Commercial Leasing, the difference between renting and selling

In this Class we will discuss the all the different types of leasing, some of it will be in detail and some types of leasing we will look at and gain an understanding of why we would move from the most common lease, The Triple Net Lease.

The following pages are the most common explanations for each type of lease and how they are used. For our lecture on the subject of leasing we will answer together the following questions.

1. What is the most common lease used across the majority of different types of commercial properties and why?It is the Triple Net lease; this is where the tenant agrees to pay the base rent amount per square foot plus the sales tax on that monthly amount, plus proportionate share of the property tax, plus insurance on the lease space rented.There might be other charges that the tenant could be responsible for in form of a pass through to the tenant; a water bill because not all units are metered separately, a CAM (common area maintenance fee). This fee would include such items as dumpster pick up, landscaping, reserves and other items.

Make sure you understand the TOTAL costs your tenant will pay.

2. Who should hold the first, last, and security rents? La Rosa Realty does not hold escrow or collected rent(s) for any period of time. The owner must receive the funds and or their lawyer. You the agent are never to take charge of any funds related to the transaction. These rents should be held in a non-interest bearing account. Last month rent should not include sales tax, unless your owner is prepared to pay it to the tax dept.

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3. Who writes the lease and who makes the changes? And why?The owner of the property in commercial must provide you with a complete lease to execute. You as the agent cannot make changes to the lease in any way at all. You can add addendums to be added to the lease. As you may know you can do a contract for lease and have all the possible terms that your client would want, and also just as important to talk about the items on a lease, that would not be acceptable to be in a lease. You can say in the contract for lease that these terms(whatever they are) are not going to be acceptable if found in the body of a lease.SO to be clear changes can be made on a lease by way of adding an addendum to be included in the final lease document.Lawyers are the only ones allowed to create a legal and binding lease agreement.

4. What type of inspections should I encourage my client to do when leasing? Is it different from buying and why?Inspections are just as important when leasing, as you will be responsible for the upkeep inside the unit and maybe on the outside as well. The biggest part about leasing a unit that is not brand new is the wear and tear on the property, and because you will be responsible for the repairs and upkeep, you want to make sure that everything is in good working repair and also how much life will be remaining or expected to have left.In most leases the owner try’s to get you to sign a lease were you pay for all repairs no matter the cost. This is not a good term to accept. What if the AC and Heat is older and near end of its life. You do not want to pay for such a repair or replacement, so you the agent should offer to pay up to a certain amount for each major repair such as the roof, Heat and AC. Lit signs, driveway repair. Etc.If you have an inspection done it is much easier to state your case on how much you would be willing to pay towards the repairs of major items.

5. The Lease Purchase agreement, should you offer this option and Why?

The Lease purchase is the single most difficult and sometimes confusing document you may ever do. You come by this most times because the purchase deal is falling apart because the buyer can’t come up with the 20% down. A creatinve Commercial agent may be good enough to come back to the conversation with a comment like; let’s do a contract to lease purchase. What this does is keep the

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buyer in a deal and in the property. The way it works best is that the landlord gives a credit to the purchase from each month’s rent. SO if they are paying $10,000.00 a month and the seller says I will give you a 5 year lease, with all the purchase agreement terms in the lease. And I will give you a $1,500.00 credit to the purchase if you complete a purchase at the end of the 5 year 60 month lease that would equal a $90,000.00 credit to the purchase. That amount of money may be enough to extra money that the buyer then qualifies for the purchase. It is great commercial real estate work to be able to put a deal like this together and keep it safe.

The benefit is that you get a commission on the total gross lease of the first term, and a commission on the total gross sale price.

The gross commercial lease is used most often in multi-tenant and single tenant office buildings, industrial and some retail properties. The landlord collects fixed rents and pays the expenses out of them.

As costs increase over time, many gross and full service leases will contain escalation clauses that increase rents over time to offset tax increases and higher insurance and maintenance costs.

It is important that a tenant shopping for space understand any escalation clauses in order to project rent expense into the future.

The gross lease works well for office tenants and some retail properties.  For many retail properties, especially those with seasonal income fluctuations, the percentage lease is better.  This allows their rent to fluctuate with income.

Other Types of Commercial Leases

Let's take a quick overview look at other commercial lease types:

Triple Net Lease:  The triple net lease is used extensively in commercial real estate. It is popular for multi-tenant industrial and retail properties. With tenants whose expenses vary greatly, such as an industrial user of electricity, the triple net lease is best for the landlord.

