Today’s guest is Jeff Love.
Jeff is a Partner at Gibbs Giden Locher Turner Senet & Wittbrodt, which has been named one of the Best Law Firms in the U.S. for construction law, construction litigation, and real estate law by U.S. News. Join Sam and Jeff in today’s episode.
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Intro [00:00:00]
Tenant Estoppel Certificates in Commercial Real Estate [00:05:14]
Reviewing Leases and Ensuring Accuracy [00:06:53]
Challenges with Obtaining Tenant Signatures [00:08:24]
Tenant Estoppel Certificates [00:09:04]
Common Pitfalls in Construction Contracts [00:11:45]
Importance of Communication and Documentation in Construction [00:17:22]
The importance of timing in real estate transactions [00:19:12]
Adjusting timelines in real estate agreements [00:20:04]
Closing [00:21:26]
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Connect with Jeff:
LinkedIn (personal) – https://www.linkedin.com/in/jeff-love-65a5951a/
LinkedIn (company) – https://www.linkedin.com/company/gibbs-giden-locher-turner-&-senet-llp/
Twitter – https://twitter.com/gibbsgiden
Web: https://www.gibbsgiden.com/attorneys/jeffrey-b-love/
Connect with Sam:
I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns.
Facebook: https://www.facebook.com/HowtoscaleCRE/
LinkedIn: https://www.linkedin.com/in/samwilsonhowtoscalecre/
Email me → sam@brickeninvestmentgroup.com
SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson
Apple Podcasts: https://podcasts.apple.com/us/podcast/how-to-scale-commercial-real-estate/id1539979234
Spotify: https://open.spotify.com/show/4m0NWYzSvznEIjRBFtCgEL?si=e10d8e039b99475f
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Want to read the full show notes of the episode? Check it out below:
Jeff Love ([00:00:00]) – And really understanding what you’re getting from your contractor because and there’s pros and cons to all of them. You know, the cost plus contract, you know, typically tell investors and clients, look, basically the contractor is passing on the cost to you, plus their premium, which is their profit and which is nothing wrong with it at all. But you got to understand that there is no maximum price if prices increase, their costs increase. So to yours. So you need to make sure you understand that and work that into your budget and your business plan. Welcome to the How to Scale Commercial Real Estate Show. Whether you are an active or passive investor, we’ll teach you how to scale your real estate investing business into something big. Jeff Love is a partner at Gibbs Garden, which has been named one of the best law firms in the US for construction law, construction litigation and real estate law by US News. Jeff, welcome to the show. Thanks for having me. Absolutely. The pleasure is mine.
Jeff Love ([00:00:56]) – Jeff There are three questions I ask every guest who comes on the show in 90s or less. Can you tell me where did you start? Where are you now and how did you get there? I started with building blocks when I was when I was a little dude, apparently. I’ve always liked real estate, wanted to get into real estate. Once college, UCLA thought, Hey, why not go to law school to learn about contracts? I could, you know, help me be a real estate developer. I went to law school, realized I actually like helping investors more than doing it myself, kind of like being behind the scenes, different clients, different stages. So instead of pivoting to be the real estate developer after a couple of years, which was my plan ten years later, I am a real estate transactional attorney dealing with corporate issues, securities issues and everything real estate from your mom and pop investor to your large national syndicator. Wow, That’s a that’s a lot to deal with. What’s your favorite part about what you do? I like to think really helping investors.
Jeff Love ([00:01:53]) – You know, a lot of times they come to me. It’s their first project. You know, they’ve listened to a podcast. They say, you know, I’m a successful doctor, but I want to invest in this ten unit multifamily building and helping them do it, avoiding the pitfalls and really seeing them grow, not just real estate, but, you know, other clients companies we have seeing them start, you know, ten years later what they’ve been able to achieve. That’s really the cool thing for me. That’s awesome. What are some of the what are some of the common things that people come to you with? And you say, all right, here’s how to go back and get your ducks in a row before you come back to me. Are there are there some things that you see repeated over and over that you’re helping these first time people kind of that are venturing into larger scale commercial projects that you can help us kind of short circuit some of that. Yeah, and it’s common sense, but it’s it’s hard to know what you don’t know.
