To be successful, any attorney must have a basic understanding of applicable law plus a sharp mind, an ability to analyze facts and issues logically, and good written and verbal communication skills. A real estate attorney must also maintain a keen understanding of market norms in various key real estate documents – and current trends/developments related to such norms, a perpetual curiosity that will drive efforts to identify the potential pitfalls in each transaction, and a deal-minded practicality that focuses on finding solutions to those potential pitfalls, rather than being a mere issue spotter (ie, the dreaded “deal killer”). Additionally, a sense of determination and pride of work is required in order to bring the necessary level of thought, action and energy to give the best possible effort each and every day on each and every transaction.

Arizona’s climate, low tax rate and historically business-friendly regulatory system have driven significant and consistent population growth in Arizona for decades. As a result, commercial and residential real estate development have long been economic drivers for the state. Recently, however, Arizona has become a national leader for (i) shipping hubs due to the intersection of Interstate Highways 8 and 10 travelling east/west and Interstate Highway 17 travelling north/south all in the Phoenix metropolitan area, as well as Interstate 17’s intersection with Interstate 40 in Flagstaff, and (ii) data retention facilities, due to Arizona’s lack of natural disasters (no floods, earthquakes, hurricanes or tornadoes) and its cheap electricity (particularly relative to its western neighbor, California). Additionally, the Phoenix area has become an international destination for microchip manufacturing facilities with Intel partnering with Canada’s Brookfield Asset Management to invest up to USD30 billion to expand Intel’s already existing chip factories in Chandler and Taiwan Semiconductor Manufacturing Company constructing two semiconductor chip plants in north Phoenix at a cost of more than USD40 billion.

The phase out of bonus depreciation, with the 100% rate no longer available, and an 80% rate for 2023, 60% for 2024, 40% for 2025, 20% for 2026 and a complete elimination of bonus depreciation in 2027 means that using cost segregation or “cost seg” studies to reduce taxes is less likely to produce results that are favorable enough to spur development that would otherwise not make economic sense. Additionally, there have been proposals at the national level almost every year to eliminate like-kind exchanges under Section 1031. This, together with the fact that the Opportunity Zone (OZ) program, while having its own requirements, is much broader than like-kind exchanges under Section 1031 may make OZ programs of continued interests. The OZ program has led to some increased development in economically distressed areas; however, due to the complexity of the program, the effects have not been as pronounced as anticipated.  If a developer is able to take advantage of the OZ program, they may be able to boost the IRR over the life of the project by 200-400 basis points. Because projects in opportunity zones often carry other environmental risks (such as on old manufacturing sites), the benefits can be enough to encourage development of a site that would otherwise remain underutilized. While certain benefits of the OZ program have been phased out, the OZ program still permits deferral of taxes for qualifying investments until December 31, 2026, together with certain other benefits.

On March 30, 2022, then governor Doug Ducey ended the COVID-19 state of emergency in Arizona. Shortly thereafter, Arizona legislators took steps to limit the state government’s ability to impose COVID-19-related restrictions in the future. On May 6, 2022, then governor Ducey signed into law SB1009, which prohibits an Arizona governor from enforcing a state of emergency related to a public health emergency for more than 120 days. After that 120-day period, the Arizona state legislature must approve a new state of emergency. SB1009 also prohibits all state and local agencies from revoking any license held by a business or used by it to operate for not complying with a state of emergency order unless such agency can establish by clear and convincing evidence that such business caused the transmission of the disease that is the subject of such order. May of 2022 also saw HB2453 signed into law. HB2453 prohibits state and local governments (including the judiciary) from requiring citizens to wear masks on government property. Since the end of the state of emergency on March 30, 2022, Arizona has not seen any newly imposed COVID-19-related rules or regulations. However, current Arizona state law does not prohibit a private business from enforcing COVID-19 restrictions of its own.

The most common ownership structure is the limited liability company structure. This has been true for many years and its prevalence has not decreased over time. Single member limited liability companies are typically used for smaller transactions, but more sophisticated buyers often have more complex structures.

The conveyance instrument must be in writing and must be signed by the grantor and acknowledged by a notary. The deed should also include the name of the grantee, as well as the grantee’s address and state of formation or organization of the grantee, if the grantee is a corporation, general or limited partnership, or limited liability company. However, the failure to state the grantee’s address or state of formation or organization does not affect the validity of the instrument (A.R.S. 33-401(C)). There are no special laws or regulations that modify or add to the jurisdictional requirements for transfer of specific types of real estate in Arizona.

Title is transferred by deed, duly executed and acknowledged and recorded in the county recorder’s office. Commercial transactions typically feature a special warranty deed (whereby the grantor’s warranty of title is limited to the acts of grantor, but not otherwise, and is subject to any permitted exceptions as identified in the deed or an exhibit thereto). A general warranty deed may be used and provides full warranty of title, except as to any permitted exceptions set forth in the deed or an exhibit thereto. A quitclaim deed is also an option, pursuant to which grantor does not provide any warranties of title to the grantee.

Typical due diligence with respect to commercial real estate transactions include the following. 

