must I still pay the remainding on the lease for the remaining amount of years?

Passive Income

A commercial real estate brokerage, or real estate brokerage house, is a firm designed to assist clients in their commercial real estate transactions. You will find various services available at a commercial real estate brokerage. Some specialize in a specific facet of real estate, such as office, retail or industrial properties. Some offer leasing only while others are strictly investment, and then there are those that offer both commercial leasing and investment. However, a quality brokerage house will have some level of all services available to a client.

It is suggested that a client look for a commercial real estate brokerage house that provides multiple levels of service. Some of those service levels include:

INVESTMENT & USER ACQUISITION: Buyers are represented by the commercial real estate brokerage with the goal of best location, price and terms.

•Determination of Client needs.

•Compilation of properties that meet acquisition criteria.

•Identification of those properties that best meet established goals.

INVESTMENT SALES: Owners are represented by Arizona commercial real estate brokerage with the goal of maximizing asset value.

•Aggressive, credible, strategic pricing.

•Preparation of custom designed marketing materials.

•Qualification of prospects.

LANDLORD REPRESENTATION: Landlords are represented by Arizona Commercial with the goal of maximizing net operating income.

•Market planning assistance.

•Marketing plan formulation and preparation of materials for print and web.

•Presentation to local, regional and national tenant prospects.

•Brokerage community meetings, mailings, personal presentation.

•Tenant qualification.

TENANT REPRESENTATION: Tenants are represented by Arizona Commercial with the goal of top sites and the best economic terms.

•Determination of Client needs

•Financial analysis of prospective locations

The reason you want a real estate brokerage that offers all of these services is so that they can grow with you, and it is also an indication of their level of commercial real estate knowledge.

For instance, if you start a business and are looking for a new location you will want to have your commercial real estate broker knowledgeable in retail leasing. Then as years pass, you might find that you need a manufacturing location that is also suited for a shipping facility. If your brokerage house has a wider range of services available, they will be able to assist you in this.

Then if a few years later your operation has grown to a point where you need to build a custom facility that can handle manufacturing and shipping, and that can also facilitate administrative offices and a retail storefront, then you will be entering into a new real estate field. This field would be called “built-to-suit,” land investment and development, or investment sales (depending on what was available and what option was right for you).

By dealing with a commercial real estate brokerage house who offers these services, you most likely would not have to search for a new broker each time your business grew. You would already be working with a company that was familiar with the markets in which you’re entering, and best of all, would already know you. This would lend to a certain level of comfort and trust in the transaction process that was already established from previous projects.



Quick House Sale

Dollars & Sense

By Denice Gierach

As published in the Naperville Sun – September 16, 2007

In the excitement of forming a new business, whether a person is purchasing a franchise or forming a new business from scratch, one critical step in getting the business started usually gets little attention by the business owner – the commercial lease.

 With everything else new business owners have to decide, they tend to spend too little time understanding the commercial lease.

Before business owners sign any commercial lease, they must read it and know what it means. This seems like common sense, but many people start reading the lease – normally a substantial number of pages with a bit of “legalese” – and then stop, assuming the lease conforms to what they were told by the leasing agent.

 If you cannot understand the lease, spend the money to hire an experienced lawyer who can tell you what the terms of the lease mean.

Although there is an upfront cost to using a lawyer for this, it is essential that you are aware of your rights and duties under the lease and that the lease incorporate the verbal promises made by the leasing agent.

 If it is not in writing, you will not be able to enforce the promises made to you by the leasing agent.

There are a number of provisions that you should be aware of.

 • Know your total cost. In many commercial leases, the tenant pays a base rent amount per month, plus a portion of taxes, insurance and maintenance of the building and its common areas.

In a shopping center lease or in a lease to a restaurant, there may be additional payments required that are a percentage of the tenant’s gross sales.

• Know the building. You should know how old the building is and when major repairs to heating and cooling systems, the roof and common areas were last completed. Otherwise, you may be surprised by a bill for your share of work on these items.

