Numerous things have to be taken into consideration when undertaking a commercial real estate venture. Needed space, location, decisions to lease or purchase property, moving issues, building plans and regulations, consultants, involved fees. All these things must be considered before one delves into the commercial development project.

When deciding on how much space will be required, several things must be taken into consideration. What will be my cost? How convenient is the location to my targeted customer? How about transportation? What about utility availability? One must decide what will be best for the business.

If plans are to lease, it must be noted that your lease will play an important part in the lease negotiation. Although a standard five year lease is usually used by the leasing broker, a commercial lease of 3 years minimum and 10 years is also commonly used. When deciding on how long your lease should be, make sure you think about your business flexibility and the rental rate.

At the end of the lease, it is very likely that the owner of the property has already committed to another customer, so moving issues come into play. Preparatory measures must be executed prior to the move in order for things to go smoothly. This should be initiated at least 2 months before the planned move, starting with negotiations for the move, standard items that will be needed (mailing labels, presentation paper, bank, checks and deposit slips, business cards, etc.), whether or not you will keep the same logo and design for your business, telecommunication services, security systems and so on.

Other things to be considered are, confirmation of telecommunication installation, ordering appropriate packing supplies, scheduling packing and moving, making sure that the freight elevator at both locations are reserved, choosing the moving company (make sure your choice of moving company provides insurance certificate) and make certain you notify your insurance company about the move.

One month before the move, reconfirm your move in and move out dates. Make sure that the moving company has already provided their moving certificate and provide them with your employee’s names for security purposes. The day before the move, walk through the new location to make sure that nothing has been left undone., make your final confirmation calls, be certain you have the keys for the new location, and this is very important, make sure your insurance is in affect.

This article has touched on many of the things involved in the procurement of a new location for your business but even more is involved. The closing of the lease and the arrangements such as, regulations and rules of the building at your new location, noise levels, usage of freight elevators, architectural design services for planning space and the like.



Quick Property Sale

In our last article we discussed: lease objectives, the common types of leases, what makes a lease enforceable, cash flow, expense stops, common area maintenance as well as the tax benefits of improvements.

As we move on in this article, we’ll discuss additional lease types and become familiar with lease additional clause, strategies and identify common terms used in commercial leases.

Ground Lease

A ground lease is as lease for land alone, and is typically a long-term net lease. Ground leases are where land ownership is retained by the owner of the land and improvements are owned by the tenant.

These leases can typically be found in areas with a shortage in highly desirable land, and may be traditional in other areas. Following the end of the lease term of a ground lease, title to the land and improvements reverts to the lessor/property owner.

Step Leases

Step Leases allow contracted rents on long-term leases to change by preset amounts or percentages which will occur on predetermined dates. These preset amounts or percentages are called escalations.

While the lease payments vary over time and the term of the lease, the actual payments are calculated and disclosed prior to the signing of the lease agreement.

The most common types of costs involving escalations may relate to real estate taxes, insurance, utilities, operations, and maintenance.

Real estate professionals representing the tenant can provide historical trend information regarding these types of escalation so that increases can be predicted and informed decisions can be made prior to a lease signing

Indexed Leases

Indexed leases are those where the contracted rent is tied to movements of a pre-specified financial index; such as the consumer price index (CPI). Here’s an example: If the current year’s consumer price index increases by 3 percent, then the next years lease payment will increase by 3 percent.

Additional lease clauses

Several other options and clauses are designed to protect the needs and concerns of the owner and tenants and should be negotiated carefully and with diligence.

Lease Renewal Options

Commercial leases often grant a tenant the ability to renew a lease for a pre-specified period of time following the initial lease expiration. However, the rate at which the lease may be renewed is specified in the initial lease contract. A renewal option is often of value as it eliminates the need for a tenant a new location for the business prior to the expiration of the current lease. Even though the tenant is not obligated to renew the lease, hence the term ‘option’, the tenant is not bound by the lease to remain and may decide to find another location for the business if either the business requires it or the tenant so desires.

Expansion and Relocation Options

As businesses grow, it is essential to that growth commercial leases provide a tenant the right to occupy additional space in the commercial structure.

The rental rate and specified period of this space should be negotiated prior to the initial lease signing. Often, the owner will agree to give a tenant the right of first refusal as space becomes available in the building. If additional contiguous space cannot be provided in a reasonable time frame for the tenant, an owner may agree to relocate the tenant within the building or shopping center within a specified time period. These additional lease clauses should be negotiated and worded carefully.