Jeff Love ([00:02:42]) – Right? So the first thing I tell people is, you know, having your team in place, you’ve watched podcasts, you’ve you’ve read about it, you may be owning your home, but it’s different when you get into kind of commercial real estate or investment real estate. And you really need to have a good insurance broker. You need to have an accountant that understands what you’re doing, especially if you have investors and you’re offering some type of preferred return. You need to have good real estate broker helping you find those deals. Oftentimes a good attorney that can help you make sure that you’re protecting your other assets. So what I tell a lot of first time investors is make sure you have a good team around you so they can help you with the things that you don’t know and you rely on your strengths. You rely on your advisors to help you, just like you would in any other facet of life. Yeah, absolutely. Absolutely. So you work on everything from, like you said, mom and pop large scale syndications.
Jeff Love ([00:03:35]) – You really love the kind of first timer and watching them, watching them grow through that process. What does it look like for you? You invest as well in real estate. So what’s it like on the legal side? You know, as you look at investments that you’re getting into reverse, to say a lot of the times when it’s me personally, I don’t read half the agreements. I’m like, Oh, it’s just me. No one’s really relying on me. So I’m like, just sign on the dotted line. But, you know, we invest in multifamily. It’s something that, you know, I like that. I like a lot of different asset classes. But for me, that’s one that my wife and I, you know, kind of we understand, you know, we’re not having to do allowances or brokers and manage kind of commercial. Everyone needs somewhere to live and we invest locally. So I’m in Redondo Beach City, right. You know, about 30 minutes south of LAX in Los Angeles.
Jeff Love ([00:04:24]) – And we’re reinvest in the city where we lived. We were renters. So we kind of know what things rent for, what we looked for. We can kind of manage it ourselves. I can lease, you know, show it, I can lease it. And what we did is really thought, you know, the buildings that we have are not as much for cash flow, which is really hard in Los Angeles, if not most of California, but appreciation. And we we’ve done it structured it in a way where we’ve kind of gifted our kids, you know, small interests every year. So eventually, you know, it gets it out of our estate for estate planning purposes. But it also helps them, you know, kind of get their feet wet. They’re really little now, but as they grow, they’ll they’ll have little portions of these buildings, hopefully spur the bug with them and kind of save that for them or their retirement one day. Right? Oh, that’s.
Sam Wilson([00:05:13]) – Really, really cool.
Sam Wilson([00:05:14]) – So I guess you probably never want to hear your attorney say you don’t read all of it, but I bet you read. I bet you read the important parts. Are there things that you really focus in on when you do dig into the documents?
Jeff Love ([00:05:26]) – I do. So a lot of times there’s certain things that I’ve seen a thousand times, you know? So those are the ones that I probably don’t read. It probably should. But reading for clients, but myself, you know, I’ve seen them over and over again, but with multifamily in particular, you know, also retail. You could make the case for any tenant is really looking at a tenant estoppel certificate in the leases because a lot of times, especially with smaller buildings, you may have ideals. A landlord may have promised a tenant certain things, you know, they could stay there for another year, but it’s not in the lease. And myself or client as an investor, I want to know exactly what I’m buying. So what a tenant estoppel certificate does is it makes the tenant basically confirm certain statements in the lease.
Jeff Love ([00:06:12]) – This is the rent, this is the term. There’s no defaults. So that once I close, I buy the building. I know what I’m getting. The tenant can’t come to me later and say, you know, sorry, you know, the old landlord said, I have a five year lease at a thousand bucks a month when it was supposed to be a one year lease for $10,000 a month. That’s a big difference. The problem is I can always go after the seller, but then I’m stuck with that tenant and depending on what my investment plan is, I may have wanted to try to get the building vacant because it was a one year lease. That really protects me and just make sure I know exactly what I’m buying and I know that what is in the lease is actually the terms.
Sam Wilson([00:06:53]) – Now, that that would, I would think, help me clarify this, but that would work on a maybe single tenant situation. Or is this something where you ask for a review of these leases before you ever close and actually look for those things and then put that tenant estoppel in place? Is that is that even word that correctly or am I missing something?
Jeff Love ([00:07:13]) – No, you did.
Jeff Love ([00:07:14]) – And it’s it’s it’s more practical and, you know, kind of the more tenants you get because then you have all these different leases to review Terms may have changed. I could get it for a multifamily building, for a retail shopping center, industrial building. I really want I just want to know if the lease that I’m getting, which is a very important part of commercial real estate, you know, is accurate and there’s no side deals.
Sam Wilson([00:07:38]) – Right? And so you sign that estoppel certificate or the seller signs that estoppel certificate, is that right? Saying, hey, look, these are the terms and then you can come after me If we find out post closed that there are terms with other tenants that vary from what I’ve defined here.
