Commercial Real Estate

If you own or operate a business, you probably rent or own commercial real estate. Most businesses require space of some sort, either for a storefront, office, personal, or warehouse storage. As your company grows, you may need more space or a different kind of space. Expansion, storage, or just a better location may all cause you to look for a new piece of commercial real estate.

What you may not know is that you are able to negotiate and bargain for more favorable lease terms. Just because a landlord calls an agreement a “standard lease” doesn’t mean it’s set in stone. There are no laws requiring that you follow the same agreement that all tenants who came before you did. Commercial real estate leases may allow for changes to the property, longer lease terms or other variations.

Before you begin negotiating, you should know the answers to a few key questions. Are others vying for the commercial real estate you have your eye on? If they are, your position is weakened, since the other company might not be as informed as you are and sign the lease blindly.

Has the space been vacant for very long? If it has, the landlord may be more desperate to rent it out, leaving you more leverage. Also, consider how desirable the space may be in terms of location, layout and other commercial real estate needs.

There are dozens of terms in any lease agreement. In addition to the monthly rent amount, there are limitations on the use of premises, how much space is leased, access to adjoining storage space, and more. Depending on the location and specific setting of the commercial real estate, you may be able to negotiate some or all of these terms.

Common commercial real estate lease terms that are negotiated include:

The monthly rent amount

Free rent granted by the landlord or leasing company after a set time of on-time payments or in response to a longer lease signed

Length of the lease in terms of months or years

Use of the premises, including parking spaces, access hours, and interior changes

Square footage and exact site space leased (can you rent half the office?)

Costs associated with the operating of the commercial real estate. Will the landlord cover water and sewer?

Process and permissibility of tenant improvements to be reimbursed by landlord

Repairs and maintenance responsibility, both financial and scheduling

Subletting approval process or permissibility

Renewal terms including reduced rent, raised rent, and free rent upon renewal

Rights and costs involved with leaving or canceling a lease. Under what terms can a renter leave without penalty?

Insurance requirements

Security deposit, damage deposit, and last month’s rent terms

Additional space options available to the tenant if needed

In addition to the terms that may vary, the actual lease type can vary as well. There are five main types of leases. The type you need depends on your business structure, budget, and space available.

A gross lease is the most common type of Commercial Real Estate agreement. The tenant submits monthly rental payments to a landlord who, in turn, takes responsibility for paying taxes, insurance, maintenance costs, and other expenses associated with owning property. These are often called “standard leases,” but understand that there is nothing “standard” about them. There is no regulatory authority that states any terms are set in stone.

A net lease is the second most common commercial real estate lease type. In a net lease, the tenant pays a monthly rent to a landlord and part or all the expenses associated with real estate ownership including maintenance, repairs, insurance, and taxes. Net leases often allow the tenant more flexibility in their use of the commercial real estate. If you need to modify the commercial real estate you are leasing, this type of lease may be the best option for you.

A triple net lease is very similar to a net lease in that the tenant pays for most or all the operating costs associated with the commercial real estate. These are most often free-standing buildings.

A shopping center or strip mall lease is aptly named. The tenant will pay a rate per square foot of the facility and some of the operating costs shared by the common areas of the shopping center. These usually include a portion of the property taxes, structure insurance, maintenance, repairs including parking areas, and delivery bays. While you may pay more for a shopping center space, it can be an ideal option to gain more customers, especially if the shopping center is heavily trafficked.

The final and most involved type of lease is a land lease or ground lease. This involves a tenant leasing a parcel of land with the intent to build property of some sort on the lot. While the buildings are purchased and maintained completely by the tenant, upon expiration of the lease, all buildings, improvements, and the property reverts to the owner of the land. These are typically very long-term leases, ranging anywhere from 5 years to 100 years or more.

After you've chosen your location, signed your lease, or closed on the purchase, it's time to begin the labor of moving.

