Secrets of Real Estate Investing

SUBORDINATION EDUCATION by Vincent Marino

2010-10-18T11:07:00.000-07:00

The subordination provision in a lease is very important. From a tenant's standpoint, if a lease is subordinate to a deed of trust granted by the landlord, the lease is generally terminated upon a subsequent foreclosure of the deed of trust. The buyer at a foreclosure sale might, under certain circumstances, attempt to continue the lease regardless of whether it is subordinate, but if the lease is not a favorable lease (e.g., the lease provides for a rental that is substantially below-marke, or contains other unfavorable provisions), a new owner may instead elect to have the tenant vacate the property after the foreclosure, rather than continuing the lease.

Sometimes the course of action could result in a ratification of a lease. For example, a lender forecloses on property on which there is a lease executed after execution of the deed of trust. The deed of trust is clearly superior to the lease, but if the tenant, after foreclosure, continues to pay rent under the lease and the lender continues to accept such rent, there may be a good argument that the lease has been affirmed and ratified. This could be either good or bad for a particular party. For example, if a lease is deemed ratified, a new owner/landlord might be subjected to certain unwanted obligations and liabilities under the lease.

A lease can be subordinate either by way of its later date of execution (relative to the execution date of the deed of trust) or by way of agreement of the parties. For example, if a lease is executed after a deed of trust is filed, then the lease is subordinate to the deed of trust. Even if the lease is executed before the deed of trust, it may still be subordinate by way of a subordination provision contained in the lease itself or by way of a separate subordination agreement executed contemporaneously therewith or anytime thereafter.

If a lease is subordinate, a tenant could obtain some protection by requesting and receiving a subordination and non-disturbance agreement. An SNDA basically could say that, regardless of whether a foreclosure occurs, the new owner agrees to recognize the tenant as its tenant. Whether a landlord will agree to pursue an SNDA for a particular tenant depends on various factors, including the willingness of the landlord (or mortgage lender) to cooperate and the tenant's bargaining power. It is entirely possible that a landlord may not want to bother its lender for an SNDA if the tenant is leasing a small space or because the landlord does not want to incur any costs because it and the lender have previously agreed on a charge for the lender's granting SNDAs. And, of course, there may be lenders who just won't agree to execute an SNDA unless specifically required by the deed of trust.

It should be noted that, with reference to foreclosures occurring after May 20, 2009, there is a new federal statute ("Protecting Tenants at Foreclosure Act of 2009") that may allow certain bona fide "dwelling or residential real property" tenants (who are current in their lease obligations) to remain in possession for at least 90 days after a notice to vacate is given even if their lease is subordinate to the deed of trust. This new federal law, which contains various exceptions, is scheduled to sunset on December 31, 2012.

Sometimes a deed of trust will contain a provision allowing the lender to unilaterally subordinate the deed of trust to a subsequent lease. A provision of that type grants a lender some flexibility. For example, if the lender desires to foreclose and not cause a termination of a favorable lease, the lender could by separate instrument (or perhaps in the notice of the foreclosure sale and trustee's deed) unilaterally subordinate the deed of trust to the subsequent lease - with the effect of the lender's foreclosing and accepting the property "subject to" a lease. There is some risk associated with a lender taking "subject to" an existing lease. The lender may be bound by lease amendments of which the new owner has no prior notice, including, for example, amendments changing the rental or otherwise modifying other terms of the lease or requiring monetary payments to the tenant. In addition, a new owner could be liable for damages arising out of a prior landlord's conduct. Proper advance planning could reduce, eliminate or at least alert the lender of some of these risks.

- Vincent Marino is a shareholder in Winstead's Houston Office, working in the Real Estate Development & Investments practice.

