Title: Exploring the Diverse World of Commercial Real Estate Properties 101
Once upon a time in the bustling world of real estate, there existed a fascinating array of properties that offered unique opportunities and experiences. These properties fell into various categories, each with its own distinct characteristics and stories to tell.
Let’s embark on a journey through these types of Commercial Real Estate (CRE) properties:
1. The Office Enclaves: Imagine a world of towering skyscrapers reaching towards the sky, small professional office buildings nestled in urban corners, and single-tenant properties that serve as business havens. From the grandeur of downtown high-rises to the intimacy of local offices, this category encompassed the entire spectrum of workspace possibilities.
2. The Industrial Labyrinths: In another part of the real estate realm, industrial spaces thrived. These spaces ranged from the flexible “Flex” or “R&D” properties to colossal office service or warehouse spaces known as “big box” properties. What set industrial spaces apart was their Clear Height – the height to the bottom of steel girders within the building. Smaller spaces boasted heights of 14 to 16 feet, while the larger ones soared to 40 feet and beyond. The type and number of docks a property had also played a vital role, ranging from Grade Level docks to semi-dock and full-dock options. Some even had Rail Spurs for train cars to load and unload, adding an extra layer of intrigue.
3. The Retail Wonderland: Along the highways and city streets, a vibrant world of retail and restaurants unfolded. Pad sites on busy roadways, single-tenant retail buildings, and quaint neighborhood shopping centers all had a story to share. Larger centers anchored by grocery stores or major retailers like Best Buy and PetSmart created bustling “power centers,” and regional and outlet malls offered a paradise for shoppers seeking diverse experiences.
4. The Multifamily Communities: High above the cityscape, the world of multifamily properties thrived. These communities included sprawling apartment complexes and towering high-rise apartment buildings. Anything larger than a fourplex was considered commercial real estate, bringing together a diverse array of residential options under this CRE umbrella.
5. The Land of Potential: In the heart of future development lay a category dedicated to land. Some properties were pristine, undeveloped land nestled in rural expanses, waiting for the touch of progress. Others were patches of opportunity within urban landscapes, known as infill land, where new dreams and structures could emerge.
6. The Miscellaneous Marvels: Lastly, there existed a category that defied definition – the catch-all realm of “Miscellaneous.” Here, one could find an eclectic mix of nonresidential properties, from the elegance of hotels to the warmth of hospitality venues. Medical spaces provided healing sanctuaries, while self-storage developments held untold secrets. This category was a treasure trove of surprises and hidden gems.
And so, in the world of commercial real estate, these diverse categories wove a tapestry of possibilities. Each type of property had its own story to tell, each with unique traits and potential for those who sought to explore their riches. With each property type, the realm of real estate expanded, offering a world of opportunities for investors, developers, and dreamers alike.
A commercial lease is an important part of your business. Negotiating a favorable lease places your business in the position to succeed. Remember that a real estate lease agreement is prepared by the landlord lawyers and leans toward them in terms. Your responsibility as a potential tenant is to read it completely and keep your Tenant Representation (like CREC Brokers) in your review circle, understand what it says, and then ask for modifications that will favor your business. It’s a business of numbers and credit so use your leverage to better the Deal.
Please have your lawyer review any legal agreement before signing and executing it.
1. Evaluate the Length of the Lease
Once you’ve locked down a Location, write-up a Letter of Intent (LOI). One of the first issues you need to work out is the length of the lease and the square foot rate. A term of three years is usually best for small businesses, with an option to renew included. This doesn’t tie you in for too long but gives you the option to stay if it is a good fit. If you feel that you could easily find a comparable location, a shorter lease is better for you in case rents in your area go down or it turns out to be an unfavorable location. However if your business is going to be very location-dependent (such as a restaurant), you will want security, so a longer term makes sense and could reflect in a better SF rental rate.
2. Research Comparable Rents
The amount of rent you will pay is an important consideration in a lease agreement. Do your homework and know what the going costs are in your area so you can negotiate a fair price. Part of negotiating renewal options includes specifying rent increases so your company has a future projection of expenses. Your landlord will likely want to increase the rent for each additional year. Try to work out a cap on these increases so it remains affordable for you to stay in that location. You can also negotiate the amount of your security deposit and the conditions for its return.
3. Look for Hidden Costs
Your lease may be a “gross lease,” in which all costs are included, or a “net lease” in which there are costs in addition to your rent. Many commercial leases make the tenant responsible for costs such as maintenance, taxes, insurance or upkeep of common areas (TICAM). Get the details on these costs up front and negotiate this section to be as favorable as possible however many landlords have a set SF price for TICAM. Find out if your business will be responsible for specific systems maintenance and learn the current conditions of those systems so you can estimate costs. Negotiate dollar amount caps to these costs or negotiate for a slightly higher rent in exchange for the landlord taking on all costs. Determine whether there are separate utility meters or if utilities are apportioned among tenants by square footage.