Modified Net Lease:  The modified net lease is a compromise between the gross lease and the triple net. The landlord and tenant usually set up a split of maintenance expenses, while the tenant agrees to pay taxes and insurance.

Utilities would likely also be negotiated in the modified net lease.

Percentage Lease:  A Percentage Lease is a lease that typically requires a tenant pay "Base Rent" and then on top of that amount pay a percentage based on monthly sales volumes. Percentage leases are

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commonly executed in retail mall outlets but depending upon the location and nature of your business can have a dramatic impact on percentage rent. SO your rent is a $5,000.00 and you tell the landlord your best month in sales would be $5,000.00 The landlord that has a percentage lease in place will say to you that once you go over the $5,000.00 in sales per month then you must pay an additional 5% of the sales above the first $5,000.00 so if one month the sales were $7,000.00 you would pay your normal $1,000.00 and the 5% of the extra amount being $2,000.00 that is above the normal $5,000. You would pay 5% 0f the $2,000.00 which equals $100.00 so the total rent would be $5,100.00

Types of Commercial Properties

Let's take a quick look at the types of commercial properties in which to invest:

Multi-family:  Multi-family commercial real estate property types include duplex homes, and other construction for habitation by multiple family groups.  Apartment projects of course are included in this category type.

Retail:  Strip centers, shopping malls, big box stores and free standing retail business structures all fall into this category.  This is a big chunk of the commercial real estate market.

Offices:  Single standing offices to office complexes make up this group.  They are often grouped physically by similarity of business, such as professional consultants, attorneys and accountants.

Industrial:  Manufacturing, refineries and other similar businesses make up this category.  It's a specialty niche, as there are many special considerations concerning zoning, licensing and the environment.

Other Specialty:  This covers a lot of ground, from oil change centers to skating rinks.  There is a lot of variety in commercial real estate uses and business types. 

Most new agents by far begin as residential agents.  There are many more homes and condominiums bought and sold each year than any other type of property. But being commercial you are introduced to many more types of leases and the different expenses to the tenant, you need to be careful to be aware of the conditions of leasing and know to ask for help if you do not know the answers for sure. It is always the best policy to suggest having a lawyer review all documents.

It takes much longer to take a deal from a prospect to a listing or purchase; it takes a lot more knowledge and skill to deal with the buyers and sellers of commercial property.  It takes staying power, both financially and business wise to get to your first commercial LEASE closing table.  

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The best way to enter commercial real estate is with the finances to stick to it and a lot of desire and dedication.

Finding a landlord and tenant match in commercial real estate requires a commercial real estate

lease type that benefits both. The needs of the landlord are income from rent and the control of costs to assure a

profit. The tenant wants to peg their rental costs as closely as possible also. Using the right type of lease, they

can both satisfy their needs with a bit of negotiation at times.

In comparison, residential leases are simpler.  The tenant usually pays their rent and their own utilities exclusive

of sewer and maybe water/trash.  In commercial leases there are many more considerations that are important to

either, the tenant, the landlord or both.  The type of lease is often determined by the type of tenant business:

Retail:  The retail business can have seasonal or other factors that make sales vary quite a bit over the

course of a year.  Just ask a Christmas store owner.  They don't make nearly as much money in July as they do in

November.  In this type of business, the tenant would prefer low lease payments in slow months and higher rents

when the money is flowing.  That's the Percentage Lease below.

Offices with Steady Business Flow:  The Gross Lease fits here, as an attorney, consultant or accountant pretty

much want to pay like a residential lease.  There's a fixed monthly amount and possibly utilities, but none of the

other expenses of building maintenance or operation are the responsibility of the tenant.

Manufacturing, Industrial or Machine Intensive:  From auto repair shops to a major manufacturing plant,

some businesses are heavy utility users, and they also can tend to be harder on the structure and facilities,

requiring more maintenance and repairs.  The landlord in these cases will prefer a triple net lease as described

below.  If the tenant balks, then possibly they can agree on a modified net lease.

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The Triple Net Lease in Commercial Real Estate

The triple net lease is used extensively in commercial real estate. It is popular for multi-tenant industrial and retail properties. With tenants whose expenses vary greatly, such as an industrial user of electricity, the leases best for the landlord.  In the triple net lease, many of the expenses of operating the property are passed along to the tenant.