Financial impact of lease clauses

After a decision has been made to lease commercial space a commercial real estate specialist may be enlisted to prepare a financial report which quantifies the potential tenant’s lease costs and which compares and contrasts alternative leases.

As outlined previously, the final lease terms will be dependent on current local market conditions and the negotiation skills of all parties involved.

Before analyzing the financial implications that a lease imposes on a tenant we need to upgrade our vocabulary to include commonly used terms. These terms and definitions may vary from market to market.

Base (contract) rent: This is the specified, pre-defined contract dollar amount for periodic rent (monthly payments). Escalations are based on this amount.

Total effective rent: This is the base rent once it has been adjusted to include concessions, allowances and costs that will become the responsibility of the tenant (such as operating expense pass-through).

Total effective rate: This is simply the total effective rent divided by the square footage.

Average annual effective rent: This is the total effective rent divided by the total years of the lease term.

Average annual effective rate: This is the average annual effective rent divided by the square footage.

Cost analysis

Now that we have defined some common terms we are able to understand how to analyze the financial impact and actual cost of a lease:

From the tenants perspective

In many commercial leases, the base rent does not necessarily equal the effective rent. An in-depth analysis of this will include all costs to the tenant such as concessions, allowances and other additional costs.

Here then is a basic formula for calculating a tenant’s effective rent:

The base (contract) rent + (Additional Costs – Concessions and/or allowances) = The Total effective rent paid which will be paid by the tenant.

From the owner’s perspective

This same analysis is covered from the owner’s perspective and will also include all costs to the owner:

Here then is a basic formula for calculating effective rent from the owner’s perspective:

Base (contract) rent – (Net additional costs – Concessions and/or allowances) = The owner’s Total effective rent as income.

Alternative Strategies

We’ve seen how the negotiation of a commercial lease can not only affect a prospective tenants’ and owner’s cash flow but also how complicated the process may be. When a prospective site located and analyzed correctly, the site may or may not satisfy the financial requirements of a prospective tenant.

With that in mind, let’s look at some alternative strategies for commercial leasing:

Sublease

A sublease is a separate lease in which the tenant may lease all or part of the leasehold interest to another tenant while retaining liability for the property and primary lease to the owner.

There are however risks to subleasing which an owner may not be willing to accept. These risks include:

Re-lease risk: The length of time it will take to find a sublease is unknown. Rental rate risk: It may be necessary to sublease at below-contract rent. Tenant quality risk: It may not be possible to find a high-quality tenant. Lease-term risk: A sub-lessee may want a shorter or longer lease than that of the primary lease. Lease agreement risk: A sub-lessee may want concessions, allowances, and other features that are not provided in the primary lease. Tenant improvement risk: The sub-lessor may have to pay build out costs for the sub-lessee.

Assignment

An assignment of lease is where all of a tenant’s leasehold interests in a property are transferred to a third party. In general this will release the original tenant from any and all responsibility of the remaining terms of the lease at the time of assignment.

Build to Suit

Build-to-suit development as those in which an owner agrees to develop or finish a property built to the specifications of the prospective tenant.

The costs for the improvements may in part be assumed by the prospective tenant and may be in the form of an increased effective rent.

A build-to-suit strategy will most likely involve a prospective tenant with significant financial capacity and strong creditworthiness.

Sale-Leaseback

A sale-leaseback is a strategy in which an owner purchases land, builds a structure on the land for their own use and in turn sells the entire property to an investor, and retains a long-term net lease.

Many companies use this strategy to convert their equity in real estate to working capital where it hopefully can generate a higher return from the operation and cash flow of the business.

Summary

While this article, appropriate title Introduction to Commercial leases does not encompass every aspect of all commercial leasing implications, it hopefully has provided those with a less then working understanding of commercial leases the knowledge and information needed when dealing with a commercial lease entity.

There are many different ways to structure lease transactions, clauses and financial implications in commercial real estate leasing.

An important item to remember is that many lease clauses will be applied to a cost to either the prospective tenant or the owner.

Commercial leases should be reviewed carefully by trained professionals or others fully qualified to negotiate and analyze both the short and long term implications of the lease and the financial responsibilities of all parties concerned.

Careful and diligent lease negotiations and analysis will provide both a prospective tenant as well as an owner the ability to profit and be successful in their individual endeavors.

© Copyright 2008 Jennifer MacKay. All Rights Reserved.



