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30 Jun Ep. 26: Attorney Doug Hickel, Realtor Matt Simon, & Commercial Leases
In this episode, Adam talks to Attorney Doug Hickel of Summers Compton Wells and Realtor Matt Simon of Hermann London about commercial real estate leases.
Email questions to Podcast@HermannLondon.com
WHAT’S INSIDE
0:43 Adam introduces Doug Hickel and Matt Simon to talk about commercial real estate leases
1:45 How did Adam meet Doug Hickel
3:36 How did Doug decide to become an attorney
4:00 What are the different categories of attorneys
5:03 What is a typical day like for Doug
5:38 Does Doug typically only do real estate
6:13 Who is Doug’s target client
8:06 What is a lease and what are the different types
10:14 When is a triple net lease used most often
11:17 How is leasing a store front in a shopping center different
12:04 What are common are maintenance charges (CAM)
12:51 Who controls the common area maintenance charges
14:21 Are there any clauses Doug focuses on regarding caps
15:57 How does it work when the lease requires the tenant to make all the updates
18:51 How common is it for a landlord to offer build-out expenses and tenant improvement allowances
20:02 How do you determine a fair rate increase to the common area maintenance
21:46 Is it common for a lawyer to do residential leases
23:08 Can a broker put a lien on a commercial property in order to receive their commission
24:17 What is the most complex commercial lease Doug has ever seen
25:52 How is the lease for a store in a mall different and what is percentage rent
27:26 How common are personal guarantees for first time business owners
28:56 Has Doug ever seen a landlord have to go after a tenant and how is a commercial eviction different
29:55 How have Doug’s leases changed over the years
30:51 How do you find the right attorney for you
32:19 Is it valuable to work with a law firm with lots of different types of attorney
33:36 What is one of the strangest/most interesting leases Doug has worked on
35:48 What if the landlord comes around too much and what are negotiated access rights
37:38 How do confidentiality agreements protect the landlord and the tenant and what to do if there is a breach
41:35 Why should tenants and landlords really pay attention to the insurance section
42:35 Why is an exclusive rights provision important especially in a shopping center
44:28 Contact Doug Hickel from Summers Compton & Wells at 314-991-4999
45:05 Who lives under Doug’s roof
45:25 When is Doug at his best
45:55 What is Doug’s favorite podcast, blog, or book
46:58 What is Doug’s guilty pleasure
47:30 Who is Doug’s mentor and how has he thanked them
Adam, Matt, and Doug
TRANSCRIPTION
Adam-Welcome to the Hermann London Real Estate Group Podcast. It’s number 26 of the St. Louis Realtor Podcast live from the rooftop in beautiful downtown Maplewood, Missouri. Today is June 28th, 2016 and we are excited because we have some special guests. Today’s topic is all about commercial real estate leases so we brought in our commercial specialist from our office, Matthew Simon. Some of you have heard him and met him before. Also we brought in our company attorney, Doug Hickel. Doug, why don’t you do your attorney disclosure and then I’ll go into introducing you.
Doug-I gotta be a lawyer for a minute before I get started and let everyone know that I am not your lawyer and everything I say is just general legal thoughts and ideas and shouldn’t be used as legal advice in your specific issue. If you have a specific issue, call a lawyer.
Adam-Everyone should call Doug unless he is busy with my legal stuff.
Doug-Or if you are mad at Adam don’t call me.
Adam-What I want to do first is give a quick intro to how I met Doug. You work at Summers Compton Wells. You are a partner there with a family friend of mine named Dick. When I got into real estate he would always talk about the leases that they do. There is a movie called Intolerable Cruelty and it is all about divorces and pre-nups and they talk about the unbreakable Massey pre-nup. I’ve always compared the Summers Compton commercial lease to the Massey pre-nup because it is so strong. When we got our office here my landlord sent over the lease for me to sign and I sent it over to my guys over at Summers Compton. I got a call ten minutes later from Doug and he told me that the bad news was that they actually made the lease. It worked out because Doug referred me to another attorney, who coincidentally, now works at Summers Compton.
Matthew-You can’t represent both sides on a lease agreement?