Jeff Love ([00:07:56]) – Sometimes it’s a seller. Even better is having the actual tenant sign it because if the tenant doesn’t sign it, I have a claim against the seller because it’s not accurate. But the tenant, if this was the deal, the tenants, you know their in their right to stay.
Jeff Love ([00:08:12]) – So I typically want the tenant to tell me that everything and this is accurate. If can’t get that for whatever reason, then I’ll have the seller sign it. But one of the two parties and that protects me as the buyer.
Sam Wilson([00:08:24]) – So let’s assume it’s a 200 unit multifamily complex. How do you practically get the tenants to sign all of this if it’s not? How do you how does that work? Like, how do you get that in writing from the tenants before you close?
Jeff Love ([00:08:39]) – Usually it’s a requirement of the lease, but when you get to that scale, there are going to be some tenants you just can’t track down. So when you get to 50, 100, 200 units, it may be a certain threshold seller is going to be required to get 75%, 80% of the tenants to sign the estoppel certificate for those that they can’t get, the seller is going to sign the remaining, say, 20% because it’s just not going to happen. If I have a 200 unit building, I’m just some tenants going to be gone.
Jeff Love ([00:09:04]) – I’m not going to track them down. I’m not going to blow the deal over that. But I want the majority of them to sign it. That’s something that’s usually negotiated as part of a purchase agreement when you get to that type of large, large scale. But most multifamily leases, most leases in general, I should say, have a requirement that a tenant is going to sign an estoppel certificate. Because a lot of times if you’re getting commercial debt, the lender is going to want to see it as well. Got it.
Sam Wilson([00:09:30]) – Got it. Okay. That’s that’s really, really interesting. So there should be already an agreement in place in the lease that the tenant says, hey, look, if I need to sign this certificate, I will when that time comes. Or is it signed? Typically when they sign the lease.
Jeff Love ([00:09:46]) – It is signed. When that time comes, usually they have ten days to do it and you’ll be doing that. Seller will usually do that during the process and that’ll be one of the last items of due diligence.
Sam Wilson([00:09:56]) – How often do you feel like this important step is skipped?
Jeff Love ([00:10:01]) – A lot, especially with smaller buildings and, you know, smaller, you know, maybe you talk to the tenant, you know, but you just, you know, you never know. And that’s the problem, especially depending on what you’re doing with the property. You know, if you’re buying it for, you know, long term investment, maybe it’s not as big of a deal. But if your strategy is, you know, I’m going to buy it, I’m going to, you know, rehab it tenant might leave, you know, rent it for a higher amount, then it’s a big problem. If that one tenant’s, you know, in there for five years and you didn’t know about that. So I think it is overlooked but it is an important aspect of do your due diligence process for any real estate acquisition, along with, you know, environmental and tidal issues that we should be looking at as well.
Sam Wilson([00:10:44]) – Yeah, absolutely.
Sam Wilson([00:10:45]) – No, that’s a great that’s a great nugget. And these are things that when you look at a deal as a passive investor, you say, hey, I want to I want to find out, you know, do we have these estoppel certificates? I think if I’m using the right terminology here, do we have those signed?
Jeff Love ([00:11:01]) – You are. And yes, yes, you should.
Sam Wilson([00:11:03]) – Okay, That’s cool. Wow. I have I learned something new here today as a passive investor myself in multiple multifamily deals. I can’t say I’ve ever asked that question. So there we go. Tip pro tip from Jeff Love here today. For those of you who are listening, that’s that’s awesome. Thank you for sharing really the inside scoop on that and what some of the things are that you look for. Let’s talk a little bit about construction. I know there in your bio we mentioned the word construction. You guys handle a lot of things on the construction side of it. When I say that and you talk about commercial real estate construction, give us kind of some inside scoops on what it is you’re looking for there, how you help clients out, common pitfalls, all of those things.
Jeff Love ([00:11:45]) – Starting from the beginning. I think it’s, you know, a lot of times, you know, maybe we do residential construction on our own home. But when you start investing and you have larger deals, the construction becomes kind of a different animal, so to speak. The first thing, you know, a lot of clients come to me and they don’t understand is the different types of construction contracts that are just out there and what’s the difference between a cost plus versus a guaranteed maximum price called sometimes you hear it called a gap and really understanding what you’re getting from your contractor because and there’s pros and cons to all of them. You know, the cost plus contract, you know, typically tell investors and clients, look, basically the contractor is passing on the cost to you, plus their premium, which is their profit and which is nothing wrong with it at all. But you got to understand that there is no maximum price if prices increase, their costs increase. So to yours. So you need to make sure you understand that and work that into your budget and your business plan, especially lately with inflation and rising costs.