Moving timeline to allow plenty of packing time and office equipment moving. Don't underestimate the amount of packing that will be needed while you are still running the business. Consider hiring some temporary helpers to pack non-confidential documents and unused stock into boxes, while your employees continue to do their jobs.

Take this opportunity to do a computer, automated, and large office equipment inventory.

Location design and decoration is easiest done before the move. Involve your employees in the design and decoration to increase morale and get employees excited about the usually dreaded move.

Consider leasing or buying a few pieces of new office furniture for your new commercial real estate space.

Amenities. Plan for the amenities that are important to your employees, and don't forget to plan for adequate rest room facilities.

Sublet with care. Make sure your Commercial Real Estate lease allows for subleasing before you do anything. If you have to get the landlord's approval before subletting, make sure you do this quickly.

Contact all utilities and communications providers to make sure you'll have service at both locations during the move.

Assign office space before the boxes arrive; this will make the move-in much smoother since everyone will know where to go.

Order keys, cards, and security service well in advance to avoid lockouts.

Anyone with security clearance should receive an official walk-through of the new security system.

Order checks, business cards, invoices, and any other printed matter you use to reflect your new address.

Contact vendors, clients, and delivery people of your new address. Don't forget the USPS.

Spend time holding telephone and communications system classes for all your employees, whether it's a new system or not. A refresher never hurts.

Throw a party and invite previous clients and vendors, in addition to friends and family of your employees-a housewarming party, of sorts.

A Commercial Real Estate broker is a person or business that is licensed by the state to represent a buyer, seller, leaser, or tenant in a commercial real estate transaction in exchange for a commission. Essentially, they are your agent and should look out for your best interests.

Find the right broker for your needs. Most brokers focus on two or three types of commercial real estate. Industrial, storefront, office space, and warehouse space are just a few of the types of commercial real estate specialties. Choose a broker with a proven background dealing with the type of space you require.

Check references and licensing. Make sure all licenses are current. Check the Better Business Bureau for any complaints they may have against them. Ask colleagues for recommendations and choose a broker with a good overall reputation for quality service.

You choose the space you need, not the broker. Don’t let a commercial real estate broker strong-arm you into a space that’s bigger or smaller than you’ve determined necessary.

Stay away from brokers that only show properties they represent. Remember, the broker is your agent and should have your best interest in mind—not their desire for a commission. Just because they aren’t representing a property that fits your need doesn’t mean it isn’t out there.

Use your Commercial Real Estate broker’s expertise in the market and prime locations to get you a great site. Reputable brokers will be able to suggest areas that will be a hotbed of activity and steer you away from inappropriate locations for your business.

A good broker should be able to help you anticipate your future needs and help you search for property with the ability to expand. Stay away from the “right now” brokers, finding you space that is needed right now, rather than looking at your projected growth over five years. Moving your business is a big decision, and one with substantial ramifications. Avoid moving unnecessarily in the future by planning well now.

After some time in your Commercial Real Estate space, you may find you need to move for some reason. The most common reasons include:

Business grew faster than expected and more space is required

You need a better location because of a shift in the direction of your business or customer needs

Business is declining and you need a smaller payment or want to close your business all together

Dissatisfaction with the landlord or property manager’s service or you disapprove of the way the lease terms are being dealt with

If you need to move because your business requires more space or you need a better location, you may be able to sublet your current space. The benefit is that it is typically a quick process and doesn’t require additional cost to you. The disadvantage is that you are still ultimately responsible for the lease if your tenant is late or vacates. Check your original lease for subletting provisions. Subletting is also a potential solution if business is going poorly and you need to lower your debts.

If you are upgrading to a more expensive area or a larger Commercial Real Estate space, you may be able to convince your landlords that it is in their best interest to lease you a larger/more expensive space they have that will meet your needs. They will make more money; you’ll make more money; and they’ll be able to lease your smaller/less profitable space to another business. This works best when dealing with large property management companies since they’ll have more to offer.