Doug-No. That is a conflict of interest. We always want to be able to advocate for our client as best as possible.
Adam-How did you decide to be an attorney?
Doug-I come from a family of attorneys so it was a natural thing for me. My dad and brother both practice law here in St. Louis.
Adam-Did you have to decide to be an in-house attorney?
Doug-There are typically 3 big categories. An in-house attorney works for one company only and is on their payroll. When working at a law-firm you are either a transactional lawyer or a litigator. A transactional lawyer helps people buy, sell, lease, and borrow things. A litigator goes to court and fights with people.
Adam-Do you litigate?
Doug-I don’t but my partners do.
Adam-Would they fight over leases you wrote?
Doug-Typically people know they are going to lose when dealing with something I drafted.
Adam-Are you at your desk most of the time?
Doug-I spend a lot of time on the phone with clients. I have found talking is better than emailing because I can get a better understanding of the issues they are facing. Another term for a lawyer is a counselor at law and I spend a lot of time helping clients find the best solutions.
Adam-Do you specifically do real estate?
Doug-I do mostly real estate. I help people buy, sell, lease, develop, and finance property. I also deal with mergers and acquisitions.
Adam-Who is your target client?
Doug-My favorite type of clients are small and medium sized business owners who need someone to come along side of them and be apart of their core team that helps advise them and helps run the company successfully through legal and business issues. I also can help people that own real estate and need help leasing it or just people with general legal questions.
Adam-Today we are going to focus on commercial leases. I know you’ve done a lot of them and you wrote our lease and you’ve helped us with other deals. We brought Matt Simon in because he does a lot of commercial stuff. I’m going to ask the simple questions and Matt will have the more complicated ones.
Matthew-I’ll come in with the follow ups that affected me personally.
Doug-Sounds good. Try to get some free legal advice?
Matthew-Absolutely! I’m trying to avoid those fifteen minute billable hours.
Adam-There are leases where the landlord has the burden and ones where the tenant has the burden. Can you talk about the different types of leases?
Doug-A lease is a situation where someone owns a piece of real estate and you want to use it so you sign a lease that gives you permission to use the property and sometimes that permission can be very limited like a small kiosk for the holidays. It could be long term lease where you have it for 99 years and you will have sole possession to build a building or sit in a beach chair. Those leases then run the spectrum over who controls what decisions are made and who has the obligation to pay for certain things. A common thing is maintenance and taxes. There is no hard and fast rule. All of it is negotiable. People often refer to a triple net lease or they try to call it a modified triple net or double net or single net. Net means money to the landlord net of taxes, insurance, and maintenance which means the tenant pays to the landlord and then the landlord pays all of the taxes, insurance, and maintenance. That would be a very landlord friendly transactions because he gets a check in the mail and doesn’t have to worry about anything.
Adam-He doesn’t have to worry if the insurance or taxes are going up.
Doug-The tenant accepts that entire responsibility.
Adam-What kind of situations are you seeing that in?
Doug-It’s usually on certain types of leases where the tenant is leasing the entire land and all of the building on it. It would be as if you had a warehouse and someone was going to lease the entire warehouse, parking lot, and grass. That would be triple net where one person is in control of everything. The tenant absorbs the risk of the taxes and insurance going up and will the roof need to be replaced.
Adam-Someone renting a little storefront wouldn’t want all that burden.
Doug-A storefront is usually part of a shopping center where space is going to be shared by tenants and their customers.
Matthew-All of those shared expenses get rolled into common area maintenance charges.
Doug-Common area maintenance charges are the costs for the landlord to maintain a piece of property like a sidewalk or roof or snow removal. All of those costs are thrown into one big bucket and shared usually in the same percentage of how much space each tenant is in control of.
Adam-Who controls them? Can the landlord get whatever snow removal bid they want?
Doug-That is right and that is a risk a lot of tenants take on when they don’t have to. There are certain common area maintenance charges that many landlords will agree to a stop gap on where there is maximum amount of increase in those each year. We typically refer to those as controllable expenses because the landlord can increase them each year. There is a category called uncontrollable expenses and snow removal is one of them. We are not in control of how much snow is going to come each winter. You can sometimes get landlords to agree to an overall cap and that avoids the situation of them hiring their best friend to come out to do the snow removal and charge and exorbitant rate.