The landlord gets the advantage of not having to foot the bill for tenants who are wasteful of utilities or rough on their spaces, requiring more maintenance and repairs. The tenants must be more careful and watch their expenses.  In older and less efficient structures, the tenants are footing ongoing expenses that are higher because the building hasn't been renovated and needs some work.

Tenants are resistant to triple net leases, as they have no control over increases in expenses and budgeting their costs is more difficult. This is especially true when it comes to repairs and maintenance. In a triple net lease, the tenants would be responsible for sharing the cost of roof replacement. This can be a large and many times unexpected expense.

Of course, fixed rent is lower with the triple net lease. If the building is a newer one, tenants may find the triple net to be preferable to other choices. If establishing a new business, the triple net tenant in a new building can enjoy lower rent and expenses in their first few years. Once established, they may have grown to the point that larger space is necessary.

The move can be to a different type of lease or another newer facility.

Commercial real estate as a real estate practice niche is more complex but done right it can be a much higher income niche.  First, there are so many different uses for the commercial property.  To succeed, the commercial agent must learn a lot about the various business types and what they look for in a rental home for their business.

From retail, through offices to industrial space, each business type has unique requirements and property evaluation criteria.

Whether representing the building owner, or the prospective tenant, the agent should understand about the business, and if and how the property meets their needs.  In retail, it's location and related traffic of customers.  Does the tenant need a lot of window space for display or not?  Is a lot of traffic already walking in the area, such as in a mall, or is the building more of a drive-to destination?

For other types of specialty businesses such as gas stations and oil change companies, there are other considerations, especially the disposal or storage of oil and possibly other hazardous materials.  Auto repair shops also fall into this group.  Knowing what their business needs to be efficient and comply with laws is of value.

Office buildings are a bit simpler, but there are still some important differences in business types and what they need in their units.  Lawyers, accountants, and consultants pretty much need normal office

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space with normal utility needs and maybe shared conference room or other services.  They do need parking for their clients, but most offices do as well.

Medical and dental offices have much more specialized needs due to the equipment they use.   From X-Ray to chiropractic appliances, these offices use more electricity and may need different outlets and voltages.  They also want small individual private treatment rooms, so their spaces are subdivided more than other types of businesses.

Real estate professionals considering moving to the commercial niche should do so carefully, as you may not get that first commission for up to a year or more.  It's not like residential.  There are fewer transactions, but they are larger.  You might want to see if you can part time apprentice with a successful commercial agent willing to share a commission for your help.  It won't be a big share, but it could be enough to keep you going as you begin to build your own business and prospect base.

 Don't let this scare you, as commercial commissions are really great once you get them rolling, and the triple net lease in commercial real estate can be a great niche.

 The Gross Lease

The gross lease in commercial real estate is sometimes described separately from the full service lease.

However, the difference is not great, and most people consider them together. Learn how they are the same, the

difference and how the gross commercial lease differs from other commercial real estate lease types. 

Though some sources break out the full service lease type from the gross lease in commercial real estate, they are more often the same. The landlord pays for:

Taxes Insurance Maintenance

The gross commercial lease is used most often in multi-tenant and single tenant office buildings, industrial and some retail properties. The landlord collects fixed rents and pays the expenses out of them.

As costs increase over time, many gross and full service leases will contain escalation clauses that increase rents over time to offset tax increases and higher insurance and maintenance costs.

It is important that a tenant shopping for space understand any escalation clauses in order to project rent expense into the future.

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The gross lease works well for office tenants and some retail properties.  For many retail properties, especially those with seasonal income fluctuations, the percentage lease is better.  This allows their rent to fluctuate with income.

Modified Net Lease:  The modified net lease is a compromise between the gross lease and the triple net. The landlord and tenant usually set up a split of maintenance expenses, while the tenant agrees to pay taxes and insurance. Utilities would likely also be negotiated in the modified net lease.

Clothing store:  This business owner is concerned about lighting and displays, and that lighting is a major consumer of electricity.  Possibly the landlord would want to negotiate utilities with the business.  While there is a seasonal component to clothing, the inventory is just adjusted for the season.  So, this business owner may want to negotiate a lease that is fixed in amount each month, but share in repair expenses, as there isn't much in the way of repairs in a clothing store space.