You can offer to buy out the remainder of your lease with a single payment. The sooner your landlord re-rents the space, the smaller your lump sum payment will be. The benefit of this deal is that you can move into your new location without a formidable penalty. The disadvantage is that your lump sum payment is in the hands of the leasing agent—if they don’t work hard to rent out the space, you will be stuck with a large bill.

If you are just unhappy at the location or working with the landlord, you should reread your lease and see if your dissatisfaction stems from something that is a violation of the lease. If you find you have sufficient grounds to get out of the lease, you should first try to work it out with the landlord. Ask to be let out of the lease and explain why. If that doesn’t work, seek legal advice.

How much Commercial Real Estate space do you need for your business? It will depend on a number of factors, both concrete facts and projections. Since most commercial real estate leases are for a term of 5 years, you should base your space-needed figures on this number.

First, you need to ask yourself and business associates, “Where is this business heading?” Does your business research call for expansion within 5 years? How much staff will you be adding over the next 5 years? While you may not be able to answer all those questions, your general expectations will be a useful clue in the commercial real estate planning process.

How big an organization do you want to grow to? What are the resources that will be needed to obtain that goal? How many employees, office furniture, manufacturing space, computers and major office equipment, storage for office supplies, files, and inventory will you need to reach your goal?

Call the trade association of your industry. Ask about the average sales per square foot. If your annual revenue goal is $500,000 and your trade association estimates $140 of sales per square foot, you will divide your goal by your square footage ($500,000/140 = 3571 square feet needed to reach the revenue goal.)

If you are primarily a people-business without much need for stock, you can estimate 150 to 200 square feet per employee in addition to traffic flow allowance of 15%.

Are you struggling with the decision to buy, rent, or lease commercial real estate for your business? You are not alone. Everyone will have his or her own opinion, but in the end the decision is yours. Understand that your business doesn’t have to do what all the other businesses do; your situation is unique.

If you choose to buy a piece of Commercial Real Estate, you get the benefit of asset appreciation. The value goes up, meaning you’ll be able to sell it for more than you paid for it. You also benefit from fixed overhead. Your mortgage won’t go up (unless you have an ARM). Your business will have the option to sublease space to help pay your bills.

One disadvantage of buying Commercial Real Estate is that you are completely responsible for all repairs, maintenance, taxes, and fees associated with the property. You are also locked into a longer commitment if you buy—there are often prepayment penalties built in to commercial real estate mortgages. If you find you don’t like the area, again, you’re pretty well stuck where you’re at for a while. Think carefully about this decision, with regards to both your business and the area.

Appraisal – A report by a licensed professional that includes an unbiased analysis of the value of the commercial real estate and the analysis and calculations that led to that opinion. An appraisal report is required for any property sale.

Broker – A licensed agent that works for the buyer, seller, tenant or landlord, or a combination of two. They help facilitate purchase or rental agreements and assist their clients with the commercial real estate process.

Build-to-suit – A manner of Commercial Real Estate leasing that a landlord improves on to suit the needs of the tenant. The construction is usually part of the terms of the lease, but the buildings and improvements remain the property of the landowner upon expiration of the lease. These are often long-term leases.

Concessions – The benefits, discounts, or compromises made by the seller or landlord to help the sale or the lease move quickly. Space improvements, moving expenses, upgrades, and reduced or free rent for a portion of the lease are common concessions.

Escalation clause – A section of a lease that permits a rent increase. The escalation clause also includes rules that must be followed in the event of a rent increase. Rules include: maximum rental increase per period, time lapse required between rent increases, cost of living increases in accordance to government index, and increases directly related to property operations.

HVAC – Stands for Heating Ventilation Air Conditioning and includes those systems. While it is usually the responsibility of a landlord to maintain these systems, there are some leases that require some assistance by the tenant.

Sublease, Sublet – An agreement by the property owner and tenant allowing the tenant to lease out part or all of the contracted commercial real estate to another business.

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