Matthew-Is there any potential clause that you seek to have inserted into leases regarding the overall caps?
Doug-I try to focus on two areas. One is what is included to the common area maintenance charges. Most landlords want to say all expenses related to owning and operating the property. Does that mean that you need to pay for their trip to a shopping center conference in Las Vegas? The landlord would say yes but the tenant would say they are concerned about that. A lot of times we like to do a laundry list of permitted expenses. The other approach is to not care what the money is spent on but you need to start with a fixed dollar amount on a per square foot basis with a maximum increase per year and as long as you stay within those parameters, I don’t care what they spend the money on because I have controlled my cost of occupancy in that space.
Adam-Is that when you start calling it a modified double net?
Doug-Usually when I get to that I just call it a lease because continuing to stick with the triple net term gets difficult.
Adam-I’ve seen where people lease a space but the tenant is the one that has to make the updates. Is that common?
Doug-You often pay for what you get so if you rent a rundown location and you are going to fix it up, the landlord is often going to charge you lower rent.
Matthew-Typically reflected as a value lease?
Doug-You could call it that. On the other end, if you are renting a place that is the latest and greatest you are going to pay a lot more. You need to look at all of the buckets of the costs to occupy this space on the same terms on a per square foot basis like insurance, common area maintenance, and the build out on the rundown location.
Adam-This is why it is so important to get an attorney involved. There was a person that was going to lease a place next door and agreed to do the build-out but found out later that the building needed a lot more work than what she budgeted for.
Doug-Anything you lease you want to look at its condition and understand what you are getting. You may want to have your contractor come out to get a feel for the cost of your build-out.
Matthew-How common are build-outs that include concessions?
Doug-It is common but you have to think about the tenant improvement allowance. No matter if the tenant is doing the improvements or the landlord is, the tenant is paying for it somehow, either out of pocket or a higher rental rate.
Matthew-How do you determine a fair rate to increase the lease year by year?
Doug-Usually it’s one of two things but both of the options have the same base, the actual cost. If your actual only goes up by $10 then we are going to go with the actual. It is usually the lesser of the actual amount of the increase. It could also be the percentage. Typically I see somewhere between 3% and 5% on large scale commercial leases. Or it is a CPI escalating clause, or the consumer price index and is usually a similar percentage. I prefer a fixed percentage because it makes calculating easier.
Adam-I didn’t quite follow what you were talking about. Were you talking about the rent or CAM?
Doug-Usually that is CAM. If you common area maintenance is going to go up you want to tie it to something or have a cap.
Adam-I was going to ask why attorneys are more involved with commercial leases more than residential but it seems obvious since commercial is so much more complex. Do you do much residential?
Doug-I do some residential leases. It’s not as common to have an attorney involved in a residential lease but it doesn’t hurt, mainly so that you understand what you are signing. I’m usually happy to see another attorney on the other side of the deal because then I know that their client is going to understand what they are signing and everybody is on the same page going forward.
Adam-Pretty much every document that we use says it has legal consequences and if you don’t understand it consult your attorney. Another thing I noticed is that commercial brokers can put liens on properties that they sold in order to get their commissions.
Doug-There are some limited lien rights granted in the Missouri brokerage laws for brokers that don’t get paid on commercial transactions. Getting them on a residential transactions is much much more difficult.
Adam-What’s the difference if we have the same licenses?
Doug-The best answer I can give is to go talk to Jefferson City. That is one of those laws that you look at and ask why is one different from the other.
Adam-I bet it was some political action committee or lobby.
Doug-That could be but we just go with what the law says.
Adam-What is the biggest lease you have ever seen?
Doug-The most complex lease I have ever seen was for a lease of a retail shop to go in a major theme park. This was for a national retailer to operate its store inside a theme park.
Adam-An example could be Dairy Queen going into Six Flags.