• Review of a current title commitment with respect to the subject property, as well as all requirements and exception documents set forth therein. An extended coverage title policy is typically obtained (where certain standard exceptions are deleted by the title company for an additional charge), and such endorsements to the policy as may be desired by the purchaser. 
• Review of current as-built survey of property, certified to the purchaser and title company, which survey would depict the location of the physical improvements on the subject property and any easements or other title matters disclosed in the title commitment. The legal description of the subject property is set forth on the survey, as well as the size of the subject property and the size and height of any buildings located on the subject property. The purchaser may require inclusion of additional details and information as desired by the purchaser, from the available options identified in the most recent edition of the ALTA/NSPS Land Title Survey Standards. Some purchasers do not obtain a new survey but instead attempt to rely on the seller’s existing survey (if relatively recent), but the title company will require an affidavit of no changes to be issued by the seller as a condition to title company agreeing to delete the survey exception from the title policy.
• Phase I Environmental Report – report which confirms the current environmental status of the subject property and surrounding properties, as well as the historical uses of the property and other factors which bear on the status of the property. Further, more invasive environmental investigation may be necessary depending on the findings and recommendations of the Phase I, but typically the seller’s approval for such invasive inspection is required. An emerging trend with respect to environmental investigations is that sellers are more willing to allow these invasive investigations than they were in prior years.
• Property Condition Assessment – report which analyses the physical condition of the subject property, with the intention of identifying any immediate and short-term repair items, as well as projecting other repairs and replacements that would normally be expected over the medium to long term of property ownership. 
• Zoning Report – report which confirms the zoning requirements applicable to the subject property, and the compliance of the property based on review of the survey and interaction by the consultant with the applicable jurisdiction. Some purchasers will not obtain a zoning report but will instead seek to obtain a zoning verification letter directly from the applicable jurisdiction to confirm that the property is in compliance with all zoning requirements.
• Other reports – specialized reports may be obtained depending on the projected maintenance obligations of the purchaser or the property type (eg, roof report, elevator report, parking garage inspection/report).
• Lease – if the property is leased, a thorough review of the lease is undertaken to confirm the economic terms of the lease and the various landlord and tenant rights and ensure that the obligations set forth in the lease meet with the client’s expectations. 
• Entitlements – if the subject property is to be developed by the purchaser, a review of the permits, approvals, and other development requirements should be undertaken to determine feasibility of the project. Certain additional inspections and investigations should also be undertaken to determine the quality of the soil and otherwise to ensure that the construction of the improvements is appropriate and sound.
• Good Standing Letter from Arizona Department of Revenue (ADOR) – the purchaser should require the seller to order and obtain a good standing letter from the ADOR pursuant to A.R.S. § 42-1110(b) showing that no amount of Arizona transaction privilege (sales) taxes, excise taxes, use taxes and other taxes (excluding estate and income taxes) is due as shown on ADOR’s records. Such letter should be delivered into escrow prior to closing of the transaction.

Typically, the lawyer will handle review of the title commitment and survey, and will be called upon to provide at least some analysis of the lease if the property is subject to a lease. Otherwise, the specific allocation of review responsibility between the attorney and the client is subject to the client’s internal processes and varies from client to client. Abstracting of the lease (which involves identification of the economic and other key provisions of the lease, but does not include the actual analysis such provisions) is often outsourced to non-lawyer consultants. Reports generated in connection with obtaining entitlements and the development of improvements on the subject property are typically reviewed by construction professionals such as engineers and architects.

In commercial real estate transactions, typical representations and warranties include: 

• due authorization and authority of purchaser and seller;
• execution of purchase agreement does not conflict with or violate any existing agreements;
• the seller has not received notice of any current or threatened condemnation or conveyance in lieu of condemnation; 
• the seller has not received notice of any material violations of any legal requirements or documents of record;
• if a lease will be assigned, confirmation that the lease is in full force and effect and there are no defaults by landlord or tenant thereunder, and tenant has not paid any rents more than 30 days in advance (nb, the no-defaults rep is often qualified to the seller’s knowledge); and
• the seller and the subject property are not subject to any litigation or threatened litigation (nb, threatened litigation rep is often qualified to the seller’s knowledge).

Purchaser Remedies

Typically, the purchaser will have a limited period of time (usually 6-12 months) to bring an action against the seller for breach of representations/warranties. Most commercial transactions include a mutual waiver of special, consequential, punitive and similar damages. Increasingly, sellers are requiring a basket concept, where purchaser’s claims must exceed certain threshold (to limit de minimis claims) (duplicate language) and the seller’s total liability is capped at a certain percentage of the purchase price, as negotiated by the parties. Once the purchaser exceeds the threshold, however, it should have the ability to recover damages back to the first dollar, in all cases; if the purchaser was aware of the inaccuracy of the representations/warranty at time of closing and proceeded to close notwithstanding such inaccuracy, the purchaser takes subject to such inaccuracy and cannot later bring an action against seller at to same.

Statutory Warranties

A seller of five or fewer parcels of land, other than subdivided land, in an unincorporated area of a county and any subsequent seller of such a parcel is required to provide the buyer with a written affidavit of disclosure to the buyer at least seven days before the transfer of the property and the buyer shall acknowledge receipt of the affidavit. The buyer then has five days to rescind the transaction. The seller’s liability for any omission or misrepresentation in an affidavit of disclosure cannot be released or waived. The affidavit of disclosure must be substantially similar to the example proscribed by statute (A.R.S. 33-422). 

