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Types of Commercial Real Estate Leases

If you’re just plunging into the world of commercial real estate leases, you might feel a little overwhelmed by the different terms used in the field. You might even feel unsure of what you’re getting into. But those terms aren’t as intimidating as many people think.

All leases are based around two main calculation methods – gross and net.  Within each method, there are a variety of types: full service lease, which is also referred to as full service gross, modified gross, and a variety of net lease, including triple net. These leases provide a base from which rent and expenses are calculated.  In both cases, the tenant pays a base rent for the property and the type of lease will determine whether the tenant or landlord pays the other operating expenses.

For instance, in a gross lease, the tenant is expected to pay a monthly lump sum rent that includes utilities, taxes, maintenance fees, janitorial fees, security fees, etc. The landlord includes all these fees in the rent and then pays for these expenses on behalf of the tenant.

For a net lease, the fundamental principle is that the landlord charges only the base rent, and the tenant contracts and directly pays for any other operating expenses including property taxes, insurance, janitorial services, maintenance fees, security fees, water, trash fees and other costs.

So, without further ado, let’s discuss the three types of commercial leases in more detail.

 

1. Gross Lease

Full Service or Full Service Gross Lease:

In a full service lease, the tenant is charged a monthly rental fee that covers all operating expenses. These expenses usually include property taxes, maintenance fees, utilities, etc. The landlord then pays for these expenses using the rent paid by the tenant. For this reason, the base rent charged to the tenant is usually high, but it’s the only cost the tenant has to pay.

Those tenants who do not like to be involved in the everyday expenses of the building prefer this type of lease. The main advantage with this lease is that the rent remains fixed, even if the expenses change. For instance, during summer, when electricity costs increase because of air conditioning, the rent remains the same. This lease is common in multi-tenant industrial or office buildings and retail shopping centers.

However, this lease also comes with a few nuances. Most landlords like to include a provision allowing them to pass through certain increases in operating expenses.  As such, a tenant can expect that the monthly amount paid to the landlord could increase over the term of the lease based on expenses they can not directly control.

 

Modified Gross Lease:

The last type of commercial lease is the modified net lease, sometimes called the modified gross lease. This commercial lease is a marriage of the two primary leases – gross and net – and offers a comfortable midpoint for both the tenant and the landlord.

The lease allows a whole lot of negotiation when it comes to who pays for which expenses. The rent will also be extensively negotiated and agreed upon by the two parties.

 

2. Net Lease

The net lease is one of the most flexible commercial leases in real estate and is common for single tenant buildings. In a net lease, the amount paid to the landlord will be less than a gross lease, as the tenant is responsible for paying operating costs including insurance, property taxes and common area maintenance (CAM) items.

There are four categories of net leases:

  • Single Net Lease: The tenant is responsible for paying property taxes in addition to rent.  The landlord pays for insurance and maintenance associated to the building.  In most cases, the tenant is responsible for paying for utilities as well as garbage and janitorial services.

 

  • Double Net Lease: A double net lease is similar to a single net lease, but in this case the tenant pays for property insurance in addition to rent and property taxes.

 

  • Triple Net Lease: The triple net lease is one of the most common lease types in the commercial real estate market today.  The tenant is responsible for paying rent, property taxes, insurance, and any  maintenance costs. As a result, triple net leases are a favorite of landlords.

 

  • Absolute Triple Net Lease: With the absolute triple net lease, the tenant pays all the costs, giving them full responsibility for the building. The responsibility on the tenant is similar to buying the building altogether. The advantage of this lease is that the tenant virtually owns the building without purchasing it. However, if catastrophe strikes and the whole building is destroyed, the responsibility solely lies on the tenant.

 

 

What We Can Do for You

If you still have questions about the various types of leases and what is typical in your area, use the Find a Broker feature to identify a local expert who can help you.  Filter the list to find brokers that specialize in your area and property type.

If you are a commercial real estate broker, be sure to create an account and update your profile.  In addition to your contact information and specializations, you can also include your social media information and a brief bio.  The link to your profile will not change, so you can even include it in your email signature and other marketing efforts.