Food Stores or Restaurants:  When there is a lot of refrigeration equipment, particularly built-in walk-in coolers, the utilities would probably be something negotiated between the landlord and tenant.  Repairs would be on that negotiation list as well, as the tenant may want to share in that expense to get some control.  Sharing in the expense would allow the tenant to schedule preventive maintenance to avoid food losses when there are refrigeration failures.

Light Manufacturing or Assembly:  Often the equipment in these businesses belongs to the business, not the landlord, so repairs and maintenance would fall on the tenant.  However, depending on the electricity or gas consumption of the equipment, there may be some negotiation of utilities.

Usage Risk Considerations:  Suppose a building has historically been used as a warehouse and the new tenant is going to do some light manufacturing or component assembly.  If this changes the insurance hazard profile for the structure, the insurance would go up, and the landlord would likely want to take care of that with a negotiated modified net lease arrangement.

Usage Zoning Change:  Let's use that previous example again.  The change in use requires a zoning change or waiver.  In getting that approved, the property tax rate for the structure changes.  If it goes up (usually likely with taxes), the landlord would probably be looking for some relief.

Sporadic Occupancy or Use:  A tenant rents a warehouse/office building, but will not be there much of the time.  It's to be a storage structure with no heating or other significant utility usage when the tenant is away.  It may be in their best interest to negotiate and pay the utilities as a trade-off for lower rent.

Those are a few examples, and there are plenty more business types that could benefit from the modified net lease.  Both the landlord and tenant are in business to make a profit.  A good tenant is valuable, as is a responsible landlord.  Sometimes adjusting the length of the lease to go longer will be desired by the landlord, and they may make concessions in other areas of the lease in exchange. Business is a series of negotiations, with customers, vendors, landlords and tenants.

The above material was created/written by James Kimmons and edited and enhanced for the purpose of teaching by Travis Sawchuk.

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Tips for Renting Your First Office SpaceDecide If You Really Need OneBusinesses used to need dedicated offices in order to survive. But plenty of entrepreneurs today do just fine working from home offices or even co-working spaces. If your business could function in one of these alternative environments, you could save yourself a lot of time and money.

Choose a Location Near Your TeamIf it is absolutely essential for you to have a dedicated office space, then the location is likely your most important consideration when renting your first office space. You first need to ensure that the office will be close enough for your team members to commute. Or if you don’t have a team just yet, choose an office that close enough to an area that’s populated with potential talent.

Ensure That it is Easily Accessible for OthersYou also have to keep clients in mind when choosing a location. Is the office building you’re considering easily accessible from freeways or public transportation? Will they be able to find it easily?

Think About What Amenities You Want NearbyAnother factor when renting your first office space that could impact your location decision is the nearby amenities. Your team will likely appreciate an office that’s at least somewhat close to restaurants and coffee shops. And if there are certain places you need to visit regularly for business purposes, like meeting spaces or banks, you’ll want those to be nearby as well.

Have a Strict Budget in MindAfter location, cost is likely your next big concern. Don’t choose an office that is going to put your business too far into debt and stunt its growth. Crunch the numbers before you even start looking to find a budget that will allow you to operate comfortably.

Account for Extra ExpensesThere are a lot of expenses that go into renting an office space. The actual rent is just part of it, when it comes to most properties. And those extra expenses can really add up if you don’t account for them in your original budget.Paul Miller, brokerage vice president for Office Services Group in Dayton, Ohio said in an email to Small Business Trends, “Make sure you understand what is included (and not) in the quoted rent.

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Does the Landlord want you to pay for your utilities? Phone and data? Snow and ice removal? Make sure it’s clear, and that it’s spelled out clearly in the Lease.”

Make Sure the Lease is ClearJust knowing what’s included is one thing when renting your first office space. You need to also make sure that all of those provisions are clearly spelled out in the lease. You don’t want to just take your landlord’s word that some utilities are included only to be charged for them later since that wasn’t officially stated in your lease.

Find Out Who is Responsible for RepairsRepairs for your space can also represent a significant expense. If your landlord is responsible for those expenses, make sure they are willing to take care of them in a timely manner. But if you are, make sure there’s some wiggle room into your budget.

Get Help From an ExpertThe process of looking for office space can be overwhelming for a newbie. But if you find a commercial real estate agent or broker who is familiar with the properties in the area, they can make the whole process a lot easier. Ask around or search on an online portal like Colliers International to find someone in your target community.