Arizona common law provides for the implied warranty of habitability and workmanship. The warranty holds builders responsible for undiscoverable latent defects. The warranty provides protection to both original and subsequent purchasers of residential property. In the context of commercial property, the implied warranty provides protection to the original purchaser and only to subsequent purchasers when expressly assigned the original owner’s warranty rights (Highland Vill. Partners, L.L.C. v Bradbury & Stamm Constr. Co. 2198 Ariz. 147, 150 (2008) (HN5)). This warranty cannot be disclaimed or waived in residential contracts (Zambrano v M & RC II LLC, 517 P.3d 1168, 1179 (Ariz. 2022)).

There is no applicable information in this jurisdiction.

Responsibility for Environmental Issues Not Caused by the Buyer 

Generally speaking, as long as the buyer obtains a Phase I Environmental Site Assessment in accordance with current ASTM standards, the buyer will qualify for the innocent landowner defense under Federal law (CERCLA), as discussed below.

Under 42 U.S.C. 9601, et seq, a purchaser of a contaminated property may obtain Bona Fide Prospective Purchaser status by establishing by a preponderance of the evidence, including: 

• all disposal of hazardous substances at the facility occurred before the person acquired the facility;
• the buyer must have made “all appropriate inquiries” into the previous ownership and uses of the property (this means that buyer’s due diligence should include a Phase I ESA); 
• the buyer must be sure to provide all legally required notices with respect to the discovery or release of hazardous substances; 
• the buyer must exercise “appropriate care” with respect to the hazardous substances by taking reasonable steps to (i) stop any continuing release, (ii) prevent any threatened future release, and (iii) prevent or limit human, environmental, or natural resource exposure to any previously released hazardous substance;
• the buyer must cooperate with all governmental personnel authorized to conduct response actions or restoration activities, including providing access to the property;
• the buyer must comply with and not impede the effectiveness of any institutional controls and land use restrictions required in connection with any response action;
• the buyer must comply with any governmental information requests related to the contamination; and
• the buyer must not be affiliated with any person who is potentially liable for the contamination.

Additionally, under A.R.S. 49-285.01, the department may provide, pursuant to Section 49-292, to a prospective purchaser of a facility a written release and a covenant not to sue and may also agree to seek an order of the court granting approval of a settlement that includes immunity from contribution claims for any potential liability for existing contamination under the article or CERCLA if a number of conditions are met. Such agreements are assignable if the assignee qualifies. 

Typical Allocation of Environmental Risk

Depending on the level of sophistication of the seller and the relative bargaining power of the parties, the seller may or not make a representation regarding the environmental status of the subject property, but such representation will typically be limited to seller’s actual knowledge and subject to any environmental documentation or reports provided to the purchaser as part of the seller’s diligence materials. Sellers will typically include "as is"-, "where is"-type language that makes the purchaser responsible for its own diligence of the property and limits seller’s representations and liability to what is expressly set forth in the purchase agreement. Sophisticated sellers will also seek a specific release from the purchaser for liability as to any existing or future environmental matters, such that seller can “walk away” from the property with no surviving responsibility for environmental issues, at least with respect to the purchaser.        

Ascertaining Permitted Uses

Purchaser can obtain a zoning report that will confirm the applicable zoning requirements with respect to use, parking, height, setback, bulk limitations and other regulated aspects of development of the property. Direct inquiry can also be made to the applicable jurisdiction and then the code studied to confirm compliance.

Development Agreements

A.R.S. 9-500.05

A.R.S. 9-500.05 grants municipalities the authority to enter into development agreements relating to property both within and outside the incorporated area of the municipality. 

Development agreements must be consistent with a municipality’s general plan or a specific plan. Otherwise, general/specific plans can be amended but the process is cumbersome. 

A.R.S. 9-462.03

A.R.S. 9-462.03 requires municipalities to adopt a citizen review process that applies to all rezoning and specific plan modification applications that require public hearing. The review process requires that:

• adjacent landowners/potentially affected citizens be notified of amendment applications;
• the municipality must inform the potentially affected citizens of the substance of the proposed rezoning;
• potentially affected citizens will be provided an opportunity to express issues or concerns before the public hearing; and
• any change from one zone to another, removal, addition or modification of regulation must follow the procedure for citizen review set forth in A.R.S. 9-462.04.

City councils cannot contractually agree to a zoning amendment in the development agreement. However, the council can contract to support an amendment but such language lacks teeth. 

A condemnation involves a municipality’s taking of private property for a public purpose. The taking requires just compensation. The municipality initiates the condemnation action by filing a complaint identifying the subject property to be condemned and the owner(s) of the property. The complaint usually also asks for an order of the court permitting the municipality to take immediate possession of the subject property upon posting a bond in an amount set by the court. Typically, the municipality will make a written offer to acquire the property before filing suit. If the parties cannot agree on the value of the property, that becomes the central issue in the case. Pursuant to Arizona statute, the value of the subject property is “the most probable price […] that the property would bring if exposed for sale in the open market, with reasonable time allowed in which to find a buyer, buying with knowledge of all of the uses and purposes to which it was adapted and for which it was capable.”  (A.R.S. sec. 12-1122(C)). The date of issuance of the summons is the date of valuation (A.R.S. sec. 12-1123(A)).  Where the parties do not agree on value, each side offers the expert testimony of an appraiser regarding the value of the subject property.  The court then makes a ruling on the value of the subject property which results in a judgment making a condemnation award to the defendant in that amount. Once the court receives notice that the condemnation award has been paid, it enters a final order of condemnation vesting title to the subject property in the name of the municipality. Arizona law permits an award of attorneys’ fees to the defendant if the case is dismissed or the municipality loses the case (A.R.S. sec. 12-1129). 