Finding the Perfect Restaurant for Your Property

Find the perfect Restaurant for Your Property

A recent report by IHL Group entitled Debunking the Retail Apocalypse included a recent chart showing the planned expansion for major restaurants for 2017.  Demand appears to remain strong for fast food and quick serve restaurants.  Restaurants continue to be popular commercial real estate investments as many restaurant leases are triple net (NNN) that more passive investments allowing the owner to receive a monthly rent check, while the tenant is responsible for taxes, insurance, and maintenance.

Every restaurant has a set of requirements when considering a new location.  It is important to understand how your building or land matches to a specific restaurant’s requirements.    Factors to consider include:

Demographics:  What is the number of residents or daytime population within a specific radius or drive time of a site.  What is the average household income for the area?  What is the spending for their specific type of cuisine?  Understanding these aspects related to your site will allow you to target the appropriate tenants.  One source for this type of information is Site To Do Business (STDB) commercial real estate’s advanced digital toolkit, providing essential data and tools to support financial, market, spatial and competitive analysis.

Zoning:  Is your property zoned to accommodate a restaurant?  Does your zoning allow for a drive-thru?

Physical characteristics:  Is your site on a corner?  Is your site on a main thoroughfare?  What is the traffic count for the location, typically expressed as Average Daily Traffic (ADT)?  Where are the curb cuts to enter or leave the property?  Is there a traffic signal or turn lanes?  The side of the street could influence the type of tenant.  If you’re on the right side of the street when people are leaving for work, it may be more appealing for breakfast or a coffee shop.

Competition or complimentary tenants:  What is the current mix of restaurants in the immediate area?  Certain restaurants have similar selection criteria and tend to cluster together, could one of these restaurants be a good target?  If there is a concept that is thriving, would a competitor also be interested in a nearby site?

Ultimately, the right restaurant for your location is one that will be successful and able to pay rent for the term of the lease and hopefully beyond.  Understanding the strengths and weaknesses of your location will give you a better chance of finding a successful restaurant as your tenant.

Is the Retail Apocalypse Fact or Fiction?

Is the Retail Apocalypse Fact or FIction

Is the Retail Apocalypse – Fact or Fiction?

If you read the headlines, you would believe the Retail Apocalypse is imminent with announcements seemingly each week of new store closures. In fact, earlier this year, we posted a story called Retail Store Closures Pick Up Speed, Says Report based on a report by Fung Global Retail and Technology Tracker.  But a new report by IHL Group entitled Debunking the Retail Apocalypse provides an alternative perspective.  Their research shows that retailers and restaurants are planning to open 14,248 locations in 2017 compared to 10,168 announced closures.  A net increase of more than 4,000 new stores is a very different story than what is captured in the headlines.  And the projections for 2018 are even stronger with more than 5,500 openings projected.

The report then breaks down the activity by segment that reveals there are only two segments with negative Net Store Growth: Department Stores and Softgoods, that includes clothing, shoes and jewelry stores.   From a real estate perspective, Department Stores have the largest footprints and can be the most challenging to release. And when enough of the department stores anchors leave a center, it frequently becomes a challenge to retain other tenants or attract new ones.  In some cases, a regional mall that is no longer viable will be converted to another use, like the recent announcement of Amazon to build a fulfillment center at the site of the Randall Park Mall site in the village of Randall, Ohio.

If you take the number of closures for the 16 brands with the largest decline multiplied by the typical store footprint, these stores will be vacating more than 72 million square feet of space.  Sears, Kmart and JC Penny account for 55 million square feet, or 75% of the total.

While the Net Store numbers are important, they don’t necessarily reflect the actual real estate impact.  The report included the 16 brands with the largest increases and declines.  Another way to review the impact is to take the number of stores and multiplying it by the typical square footage for each brand.  The 4,162 new store openings will absorb approximately 34 million square feet of space, with an average store size of 8,339 square feet.


New Stores From These 16 Banners

The amount of space that will be vacated totals more than 72 million square feet, or an average store size of 14,805 square feet.  However, three department stores, Sears, Kmart and JC Penny, have a disproportionate impact since their typical store size is 100,000 square feet or more.  While department stores account for only 500 of the nearly 5,000 store closings (10%), they account for more than 55 million square feet, or 75% of the square footage.