Jeff Love ([00:12:46]) – Really something to think about. And on the other side, I’ll tell clients, well, yes, you could have a gap, which is it’s my fixed price, but if the contractor has a fixed price, are they going to be cutting corners because they can get things cheaper? Is it the quality that you want and you expect or is it a different type of materials that they’re using that you weren’t expecting? So the first most important and probably most important thing is just to understand the relationship with the contractor, what you’re getting from them, how they’re billing it and how that’s documented in a contract so that there are no surprises later on.
Sam Wilson([00:13:23]) – Yeah, I would imagine. I would imagine so. Yeah, there are. I mean, I’ve been a been a contractor and have contracted a lot in my life. And you’re right, there’s there’s costs or there’s benefits to both. I think the cost plus one, like you said, there’s no maximum price. And it’s and it’s in its own right. I like it.
Sam Wilson([00:13:41]) – But it’s also. You’re basically giving your contractor a blank check. All right. Right. Hey, man, you know what and where? Ordinarily, if there’s a maxed or a max price in the deal where they say, okay, you know what, maybe we don’t have to order an extra, you know, truckload of whatever it is, OSB or whatever the project is. I’m just dreaming out loud here. But whereas if it’s like, hey, it’s cost plus it’s like, yeah, sure, we’ll take an extra semi load of OSB because maybe we’ll need it when we’re doing roofing repairs or whatever it is we’re up against and oh well, just tack it on and there goes an extra 20 grand. No big deal. Right. So it’s it’s, it’s a, it’s a catch, a catch 22 there. On which way is the absolute right way to do it. What are some common not maybe the disputes isn’t the wrong word but common uh things you see people getting wrong in that contract side of things that could have been worked out ahead of time.
Jeff Love ([00:14:35]) – I don’t know that would say getting wrong. A lot of times we’ll use, you know, form as American Institute of Architects that are kind of common forms out in California and are pre-printed, but just not understanding the contract. You know, one of the big ones that we get, you know, defaults and kind of disputes over are termination clauses because timing is a huge issue. You know, I’ve got investors or even for myself, you know, I’m losing rent because I’m waiting for this to be done. And the contractor, for whatever reason, not not putting on the contractor, but they’re delays. That could be the you know, the contractor is understaffed or can’t get the subs out there. It could be materials. They’re not coming in. But as the owner, you know, I may not be fully informed and just. I don’t understand what’s taking so long. So making sure you understand that. And if it doesn’t work out, what does the termination section look like? I had a client, you know, a couple of weeks ago that was entering into, you know, rather small contract.
Jeff Love ([00:15:35]) – But, you know, for what it was, it was, you know, maybe, you know, a couple million dollars, but it was for a single family residence. And what this contract had is it had a fixed fee. It was cost plus. But the contractor basically had a fixed fee in there of $200,000 that no matter when I terminated the deal, if for any reason, no reason, he got that $200,000. So to me and to the client, he had no idea that was in there and said, Well, you know what? If I just want to, you know, stop and flip the property, I’ve got a lot of interest. I said, If you sign this tomorrow, you owe your contractor $200,000, right? So making sure, you know, is there something like that in there or is it more common where if I terminate, I’ll pay my contractor everything I owe him to date? You know, maybe there’s some lost profit, but I’m not on the hook for the whole thing and that I understand that because those delays do lead a lot of times to default and desires to terminate.
Jeff Love ([00:16:33]) – And that’s where we see a lot of disputes between both sides.
Sam Wilson([00:16:37]) – Yeah, I can only imagine. And again, coming at it from I mean, I’ve been on both sides of the equation, both the the contractor doing the work in a previous life and then also the one now as the as the contractor or the general contractor, if you will, or the property owner, rather, that is, you know, contracting this this work out. And you do run into delays, be it. My problem, be it their problem, be it other subs, be it weather, be it all these things. And I think I think what I’m hearing you say and tell me if I’m wrong, but is that it’s just imperative to have a clear line of communication where you guys are talking back and forth saying, hey, this is why we’re slowing down. This is why it’s taking more time. There is. And do you recommend if that conversation does happen, is it important to get those things in writing?
Jeff Love ([00:17:22]) – Absolutely.
