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3 Things to Know When Negotiating a Commercial Lease

3 Things to Know When Signing a Commercial Lease

Today’s guest post is by Evan Tarver, a small business and investments writer for Fit Small Business, fiction author, and screenwriter with experience in finance and technology. When he isn’t busy scheming his next business idea, you’ll find Evan holed up in a coffee shop working on the next great American fiction story.

4 Things to Know When Negotiating a Commercial Lease

Commercial leases typically have longer terms than residential leases and have more tenant and landlord clauses. Whether you’re working with a broker or negotiating yourself, it’s important to fully understand a commercial lease before you sign as it can have a significant impact on the success of your business.

Below are the top 4 things you should know about commercial leases that’ll help you negotiate more favorable lease terms:

1. Your Commercial Property Parameters

Before you start negotiating your lease it’s important to fully understand your commercial property parameters. This is because the needs of your business will dictate the types of properties you can lease as well as the terms you can negotiate. Your commercial property parameters should include the following:

  • Ideal customer or employee pool (including location)
  • Commercial property zoning
  • Desired property size (rentable space and usable space)
  • Maximum monthly lease budget
  • Accessibility (foot traffic, vehicle traffic, and parking needs)

By defining each of these commercial real estate parameters, you’ll know the exact type of property you need as well as what you can and can’t negotiate. For example, if you’re a restaurant, you might be able to negotiate landlord build-outs, which are improvements made by the landlord – such as upgrading kitchen appliances – at potentially no cost to you.

2. Lease Types and their Associated Costs

Most people aren’t aware of the fact that there are typically 3 different types of commercial leases. These leases include a full-service lease, net lease, and a modified gross lease. The major differences between these 3 are the costs and fees associated with them as well as the types of businesses who typically sign them.

The Types of Leases

Understanding these different types of leases will give you greater negotiating power. For example, a full-service lease is the most common type of lease for commercial office buildings. This lease is all-inclusive, meaning that the landlord is required to pay for expenses such as utilities, property taxes, insurance and repairs out of the rent he/she receives from the tenants.

By contrast, a net lease can either be a single, double, or triple net lease and is most commonly used for restaurants and retail. Depending on the type of net lease, the tenant will be required to pay for a pro-rata share of property taxes, property insurance, and common area maintenance fees (CAMS) if it’s a multi-tenant building. If there is only a single tenant, the tenant will be responsible for those expenses.

A compromise or a hybrid between the full-service lease and the net lease is the modified gross lease. This type of lease is most commonly used for multi-tenant office buildings. Typically, the landlord is responsible for the major expenses and the tenant is responsible for their directly related expenses. For example, the landlord may pay real estate taxes and insurance and the tenant may pay janitorial and utility expenses for their specific space. The landlord usually has the right to expense pass-throughs using a base year.

Costs Associated with Your Lease

Of course, the type of lease above will largely dictate the costs associated with your monthly commercial lease payment. Still, it’s important to understand the general costs associated with a commercial lease so that you can better negotiate your terms.

The common types of monthly expenses associated with a commercial lease include:

  • Rent (based on a price per square foot)
  • Pro-rata property taxes
  • Pro-rata property insurance
  • General repairs and maintenance
  • Utilities and janitorial services
  • Tenant build-outs (improvements made by the tenant)

While these costs are dependent on the type of lease, some of the costs can potentially be negotiated with the landlord. Of course, certain costs like janitorial services and utilities can’t be negotiated unless you decide not to use the services. It’s important to remember which types of costs are typically associated with each lease type. This will help you better estimate your monthly costs as well as determine whether it’s more cost effective to buy real estate or lease the space.

3. Common Commercial Lease Terms and Clauses

When negotiating a commercial lease, it’s important to be familiar with the lease terms and clauses you might encounter. These terms and clauses will typically dictate the length of your lease, the total monthly costs, annual rent increases, lease terminations, and more. Understanding these terms will help you negotiate a more flexible and cost-effective commercial lease.

