March 10, 2007


Two stories in the March 10, 2007 edition of the Los Angeles Times highlight the divergence between the residential and commercial real estate markets in Southern California.

As we discussed in our post on December 28, 2006, the residential market is on slippery footing because of the subprime and adjustable rate, 100% loans made when rising prices lifted all boats. The increase in foreclosures and mortgage delinquencies has rocked the financial markets. But the real casualties the people who hoped the rising market would protect them and now find they own homes with little equity and monthly loan payments they cannot afford.

The legal fall-out of the "creative financing" mania will trigger: a wave of non-judicial foreclosures and damaged credit ratings; and an increase in lawsuits by buyers who claim they were misled by brokers or lenders when they "creatively" financed home purchases beyond their means.

The commercial real estate market in So Cal is a different story. Some commercial tenants are being priced out of the market. The recent sale of Equity Office Properties to Blackstone for a record $39 billion is a sign of the times.

One lesson to be learned from the increase in commercial rents is the importance of negotiating lease options to extend the term when entering into a commercial lease. From the tenant's perspective, the option rent should be based on something other than an appraisal of fair market rental value before the option term begins. From the landlord's perspective, the option rent should be fixed by an arbitration that determines the fair market rental value with no right for the tenant to "rescind" if it disagrees with the arbitrator's determination.