Repossession

ng>What You Need to Know to Invest in Single-tenant, Net-leased Properties

Many investors are looking for a safe place to put their money with the wild fluctuations in the financial market. Stable, predictable investment vehicles are increasingly hard to find, but smart investors do have choices. One of the better choices is to invest in single-tenant, net-leased properties, which many investors also call a corporate bond combined with real estate investments that still make sense today.

Here’s what you need to know about single-tenant, net-leased properties:

What is a single-tenant, net-leased investment?

A single-tenant, net-leased investment is typically a freestanding office, retail, or industrial building that is leased and occupied by one user or one company. Typically the tenant has committed to a long-term lease – usually longer than 10 years, and as long as 25 years with increasing rent over the lease term.

What is a net lease?

There are different types of leases for commercial property in the U.S. The two most common leases are full-service leases and net leases.

A full-service lease means that the tenant is paying one base amount to the landlord/owner to occupy the space and the owner pays all the expenses related to the building including insurance and property taxes. With a full-service lease, the landlord/owner also is responsible for all maintenance related to the building. For example, if a thunderstorm damages the roof, the landlord/owner must pay for the repairs.

In comparison, a tenant with a net lease is responsible for paying rent plus some or all of the operating expenses of the building such as taxes, insurance premiums, repairs, and utilities. Depending on how the leases are structured, they can be net-net leases or triple-net-leases. Specifically, in the case of a triple net lease, also known as NNN leases, the tenant agrees to pay all of the building’s operating expenses, real estate taxes and insurance.

How are single-tenant, net-leased investments different from multi-tenant buildings? Multi-tenant buildings have more than one tenant, and as a result, owners and landlords must juggle multiple leases that begin and end at different times. These leases are rarely longer than seven years. That means that the building’s financial performance is vulnerable to the ups and downs of the market.

Many net-lease investors have previously owned other types of real estate but are looking for an investment that requires less maintenance and supervision. For example, many apartment investors end up selling their high-maintenance properties and then reinvesting the sale proceeds in single-tenant, net-leased retail properties, as do many land owners who have previously never received any income or tax benefits from their property.

Who can invest in single-tenant, net-leased properties?

Net leased properties are appealing to a wide variety of buyers, from high net worth individuals to partnerships to large institutional investors like real estate investment trusts, life insurance companies and pension funds. Net leased properties also are very attractive to investors who need to do 1031 tax-deferred exchanges, or 1031 exchanges for short.

What are the benefits of investing in single-tenant, net-leased properties?

Many people consider single-tenant, net-leased properties as bond-like investments because of their stable, predictable returns. Because tenants commit to long-term leases, there’s very little re-leasing risk. Moreover, single-tenant, net-leased investments can be tailored to an investor’s risk-reward expectations by choosing tenants with different credit profiles. For example, some tenants are rated by national credit ratings agencies while other tenants have only their previous financial performance to recommend them.

What are the risks related to investing in single-tenant, net-leased properties?

While there are very few risks related to investing in single-tenant, net-leased properties, tenants with non-investment grade credit profiles offer higher levels of risk. But that risk typically provides higher returns as well. And investors always need to think about the “re-leaseability” of a property if the net-tenant were to vacate the space.

How are single-tenant, net-leased assets valued?

Unlike traditional real estate investments whose valued is determined exclusively by the real estate itself, a single-tenant, net-leased property’s value is determined by a combination of factors including the tenant’s credit, the length of the lease and rental escalations over the term, and, last but not least, the real estate. In markets where the real estate experiences wide valuation swings, a single-tenant, net-leased property will maintain its value because of its bond-like, long-term lease and the credit tenant guaranty for the lease.

When is the best time to invest in a single-tenant, net-lease property?

Net-leased properties are like all-weather tires. They are good investments in both good and bad economic times and in hot and cold real estate markets. Here’s why: a single-tenant net lease is guaranteed by a long-term lease at pre-set rental rates. As an owner, you know exactly who will be a tenant in your building, how long that tenant will be there and exactly how much rent they will pay you. That means you will derive a steady income from your investment, regardless of how the economy or real estate market is performing.



Quick Property Sale

With the benefits of leasing over purchasing office equipment outright, many start-up businesses and expanding businesses are making the choice to lease office equipment. Businesses often choose the leasing option due to the benefits offered over buying. Leasing offers tax deductions, credit building, preserving initial cash flow, flexible terms and the ability to upgrade equipment easily. With all of the benefits leasing is a likely option when it comes to making the decision to buy or lease. After the decision is made to lease, where do you start?