 

The key commercial lease terms that you should become familiar with include:

  • Use clause –  Determines the types of businesses that are allowed to use the commercial space. This is particularly important if you expect to sublease in the future.
  • Length of lease – Commercial lease terms typically range from 3 – 10 years.
  • Assignability – A lease is required to be assignable in order for the tenant to sublease the space. An assignable lease can be included in the potential sale of your business.
  • Escalation – Commercial leases will often have escalation clauses that let landlords increase rent annually, around 3% a year.
  • Build-out credits – These credits give the tenant the chance to make improvements at the expense of the landlord.
  • Termination clause – Clause that allows a landlord and/or a tenant to terminate a lease if certain criteria are met.

4. Benefits of Leasing vs Buying Commercial Real Estate

Ultimately, negotiating a commercial lease is only a good idea if leasing commercial real estate is more cost effective than buying a commercial space. Since each space is unique you’ll want to run a cost-benefit analysis on the difference between renting and owning the space.  

Some factors to consider when weighing the options of leasing or buying commercial real estate include:

  • Tax benefits of owning the space
  • Down payment available to purchase the space
  • Will you outgrow the space?
  • Being responsible for maintenance of the property if you own it
  • The freedom to alter the property if you own it

Bottom Line

Overall, a commercial lease can be confusing and it’s important to adequately prepare when negotiating one. In order to negotiate favorable lease terms, you’ll want to know your property parameters, lease types, potential costs, potential lease terms and clauses, as well as the benefits of leasing vs buying commercial real estate.

Get Your Competitive Edge on Pre-Due Diligence 

Today’s guest post is by Leigh Budlong, founder of Zonability. You can connect with her on LinkedIn or email her at [email protected]

The purpose of formal due diligence is well known to all real estate professionals. We’ve all experienced either the first-hand hiring of experts to help mitigate risks or advising clients to do so. It takes time and money with results often bringing up more questions than answers.

In this age of technology, a new approach for gaining insight into important issues that can impact real estate deals quickly and efficiently is now a reality. It means leveraging technology assets to quickly and inexpensively ascertain initial answers to questions that would typically require extensive time and money during a formal due diligence process.

This stage is called pre-due diligence and can help to quickly evaluate a listing you might find on CommercialSearch.  Pre-due diligence sacrifices accuracy in return for speed, but that tradeoff is perfectly acceptable as long as everyone involved is clear about the objectives and capabilities of pre-due diligence vs formal due diligence which involve experts.

 

Consider what it would mean to have your own process around this stage of information gathering and property assessment. How can it be mined to improve your work and business relationships? Can it become your competitive edge?

 

Before going into more detail, my inspiration for this blog post came from a summer read, Phil Knight’s book, “Shoe Dog”. The memoire came recommended by a real estate data executive, and it has all the thrills – and letdowns – that come with building a business and the people you meet along the way.

 

Phil Knight talks about Steve Prefontaine, an American runner from Oregon known from the 1972 Olympics. Known as “Pre”, he was an early endorser of Nike shoes and a real athlete. According to Knight, Pre’s “competitive fire, gutsy race tactics and inherent charisma charmed crowds and inspired up-and-coming runners to stick with the sport and give it their all.” 

 

Who doesn’t like to be inspired, or to inspire others? In reading these words I instantly recognized the traits that make a great athlete also make a successful real estate professional. It takes training, dedication and a positive “can-do” attitude. The training is what pays dividends during a race or match. The same is true for the real estate professional.

 

By being willing to train hard on honing your skills around pre due diligence, you can be better prepared to serve clients and help them succeed. As part of any training, it means approaching the learning curve. In this case, you’ll need to find those technology tools designed for efficiency and use them regularly to get in more reps, to get better in your role.

 

In my role as an inventor of real estate technology called Zonability, I focused on showcasing a method successfully employed when I practiced in real estate as a commercial real estate appraiser and broker (earning both the MAI and CCIM designations).  Rather than spend hours piecing together, our customers instantly assess a property from a pre-due diligence perspective. It employs what I call “the PLE technique”.

 

P stands for physical, L for legal and E for economic. Together, the review of PLE on any property, at the pre due diligence level, provides a solid initial assessment.

  • Physical – property strengths and weaknesses.
  • Legal – find the hidden opportunities and risks.
  • Economic – run numbers to test “what if” scenarios.