Arizona does not have a transfer, stamp or similar tax that is applicable to the purchase and sale of real estate. However, there are two significant matters to be aware of when acquiring real estate in Arizona, because a failure of a buyer to address them (to the extent they are applicable) will result in successor liability on the part of buyer, with the effect being that the buyer will be responsible for payment of taxes which should otherwise be the obligation of the seller.

The purchase agreement should require that the seller order a good standing letter from the ADOR pursuant to A.R.S. § 42-1110(b), which letter must confirm that no amount of Arizona transaction privilege (sales) taxes, excise taxes, use taxes and other taxes (excluding estate and income taxes) (collectively, “Arizona TPT”) are due as shown on ADOR’s records. Delivery of such letter should be a condition precedent to the buyer’s obligation to close under the purchase agreement. Delivery of a letter confirming no tax obligations are owed by the seller to ADOR shall ensure that the buyer shall not be subject to or otherwise responsible for any such tax or similar obligations incurred by the seller under applicable successor liability or so-called “bulk sales” laws or regulations. 

A special tax exists in Arizona called the Speculative Builder Tax, which is a tax imposed by many municipalities in the state (but not by the ADOR) with respect to the first conveyance of improved real property which is either sold (i) prior to the completion of the improvements, or (ii) within 24 months after the improvements are substantially complete. However, if a custom, model or inventory home or improved residential or commercial lots without a structure are involved, there is no time limitation as to when the tax can be imposed. Improved real property is defined as being any property where:

• a new structure is substantially completed;
• improvements (such as paving or landscaping) have been made to land containing no structure;
• a conversion of apartments to condominiums has occurred; or
• water, power and streets have been constructed to the property line of an otherwise unimproved lot. 

Substantially complete means that the construction has either passed final inspection, a certificate of occupancy (or equivalent) has been issued, or the improvements are ready for immediate occupancy or use. There are a number of exemptions and offsets against the tax that may be available. If the tax is not determined and withheld from the seller’s proceeds at closing, and seller fails to pay the tax, the buyer is responsible for payment. It is very difficult to structure around the tax due to the broad language of the applicable code – attempting to avoid the tax by utilizing an entity transfer instead of an asset transfer will not be successful.

There is no applicable information in this jurisdiction.

Acquisitions of commercial real estate are generally financed by:

• cash consideration;
• first lien debt (either private money financing or more traditional bank financing);
• conduit loans;
• carry-back/subordinated debt; and
• a combination of the above.

Acquisitions of large real estate portfolios can be financed with a line of credit or a warehouse facility that is approved and maintained on an overall asset base (versus a specific property covenant package). The primary security for the line of credit or facility is a lien on the real estate assets comprising the portfolio. Mezzanine lenders can provide financing to the “entity” that holds real estate. The primary security for mezzanine financing is the equity interest in the entity that is holding real estate. Financing structures to private companies are more focused on controlling (i) the ownership interest in the borrowing entity (versus a public company which is owned by the public) and (ii) the specific purpose of the entity (private companies can be organized to own just the financed asset (single purpose asset structure)). The covenant package for a public company can also be focused more on overall operating covenants versus specific property based covenants.

A real estate investor borrowing funds may create a priority-based lien on the real estate being acquired. Such lien is usually in the form of a “deed of trust” granting a priority lien in favor of the lender to secure the debt obligation. A “mortgage” may also be given in Arizona as well as a “contract for deed.” A real estate investor may also grant a security interest in the equity ownership of the entity acquiring the real estate.

Arizona law requires a license for person to provide a mortgage loan in Arizona for compensation. There are several license exceptions to such license requirement set forth in ARS Title 6, Chapter 9, Article 2.

Arizona does not have mortgage taxes, real estate transfer taxes or documentary stamp taxes.

For an entity to give a valid security interest in a real estate asset, the entity must duly own the real estate asset and duly authorize the security interest given for due consideration.

If required by the loan documents, the lender should send a demand/default letter to the trustor/borrower declaring default and accelerating payment on the debt obligation. The lender should obtain a Trustee Sale Guaranty Report (TSG) from a title company, which can take approximately ten days to obtain. The TSG will give a roadmap for the lender to follow in order to properly foreclose on the property. Typically, the lender will record an Assignment, Substitution and Notice of Trustee’s Sale after obtaining the TSG (sale date must be no earlier than 91 days from date of recording of such notice). The TSG provides information as to the parties that are required to receive notice. The Statement of Breach, and Notice of Trustee’s Sale should be mailed to all parties on the Deed of Trust (except trustee) and as required by the TSG. The lender must comply with statutory publishing requirements – publish Notice of Trustee’s Sale for four consecutive weeks (last day of publication not less than ten days before sale date) and post a copy of the Notice of Trustee’s Sale on Property and at the courthouse at least 20 days before the sale date. Thereafter a trustee’s sale may occur and the successful binder must pay the bid price to trustee. Prior to the trustee’s sale, the borrower has an opportunity to reinstate the loan by paying off the late debt. After a nonjudicial foreclosure, a party does not have the right to redeem the property as the sale is considered final. If, however, instead of a trustee’s sale, the property is foreclosed via the mortgage statutes (ie, a judicial foreclosure), a party has six months to pay all amounts owing and redeem the property.

