Buyers in a transaction involving the purchase of a leased property will usually require the tenant to complete an estoppel certificate. By completing this form, the tenant has an opportunity to confirm the terms of the lease, verify that the landlord is in compliance with those terms and/or provide any other information relating to their relationship with the landlord. It is important for a buyer to have a solid understanding of the tenant's perspective of their relationship with the landlord; after all it is a relationship that the buyer will inherit. Because of its importance, the estoppel certificate is usually a condition of closing a sale transaction. Most leases have language that requires tenants to complete and execute an estoppel certificate within a certain time period, say 10 days. 

Despite its importance and the requirements of the lease, it is not uncommon for tenants to make completing the estoppel a low priority. This can lead to a delay in closing the sale transaction. Depending on the language of the lease, the landlord has a few remedies against the tenant. First, he can pursue a breach action against the tenant. This option is probably not practical considering the time required and the fact that most buyers do not want to inherit a lease that is in breach. Secondly, many leases have language which allows landlords to provide an estoppel on behalf of the tenant if the tenant refuses to provide it. That being said, most buyers prefer to have an estoppel provided by the tenant themselves. Perhaps the most effective option is a monetary penalty. Try adding language to your leases that allows for charging an amount equal to one month’s rent. This could be the most effective way to motivate a tenant to complete an estoppel certificate.

One last word on estoppels. It's not unsual for a buyer or lender to add language to an estoppel that essentially amends/modifies the lease rather than just confirm its terms. Tenants are under no obliation to execute such an estoppel.

Rental adjustment provisions are a common component of most leases. Often such adjustments are linked to the rise and fall of the Consumer Price Index (CPI). Sometimes referred to as a cost of living adjustment (COLA), these adjustments typically occur annually on the anniversary of the start date of the lease.  The adjustments parallel the increase, or decrease, in the CPI over that same period. For example if the CPI increases 3% then the rent will increase 3% as well.

One inherent problem with using the CPI as an index for adjusting rent is that landlords are forced to wait a few months before billing tenants for the newly adjusted rent.  This problem is a result of the fact that there is a delay in the publication of the CPI. In other words, the CPI for January may not be published until March because the Government must gather and analyze data prior to releasing the index to the public. This forces landlords to bill tenants retroactively for the adjustment in rent each year. If January is used as the month that the rent adjusts each year, then landlords must wait until the CPI for January is published at some later date in order to know exactly how much to increase, or decrease, the rent. Besides being inconvenient, retroactively billing a tenant causes budgeting problems and accounts payable issues for tenants not to mention cash flow planning problems for landlords.  

One solution is to set the CPI index date as a date prior to the rental adjustment date. In other words, separate the two dates. If a lease begins in January and the landlord would like to bill and collect the adjusted rent annually in January, he should set the CPI index date as the month of November (i.e. two months prior). In doing so, the landlord can be assured of having the published CPI index by the time he is ready to bill the rent for January. The difference between the November CPI and January CPI will be almost certainly be negligible, so there is little downside for either the tenant or landlord.

Conceptually, and in an abbreviated form, the lease language might read: "The monthly rent shall be adjusted annually in the month of January. The adjustment will be based upon the difference in the CPI between the months of November 2011 and November 2012…"

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Commercial Real Estate Vacancy Rates to Decline but Rent Recovery Delayed
WASHINGTON (February 25, 2011) – A stabilization trend is taking place in commercial real estate sectors, but in most markets rent will remain soft except for multifamily rentals, according to the National Association of Realtors.
Lawrence Yun, NAR chief economist, said a pullback in construction is helping stabilize the market. “Very limited construction of new commercial real estate over the past few years has essentially fixed the supply of available space,” he said. “This means vacancy rates could fall quickly from any increase in demand for commercial space.”
From the first quarter of this year to the first quarter of 2012, NAR expects vacancy rates to decline 0.5 percentage point in the office sector, 1.3 points in industrial real estate, 0.1 point in the retail sector and 0.9 percentage point in the multifamily rental market.
“Even with declining vacancy rates, rents are not likely to turn positive in most markets until next year, outside of multifamily rental properties,” Yun said. For example, office rents are forecast to fall 1.8 percent this year before turning higher by 4.0 percent in 2012.
“Apartment rent increases are expected to accelerate from job creation leading to new household formation, particularly among the young adult population who will seek their own housing arrangements – many will be leaving their parents’ homes, or choose to live with with fewer roommates,” Yun said.
Average apartment rent is projected to grow 3.4 percent this year and another 4.2 percent in 2012.
“Rising apartment rent in combination with rising oil prices could push the overall inflation rate beyond a comfort level, which could then force the Federal Reserve to raise interest rates later this year or early in 2012,” Yun added.
The Society of Industrial and Office Realtors, in its SIOR Commercial Real Estate Index, an attitudinal survey of more than 360 local market experts,1 shows a notable improvement in market fundamentals.
The SIOR index, measuring the impact of 10 variables, rose 8.1 percentage points to 50.7 in the fourth quarter, the largest quarterly gain in five years, and is at the highest level since the fall of 2008. However, the index is well below a level of 100 that represents a balanced marketplace. This is the fifth consecutive quarterly improvement following nearly three years of decline, but the last time the index was at the 100 level was in the third quarter of 2007.