Planned 2017 Store Closings

What will happen to the 38 million square feet of space that will be vacated this year?  Retailers and restaurants all have specific requirements for potential new locations.  Will existing centers or buildings be converted to accommodate these growing brands?  Or, will there be more redevelopment of prime locations into new uses?

If you have retail space to fill or are looking for your next location, try CommercialSearch.com.

Retail Store Closures Pick Up Speed, Says Report

chart showing fung global numbers of retail store closures in 2017

The preeminent trend in the national retail sector is a wave of bad news coming in harder and faster than before. Store closures, according to a recent report by the Fung Global Retail and Technology Tracker, have seen an eye-popping 218% increase over the previous year.

The Fung Global Retail & Technology Tracker watches store openings and closures “for a select group of retailers.” The most recent report cited losses

Payless and Radio Shack top a long list of closures

As reported in NREIOnline, specialty stores are among the hardest-hit of the recent uptick of closures:

Department and specialty stores accounted for most of the pullback, according to Fung Global. The retail research firm tracks store openings and closings for a select group of companies on a weekly basis.

Specifically, RadioShack, the Fort Worth, Texas-based electronics retailer, and Payless Inc., the value-priced shoe retailer based in Topeka, Ks., led the store closing tally with 1,000 and 512 respectively. RadioShack is in the final stages of liquidating and winding down its stores for good, after the company filed for bankruptcy for the second time in two years. The two companies have exemplified the troubles of retailers vying with Internet sales channels to win over consumers and remain profitable.

News Not All Bad: Dollar Stores Are Opening

The same report also found that announced store openings were at 2,573, up 20 percent from the previous year:

The retail sector is used to seeing store openings from off-price sellers like Burlington and the Framingham, Mass.-based TJX Inc. chains, as well as value-oriented retailers including Dollar Tree, Aldi and Lidl.

With 111 scheduled openings, TJX accounts for the third largest number of planned new stores in the United States. The company operates the brands T.J.Maxx, Marshalls, HomeGoods and the forthcoming HomeSense. It was behind Aldi, with 130 planned new stores, and Dollar Tree, with 650 new stores.

Photo source: Fung Global

 

Amazon’s Acquisition Of Whole Foods Has A Rival: Walmart

Photo of Whole Foods store

Is it time to put a halt on the recent wave of think pieces all across the web concerning the recent announcement that Amazon will acquire upscale grocer Whole Foods? Two research analysts at JPMorgan have identified a potential rival bidder: Walmart.

The potential bidding war comes with the stock price of the grocery chain edging higher than Amazon’s offer of $42 per share. The following CNBC video spells out the details that might arise with a competition for the 431-location, 91,000-employee grocery brand. Click below to view:

Becoming A Whole Foods Landlord

While the market (and regulators) decide the fate of Whole Foods deal, what does it take to become a landlord for a Whole Foods outlet?  As it turns out, the chain has thoughtfully provided a partial specifications list as well as a downloadable spreadsheet containing a Master Broker List, including contact information and territories for over 70 brokers across the US and Canada.  Also available: a list of Whole Foods stores currently under development.  Brokers and owners can propose a store site at this online form at WF’s site.

 

 

Walgreens Rite Aid Purchase Hits Antitrust Snag

English: Walgreens in Little Egg Harbor, New J...

With 13,200 stores in 11 countries including over 8,100 in the USA, Walgreens Boots Alliance, home to the venerable Walgreens drugstore brand, made big news in October 2015 when it announced its intention to acquire national drug chain Rite Aid. Rite Aid’s 4,600 stores across the US would join Walgreens in a mega-deal — pending approval by the Federal Trade Commission.