Arizona follows the general rule that the first lien to be recorded has priority over later recorded liens. However, Arizona law will give certain lien rights priority for those who provide labor and materials (mechanic’s liens) if work is commenced prior to the recording of the lender’s lien and a preliminary 20-day notice is filed. Certain statutory liens can also have priority over existing liens such as unpaid taxes and certain crop liens. Any future advances that are not contemplated in the original loan agreement will not have priority relating back to the date of the recording of the deed of trust. Future debt/liens can also obtain priority over prior recorded debt/liens based upon a written agreement (such as a subordination agreement or an intercreditor agreement).

If a lender is the owner or operator, the lender in certain circumstances can become liable under CERCLA. There is no Arizona specific statute/case law holding that a lender is liable under environmental laws simply by holding a security interest in real estate.

Any new collateral obtained prior to bankruptcy (or insolvency) can be deemed a preference subject to voidance. The general preference period (subject to certain exceptions) is 90 days. Lenders can attempt to avoid such preference by documenting and evidencing that the security interests were granted for new value in the ordinary course of business. 

There are no existing, pending, or proposed rules, regulations or requirements that lenders or borrowers pay any recording or similar taxes in connection with mezzanine loans related to real estate

There is no applicable information in this jurisdiction.

There is no applicable information in this jurisdiction.

There is no applicable information in this jurisdiction.

There is no applicable information in this jurisdiction.

There is no applicable information in this jurisdiction.

There is no applicable information in this jurisdiction.

The two entities most commonly used for commercial real estate investment are limited liability companies (LLCs) and limited partnerships.

Limited Liability Companies (LLCs)

LLCs provide their owners (members) protection from liability for company obligations analogous to that provided shareholders in a corporation, but afford significantly more flexibility in governance structure. Similar to partnerships, LLCs may be taxed as pass-through entities (in which income is distributed to members before it is taxed). Unlike partnerships, LLCs may be owned by a single member.

Limited Partnerships

Limited partnerships consist of one or more limited partners and one or more general partners. These entities provide their limited partners limited liability conceptually consistent with that afforded to members of LLCs and shareholders of corporations. A general partner manages the limited partnership’s day-to-day activities and is directly liable for obligations of the limited partnership. Often, the general partners are themselves entities (such as LLCs or corporations) that afford limited liability protection to their constituent owners. 

Other Entities

Less commonly used real estate investment vehicles are corporations, general partnerships, and limited liability partnerships and limited liability limited partnerships, some of the characteristics of which are discussed in the remainder of this 5. Investment Vehicles. Real Estate Investment Trusts (REITs) are entities that fulfill certain statutory compliance requirements to act as pass-through entities for federal tax purposes. REIT structuring and ongoing compliance are complex and necessitate specialized legal and tax expertise.

Limited Liability Companies (LLCs)

LLCs are formed by filing articles of organization with the Arizona Corporation Commission. LLCs are not required to adopt an operating agreement. However, in multi-member LLCs it is common and generally advisable for the members to adopt an operating agreement to govern the affairs of the LLC, including capital contribution obligations, distribution rights and governance. Single member LLCs may also adopt operating agreements, which are generally shorter in form because all income and governance rights are allocated to a single member. 

Limited Partnerships

Limited partnerships are organized by filing a certificate of limited partnership in the office of the secretary of state. The partners typically adopt a partnership agreement covering economics, governance and other rights of the partners. 

General Partnerships

General partnerships are formed by an agreement between the partners. They need not register with the secretary of state to be validly formed. Partners of a general partnership are directly liable for partnership obligations. 

Corporations

Corporations are formed by filing articles of incorporation with the Arizona Corporation Commission. They adopt bylaws, which provide for certain governance and economic matters. Shareholders of a corporation sometimes also adopt shareholder agreements to govern matters that could include transfer restrictions, procedures surrounding deadlock on shareholder votes and other matters. Shareholders of a corporation are provided a level of protection from liability for corporate obligations similar to that provided members of an LLC and limited partners in a limited partnership. 

Limited Liability Partnerships and Limited Liability Limited Partnerships

Limited liability partnerships obtain that status by meeting certain statutory requirements and filing a statement of qualification with the secretary of state. They provide all partners (including those involved in management) liability protection analogous to that provided shareholders in a corporation, members of an LLC and limited partners in a limited partnership.

There is no applicable information in this jurisdiction.

Limited Liability Companies (LLCs)

LLCs may be managed by one or more members or non-member managers. Operating agreements for LLCs managed by a single member or a non-member manager often reserve to some or all of the (other) members consent rights and/or unilateral decisional authority over certain matters. 

