The holiday season is supposed to be a joyful time. Beginning at the start of November, as thoughts turn towards Thanksgiving turkey, cooler temperatures, family gatherings, Christmas, Chanukah, New Years and shopping, a certain contentment begins to settle in all around.  Or does it?

Certainly not in offices where real estate closings take place. Holiday season brings panic.  As year end approaches, the calendar is the enemy.  Everybody wants to close and everything is a rush.  A feeding frenzy has begun.

Why does this happen? I remember when I first began practicing, we always had to get 1 or 2 last big deals finished before the end of the year.  My senior partners always told me we had to do this for “tax reasons”.  The first couple of years, I assumed that this was because the client had tax planning reasons for closing by December 31.  I then came to realize that it was really for the firm’s cash flow needs that December 31 was critical.  Close the deals, collect large fees, partners get bonuses, don’t close, no fee, partners don’t get bonus.  Simple economics!

Later, when I started practicing on my own and money in the bank on 12/31 vs. 1/1 made no difference to me, we still had surges in November and December. But, if deals weren’t closed by the middle of December, many clients began to close up shop for the holidays, deciding to carry over the gain or loss until the next tax year.  Thus, 12/31 became an artificial deadline.  Sometime before 12/20 was the new deadline only for my own peace of mind.

Today, the feeding frenzy is as real as ever. It is true for residential and commercial closings.  Some of it might have to do with Trump tax reform.  But there are other factors.  First, we continue to ride a long, strong economy.  The real estate market remains strong and interest rates remain low.  With so many deals out there, clients want to close quickly to take advantage of the economic climate and interest rates before this changes.

Second, contracts signed early in the year, after everything closed at year end, run their course and have year end closing dates. There are 2 factors driving this.   Commercial deals are longer term.  Once the due diligence period has run its course and approval and other contingencies have been satisfied, closing must occur.  In a typical commercial contract, this can take 6-12 months, sometimes longer.  But when the date comes up, there is a rush to close.  Though you can’t predict when a contract will be signed, it does seem that many projects start at the beginning of the year which often times out the closing date for the end of the year.  As to residential contracts, many people put their homes up for sale in the summer, after the school year.  Consequently, contracts are often signed at the end of summer and early fall.  Closings usually take 60-90 days, which puts the closing right in the middle of the holiday period.

Third, cash deals are very common in both residential and small commercial contracts. Take a lender out of the picture and the process to close gets shorter.  Sellers like to accept cash contracts as it takes a major contingency out of the picture, further shortening the closing.  Sellers will accept lower purchase prices to get to closing faster.  If the expectation is a faster closing, a closing scheduled for the holiday time period will not likely carry over to the new year.

How do we cope with the frenzy and avoid becoming shark chum? Clients, brokers and other attorneys can sense stress immediately and when they do, they do what they can to add to it.  It is important to remain organized and up to date on every transaction, no matter the size, so that you never let the sharks smell the blood in the water.  If we do this, we will make it from Thanksgiving to New Years in one piece.

A personal guaranty is often the last requirement to finalizing a lease deal. Most landlords will require guaranties from all of the principals of the tenant and their spouses for closely held businesses that are leasing space in a property.  Though the tenant is the occupant and generating income and paying rent, the tenant itself generally has no net worth.  It is usually the practice of small businesses for owners to draw out most, if not all of the income of a business so that if there is a lease default, a landlord will have no remedy.  Therefore, lease guaranties are essential components to making a lease deal.

Yet, novice tenants are reluctant to sign personally, arguing that they have formed the entity specifically to avoid personal liability. They are quick to ask for lease incentives like large tenant improvement allowances and free rent, but they don’t comprehend the credit risk a landlord takes in entering these leases and providing incentives.  I have come across this problem several times in the past few months with tenants refusing to provide financial statements or guaranties or having their spouses guaranty the lease.  They will argue that a corporate financial statement from the start-up entity or an affiliate company should suffice.  Or, they think that the wife should not sign since she isn’t involved in the business.  Some offer short term (1-year) limited guaranties for longer term (10-year) leases.  How is the landlord to amortize and protect its investment under those terms?

Without the non-shareholder/member spouse as a co-guarantor, the shareholder/member spouse could easily avoid liability under a guaranty and lease by transferring personal assets to the spouse. Without personal financial statements or by providing only financial statements of the startup or an affiliate company, a landlord has no idea whether the people behind the tenant have the financial ability to fund, open and operate the business and cover losses in the future and pay the debt on default.  A landlord’s due diligence of a tenant and its principals should be akin to a bank’s underwriting of a loan.  Rent and lease incentives are not different than a loan.

Recently, in arguing these points with potential tenants, I have had one tenant walk away from a lease and another tenant partnership split up, leaving the financially stronger partner to solely own the business and guaranty the lease with his wife. Because these potential tenants were unwilling to provide the guaranties and/or complete financial information, we knew these were not good risks and fortunately, we never got to the point of spending the time or money of preparing leases.

A landlord should raise the issue of the guaranty early in lease discussions. If the tenant’s principal won’t provide one or won’t provide adequate financial information, landlords should end discussions and move on.

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    Welcome to Assouline & Berlowe’s Florida Real Estate Law and Investment Blog with news, insights, and commentary for investors, developers, and their advisors.


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