At Zonability, our role in pre-due diligence focuses on assessing untapped development potential and uncovering risks associated with zoning regulations which tie to some of the property’s physical attributes, legal and eventually, economic. How do they tie to economics? It is the combination of the land – its size and zoning relative to the existing improvements and what economic benefits they continue to offer in their market.

 

My years of experience as a commercial real estate appraiser and broker helped hone my skills to assess PLE opportunity and risk. I wanted to translate that when I had Zonability developed. Some call it a “highest and best use” starter, others see as a way to hone in on their to-do list – especially those who handle real estate development.

 

Here are highlights:

 

  1. Identify ALL kinds of regulations impacting the parcel. Yes, these fall under the L category (for legal). Our aim is to give these letter/numbers some meaning and include “future land use” plans which really start to touch on E for economics.

zonability current regulations

  1. Make it obvious what is the zoning landscape around the subject and showcase the parcels’ shapes – this gets into the P for physical as well as L for legal.
    Zonability legendQuickly gather intelligence within a 1/4 mile of the property for existing conditions: zoning category distribution, building size and lot size. Use this information to size up the subject and the ideas about how it might be used which leads to point #3.

Zoning Statistics

  1. Does the property have zotential? Zotential is our way of saying data-driven potential. The reason we opt to use this language is to make it abundantly clear, this is an interpretation, it is not documented in some city file or stamped and ready for approvals. No, it is very much in the early stage – or “pre” – realm where ideas are still being kicked around.


What is your space's Zotential?

  1. Get the numbers running! Zonability also has a one click “pro forma” that generates an Excel using our zotential estimates. You can set the basics like monthly rent and cap rate range then iterate in Excel.
    Pro Forma

Real estate professionals have always had a unique opportunity to differentiate themselves from competitors by discussing untapped property potential with their clients. However, before Zonability, the process of calculating untapped potential was slow, frustrating, and expensive given the complexity of regulations involved.

 

The reality is that most people won’t make the effort to do this work manually. However, we’ve repeatedly found that there’s a direct correlation between the difficulty to obtain important data and the opportunity to deliver value to clients.

 

By having your process in place, quickly and inexpensively:

  • Gauge demand, including current a highest and best use analysis.
  • Develop initial marketing, including ballpark pricing and valuation considerations.
  • Work with the owner/stakeholders to set expectations.

At the root of this process, is being able to decide if the deal is worth pursuing or will terms need to be changed as well as a focus on further evaluation?

In order to remember this concept, think of the long-distance runner, Pre, who had to often “dig deep” to find the energy reserve required for deals that take weeks and months to come together. Building relationships focused on problem-solving and not solely on closing the deal are worth the time. These are the types of deals that people walk away from satisfied and wanting to do again. Who doesn’t appreciate the chance to repeat a win?

In summary, offering fundamental real estate information that can’t easily be “googled” is a great way to establish expertise and build trust with clients. Tech driven pre-due diligence is a way to reduce the time and money required to deliver value to clients. Ultimately this leads to better relationships, which is still the basis for success in real estate.

Do you have success stories about having employed such a technique that saved you and your client time and money? If so, I’d like to hear about it.

 

CRE Brokers’ Ingredients to Success

CRE Brokers’ Ingredients to Success

Today’s guest post is by Dave Morris, CCIM, Sales Executive with Xceligent and former president of St. Louis CCIM, SIOR, Missouri Commercial Realtors, and St. Louis Commercial Realtors chapters. Connect with David on LinkedIn: DavidMorrisCCIM

 

CRE Brokers’ Ingredients to Success

What do top producers do differently than average brokers? They adhere to a discipline of hard work, market knowledge, and relationships.

Aptitude

A broker must be educated enough to know investment real estate theory and why CRE works for investors. They must also keep pace with many industries and know whether a sector is growing or dying and why.

Attitude

Think and act like a winner. (Fake it until you make it if required). Enthusiastically think “team” and “collaboration” to bring about win-win deals. In general, winners want to work with winners…attract winners to your circle. Execute your services with the highest ethical standards.

Work Ethic

Put in the hours. Stretch your comfort zone. Do the things other brokers don’t or aren’t willing to do.