Latest Transactions from Black Commercial, Inc. an NAI Black company

2010-07-02T13:54:00.000-07:00

ASIAN BISTRO
3,400 SF Lease
Northgate Shopping Center
7458 North Division
Jim Orcutt
David Wright
Black Commercial, Inc.
an NAI Black company

STUDIO PILATES & PHYSICAL THERAPY
900 SF Lease
Ben Burr Building
5915 South Regal
Mark McLees
Black Commercial, Inc.
an NAI Black company

STICKER SHOCK SIGNS, Inc.
5,200 SF Purchase
4023 East Sprague
Mark McLees
Black Commercial, Inc.
an NAI Black company

OMS, Inc.
1,500 SF Lease
Metropole Building
176 South Howard
Mark McLees
Black Commercial, Inc.
an NAI Black company

GUTHRIE CHIROPRACTIC PLLP
dba HealthSource of Spokane
1,550 SF Lease
524 West Indiana
Jon Jeffreys
Black Commercial, Inc.
an NAI Black company

Top 5 Growth Factors For Spokane, Washington in 2010

2010-04-27T15:49:00.000-07:00

WESTERN SNAPSHOT, APRIL 2010

TOP 5 GROWTH FACTORS FOR SPOKANE, WASHINGTON, IN 2010

With Spokane's reputation as a steady commercial real estate market, it's little wonder that Seattle investors have said they invest in Seattle for appreciation and invest in Spokane for stable income. Growth percentages have increased slightly during the years as the city's economy has changed from relying on the area's agriculture, timber and mining interests. Today some of the main economic drivers are government, healthcare, visitor and convention business, technology and biotechnology. The largest metropolitan area between Seattle and Minneapolis, Spokane has been affected by the national economic downturn, but has not seen the high level of residential and commercial foreclosures common in some other markets its size. Here are five key areas to watch in Spokane in 2010:

1. Spokane's apartment market has always been a draw to California investors and those from western Washington. In 2008, approximately $70 million in multifamily investment real estate changed ownership in Spokane County, but only $10 million did last year. With relatively low vacancy rates and cap rates higher than many other West Coast markets, Spokane's multifamily investment sector will see renewed interest from outside investors that have been waiting on the sidelines.

2. Spokane's quality healthcare providers serve a huge four-state region. This large regional draw for medical services has contributed to a very stable medical office space market. At the end of 2009, the medical office vacancy in Spokane ended the year at 7.06 percent. Medical office development, including specialty medical and dental practices, will continue at a steady pace for the foreseeable future.

3. The majority of the challenging loans made by Spokane area banks were for residential and commercial development projects outside of the Spokane market. To date, this has resulted in relatively few REO bank properties coming on the market in the area. Those that have are mostly the result of local office or retail businesses closing their doors. In the last month, significant interest in these properties from buyers, both users and investors, has become apparent. Overall, property valuations seem to be stabilizing as these properties work their way through the system to new ownership.

4. Spokane is fortunate to have a growing number of technology companies like Itron, which is the world's leading provider of solid-state water, electric and gas meters with $1.69 billion in sales in 2008, that provide consistent job growth to the area. Higher-education research and related private-sector investment in emerging technologies are strong as well. Spokane's higher-education institutions of Gonzaga University, Eastern Washington University, Whitworth University and Washington State University at Spokane have all contributed promising new technology, which along with advances by Spokane start-up companies has been fostered and funded by organizations such as the Hogan Entrepreneurial Institute at Gonzaga University and the Spokane Alliance of Angels. As a result, many new and exiting companies have been turning their ideas and technologies into growing, profitable business ventures.

5. Another growth factor is the steady in-migration of people from mostly California and western Washington, who are attracted to the affordable housing, quality of living and outdoor recreational opportunities. The in-migration to Spokane will only increase as the national economy turns around.

2010 looks to be a prosperous year of growth for Spokane's commercial real estate market, which should move ahead on its usual stable and steady track to a promising future.

Jeff Johnson is President of Black Commercial, Inc., an NAI Black company in Spokane.