Limited Partnerships

Limited partnerships are managed by one or more general partners, though often the partnership agreement will enumerate certain decisions over which limited partners retain consent rights. 

General Partnerships

General partnerships are managed by the partners, who are directly liable for partnership obligations. 

Corporations

In a corporation, shareholders elect a board of directors who, in turn, appoint officers to manage the corporation’s day-to-day affairs. 

Limited Liability Partnerships and Limited Liability Limited Partnerships

Limited liability partnerships are managed in a manner similar to general partnerships, and limited liability limited partnerships are managed in a manner similar to limited partnerships, but, in each instance, provide liability protection to all partners.

Lease

A lease grants an exclusive possessory interest in real property for a defined period of time. Unless otherwise provided in the lease, a lease is transferable and irrevocable.

License

A license is an alternative to a lease and grants a conditional right to use real property. A license does not transfer an interest in the real property, does not run with the land, and is usually revocable by the owner, and can be exclusive or non-exclusive.

Other Real Property Interests

There are other interests in real property, which grant third party rights to real property. For example, an easement is a nonpossessory right to use and/or enter someone else’s real property for a specific purpose. An easement typically runs with the land and can be exclusive or non-exclusive.

Gross Lease

In a gross lease, tenant pays a single, fixed amount of rent and landlord is responsible for covering all other costs (eg, taxes, insurance, utilities and maintenance expenses). The landlord and tenant may also agree to a modified gross lease, wherein tenant may be required to pay for certain utility costs or a proportionate share of additional expenses that exceed a set amount (“expense stop”) or that exceed such costs or expenses during the initial year of the lease term (“base year”).

Net Lease

Net leases obligate tenants to pay base rent and all/some operating expenses. In a triple net lease, tenant pays base rent and operating expenses for the property (eg, taxes, maintenance and insurance), which may be a proportionate share of such expenses in a multi-tenant property. The tenant will either reimburse the landlord for operating expenses or pay them directly to the provider(s)/taxing authority. In a double net lease, the tenant typically pays for taxes and insurance in addition to base rent, but the landlord is responsible for some/all of the maintenance expenses. In a single net lease, the tenant typically pays base rent and taxes, but the landlord is responsible for maintenance and insurance. In an absolute net lease, the tenant is responsible for base rent and all other property related expenses, including structural and roof maintenance, repair and replacement.

Percentage Rent Lease

In a percentage rent lease, the tenant pays base rent and a percentage of tenant’s gross sales derived from its premises. Percentage rent can be based on all tenant’s gross sales or may only be applicable after the gross income reaches a certain amount (“breakpoint”). A percentage rent lease can be structured as a “gross” or “net” lease.

Ground Lease

A ground lease permits a tenant to develop certain property during a specified term and depreciate the improvements throughout that term. Upon expiration of the lease, the land and all improvements revert to the property owner. Under most ground leases, the tenant assumes responsibility for all expenses of development and operation.

Arizona does not impose rent restrictions on commercial lease agreements. There are no restrictions on the maximum term of a lease in Arizona outside of the rule against perpetuities. (A.R.S. §33-261). However, leases for a period in excess of one year must be in writing to comply with the statute of frauds (A.R.S. §44-101(6)).

The length of a lease term varies greatly. A typical initial term for a smaller commercial tenant is five to ten years, with one to two extension options, each of five years or less. Larger/national commercial tenants typically have an initial term of 10-15 years and two or more five-plus-year extension options.

Most leases require the tenant to maintain and repair the interior portion of the premises. Leases vary on maintenance obligations to premises exteriors and common areas. In multi-tenant leases, the landlord usually repairs and maintains exterior portions of the building and common areas and such expenses may be passed through to the tenant on a proportionate basis (based upon the size of the tenant’s premises in relation to the overall size of all premises within the development). In single tenant leases, tenants typically maintain and repair the exterior portions of the building and all other portions of the property; however, the landlord may be responsible for structural, roof and/or capital repairs.

Tenants usually pay rent in advance on a monthly basis, without demand, offset or credit.

For short term leases (five years or less), rent may remain flat throughout the term or increase on an annual basis, often by a set percentage above that which is paid for the preceding year. For leases with longer terms, rent may increase annually or every set number of years. Rent will typically increase at the commencement of each extension option (either at a set percentage above that immediately prior to the extension or based upon then-current fair market rent), and may remain flat or increase annually during each extension.

Rent changes or increases are determined as follows.

• Annual increases – annual rent increases of 2-3% over the prior years’ rent are typical.
• Periodic increases – for leases that include rent increases every five to ten years, a 5-10% increase is typical.
• Fair market value – leases may include extension option(s) at fair market rent. Fair market rent is determined at the time the extension is exercised, often by landlord, and tenant may have the right to refute landlord’s determination. If the parties cannot agree on fair market rent, leases often require arbitration for resolving the dispute.
• Consumer Price Index – a lease may also state that rent will increase at the same rate as the Consumer Price Index. Such increases can occur annually or every set number of years throughout the term.