Doug-The lease there was extremely complex because the amusement park needed to control what the retail employees wore and how they behaved. If you don’t live up to their standards then you are out.
Adam-That reminds me of a friend that was opening a store in the mall and the mall made him keep the mall hours and give a percentage of his revenue to them.
Doug-People refer to that as percentage rent. A landlord will receive a percentage of your sales as rent. A landlord will give typically give you a little bit lower than market rent and then ask for percentage rent and become a partner of sorts since if you succeed then they succeed. Usually they will receive a percentage of your sales after a break point. Until you make a million dollars in sales the landlord doesn’t get a nickel but after you will share 3%-5%.
Adam-In the case of the mall does that replace CAM?
Doug-That would be in addition to CAM.
Adam-Wow. Let’s go open a mall!
Matthew-How common are personal guarantees for the tenant to have to sign for occupying space for the first time?
Doug-For the landlord, it is a default to ask for personal guarantees unless you are dealing with a really well established tenant who has multiple locations. If you are a first time tenant, signing a personal guarantee is part of the game. A great example is Starbucks. Starbucks does not need their leases personally guaranteed. A small, family owned, first time coffee shop probably will have a personal guarantee attached to it. Starbucks’ financials are so strong that the landlord can sign confidently that they are going to get their rent.
Adam-Have you ever seen a landlord go after someone?
Doug-Yes. It’s apart of the lease that the landlord can recoup part of the costs. They can go after the tenant and if the tenant doesn’t have the necessary resources they go after any guarantors on the lease.
Matthew-In residential we see a very drawn out eviction process. Are you talking about going after them after they vacate?
Doug-Yes. Residential eviction is different from commercial. Commercial is usually a little more expedited.
Adam-Has anyone gone to court over your lease and do you change the general terms as you go? Our residential sales contracts used to be one page and now it’s much more than that.
Doug-Every time you encounter a unique circumstance you reevaluate what you put into your leases. It could be that your lease is perfectly fine without that provision but you encounter a unique situation so you choose to add a provision to help address that issue in the future.
Adam-How do you know what kind of attorney to use?
Doug-The most important thing when looking for an attorney is being able to tell all the facts. It’s like with a doctor. If you don’t tell a doctor everything that is wrong then they can’t help you. The second thing is experience with what you are doing. Not everyone is going to have experience with the exact line of business you are going into but an attorney with shopping center leases may not have the same understanding over warehouse leases.
Adam-Is that why going to a firm with a bunch of different attorneys valuable?
Doug-There is a great advantage with having the firm because you have that many more years of experience at your disposal. If I encounter a lease that I don’t typically do, I’ll go to one of my partners and talk to them.
Adam-Hermann London is similar in that way. Can you share some interesting stories? My aunt was a teacher and whenever I’d see her I’d ask her to tell me about the bad kids. Do you have any weird stories?
Doug-Lawyers find the strangest things interesting. We were working on a lease but didn’t end up signing it because after doing our due diligence we found out that the land was land-locked and there was no way to access it via car. If we wanted to use it we would have to take a helicopter to it every time. We told the landlord that if he couldn’t get us access then we weren’t going to do it. The landlord couldn’t get access. When I told the lawyer that there isn’t road access he said it couldn’t be true. He came back a few days later and said I was right.
Adam-Doesn’t someone have to provide an easement to a landlocked property?
Doug-There are legal means to force easements to be granted but we didn’t want to wait around for that.
Matthew-Were you turned off that it was misrepresented that way?
Doug-It was disappointing that we had gone down the path so far and the client had spent money on working on a lease to come to find out that you couldn’t access it.
Adam-Are there cases where the landlord are too involved and try to tell people how to run their business?
Doug-There are landlords that are very interested in their tenant’s business and those are sometime percentage rent landlords but other landlords do come and poke around too much. It’s important for both landlord and tenant to have some sort of negotiated access rights especially for a business that is not open to the public. If you are renting a restaurant the landlord can come eat lunch whenever they want but if you are a business like a financial services you may not want the landlord poking around as often. It is fair for the landlord to come take a look around every once in a while but they shouldn’t disrupt your business. It is usually 24 hours notice to arrange an appointment. This gives the opportunity to put anything away that is confidential.