Infinite Bliss Trip Report

2009-10-15T13:57:00.000-07:00

Infinite Bliss Trip Report
Jeff K. Johnson
7-11-09

I first read about Infinite Bliss in the December 2004 issue of Rock and Ice magazine. The 23 pitch 10b rock climb was described as "the longest sport climb in the country". Wow, that sounded like a great rock climbing challenge and adventure. I had never attempted a rock climb anywhere close to 23 pitches or 2600 feet long. I love the Cascades and visiting a new climbing area in the Mt. Baker-Snoqualmie National Forest was also appealing. Infinite Bliss is located on Mt. Garfield which is about eleven miles north of I-90 off exit 34 at North Bend. The access from Spokane is about as easy as it gets!
Over the last few years, I had discussed the route with a number of prospective partners but had a tough time getting partners, dates and weather to line up. Earlier this summer I told my friend, Rick LaBelle, that I really wanted to get that route done this summer and asked if he would join me to do the climb. Rick has climbed extensively in the Cascades since he began climbing while attending Western Washington University many years ago. He was intrigued about what he had heard about the route and wanted to give it a try as well.
We collected as much beta on the route as we could to optimize our ability to get efficiently to the route and get up as many pitches as possible. We had heard that it was problematic to find the trail and route finding on the climb had turned back many parties. A couple days before we first drove over to attempt the route, we found out the bridge was washed out one mile before the trail leading uphill to the route. A 2009 trip report on summitpost.org provided helpful information on crossing the Snoqualmie River on a log and finding the trail uphill to the route. On our first attempt in June we drove over and camped by the bridge. The log crossing looked very sketchy and wading the river did not look much safer. Our concerns about crossing the river were cast aside the next morning when unexpected rain caused us to pack up and head to Banks Lake for an alternate day of climbing.
Last Friday July 11th we headed back for a second attempt. This time we arrived at the washed out bridge, waded across the river and began our hike into the trail head. Please be aware that wading the river earlier in the year would have been a very risky endeavor. The log that was leaning on the bridge has been cut down and I understand that the bridge may not be rebuilt for some time. So as far as we know wading the river is the only access to the route.
On the way in we met two unhappy climbers who told us that they had headed up the approach trail and had spent a couple hours belaying steep sections of the approach gully. They only climbed eight pitches knowing that they would have to rappel down part of the approach as well as the climb! That did not sound right to us so after our forty minute walk in on the road we set up camp and headed up the trail to view the route and check out the approach. About one hundred yards into the woods the trail comes to a smooth granite slab on your right leading up towards the route from a pile of avalanche debris in the creek bottom. The spring avalanche debris had wiped out the cairns marking the trail as it crosses the debris area and into the woods on the other side of the creek and slabs. The climbers we met had missed the trail crossing and headed up the slabs. We followed up the slabs as well and after about a half hour figured out their mistake and found the trail on the right side of the gully up in the woods. We rebuilt the cairns so hopefully future parties will find the trail with ease.
We got up at 5:00 am Saturday morning and headed up the correct trail to the base of the route. To our surprise, another team of climbers had walked in during the night and were just starting up the climb. In preparation for the climb, we had each packed three and a half liters of water up the hill to the route only to find a nice stream of water coming down the slabs to the left of the route. So early in the year, you can filter water for the climb right at the start. That would have saved us a lot of weight!
My goal in writing this report is to provide some helpful information that will make your climb of this route safe and fun. I do not want to give away all the mystery of the route so I am not going to take time to detail all the pitches we climbed. I will say that this is a long and serious alpine climb with some great route finding challenges. Make sure you are well prepared for a long climb with many unknowns.
Rick and I agreed to a turn around time of 3:30 pm and headed up the route behind the other climbers at 6:30 am. We simul-climbed the first six slab pitches and continued up the route passing the other climbers at about pitch three. Again the route finding in places was challenging. The pitches with a couple bolts or no bolts are not easy to protect with trad gear. I did bring along and use five cams from size .5 to number 2 on various pitches of the route.
There are so many pitches that I can't clearly remember pitches 13,14 or 15 other than they have very few bolts! I do very clearly remember pitches 16 and 17! They have NO bolts in about 330 feet!!! Rick and I agreed that bolts should be added to these pitches for route finding and safely. Two additional fixed rappel stations would add additional safety to these pitches as well. There are two belay stations for these pitches that are hidden in clumps of bushes. Fortunately we found them on the way down. I would not recommend starting up pitch 16 unless you are very comfortable soloing loose 5th class terrain. There is no "worn path" that indicates where the route goes on this part of the climb. My assumption is that very few climbers have continued on past this point. Rick and I questioned continuing at this point but were still feeling strong and just kept on going. Once I started up pitch 17 there was no turning back. It was not terrain I wanted to down climb! There is also loose rock on some of these upper pitches and our rope pulled loose a couple football sized rocks as Rick traversed out on pitch 16. Unfortunately the route funnels that rock down on any climbers below. It may be ok to follow a party closely up the route but if you are out of sight or hearing distance be very alert for falling rock if there is anyone in front of you on the route.
The views on the route are fabulous and the climb contains some superb climbing. I was fortunate to lead the outstanding 19th pitch which contains 17 bolts in about 130 feet. That pitch is rated 10b or 10c depending on who you talk to. I thought there were a couple of 10c moves on the pitch but at that point everything seemed hard. Rick led pitch 20 and we arrived at the belay anchors at 1:30 after seven hours of climbing. We had been in full exposure to the sun for some time now and were running low on water. Make sure you take plenty of water! We each drank 2.5 liters on the climb and did not have enough water. After some discussion we agreed that it would be wise to head down. We had enjoyed a great day of climbing and knew it was going to take us a long time to complete the 19 rappels that would take us back to our packs. Five hours later and somewhat dehydrated we finished the last rappel. In desperation to quench our thirst on the way down we drank from a seep on one of the rappel ledges. Hopefully we will not endure any ill effects from that decision!
We hiked out, waded across the river and arrived back at our car at 9:00 that evening. We were tired but enjoyed a sense of accomplishment for the effort we had expended. It was indeed Infinite Bliss!