• Know who’s responsible. The tenant named in the lease should be your business entity, which is the party responsible for making the lease payments.

 As a newly formed business with no track record, the landlord may ask you to personally guarantee the lease. This means that if the business fails, the landlord will expect you to pay the lease for the rest of its term, which could be a substantial amount of money. Your lawyer might be able to help negotiate better terms than a personal guarantee, especially if you have owned a business in the past.

 • Know your neighbors. If the property you want to lease is in a mall or a shopping center, you may be concerned about whether the landlord rents space to a competitor.

If your business requires peace and quiet, you may need to bolster the provision allowing for your “quiet enjoyment” of your leased space, to allow you to terminate the lease if the landlord rents to a noisy neighbor.

• Know your financing. If you are a franchisee, you should not sign a lease if you have not finished your financing, bought your franchise or finished the purchase of your new business. There is no fun in making lease payments for a business you don’t have.

 If the landlord insists you sign the lease, your lawyer will need to insist on language that includes a contingency for financing and a contingency for the completion of the business or franchise purchase. 

 



Sell and Rent Back

In my daily dealings with small business owners I see entrepreneurs struggle with the question of whether to lease or own their buildings consistently. The idea of owning can be very appealing, especially now as interest rates are still low (historically), new loan programs are popping up like 90% non SBA financing, commercial second mortgages and 30 year fixed programs. And, building bargains seem abundant as real estate values continue to take a beating.

This question is certainly not new. Businesses have contemplated this for years – in good times and bad. The decision can become complicated quickly as objective (financial, space needs, etc.) and subjective factors (business image, growth plans, pride of ownership, etc.) combine. Forces outside of the business owner’s control, such as the general economy, interest rates, future real estate values, further obscure the issue.

The most thought of advantage of ownership is the potential appreciation. However as we are seeing now, appreciation is not always guaranteed.

Historically, financial experts have broken down the question by quantifying the factors such as the difference between the down payment/monthly mortgage vs. lease payments (among many others factors such as tax rate, tax benefits, interest rate, inflation, depreciation, expected holding period, expenses, etc). The point is to come up with an estimate of the buyers Internal Rate of Return on the down payment injected into the purchase.

Internal Rate of Return is commonly discussed, analyzed and dissected. Many factors can be manipulated, such as the anticipated appreciation rate inflation rate etc, to come up with different projections.

Some of the major pros and cons of ownership include:

Pros

• The creation of equity

• Monthly mortgage payment is usually lower than comparable lease payment

• Potential future rental income

• Assisting owners with wealth/retirement

• Building an asset that will assist in securing business lines of credit and other forms of loans

• Pride of ownership

• Stability

• Control

• Business image

• Not being exposed to increases in rental market

• Not being exposed to whims of landlords

• Dramatic tax benefits

Cons

• Property management responsibilities

• Interest rate exposure on adjustable mortgages and/or if mortgage balloons

• Opportunity costs of down payment not being in a more liquid asset, or being used for business operations

• Decrease in functionality of building

• Building value subject to market conditions

• Length of time in selling building

• Decrease in space flexibility

These types of analysis can be very useful and give a clear perspective on a complicated issue. But, for most small business owners in general and in our economy, the question really boils down to cash in hand and long term plans.

First of all, can the business really afford to inject 10% or 20% into a facility? Equity is hard to “tap” in commercial real estate. Many businesses need that capital for daily operations. Secondly, what is the difference in the potential mortgage payment vs. lease payments? Is owning going to increase cash-flow for the business (as it commonly does)?

Long term plans. Owning can be the wrong strategy for companies with strong growth potential/ expansion plans as selling on the short term can be expensive and difficult. Also, companies seeking venture capital may want to shy away due to how real estate ownership affects their balance sheet.

So, without oversimplifying the issue, the economy seems to be making purchasers think more of “now”, how holding real estate affects their business immediately vs. traditional long term hold IRR type mentality. Many buyers are discovering that despite concerns over the market, ownership still makes a lot of sense for their business and personal wealth.



Repossession