However, recent developments suggest the FTC is not happy with the idea.  By the time the dust settles, Walgreens could be compelled to kill the deal or move over 1,000 stores to the sales block in order to get the deal done

Compliance Moves Might Involve 1,200 Walgreens Stores Sold

Reuters reports that Walgreens has indicated it may sell as many as 1,200 stores to smaller chain Fred’s as a way to resolve antitrust problems under the proposed merger.
But regulators have looked at that proposal askance, as so many stores ending up in Fred’s hands would create a new national competitor, something that requires top-tier financing and commitment, which hasn’t been easy to come by, with similarly-shaped national retail merger deals including Office Depot / Staples falling through thanks to the FTC.

But the FTC may be wary of Fred’s move, and rival drugstore chain CVS reportedly has pointed out to the FTC what it says are similar deals gone bad. CVS executives say that the sale to Fred’s isn’t sufficient to ensure competition. They compare the situation to Safeway’s sale of 146 stores to Haggen Holdings in 2015 in order to win antitrust clearance for its merger with Albertsons. Haggen eventually went bankrupt and sold some stores back to Albertsons in the process. 

Some observers have never been all that sanguine about the deal’s prospects, considering the skepticism the FTC (at least in the Obama era) has shown against some mega-mergers, including deals involving retailers. Last May, for example, regulators scuttled a proposed $6.3 billion tie-up between rivals Office Depot and Staples, despite Amazon’s entry into the office supplies retail and business contracts spaces.

Walgreens Store Counts By State

What locations are likely to be affected by the acquisition moves? The inventory of saleable Walgreens stores roughly matches population distribution by state, even though Florida tops the list with 831 stores, followed by Texas (713) California (633), and Illinois (598).  The chain claims that 75% of the US population lives within five miles of a Walgreens.

(Photo credit: Wikipedia)

Chain Pain: Touring The Disruptions In Casual Dining

Buffalo Wild Wings & Weck logo

Sally Smith, CEO of Buffalo Wild Wings (1,235 locations) has some words of dire caution for the casual dining industry. In a fight with activist investors over the direction of the company she leads, Smith attributed the company’s recent ills to sea changes in how younger customers — millennials — approach eating out.

“Casual dining restaurants face a uniquely challenging market today,” wrote Smith in a letter to shareholders. Citing observed habits among millennials including eating faster, ordering delivery and cooking at home, Smith even went so far as to cite a national downturn in television sports viewing, a trend that’s been on the sports industry’s radar for months and that undercuts a big force attracting diners to chains such as Smith’s.

In March, Business Insider reported that industry tracker TDn2k had found 2016 was the worst year for the restaurant industry generally, with the casual dining sector performing worst of all.  Major casual dining brands include Applebee’s (2,000+ locations), Chili’s (1,600+ locations), TGI Friday’s (990 locations), with the “fast casual” category including Chipotle (2,250 locations) and Panera Bread (2,000 locations).

Casual Vs. Fast Casual

The Washington Post reports that growth in “fast casual” dining was an eye-popping 550% from 1999 to 2014.  But the current environment for casual dining is very often tied to the general decline in mall traffic, where casual dining establishments tend to rent.  Shortly before being replaced as the CEO of TGI Fridays, then-CEO John Antioco cited his decision to deepen the company’s suburban presence near to 2010 was responsible for the company’s slump.

Also adding to the fray: falling grocery prices. The financial crisis of 2008 seems to have instilled in the American consumer a stronger tendency toward thrift, leading diners to emphasize bang for the buck.

With many thousands of locations in the balance, and with dining and shopping habits so clearly intertwined, the struggles of the casual dining industry and the retail property industry seem to be ordering off the same menu.

(Photo credit: Wikipedia)

Six Amazing Takeaways From ICSC RECon

English: Vector image of the Las Vegas sign. P...

“What goes on in Las Vegas stays in Las Vegas,” goes the familiar TV commercial. But for three days last week the town played host to ICSC RECon, the top retail real estate conference of the year, and the news is too good to keep quiet.