Real Estate Investing, A new paradigm!

2009-05-26T10:46:00.000-07:00

The landscape of real estate investing has done a dramatic about face. Investment real estate goes through normal cycles of expansion and contraction like the rest of the economy but the cycle we are currently in has swung as far to one side of the equation as I have ever seen the market shift. Just a couple years ago a study by one the nations largest commercial real estate companies determined that there were about twenty buyers for each investment property for sale in the United States. Today I am going to guess that there are twenty investment properties for sale for each investor in the market place!

So where have all the buyers gone? The first part of that answer is that many former buyers are out of the market due to tough new lending requirements by the banks. Or in some cases a lack of any financing options for investment real estate purchases. If you are fortunate to meet the new credit requirements of the lenders you need to be prepared to put 30 to 40% cash down today to secure financing for investment real estate. Those requirements have greatly reduced the pool of buyers active in the market place.

Secondly investors return requirements have gone up. From talking with appraisers and real estate brokers the consensus is that cap rates have gone up one hundred basis points or more over the last year and that number is still rising. I was in Seattle last week and what I heard was that cap rates for quality commercial investment properties are around 8%. Usually Spokane cap rates are higher than those seen in the Seattle market. We tend to see cap rates running one percent or more higher in Spokane which would suggest cap rates here need to be 9% or more to attract buyers. Sellers ,unless they are highly motivated to sell, will need to adjust their expectations and corresponding asking prices downward to attract buyers. It will probably take some time for most sellers to adjust to these new economics.

One segment of the real estate market that is quickly adjusting to the slow down in our economy are developers and investors who hold land with underlying debt. A lot of land has come on the market in the last six months and there is more coming. We are starting to see dramatic price adjustments from very motivated sellers who need to get relief from the debt on their land holdings. For those investors with cash and patience there will be some great land buying opportunities available this year.

I believe we are headed toward a new and healthier real estate investing paradigm. The shift will be slow and for some very painful but in the long run we are going to be ahead. So research the new financing options and sharpen your pencils. Real estate will continue to be a great investment for those of us who adjust to the changes before us.