Find a Secure BuildingThe building itself should offer some amenities as well. To keep you, your employees and your equipment safe and secure, find out if the building has a security guard, manned entry way and after-hours security.

Choose a Space That Fits Your TeamOf course, you will need a large enough space for the members of your team to each have a desk or place to sit. But you don’t want something so large that you’re paying for entire rooms that you never use.

But Leave Some Room to GrowHowever, a bit of extra space can be a good thing, especially if you plan to grow within the length of your lease. Even a few extra cubicle spaces or some room to add a few desks can be helpful.

Decide How You Want the Office Laid OutDo you want an open concept or more closed-off work spaces? Different bosses and teams have different preferences. So think about what style would suit your team best and choose an office that lends itself to your preferred layout.

Know Exactly in What Condition You’ll Receive the SpaceSome offices don’t always come as advertised. And some might require a bit of work before you actually move your things in. If you want to know exactly what the space will look like if you actually decide to rent it, you have to ask those questions. Miller says:“Make sure you understand how the space will be delivered. Do you require improvements like paint and carpet, or do you need walls and doors moved or added? Who will pay for these improvements?”

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Consider Parking and Bike StorageParking is another important factor that might be overlooked when renting your first office space. You need to make sure there are enough parking spaces nearby so that your team can actually get to work on time without much hassle. A secure parking lot or dedicated area is a plus. Or if you’re in an area where there are more bikers, make sure there’s a rack or enough space somewhere in the building for employees to store their bikes.

Think About How the Office Will Appear to OthersLike it or not, your office sends a message to others about your business. If you choose a building that’s falling apart, that could tell clients that you’re struggling. But if you overextend your budget with a lavish space for your first office, they could think that they’re paying you too much.

Have a Place to MeetAside from just desks or cubicles, you’ll need to think about some other spaces that could be useful to your team. Do you need a dedicated conference room or a few smaller meeting rooms? Do you need a kitchen or any other specific types of spaces?

Know What You’re Allowed to CustomizeYou likely want to make your first office your own. But most landlords probably don’t want you knocking down walls and completely changing their buildings. So before you sign anything, see what you’re allowed to do to the space without them charging you for damages.

Consider the Lease LengthThe length of your lease can be another important factor in your decision when renting your first office space. For your first office, you might not want to get tied into a really long-term commitment. You don’t want to be stuck with an office space if your business folds, sells or outgrows the space.

Don’t sign a multi-year lease. Many landlords will try to lock you into a contract as long as they can. But remember that you are in control and can always walk away. This is critical because your business may not take off in the way you expect, thus requiring you to downsize. Or you can face the opposite problem: your company booms and you need a larger space. Either way, you want to have an option in the lease for you to change your plans if needed.That may be very difficult to have such open terms but you te agent needs to always try for what is most right for your client.

Have Confidence in Your Business Moving ForwardFor that reason, you really have to think about where you see your business at the end of that time period. If it’s a five-year lease, where do you see your business in five years? And do you have an actual plan to get there?

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Have Provisions in Place for an Early ExitJust in case, you should know what might happen if you have to break your lease. Make sure that you’re comfortable with any fees or other penalties just in case something changes throughout the course of your lease.

Consider leasing equipment and furniture to ease the costs. Keep in mind the total cost of renting a space is not just the monthly rent payment. It also includes utilities, furnishings and equipment. You may consider leasing office equipment instead of buying it. There are several advantages to this strategy, the main one being it’s often easier to obtain financing to lease then purchase. Leasing also means you won’t be stuck with equipment when it becomes obsolete. This is a big factor to consider given how quickly technology changes these days. If you decide to go this route, always look for an option-to-buy clause in your contract.

Remember at the end of the day, only you the Commercial Agent are responsible for the success of a lease and the terms you negotiate for your client. Remember to take the time to consider some of the above descriptions and concerns. Think out side the box and be creative with the lease terms, ask for all that your client wants. Lastly try to best understand the lease purchase contract. That is the most difficult terms to work out, but it will get you respect from all parties involved. Ask your MD or the Director for help.

We care about your success, we strive to keep you safe and give you the knowledge from firsthand experiences so you can work with confidence to keep your client safe.

“Family Passion Growth,

Mean It Live It”

Prove it by being the best you can be

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