Start with Planning

Planning is always a good place to start with any venture including when you decide to lease office equipment. Make sure you are aware of the space you have to work with concerning usable space. It is not feasible to have a top of the line copier, when the space allotted is not big enough to accommodate the equipment.

Research

The web has thousands of sites and reviews dedicated to the equipment pieces you are interested in leasing. Narrow down the pieces you might lease and check reviews in a few different places. Also research the average monthly cost. Savings of $50-$100 a month can save $600 – $1200 a year.

Understand Fair Market Value

Financial assets and liabilities give information towards fair values more so than historical costs value. The fair market value assesses the price at which a willing party would pay for the product at hand.

Know the Businesses Credit History

Leasing companies do run credit history to get a better understanding of what type of client you will be. Know the credit score of your company lower scores equate to higher interest rates and/or higher initial deposits. Know if credit will solely run off of credit bureaus, business references such as banks, or off of personal history. Knowing your business credit will help for better positioning during leasing term negotiations.

Understand the Terms of a Lease

One of the benefits of leasing is having varied leasing terms that are more accommodating to your business needs. A commercial leasing vendor should be more than just a leasing mill. The leasing company should be rooted in customer service. Do not be hesitant is asking for assistance with research and planning. A good leasing agent should be willing to help your business succeed, not just get you sign on the bottom line and write a monthly check.

With the various benefits of leasing office equipment, this is a business decision that should be taken seriously. Office equipment does seem to be a passive commodity, depending on the nature of the business. However the decision should not be passive. Make sure when you begin to lease office equipment you research, plan and know your standing when leasing equipment. You should also find a leasing agency willing to work with your business to accomplish your leasing needs in accordance with your business.

The points mentioned above should be more than enough in allowing you to understand the procedure to lease office equipment.



Quick House Sale

Choosing to buy commercial property is a big decision. You require a high level of investment and have to ensure that you don’t make a costly mistake. A number of websites provide commercial real estate listings of properties for sale. These lists are regularly updated. One can search these lists to gain a general idea of the quality of the properties that are available within a given budget. The prices of commercial real estate typically vary according to their location, size, and quality of construction. If you are planning to invest in commercial real estate, you should look at these lists these lists. Looking at these lists requires a great degree of skill, as it is important to read between the lines to uncover the true value of a listing.

Find out how many Commercial Property Listings there are in your local area

Your first step should be to find out what the best locations to buy commercial properties are. Often you will find that certain areas will have a high density of commercial real estate for sale, be wary of such pockets lest you find yourself buying a ticket aboard a sinking ship. Although it may cost you more money at times, make it your mission to find an area where companies such as your own have a proven track record of doing well.

Once you find an appropriate property from a commercial real estate listing, perform a thorough inspection before you buy Commercial Real Estate. While you may feel that a thorough inspection is not necessary as you are not going to be living there, this could not be further from the truth, as this is a business premises inspection it is just as prudent to thoroughly examine as a residential property.

Are you Buying Commercial Property in a Rural or Urban Setting?

When you look at a commercial real estate listing, the type of development where you are purchasing commercial real estate is very important, for instance if you are in a rural setting then you will be looking for very different features than if you were looking for a ware house for sale in an urban setting. Another thing to consider if you are in a rural setting is the cost, you can expect to pay lot less to be in a less developed area but if you are in a more developed district, especially a retail shop for sale or lease inside the city center you can expect to pay a premium.

Will you be buying this Commercial Property to rent out?

It is also important to consider whether you are buying commercial property for your company to actually move into, or whether you are going to rent it out to someone else. If your goal is to own the commercial property to let, then don’t get hung up on want you would like to see when buying commercial real estate, rather find out what the widest possible market is looking for in a commercial property for lease and acquire something that fits that description.

What are the tenant’s assets and liabilities?

It is a good idea to obtain a financial statement from the potential tenant that is occupying the space that you buy. The financial statement will list the tenant’s assets and liabilities. This will give you a good idea of how financially stable the tenant is. Would you like a tenant with $0 cash in the bank, a negative net worth, and credit problems? The answer is of course, no. Once again it’s surprising how many commercial investment property owners don’t do this and find out after the fact that it’s something they shouldn’t have done in the first thing. Now, this is all pretty easy as long as you do a good job of checking out the tenant in the first place.

While on the face of it a commercial property listing may appear straightforward, it is important to dig deeper and find out more before signing on the dotted line. Don’t be afraid to ask the right questions. Only when you are absolutely sure that all your questions have been answered to your satisfaction, you should proceed with the purchase.



Real Estate Professionals