A.R.S. 42-5008 authorizes municipalities to levy a transaction privilege tax on commercial leases. The landlord pays the tax; however, the landlord collects the tax from the tenant pursuant to the terms of the lease. The landlord must obtain operational and transaction privilege tax licenses from the ADOR before offering the property for rent.

Prior to lease commencement, the landlord may require tenant to pay a security deposit, produce a letter of credit, or a third-party guaranty or prepay the first and/or last month’s rent. Either the landlord or tenant can be responsible for the initial improvements to the premises. If the landlord is responsible, the landlord will typically pay the costs; however, the tenant may be required to contribute a set amount or pay amounts in excess of the landlord contribution, and the landlord will amortize any unreimbursed costs into the base rent. If the tenant is required to construct the initial improvements, such improvements will generally be done at the tenant’s cost; however, the landlord may provide a tenant allowance to reimburse the tenant for such costs.

In multi-tenant developments, the landlord pays for common area maintenance and repair and the tenants reimburse the landlord for their proportionate shares of such expenses. The lease may carve out certain common area expenses that are not reimbursed by tenant (eg, capital expenses) and will often set a maximum administration fee passed through as common area expenses. Controllable common area expenses may be “capped” at some percentage of the prior year’s expenses and certain parcels may self-maintain, and therefore the premises thereon may be removed from the proportionate share “denominator.” Common area expenses are often estimated by landlords, paid in advance by tenants, and subject to future reconciliation.

Utilities are typically metered or sub-metered. If utilities are metered to more than one premises, each tenant pays its proportionate share. If utilities are separately metered (or sub-metered) to individual premises, the tenant pays for the utilities used by the tenant in its premises (and the tenant will often contract directly with the utilities providers). Typically, utilities for common areas are paid by the landlord and tenants reimburse the landlord for their proportionate shares of such costs.

Tenants often maintain commercial general liability (CGL) insurance as the primary policy respecting the premises interior. Landlords often maintain CGL insurance as the primary policy respecting the common areas and premises exterior. There are often carve-outs for the other party’s (gross) negligence and willful misconduct, and these policies protect against claims for property damage/personal injury in the respective areas of the development.

Regarding property insurance coverage, the tenant generally insures the interior of the premises, including any alterations or improvements, and the tenant’s personal property. In multi-tenant leases, the landlord insures the buildings and common areas and the tenants reimburse the landlord for their proportionate shares of such costs. In single tenant leases, insurance for the building and other portions of the real property are insured by:

• the tenant at its expense;
• the landlord and costs are passed through to the tenant; or
• the landlord at its expense ‒ this insurance is used to repair or rebuild damaged portions of the development following a casualty.

Landlords often impose restrictions on a tenant’s use of property. Leases typically include a permitted use, which limits the tenant’s use to the use(s) in the lease. Leases may also include prohibited uses and restrictions against uses which violate any document of record or exclusive use of any other tenant at the same property. Further, the use of real property in Arizona must comply with the zoning and land use laws, environmental laws, permitting requirements and other applicable regulations.

Tenants are generally allowed to perform non-structural alterations to the premises during the term, subject to landlord’s reasonable approval and other rules and regulations, including:

• all work complies with laws, documents of record and construction standards established by the landlord;
• the tenant secures permits;
• the work must be performed by licensed and insured contractors; and
• no mechanic’s liens may be filed against the property. 

Leases often stipulate whether the tenant must remove alterations (including cabling) at the expiration of the term or whether such alterations are to remain in the premises.

Landlord/Tenant Acts

Arizona has four landlord/tenant acts relating to:

• residential tenancies (A.R.S. Title 33, Chapter 10);
• non-residential tenancies (A.R.S Title 33, Chapter 3);
• mobile-home park tenancies (A.R.S. Title 33, Chapter 11); and
• recreational vehicle long-term tenancies (A.R.S. Title 33, Chapter 19). 

Owners of Arizona residential rental property must comply with registration/recordation requirements (A.R.S. 33-1902).

Agricultural Leases

Agricultural land leases with terms of more than 90 days must be accompanied by an Agricultural Lease Abstract (Form Number 82917), which must be filed with the county assessor (A.R.S. 42-13102). 

Self-Storage Leases

A.R.S. 33-1702 prohibits the use of leased self-storage spaces/facilities for residential purposes.

Telecommunication Services

Upon a prospective tenant’s request or prior to entering into any lease, the owner of a commercial building must provide certain information about available telecommunication services (A.R.S. 33-2301).

Casualty and Condemnation

A.R.S. §33-343 states that unless expressly provided by written agreement, in the event the building occupied by tenant is destroyed by the elements or any other cause (with no fault or neglect of tenant) to the extent it is untenantable or unfit for occupancy, tenant will not be liable for rent and may surrender possession of the premises. 

Landlord’s Liens

The landlord has a statutory lien on personal property of tenant (or upon crops grown on land for agricultural leases) until rent is paid (A.R.S. §33-362). Landlords may subordinate such rights to specific tenant lenders.

Mechanic’s Liens

Pursuant to A.R.S. §33-981, any person who furnishes services, materials, machinery, fixtures or tools in the construction, alteration or repair of any building or improvement, will have a lien on such building or improvement. In order to ensure that a mechanic’s lien is not filed against the landlord’s real property, landlords may add a provision in the lease stating that such improvements were not authorized by the landlord and are being made at the instance of the tenant or otherwise obligating the tenant to keep the property lien-free.