Infrastructure and Support

Take inventory of every resource available to you (software, CRM systems, lease analysis, Xceligent, staff, senior management, etc…). You need an infrastructure of capable support staff with access to the necessary tools to conduct your business effectively and productively.

Brand Recognition

Build your personal brand within your company brand. A positive reputation is everything! You and your company must be seen as a trusted source.

Market Depth

Work in a market niche (by product type or geography) that has a deep enough commission base and that you are able to control a reasonable and sustainable market share. Every year, re-evaluate it and try to expand on it.

Market and Economic Conditions

While somewhat out of your control, whatever the conditions, you must understand how different cycles affect your marketplace, then plan and react accordingly. Top producers know and understand trends which allow them to stay ahead of the curve.

Relationships

CRE brokers are the fabric of the business marketplace. Combine your personal relationships with your business relationships. Educate everyone you know as to what kinds of opportunities you’re specifically seeking. Do the same for people/customers you know. (You will win a client/friend for life if you refer them a prospect!)

Trends and Predictions for Industrial Real Estate from NAIOP I.CON Conference

NAIOP I.CON logo

Last week, more than 600 attendees attended the NAIOP I.CON Conference to learn more about the trends that will be impacting industrial real estate.  Topics included: the impact on possible changes in trade agreements, the development of supply chain management allowing for nearly instant delivery of products and the impact of cannabis legalization in many states. Key highlights from the panel discussions include:

  • There is a major focus on the last mile, a term used in supply chain management to describe delivering products to your home.
  • Last mile is giving new life to infill / older buildings.
  • Location trumps all for last mile buildings, and occupiers will pay premium rents for these buildings.
  • Last mile buildings are for moving product, not storing product, so many of the traditional amenities like 30-foot clear height are not important.
  • City leadership must recognize that last mile re-use is valuable to constituents and be welcoming to these uses.  
  • Last mile facilities are providing new life for 50,000 to 100,000 square foot older industrial buildings or vacant retail spaces.
  • Of Amazon’s 100 million square feet of logistics space, only 3 million is focused on last mile.
  • Developers like ProLogis are getting creative and developing Georgetown Crossroads, a 3 story, 414,000 s.f. logistics building on 9 acres in Seattle.
  • Multistory logistics facilities are also being discussed in gateway markets like San Francisco, Los Angeles, Northern New Jersey and Miami.  
  • Japan and Singapore utilize multistory distribution centers, even up to 11 stories, but use smaller trucks.
  • In California, marijuana operations and dispensaries will challenge last mile delivery for space and may be preferred by cities due to its tax generating capacity. 
  • Warehouses can be retrofitted to grow marijuana, but the capital expenditure is more than 5 times the cost of a green house.
  • The Gulf Coast markets will be the biggest beneficiary of the recently completed Panama Canal expansion. 

 

Telecommuting Turnaround: IBM Changes Its Tune On Remote Working

Home office

Telecommuting or remote working enabled by technology and online access has long been a commercial real estate market worry. The phenomenon of employees skipping on commutes and avoiding distant offices has raised fears of a softening national demand of office space since at least 1996. As reported by Global Workplace Analytics, regular remote working at home among the non-self-employed population has grown by 103% since 2005. From 2013 to 2014, the population of all employees grew 1.9% while the population of telecommuters grew 5.6%,  putting the growth in telecommuting employees at more than double the rate of all employees.

Anecdotally, the telecommuting trend has contributed to disruption of office space demand patterns over the years, depending on locality. Also, we’ve covered the telecommuting trend here at CRE Blog before.  While it is tough to put the effect of remote working into terms of a market’s absorption rate or development pipeline, the technology industry’s line about remote working has been more or less unchanging, touting reducing real estate costs and overhead as a boon to tenants and space consumers.

But now, one of remote working’s chief technological enablers has decided it won’t be “eating its own dog food” after all. IBM has taken the dimmest possible view on telecommuting for its own business, proclaiming that its employees must return to their offices or find work elsewhere. As reported by Ars Technica, the tech giant has nearly 40% of its workforce under remote work policy, and that policy is coming to a close.  This week is the deadline for those employees to return to their cubicles with Big Blue, or, alternatively, to leave the employ of the upstate NY-headquartered company.