Matthew-What kind of protection is a confidentiality agreement affording an owner?
Doug-A great example would be selling a shopping center. There are two levels of confidentiality. One is between the tenant and the landlord. Tenants want to make sure that if they are giving financial information to the landlord, the landlord will keep it confidential. The other level is between the landlord and the potential buyer. You don’t want financials advertised to other competitors in the area. The important components are the information given, how long it has to be kept confidential, and getting the information back or having it destroyed.
Matthew-That is an outstanding point. I’ve executed two dozen confidentiality agreements and not once have I been asked for that information back even though I have obviously shredded it. In the instance of a breach, what recourse do you have?
Doug-Typically the first wave of a breach of a confidentiality agreement is some sort of a restraining order type action where you are getting a court to step in and tell this person that is misbehaving to stop. The next step is to find out where it has all gone, tracking it all down, and getting similar orders against anyone else who has received the information. Those are very difficult cases because why should someone else be at fault for you disclosing the information. There is a little bit of trust involved because the cost and effort to enforce it will be difficult. That is why I like to ask for the information back if the deal falls apart.
Adam-I imagine it would be difficult to measure the damage.
Doug-The other thing of importance that some people’s eyes will glaze over when reading is the insurance section and what insurance the tenant is going to carry and what insurance the landlord is going to carry. When it comes to insurance I always recommend that the tenant have the insurance requirements reviewed by their insurance agent to make sure they can get the insurance and make sure they can get it at a reasonable cost. Some landlords are trying to require very high levels of insurance. That’s another provision that is quickly read over and not thought carefully about. Another thing that is important, especially in a shopping center, is an exclusive rights provision. You don’t want to invest your life’s savings into opening a really good sandwich shop only to have Jimmy John’s open next door. When you are leasing in a shopping center, get the right to be the only sandwich shop or whatever your business is.
Matthew-We are seeing that a lot with the fitness centers that are popping up all over the place.
Adam-That only applies to what your landlord owns, right?
Doug-That’s right but sometimes your landlord owns more than what you think they do. You need to make sure you get the landlord to agree that all of their properties within a certain radius of your location are going to be protected by the exclusive use.
Adam-Do you mind if we give the phone number for your office?
Doug-I’m Doug Hickel at Summers Compton Wells and my phone number is 314-991-4999
Adam-I have 5 questions that I like to ask everyone to get to know you better and I’m sure you know how to plead the fifth if you don’t want to answer, but who lives under your roof?
Doug-I have lovely wife, a 9 year old, and twin 5 year olds. I love them all. I also have a dog.
Adam-Where are you at your best?
Doug-The best parts of my day are when I walk into my house and all the kids and the dog comes running at me. I’m best at doing my work sitting in my office.
Adam-Do you have a favorite blog, podcast, or book?
Doug-I typically defer to the apps on my phone so I read a lot of the BBC and CNN news.
Adam-Do you read any legal stuff?
Doug-When it comes to legal publications it is still good old print material. I get some publications from the Missouri, Illinois, and Colorado bar. I enjoy reading the most recent legal rules on operating ski resorts in Colorado but not too practical here in St. Louis, though.
Adam-What is your guilty pleasure?
Doug-It is probably reading. I read a lot.
Adam-Have you read the Game of Thrones?
Doug-I have read The Song of Fire and Ice.
Adam-Who is your mentor and how have you thanked them?
Doug-My greatest mentor is my father. He taught me how to be a good guy and helped me be a lawyer. He has a lot of great wisdom and ideas to share with me. Even though I’ve been doing it for fifteen years I still call him for his thoughts.
Adam-How have you thanked him? Does he know that he is your mentor?
Dough-I thank him all the time. The most recent time was father’s day.
Adam-Doug thank you for being here. Matthew thank you. If you have commercial real estate needs please call Matt Simon at 314-922-3523. If you have any questions, email PODCAST@HermannLondon.com . Joey, our producer has been working on some crazy videos so go to our company Facebook page to check those out. Thank you for listening and take care.