The commercial RE industry’s retail property market professionals met to share knowledge and stay on top of the latest offerings in technology, data, business intelligence and every other facet of retail property market making. CommercialSearch was there, and here’s the top six notable exhibits we saw during the show:

  • BuildOut – The journey from plain vanilla property listing data to customized, branded collateral can be an ugly and time-consuming one, but BuildOut makes it a breeze to generate property listing websites, customized presentation output, documents and trackable emails including head-turning graphics and design.
  • CompStak – Is there anything tougher in the retail property sales cycle than getting accurate lease comps for retail transactions?  CompStak allows you to access actual deal terms by participating in a crowdsourced comp exchange.
  • CommissionTrac – Custom commission accounting solutions for brokerages, because one size absolutely does not fit all. Ledgers and reports that are tailored to customer workflows is what CommissionTrac delivers.
  • IdealSpot – With a tag line of “demand-driven site selection”, IdealSpot knits together exciting demographic data, location based analytics and social demand to help retailers and property owners identify product and service gaps along with the proper co-tenancy for retail projects nationwide.
  • RealConnex – A social media platform play customized for the commercial real estate ecosystem, RealConnex brings together capital markets, advisors, developers, brokers, investors, designers and everybody in between for networking, engagement and collaboration.
  • RPR – NAR’s Realtor Property Resource (RPR) continues to impress with its historical depth of data on properties as well as its rich palette data sources and representation tools that make deep, consultative service to clients easier than ever.

While this wasn’t the list of everything memorable, it’s for sure the don’t-miss list. We’ll see you there next year!

(Photo credit: Wikipedia)

How To Find A Food Desert

Grocery store preventing the existence of a food desert

The food desert is that stretch of town or region where no grocery stores are operating, forcing residents into leaving the area to shop for basics, or worse, subsist on junk food for lack of better choices.  In social and health terms, food deserts are a serious problem, but in economic terms they can represent commercial real estate opportunity.  CRE investors seeking to profit from filling local needs can do much worse than finding highly populated areas that are underserved by grocery stores. These areas cry out for the development of food stores to fill the gap.  Tools to find these areas are very helpful for acquisition and site selection – but where can one find these tools?

As it turns out, the federal government is one place to look.  Enter the Food Desert Locator, a website run by the US Department of Agriculture.  It’s an interactive web application that takes reams of real estate, economic and demographic data and provides an easy-to-use mapping interface to cut through the clutter to get to the sites that really cry out for grocery stores.

The mapping application allows you to select areas based on income and access to grocery stores, as well as compare trends across years to find areas that have seen changes in access. Subpopulations are also selectable, allowing a range of site selection criteria.

Of course the final step in conducting this research is to use CommercialSearch.com to browse the retail property and land listings that lay in the areas you define with the Food Desert Locator.

With this one-two punch, site selection can be easy, quickly bringing you one step closer to a high-foot-traffic, only-game-in-town investment play in grocery store development.

New Supermarket Arrival Lidl Promises To Be Big

Retailing industry analyst Kantar Retail this month released an impact study on the US supermarket sector that highlights a new entry from Europe. Lidl, a no-frills grocery chain headquartered in Germany, is in business in 28 countries in Europe, is expected to enter the US market in 2018.

Similar to Aldi, another German supermarket competitor who have long since set up shop in the US, Lidl stores take a low-staff, no-frills approach to supermarket operation, displaying skids of product in aisles, letting customers take product from opened cartons. A lack of specialty areas, preferred by some other supermarket chains, creates store floor plans that are streamlined and configurations that demand less of basic space than does the average US supermarket.

The Predictions

Kantar sees Lidl as opening over 100 stores a year in the US, with a total of 400 up and down the east coast by 2020.  The chain’s operating efficiency is touted, as a single, fully mature store could generate $14 million, or , “a lot of volume packed into a 36KSF box”. Other highlights from Kantar:

  • Lidl could surpass USD2 billion in volume by the end of its second full year of operations
  • By 2023, we believe Lidl could approach USD 9 billion in sales, which is more than what Wegmans does today
  • Expect Lidl to have over 400 stores up and down the East Coast by the start of the next decade

East Coast Rollout Locations To Watch

The chain’s US corporate headquarters is announced as being located in Arlington County, VA. European press has put a location of the first wave of Lidl stores as Virginia Beach.  Its logistics network has already put down roots with two regional distribution centers, one in Alamance County, NC and Arlington County.