Clay & Company » A Texas Commercial Real Estate Blog

by Ron Consolino for Chron.com

Q: I found space to lease for my new washateria, and the landlord has given me her standard lease contract. How do I know if I should just sign it?

A: Before you sign anything, make sure you understand and agree with the terms of the contract.

“There is no such thing as a ’standard lease,’ and landlords almost always negotiate,” says Benjamin Miller, who practices business and real estate law in Houston. Don’t lose sight of the fact that the “Standard Form Lease” represents the landlord’s wish list and, if not appropriately modified, may not serve your interests if issues arise.

A lease is much like any business agreement in that it sets out parameters of a business relationship. You cannot easily break or change a commercial lease. It is legally binding.

When everything goes as planned, most any lease will serve the parties well. The true test occurs when there are hiccups.

There are, in general, three kinds of commercial leases. With a gross lease, the renter pays the landlord a fixed rent. It is up to the landlord to pay all the expenses of operating the building. In a triple net, or NNN, lease, the tenant not only pays base rent, but also part of the building’s operating costs. These costs include property taxes, insurance and common area maintenance, or CAM. Hybrid leases have features of both.

NNN costs are shared according to the percentage of the tenant’s square footage to the total building square footage. So, Miller advises, “Pay attention to what is included in NNN costs and get the right to audit the landlord’s cost records.”

CAM is generally the amount of additional rent charged to the tenant to maintain common areas shared by all the tenants and from which all tenants benefit. Examples include: repairs, janitorial and trash services, and personnel costs associated with the property. Most often, this does not include capital improvements, tenant build-out expenses, legal fees, costs for services to other tenants and commissions to brokers.

Consider having your lease contract reviewed by an experienced attorney.

By David John Marotta, Contributor

Question: I would like to see your take on paying off a house faster (extra principal payments) so that overall your house hasn’t cost you all the extra interest; or investing your money, taxable or non-taxable. I’ve heard arguments on both sides, some for rental property some for personal property. I own a duplex, live in one half, rent out the other half. So I’m a little torn between arguments.

I feel like society has been brainwashed to not make extra payments, or if you do, only do a little extra.(IE…bi-weekly payments bring in your payoff date.) Mainly because the argument is “you get tax deductions!”

Owners of rental property claim: get a 30-year, make sure you have cash flow, don’t make any extra payments. The tax deductions offset your income.

Debt free “gurus” say: Why would you pay $10K in interest only to get a $2.5K deduction? The faster you pay it off, the faster you’re not paying an extra $10K each year while getting a measly deduction.

I could go on and on with all kinds of arguments. Thanks for your time,

Duplex owner

Answer: Great question! Financial advisors disagree because there are some things more important and some things less important. My advice is based on a millionaire mindset and not just a get-out-of-debt mindset.

In 2003 I wrote a column “Using a mortgage wisely” in which I listed seven rules for handling a mortgage. I started that column by saying, “Most Americans have a home mortgage. The rich often have two. Only the poor can’t take advantage of this ‘good’ debt.” Here are the seven rules:

1. 1. Have a home mortgage
2. Borrow a 30-year fixed rate mortgage
3. Don’t buy down the interest rate by paying points
4. Keep your mortgage debt under 30% of your net worth and under 80% of the value of your home
5. Invest significantly in taxable investments each month
6. Diversify your investments between stable fixed investments and growth stock investments
7. After 8-11 years, pay off your mortgage or refinance depending on interest rates.

Having a mortgage at even as high as 6% means it is only costing you 4% and the government is paying the other 2% if you are in the 33% marginal tax bracket. Additionally, I don’t think you will ever see interest rates as low as they are right now. Just as the government will benefit from devaluing the buying power of the U.S. dollar because it will make it easier to pay off the national debt, so it will make it easier for you to pay off your mortgage with cheaper dollars over the next 30 years.

Bert Whitehead writes in “How to Get the Best Mortgage“, “A 30-year fixed rate mortgage is your best protection against inflation.” His article is worth reading and in it you will find much of the same advice.

Another way to look at a home mortgage which of the following is better:

1. Having a home worth $360,000 which is appreciating with inflation
2. Having a home worth $360,000 appreciating with inflation PLUS a $300,000 fixed 30-year mortgage on which you are paying 3% interest and the government is paying 1% interest by lowering your taxes AND $300,000 in taxable investments earning an average of 9-10% over the next 30-years.

Clearly (2) is advantageous. Any time you wanted you could slap your investments over your mortgage and be debt free. In fact, if your investments appreciate by 10% they should double in about 7 years. That means in 7 years you could pay off your mortgage and still have $300,000 in investments left over.

One more advantage, if you ever do need the money, if you have a mortgage you have a $300,000 cushion of an emergency fund. If you don’t have the mortgage and you get in financial trouble. NO ONE will loan you money once you are in financial trouble.

And this leads us to the reason for the mixed advice. If you are already living hand to mouth and unable to live within your means, you are not able to handle a mortgage well. If you can’t save money, then having $300,000 sitting around able to be spent will result in you spending it. Those with a millionaire mindset can have a mortgage. Those apt to spend and not save should work at being debt free and learning to save.

Source

If you are  involved in property management, the below videos featuring Texas Association of REALTORS® Associate Counsel Kinski Leuffer share a few important things you should be aware of.

Via TexasRealEstate.com

Dear George: I’m about to close on the sale of my home and want to see the results of the appraisal. But I was told that only the buyer can see the appraisal because he is paying for it. Is that correct?

Answer: Yes. You’ll know if the home appraised at or above the sales price when the lender approves the loan. It’s up to the buyer if he wants you to see the full appraisal report.

The following comes from the Legal FAQ section of TexasRealtors.com:

After the sale of a home [or other property] occupied by a renter, it was discovered that the security deposit was not transferred from the seller to the buyer as part of the closing. Now the parties can’t agree on who is responsible for the security deposit when the rental ends. Who is responsible for the security deposit?

Both buyer and seller could be responsible. Under the provisions of Section 92.105 of the Texas Property Code, the seller and the buyer may be liable for the security deposit and any refund of the deposit to the tenant upon termination of the rental. The new owner is liable for the return of the security deposit from the date he acquires the property. However, the seller also remains liable for the security deposit he received from the tenant until the buyer delivers to the tenant a signed statement acknowledging that the buyer is the new owner and has received and is now responsible for the tenant’s security deposit.

The transfer of the security deposit upon closing is now specifically addressed in the TREC One to Four Family Residential Contract. Paragraph 9(B)(5) now expressly states:

“If the Property is subject to a lease, Seller shall (i) deliver to Buyer the lease(s) and the move-in condition form signed by the tenant, if any, and (ii) transfer security deposits (as defined under §92.102, Property Code), if any, to Buyer. In such an event, Buyer shall deliver to the tenant a signed statement acknowledging that the Buyer has received the security deposit and is responsible for the return of the security deposit, and specifying the exact dollar amount of the security deposit.”

Texas Association of REALTORS® form 2210, Notice to Tenant of Change in Management and Accountability for Security Deposit, could also be used for this purpose with a few obvious changes.

Note: Section 92.105 of the Texas Property Code does not apply to a real estate mortgage lienholder who acquires title by foreclosure.