Jeff Love ([00:17:23]) – And that’s probably, if not the most biggest takeaway. You know, those listeners can communicate in every single deal because most of the problems that we have, you know, when it gets to litigation and I’ll bring one of my partners say, hey, this dispute, I can’t handle it now. It’s not transactional. It’s litigation because you can communicate whether you’re contractor, you’re investors, you know, whatever party it is, they didn’t know what was going on, so you left them with no choice. So to your construction contract is communicate. And if there is something that changes or documenting it, you know, put it in an email, have the conversation, you know, a phone call and then follow up with an email, just, you know, confirming what we talked about. So you have that paper trail if it ever becomes an issue. And hopefully it wasn’t, because now you guys you talked through it. You everyone is aware of what’s going on and no one’s left in the dark.
Sam Wilson([00:18:14]) – Yeah, absolutely.
Sam Wilson([00:18:16]) – Absolutely. Cool. We’ve talked about a lot of really great stuff here so far. We’ve talked about the Estoppel certificates and what you look for in opportunities. We’ve talked about construction and just kind of some things we should be looking for and how to how to avoid the common problems that happen on large scale commercial projects. Is there anything else that comes to mind, I guess, from the legal side of things that you think about that you say, man, here’s here’s the way the world is changing or stuff that you are making sure are now in deal decks or or pens maybe that weren’t there a year ago. Anything any new updates on that front?
Jeff Love ([00:18:50]) – It’s a timing is a big one. I think the last couple of years when things really slowed down have showed us, you know, things take longer. A lot of times now with clients, purchase agreements, leases, we’re kind of building in extra kind of contingency periods, so to speak, because I can’t get someone I can’t get my inspector out there.
Jeff Love ([00:19:12]) – He’s taking longer. I’ve had a number of clients kind of run up against hard deadlines where they’re, you know, in a purchase agreement, they’re forced to waive contingencies and risk their money being non-refundable, but they haven’t been able to get everything done. And seller or buyer aren’t cooperative. So we’re really just kind of thinking that things from a 10,000 foot level and saying, can I get this done in this time period? Can I raise money from investors? Can I get my lender to respond? Can I get my property inspector out there? And if not, you know, working in can have a 30 day extension, even if I have to pay for it to make sure that that doesn’t affect my deal. And that really goes across the real estate spectrum is making sure that you have adequate timing for what you need. Things are moving slower. Make sure that you’re going to be prepared for that.
Sam Wilson([00:19:58]) – I think that’s a great word. It’s funny you say that because even yesterday we’re sending out some LOI.
Sam Wilson([00:20:04]) – We kind of had a verbal agreements on things and we were changing the timelines. It was just like before it was, you know, 30 days and maybe it was 15 days, 30 days to close. And now it’s, you know what we’re doing 30 and 30 with a 15 day extension on the due diligence period, due diligence period, because all of the above things you just mentioned. And so it was funny just having that conversation yesterday afternoon, just slowing things down, saying, you know what, we’re going to we’re going to need more time for all of the aforementioned reasons. So thanks. Thanks for pointing that out because that is something that probably even six months ago I wouldn’t have thought was really going to be an issue. But now it is. It’s just it’s just taking everybody surveyors, you name it. I mean, oh, sorry. We’re four weeks out. We’ll shoot. We’re under. I mean, what do you do? You just you got to just, you know, get in line and wait.
Sam Wilson([00:20:51]) – So. That’s right. That’s the way it goes. Well, Jeff, thank you for taking the time to come on the show here today. Certainly learned a lot from you. A lot of great homes here for us to practically employ. So I appreciate that. If our listeners want to get in touch with you or learn more about you, what is the best way to do that?
Jeff Love ([00:21:06]) – Check out our website. It’s Gibbs Gedcom or feel free to email me J. Love at Gibbs Gate and always happy to answer real estate questions.
Sam Wilson([00:21:15]) – Fantastic. And for those of you who are listening, Gibbs is Gibbs getting giddy in? So Gibbs giving Jeff, thank you again for coming on today. I do appreciate it.
Jeff Love ([00:21:26]) – Thank you.
Sam Wilson([00:21:26]) – Hey, thanks for listening to the How to Scale Commercial Real Estate podcast. If you can do me a favor and subscribe and leave us a review on Apple Podcasts, Spotify, Google Podcasts, whatever platform it is you use to listen. If you can do that for us, that would be a fantastic help to the show.
Sam Wilson([00:21:43]) – It helps us both attract new listeners as well as rank higher on those directories. So appreciate you listening. Thanks so much and hope to catch you on the next episode.