Commercial Real Estate Forecast/Market Report

Seventy-eight percent of SIOR participants expect improvements in the office and industrial sectors for the first quarter of this year.
There has been an increase of liquidity in Commercial Mortgage Backed Securities, which is helping to open the commercial market to more property transactions; commercial real estate sales had been stalled over the past few years with excessively tight credit conditions. In terms of development acquisitions, it remains a buyer’s market for those with cash or who can obtain credit financing.
NAR’s latest COMMERCIAL REAL ESTATE OUTLOOK2 offers projections for four major commercial sectors and analyzes quarterly data in the office, industrial, retail and multifamily markets. Historic data were provided by CBRE Econometric Advisors.

Office Markets
Vacancy rates in the office sector are forecast to decline from 16.5 percent in the first quarter of this year to 16.0 percent in the first quarter of 2012.
The markets with the lowest office vacancy rates currently are New York City and Honolulu, with vacancies in the 8 to 9 percent range.
In 57 markets tracked, net absorption of office space, which includes the leasing of new space coming on the market as well as space in existing properties, should be 14.5 million square feet in 2011.

Industrial Markets
Industrial vacancy rates are projected to decline from 14.2 percent in the current quarter to 12.9 percent in the first quarter of 2012.
At present, the areas with the lowest industrial vacancy rates are Los Angeles and Salt Lake City, with vacancies of 7.5 percent.
Annual industrial rent is likely to decline 2.5 percent in 2011, before rising 3.0 percent next year. Net absorption of industrial space in 58 markets tracked should be 127.5 million square feet in 2011.

Retail Markets
Retail vacancy rates are expected to slip from 13.0 percent in the first quarter of this year to 12.9 percent in the first quarter of 2012.
Markets with the lowest retail vacancy rates currently include San Francisco; Miami; Honolulu; and Long Island, N.Y., all with vacancies in the 7 to 8 percent range.
Average retail rent is seen to decline 0.9 percent in 2011, then rising 0.7 percent next year. Net absorption of retail space in 53 tracked markets is projected to be 4.8 million in 2011.

Multifamily Markets
The apartment rental market – multifamily housing – is tightening as the economy improves. Multifamily vacancy rates are forecast to decline from 5.8 percent in the current quarter to 4.9 percent in the first quarter of 2012.


Areas with the lowest multifamily vacancy rates presently are San Jose, Calif.; Pittsburgh; and Newark, N.J, with vacancies in a range around 3 percent.
Multifamily net absorption should be 207,000 units in 59 tracked metro areas in 2011.
The COMMERCIAL REAL ESTATE OUTLOOK is published by the NAR Research Division for the commercial community. NAR’s Commercial Division, formed in 1990, provides targeted products and services to meet the needs of the commercial market and constituency within NAR.
The NAR commercial components include commercial members; commercial committees, subcommittees and forums; commercial real estate boards and structures; and the NAR commercial affiliate organizations – CCIM Institute, Institute of Real Estate Management, Realtors® Land Institute, Society of Industrial and Office Realtors®, and Counselors of Real Estate.
Approximately 79,000 NAR and institute affiliate members specialize in commercial brokerage services, and an additional 263,000 members offer commercial real estate as a secondary business.
The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1.1 million members involved in all aspects of the residential and commercial real estate industries.
# # #
1 The SIOR Commercial Real Estate Index, conducted by SIOR and analyzed by NAR Research, is a diffusion index based on market conditions as viewed by local SIOR experts. For more information contact Richard Hollander, SIOR, at 202/449-8200.

2Additional analyses will be posted under Economists’ Commentary in the Research area of Realtor.org in coming days.

The next commercial real estate forecast and quarterly market report will be released on May 24.

Information about NAR is available at www.realtor.org.


For Further Information Contact:
Walter Molony, 202/383-1177
wmolony@realtors.org