Guaranty

Absent an express waiver in the guaranty, pursuant to A.R.S. §§12-1641 and 12-1642, a guarantor may first require the landlord to bring an action upon the contract or an action relating to the issue of suretyship between the tenant and guarantor.

Tenant’s insolvency is generally a default under the lease. If the tenant becomes insolvent, the landlord may proceed with enforcement rights under the lease, subject to the bankruptcy proceedings.

Upon a bankruptcy filing, Section 362 of the U.S. Bankruptcy Code imposes an “automatic stay,” precluding landlords from taking any action to enforce a lease in default. While many leases provide that a tenant’s insolvency or bankruptcy are events of default, Section 365(e)(1) of the Code generally renders such provisions unenforceable. Section 365(f) generally does the same to any provisions prohibiting or restricting a tenant from assigning a lease during the bankruptcy proceeding.

Section 365(d) requires tenants in Chapter 11 (or a trustee in Chapter 7) to perform all commercial lease obligations accruing from the date of the bankruptcy filing through the date the lease is assumed or rejected. The tenant may either assume or reject the lease within 120 days of the filing, subject to a 90-day extension from the court. If the tenant assumes the lease, it must cure all defaults under the lease. If the tenant rejects the lease, it is treated as a breach and the landlord may retake possession of the premises and file a proof of claim for pre-bankruptcy damages, future rent (subject to statutory cap) and other damages.

Security Deposit

Landlord may require a security deposit upon lease execution, which is generally equal to at least one month’s rent. The landlord generally holds the security deposit throughout the term. Upon the occurrence of a default, the landlord may use such funds to remedy or cure such default and the tenant must restore the security deposit to its original amount. Upon lease expiration, any unused portion of the security deposit is returned to the tenant.

Letter of Credit

A letter of credit is a document from the tenant’s bank guaranteeing rent payments up to a negotiated amount. The landlord is the named beneficiary. In the event of a monetary default, the landlord has the ability to withdraw payments from the bank in order to satisfy the monetary default.

Guaranty

A guaranty is an agreement by a third party to be responsible for the obligations of the tenant under the lease in the event of a tenant default. The guaranty can be for full performance of all lease obligations or be limited to monetary obligations only. Upon a tenant default under the lease, the landlord can look to either the tenant or guarantor to remedy or cure such default.

Unless the lease expressly provides otherwise, the tenant must vacate the premises at the expiration of the lease. In Arizona, absent any holdover provision in the lease, if the tenant retains possession of the premises without express consent from the landlord, it will be treated as a month-to-month tenancy at the rent amount before the holdover (A.R.S. §33-342). Per A.R.S. §33-341, upon the creation of the new month-to-month tenancy, either party may terminate the lease with ten days’ notice to the other party.

Commercial leases typically state that the lease will be deemed a month-to-month tenancy in the event of a holdover, but generally provide that rent will be an amount equal to 125%-200% of the rent in effect at the expiration of the term. Additionally, in situations where a tenant holds over after lease expiration without the landlord’s consent, and the landlord is unable to deliver the premises to a subsequent tenant as a result thereof, the lease may stipulate that the tenant holding over is liable to the landlord for the landlord’s actual and consequential/speculative damages.

Leases typically include termination rights related to the following circumstances:

• a default under the lease beyond a specified cure period;
• condemnation;
• casualty;
• violation of an exclusive use or prohibited use;
• a co-tenancy violation;
• the landlord’s failure to deliver the space or the tenant’s failure to open for business within a certain timeframe; or
• the tenant’s failure to remain open for business in the space.

A tenant can be forced to vacate in the event of default prior to the lease expiration date. In the event of default, the landlord may reenter and take possession, or without formal demand or reentry, commence an action for recovery of possession of the premises. Per A.R.S. 33-361, an action for forcible entry or detainer will be tried not less than five days nor more than 30 days after its commencement.

Condemnation

In the event of a taking, the government may terminate the lease. The lease generally sets forth the terms of whether the lease will terminate in its entirety in the event of a taking, or if the lease will only terminate as to the portion of the premises. If landlord and the government mutually agree to the terms of the taking, the parties can enter into a written settlement. If not, a court action will be filed to assess the value of each estate or interest in the property. Absent a provision in the lease specifying whether landlord or tenant will receive the compensation from such taking, tenant has no right to compensation for the taking. Cardi Am. Corp. v All Am. House & Apt. Movers, L.L.C., 221 Ariz. 85, 87 (Ct. App. 2009).

Foreclosure

In the event of a foreclosure, absent a subordination, non-disturbance and attornment agreement, a senior lender may elect to terminate a subordinate lease or keep it in place. A “foreclosure” involving a deed of trust may be by court action or a non-judicial trustee’s sale (A.R.S. §33-721). A “foreclosure” involving a mortgage involves a court action and the issuance of a judgment requiring sale of the property by a court appointed officer (A.R.S. §33-725). The timing for court foreclosure actions is not specifically prescribed by Arizona law; however, a non-judicial foreclosure accomplished by a trustee’s sale cannot be held sooner than the 91st day following recordation of the notice of sale (A.R.S. §33-807).

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