Clients whose business operations include significant telecommuting might well take note about the distinct split in IBM’s very recent remote working advocacy vs. its practice. Will that mean a reclaiming of unused rented space, or will it mean a hunt for new digs?  Only great relationships with your clients will give you the business intelligence to know where the remote working saga is headed.

(Photo credit: Wikipedia)

CommercialSearch Integrates Realtors Property Resource

Logos of CommercialSearch and RPR

Transformational providers of commercial real estate data don’t often find ways to interoperate, but when they do, the user benefits pile up fast.  Starting tomorrow, a notable new integration arrives: REALTOR® users of CommercialSearch’s national marketplace in commercial real estate data will have one-click access to powerful new features driven by RPR Commercial, including tax information, transaction history, and more.  From RPR:

As of March 16, 2017, REALTORS® with CommercialSearch who hold RPR accounts can easily jump from a listing within CommercialSearch into RPR’s extensive commercial property and trade area data, investment analysis tools, business intel, and comprehensive reports.

“RPR’s mission is to serve the needs of our 1.2 million REALTORS®,” said Emily Line, RPR vice president of commercial services. “Through partnerships like the RPR / CommercialSearch integration, we are able to expand our service offerings and to ultimately save our members time and money previously spent on multiple applications and subscriptions.”

The integration offers REALTORS® on CommercialSearch one-click access to RPR data found on both the website and RPR Mobile™. Subscribers will find property and owner facts, mortgage and tax info, transaction history, maps and photos. Visual heat maps can be drawn down to the census block group level with 25+ variables including traffic counts and more than 20 million business points of interest. And RPR Commercial reports––which can be sent by way of email or text–– reveal data on consumer segmentation, population, age, marital status, economic conditions, and education comparisons, among other datasets.

David O’Rell, managing director of CommercialSearch, believes the partnership furthers Xceligent’s commitment to providing an open technology platform that combines researched content with leading workflow tools.

“We are excited to partner with Realtors Property Resource®,” said David. “We will now be able to provide RPR account holders an exclusive opportunity to analyze local dynamics surrounding properties actively listed for lease or sale in the CommercialSearch national marketplace.“

About RPR® Commercial

Realtors Property Resource® (RPR®) is a wholly owned subsidiary of the NATIONAL ASSOCIATION OF REALTORS®. RPR Commercial provides REALTORS® with persuasive, decision-making data and reports for all types of clients. From identifying site selection using data sets such as public records, traffic counts, business points of interest, demographic and psychographic insights, and consumer spending data, to presenting reports that accurately depict current market activity as well as future projections, this valuable members-only benefit truly helps to validate a practitioner’s expertise.

About Xceligent™

Xceligent™ is a leading provider of verified commercial real estate information across the United States. Xceligent’s professional research team pro-actively collects: a comprehensive inventory of commercial properties, buildings available for lease and sale, tenant information, sales comparables, historical trends on lease rates and building occupancy, market analytics, and demographics. This information assists real estate professionals, appraisers, owners, investors, and developers that make strategic decisions to lease, sell, and develop commercial properties. Xceligent™, backed by dmg information, has launched an aggressive national expansion that will provide researched information in the 100 largest United States markets. Visit Xceligent.

Stadium Finance: Wins On The Field Can Mean Wins For Investors

Panorama of Dodger Stadium in Los Angeles (tak...
Panorama of Dodger Stadium in Los Angeles  (Photo credit: Wikipedia)

As Spring Training for the 2017 Major League Baseball season gets underway, our attention turns to stadium finance, a strange intersection of finance, athletics and real estate that leverages competition on-field and off.

Stadium development in the US is often subsidized by the public, meaning development risks are often shared by taxpayers in various ways, from tangible environmental impacts (parking availability, foot traffic) to the borrowing of already-strapped municipalities aiming to improve the business fitness of the areas surrounding the stadium.

That borrowing – typically performed by issuing municipal bonds – is rated by bond ratings agencies, allowing comparisons to be made in a bond market matching lenders and borrowers.  But which sport throws off the most data to use for investment comparisons?  It’s baseball.

