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Los Angeles Business & Commercial Law Blog

What the tax bill may do to commercial real estate values

The Tax Cut and Jobs Act is widely considered to be positive legislation for the California commercial real estate industry. Specifically, it could lead to greater demand for multifamily properties throughout the country. It may also result in corporations spending more money on real estate holdings. However, some believe that too much demand could cause new problems for the commercial real estate landscape.

For instance, higher demand might lead to inflation. Inflation generally results in higher interest rates, and higher interest rates create less demand for existing properties. Of course, if demand continues to be strong, higher interest rates might not be an issue for the time being. This could occur because the bill may result in residents choosing to rent instead of purchasing a home. Furthermore, high demand could lead to too many properties being developed that may never be occupied.

Auto insurer pressure could be cause of shoddy repairs

When automobile accidents occur in California, many motorists rely on insurance companies to cover the necessary repairs. A relationship of trust is the basis of a driver's reliance on car insurance. However, one case has indicated dangers that can result if auto insurance companies actually put pressure on repair shops to perform less expensive (and less safe) repairs on damaged cars.

In one accident, a car insurance company allegedly pressured an auto body shop to perform substandard repairs. The manufacturer's standard of repair for hailstorm damage to the roof of the car involved 108 welds; however, the auto body shop instead used glue, saving $3,000. In a later collision, the roof detached, causing severe injuries to the car's occupants. The victims are accusing the auto insurer of deceptive trade practices for its alleged involvement in compelling the repair shop to perform the cheap yet shoddy repair.

Disney accuses Redbox of knowingly violating copyright licenses

Disney has filed a complaint in the U.S. District Court for the Central District of California against Redbox, a company that rents DVDs through kiosks nationwide. The court filings make multiple claims against the DVD distributor, including violation of licensing agreements for copyrighted material and copyright infringement.

The combo packs sold by Redbox have caused Disney to file the lawsuit because those products include codes that allow customers to download digital copies of Disney movies. The lawsuit describes Redbox's action as a violation of the licensing terms for the copyrighted material. Disney insists that Redbox has distributed these codes with "full knowledge" that it is not adhering to the licensing terms.

CRE owners are becoming increasingly worried about climate change

Commercial real estate owners and developers in California and around the country are becoming more concerned about the consequences of climate change and how their buildings may be contributing to the problem according to a report released recently by the Urban Land Institute. Human activity releases billions of tons of carbon into the atmosphere each year, and experts say that about a third of these emissions come from buildings of one type or another.

The ULI Greenprint Center for Building Performance report reveals that becoming more environmentally aware provides commercial property owners and developers with several benefits. Space in energy-efficient buildings is usually rented quickly by companies interested in reducing their monthly heating and cooling costs, and taking steps to reduce carbon emissions can boost corporate reputations and nurture brand loyalty. While going green may be a prudent marketing strategy, property owners in vulnerable coastal markets have more pressing concerns and are taking action on this issue to protect their investments from the consequences of rising temperatures and sea levels.

Expected 2018 commercial real estate trends

Developers, investors and buyers who are involved in the commercial real estate market in California might want to be aware of the trends that are expected during 2018. It is important to understand where the market might be headed in order to reap the most profits and negotiate the best deals.

According to the chief economist at Jones Lang LaSalle Inc., people should take the hype for and against tax reform with a grain of salt. While tax cuts might lead to a short-term boost in the economy, the drag that increased deficits cause is likely to prevent any meaningful long-term growth. The economist recommends that prospective business tenants might want to look at spaces that are located in the suburbs as opposed to the city centers for better deals.

Commercial real estate's hesitance to embrace technology

The availability of data analytics technology has the potential to transform the commercial real estate industry in California, but the industry has been famously slow to adopt it. Many CRE firms still rely on old methods of data-gathering and are reticent to share the information with others.

Some of the hesitance to embrace modern technology within the CRE industry likely stems from the past experiences that the firms have had. In the past, firms would give their data to companies such as CoStar and then be forced to pay money in order to access it.

Spirit Halloween grows and retail shrinks

California residents may be seeing a Spirit Halloween store in their local malls in the near future. The chain operates mostly online throughout the year, having a physical presence only two months out of 12. Stores such as Spirit Halloween appeal to malls or other retail landlords with vacant space because national chains may take months to sign leases. Therefore, companies like these can fill space and create revenue in the interim.

In 2017, Spirit Halloween will have 1,300 locations throughout the United States and Canada. It has added as many as 100 locations annually since 2002. In addition to malls, the company signs leases in open-air venues and wherever else space may be available for the right price. In recent years, traditional retailers have either closed locations or have gone out of business for good. This has made landlords more open to the idea of pop-up shops.

NAR economist expects commercial real estate prices to plateau

Commercial real estate investors in California might find good opportunities beyond big cities. The chief economist from the National Association of Realtors said that investors have curtailed their activities around Class A assets. Smaller markets, however, have been presenting buyers with chances to buy properties with the potential for stable and consistent profits.

Overall, the market for commercial properties across the country looked promising, the economist said. Vacancy rates should continue to decline because of economic growth. The forecast from the association predicts that the vacancy rate will go down to 11.9 percent during the year. This represents a decline of 1.1 percent across all sectors. Among industrial properties, available units stood at only 7.8 percent, and retail units should edge down 0.4 percent to an 11.4 percent vacancy rate. Multifamily housing will continue to fill up as vacancies decline by 0.5 percent to 6.1 percent of total units.

The importance of due diligence in commercial real estate

Before proceeding with the purchase of commercial real estate, California buyers should complete due diligence on the property to make certain that it is what has been represented to them and that it is worth the asking price. Conducting due diligence may take weeks or months. Sellers often want to negotiate shorter periods so that they can complete the transactions faster.

Buyers will need enough time to review the property's zoning and compliance, structural integrity, conduct title research and inspect the books. They will want to find out if the amount of money that the seller claims comes in every month really does. Finding out the actual occupancy and vacancy rates is also important to make certain that the property will provide the desired cash flow.

Commercial real estate investors see values at their peak

The value of commercial real estate varies greatly throughout California, and investors appear to be growing cautious according to the NREI/Marcus & Millichap Investor Sentiment Survey for the third quarter of 2017. A majority of respondents, 71 percent, believed that the price cycle for commercial properties had reached a peak.

Despite concerns that property values have crested, 49 percent of those surveyed possessed confidence that construction levels would increase. They believed that the Trump administration would have a positive effect. Confidence, however, has declined since the fourth quarter of 2016 when 56 percent of surveyed investors expected more construction.

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