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What you need to know about commercial real estate

What is a “Triple Net”  or “NNN” lease?

This is typically a lease of property where the Lessee or Tenant pays a base rent plus their pro-rata share of the property’s taxes, insurance, maintenance and janitorial. Typically, this lease is used in retail or industrial space. Example:

2,500 SF commercial space

$.75 / SF / Mo (base rent)

+ $.29 / SF / Mo (taxes, insurance, maintenance and property mgmt) = $1.04 / SF / MO

X 2,500 SF

= $2,600 / Mo + Rental tax 2.15%

= $2,655.90 total monthly payment / month

What is a “Gross” lease?

A lease of property under which the Lessee or Tenant pays a fixed rent. Sometimes the Lessee is responsible for a C.A.M (common area maintenance charge) estimated at $.02 – $.05 per SF per month. This usually covers the Lessee’s pro-rata share of water, sewer and trash. The Lessor or Landord pays the taxes, insurance and maintenance. The Lessee is also responsible for his/hers electricity and janitorial. Please note that in a Gross Lease there is usually a base year. This means the Lessee is responsible for their pro-rata share of the difference between the base year (usually the year in which the lease is created) and any increas in taxes, insurance or maintenance over the base year. Typically, this lease is used in office or industrial space. Usually the base rent will be higher than a NNN lease for similar property because the taxes, insurance and common area maintenance are absorbed into the rent. Example:

2,500 SF commercial space

$.75 / SF / Mo (base rent)

+ $.05 / SF / Mo (CAM)

X 2,500 SF

= $2,000 / Mo + Rental tax 2.15%

= $2,043.00 total monthly payment

What is a “Full Service” lease?

A lease of property under which the lessee pays the fixed rent and the Lessor or Landlord pays the taxes, insurance and maintenance and utilities. Please note that there is usually a base year (see Gross Lease). Typically, this lease is an office lease. The base rent will usually be higher than a Gross Lease in the same area because the taxes, insurance, complete building maintenance and utilities are included. Example:

2,500 SF office space

$1.67 / SF / Mo or $20 / SF / year (base rent)

X 2,500 SF

= $4,175 / Mo + rental tax 2.15%

= $4,264.76 total monthly payment

How is a broker compensated?

On new leases, renewals and purchases agent are compensated by splitting commissions offered to the listing agent by the Landlord. As a cost of doing business, most owners/landlords hire a brokerage firm to list and market their property(s). Even if a tenant or buyer doesn’t use a broker and represents themselves, 99% of the time, the owner will still pay themselves or the listing broker the commission they would otherwise split with the representing broker.

When Jim represents both a property and the tenant which is called duel representation, Jim discounts his commission to the Landlord. This ends up saving both parties money and helps to create a win win scenario. To stay impartial Jim lets his building owners know in advance if he brings them a tenant he represents, the building owner will need to be competitive because most likely offers will be made on competitive properties.

Moreover, Jim communicates with the tenants/buyers he represents, and assures them he will show them everything on the market whether it is his listings or a competitor’s. Jim is usually compensated the same since he discounts his fees to owners he represents. This keeps Jim impartial and the properties he represents competitive. This model works well and assures the tenant he is getting the best deal possible and the building owner a good solid tenant.

How do I get financing?

Right now, many banks provides both SBA and conventional lending for leasehold improvement and commercial real estate purchases. SBA programs offer 7(A) and 504, and conventional programs have a multiple of lending options as well which assures there is a lending product to fit each individual borrower’s needs. These loan programs allow banks to offer up to 90% financing, up to 25 year loan amortization, and highly competitive fixed rates. jim would be happy to make recommendations upon requests.

How much Space do I need?

It will depend on a number of factors, both concrete facts and projections. Since most Commercial Real Estate leases are for a term of 3 –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 3 –5 years? How much do you expect your business to expand? What are the resources 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. For example, if your annual revenue goal is $500,000 and your trade association estimates $140 of sales per square foot, you 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% of your total square footage.

Should I buy or should I lease?

Plan ahead and be prepared. If cash is being used to buy a property, the reader can disregard the next few paragraphs. Cash is the best possible position for negotiating a quick close with aggressive terms. Otherwise, the first step is to secure financing with a bank, credit union or private lender. The relationship with a lender should be established even before a property is targeted. The financing situations are fairly standard with several variations. The first choice may be conventional financing requiring 15-30% down and about 1% closing cost. This down payment could go up if a private lender is involved. A second choice is SBA financing which is partially government backed, requiring a buyer to put down 10% with about 3% closing costs.

In either case, the borrower must produce documentation for the lender to evaluate the loan. This might consist of three years of business and personal financial statements, collateral to secure the loan and a business profile. This information allows the lender to determine how much will be lent and how much a buyer can afford to pay for a property. The lender will also let the buyer know the additional expenses involved: such as appraisal fees and environmental reports.

Research the market. Know the comparables. Information is plentiful to the buyer seeking it. The buyer needs a sense of what is available for sale and what has sold commercially. These reports are available through a Commercial Real Estate Agent’s personal knowledge, through reports from a variety of services the agent subscribes to and through his or her personal contacts. Understanding market pricing will give a buyer realistic expectations.

Exit strategy Understanding options to dispose of an asset is as important as understanding how and when to acquire the asset. Without a plan, should the unforeseeable occur, an owner may be left in a precarious position. Planning requires the buyer to ask him or herself some questions before the property is purchased.

First, can the property be rented for an amount that covers the mortgage and gives the owner a comfortable cash flow over and above what is owed and what is received from a tenant? Secondly, will the owner be able to sell the property for at least what is owed on it, not necessarily what was paid for it? The goal is for the bank to write a check to the owner at closing when the property is sold. Third, does the owner have reserves to cover at least six to 12 months of payments and taxes?

We have not seen opportunities available In the Scottsdale Airpark today since the RTC crisis two decades ago. Huge profits were made at that time by investors. Will commercial real estate experience a similar dramatic turnaround? It is very possible and probable, but it’s important to keep in mind the three strategies to limit risk and reward the buying experience.

When is a good time to sell?

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