Baseball Is The Handiest Test Case

Of the major sports, only Major League Baseball puts the “business fitness” argument behind stadium development to its greatest utilization test. Unlike football, basketball or hockey, (major league) baseball hosts a whopping 81 home games a season. From April to September, baseball stadium utilization when the team is in town is a nearly-every-day-of-the-week affair, whereas other sports make their home appearances only a handful of days of a season-week – or only one day, as in football.

It’s in part because of this high utilization that the finances of stadium development can be deeply affected by the performance of the team on the field.  In an amazing post at Commercial Observer by Terrence Cullen, exactly how on-field performance can affect financial performance underwriting a development is shown by a long look at the New York Mets and Citi Field. From “How Batting Averages Can Affect A Stadium’s Bond Rating”:

“There are two ways to argue for a new stadium,” he said. “One is, ‘Our team sucks, we need a new stadium so we can be good again.’ Which usually doesn’t work very well, because if your team sucks, nobody cares. Or, ‘Our team is great. If you don’t give us a new stadium, you’ll never see this again.’”

The latter option, he added, is often the better route. “This is very, very common,” he said. “If you’re trying to get a new stadium you compete that one year.”

[…]

Gerstner pointed to the instance in which the San Diego Padres leveraged its All-Star roster to secure financing in the late-1990s to build what is today Petco Park. The Padres boosted their roster for the 1998 season, making it all the way to the World Series that October (the Yankees swept the team). The following month, voters went to the polls to determine whether the team could build the stadium. The city invested $300 million into the project, while the Padres invested $115 million, according to news organization Voice of San Diego.  

Following the approval, however, the Padres traded away key players and lost others to free agency, Gerstner noted. The team finished fourth in its division with a 74-88 record.

Read the entire post at Commercial Observer here. And don’t forget to Play Ball!

 

Downtown Cleveland’s Key Center Sells For $268M: What’s The Market Like?

Key Tower in downtown Cleveland, Ohio
Key Tower in downtown Cleveland, Ohio (Photo credit: Wikipedia)

The cornerstone of Cleveland’s skyline has sold this week for $268M to a local owner.  What does it mean for the local office market?

The Key Center, a 1.3M SF office tower sporting 57 stories and Class A status has been sold by national office REIT Columbia Property Trust to a Cleveland-based multifamily property and development firm. Built in 1991, the Key Center anchors a deal that includes a nearly 1,000-space parking garage as well as a ten-story bank building.

The anchor tenant in the tower is a regional banking power. KeyCorp, a holding company that owns the 18th largest bank in the US, lends a significant chunk to the tower’s 95% occupancy at sale time. The new owner, Ohio’s Millennia Companies – a group of real estate operations and development firms – intends to move operations into the tower, further bolstering the Cleveland CBD strong net absorption numbers, reported in Xceligent’s 4Q2016  Cleveland Market Report as the city’s leading absorption submarket with over 75KSF absorbed.

A Peek Around The Neighborhood

The deal takes place against Cleveland’s backdrop of declining office vacancy and modest levels of new construction. From Xceligent’s most recent Market Report:

  • During the 4Q 2016 the Cleveland office market has absorbed 104,105 square feet (sf) of space.
  • At 12.0% the regional vacancy rate has continued to decline, showing improvements from the 4Q 2015 at 13.1%.
  • The Cleveland CBD submarket observed the greatest positive net absorption totaling 75,222 sf during the 4Q 2016.
  • The Cleveland Office development pipeline had 67,000 sf under construction during the fourth quarter

Cleveland, In Fact, Rocks

If nothing else, the Key Center deal is a strong show of local commercial confidence in the face of a city’s commercial history that has suffered from capital flight, at times resulting in “rust belt” perception. It’s the duty of CRE professionals to look past such cliches, however. Industry players who might shadow the principals in this deal — such as financial support services or real estate service companies who have or seek profiles in the Midwest — can indulge their interest in low-barrier office markets such as Cleveland’s with a quick and easy look at Cleveland CBD’s comparable and nearby office properties.  To view a live query at CommercialSearch of office properties listed for lease or sale in the shadow of the Key Center,  click here.

Get Xceligent’s 4Q Cleveland Office Market Report

To get your own copy of Xceligent’s latest (4Q2016) Market Report on the Cleveland Office Market, click here to drop us a note today.