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One of the most viewed Ruminations postings is the one titled: “Why So Much Confusion About Holdover Tenants?” It can be seen by clicking: HERE. Today, we are going to illustrate the concept and, at the same time, demonstrate why there is a difference between understanding the individual words of a document, a law or whatever and understanding what they mean in light of words you have never read. Those “words” are in countless court decisions.

That last sentence needs some explaining. We’ll let the following dialog do the work for us:

“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean — neither more nor less.”

“The question is,” said Alice, “whether you can make words mean so many different things.”

“The question is,” said Humpty Dumpty, “which is to be master — that’s all.”

Today, we’ll look at an unpublished August 6, 2014 decision by the Appellate Division of the New Jersey Supreme Court. It is known as: WA Golf Company, LLC v. Armored, Inc. and can be seen by clicking HERE. [Read more...]

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We Hold These Truths To Be Self-Evident, That All Rents Are Not Created Equal. What Does “Present Value” Mean?

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Everyone knows that a dollar received today is better than a dollar received a year from now. Many realize that it is advantageous to pay a dollar a year from now rather than pay it today. That’s the “time value of money.” It is also based on a pretty good, but not guaranteed, assumption that interest rates and inflation rates will be positive. Historically, that has been a good bet.

We’ve used the word “better” in the sense that most would understand, but “better” is actually in the eyes of the beholder. It is better for the recipient to get the dollar now, but that’s not the case for the payor. [Well, we’ve gotten that out of the way.]

So, which is better when it comes to paying or receiving monthly rent for a five year lease: (a) $12 per square foot of floor area throughout the term; or (b) $10 the first year, $11 the second year, $12 the third year, $13 the fourth year, and $14 the final year? After all, $12 per square foot is right in the middle, it is the average rent “figure” over the five year term. [Read more...]

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Electricity (For Leases, Etc.) Explained And Possibly Demystified

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Nothing in today’s Ruminations posting should shock its readers.

We’re sure that more than a few readers know that calling for 600 amp electrical service doesn’t assure that you’ll get usable electrical service. Doing so only calls for one ingredient in the recipe that gets the place properly lit, the computers to run, the HVAC to work, and … well, you get the idea. Today, we’ll try to explain what those who throw electrical specifications around (like they know what they are talking about) might want to know. It won’t be easy because it’s somewhat technical, but we’ll try to make it simple (if not interesting). [Read more...]

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