4. Ask for Favorable Clauses
Ask for modifications to the lease that will benefit you. For example, a clause allowing you to sublease the property can be important should your business suddenly relocate or close. You may want to ask for a clause that restricts the landlord from renting out any other unit on the premises to a business similar to yours. A co-tenancy clause will allow you to break the lease if a large anchor tenant (which drives business to you) leaves. It is also possible to negotiate for the landlord to be responsible for making improvements to the property before you move in (Tenant Incentive). Make sure you are permitted to put up signage for your business.
5. Check the Termination Clause Closely
Read the terms of your commercial property lease as it pertains to default and termination of the lease. You’ll want a clause that allows you time to cure a default before eviction, particularly one that allows you to pay one month’s rent instead of the entire amount owed on the lease. You will want to negotiate any penalties for early termination of the lease should you decide you need to leave before the lease term is up.
The most important thing you can do is read your commercial lease carefully and understand it completely. This allows you to realize what benefits you have so you can ask for changes and it also prepares you for your responsibilities as a tenant.
Before starting your search for rental space, think carefully about the kind of location and building that will best suit your business, determine the maximum rent you’re willing to pay, and set other priorities, such as the size and configuration of the rental space. Then consider the working relationship you want with a broker. If your rental needs are fairly straightforward, the types of spaces you want are plentiful, and you’re comfortable negotiating lease terms with the landlord, you may find space on your own and forego hiring your own broker. But if you want to work with a real estate broker who represents tenants (ideally, exclusively), you’ll need to do some searching. Here’s how to get the best results.
Finding a commercial real estate broker isn’t all that different from finding a good doctor, lawyer, or dentist. A hefty application of common sense, professional and personal connections, and some independent research usually does the trick. The same method works when looking for a broker. Here’s what to look for:
- Expertise in commercial real estate. Make sure the broker you choose is experienced in helping tenants find office, retail, and other commercial space (not someone who works primarily with houses, condos, and apartments).
- Experience in representing tenants in commercial real estate transactions. You’ll ideally want a broker who consistently works only with tenants, but it may be difficult to locate such a broker, especially if your business is located in a small community (in this case, you may need to find a broker who works for landlords and tenants).
- An established business in your geographical area. Look for someone who’s been in commercial real estate long enough to know how deals are done and how landlords and their brokers work. In addition, experienced and successful brokers will have the financial stability to enable them to firmly put your best interests at the front. Remember, in most situations a broker gets paid when the deal is done, according to the size of the rent. A broker who isn’t hungry will be less tempted to rush negotiations or settle for a more expensive result when patience might produce something better for you.
How to Find a CRE Professional
Other commercial tenants in your community will be the best source of leads for brokers. Ask businesses if they have engaged a broker and whom they would recommend. Look for tenants who appear to be running a healthy business (chances are that their good business sense was at work when they chose a broker, too).
You can narrow your field of inquiry by approaching tenants whose businesses are similar to yours, especially if you’re in a large city where brokers may have divided the market into niches, with some specializing in office space, others concentrating on restaurants and food stores, and others working mainly with light industry. For example, if you’re intending to open an art gallery, you’ll want to deal with a broker who’s familiar with the commercial space that is appropriate for a gallery. The owner of a currently operating gallery may have found just the broker.
In some cities, brokers may even concentrate on specific neighborhoods. If you want to locate in a particular area, to take advantage of adjoining businesses, traffic patterns, or expected rents, it makes sense to look for brokers who have already done deals in the neighborhood.
Be sure to check out brokers who represent buyers—but not sellers—of commercial real estate; they may act as tenants’ agents in leasing transactions too, or they may be able to direct you to a kindred spirit who represents tenants only.
Try to get recommendations from several tenants and business people. You may find that the same name or names pop to the top of everyone’s list. Once you’ve whittled down your list to two or three promising names, you’ll want to ask your contacts about the broker’s strong and weak points, before you interview and chose a CRE Broker.
Commercial RE Facts on Income Producing
The basic elements of an investment are cash inflows, outflows, timing of cash flows, and risk. The ability to analyze these elements is key in providing services to investors in commercial real estate.
Cash inflows and outflows are the money that is put into, or received from, the property including the original purchase cost and sale revenue over the entire life of the investment. An example of this sort of investment is a real estate fund.
Cash inflows include the following:
- Operating expense recoveries
- Fees: Parking, vending, services, etc.
- Proceeds from sale
- Tax Benefits
- Tax credits (e.g., historical)
Cash outflows include:
- Initial investment (down payment)
- All operating expenses and taxes
- Debt service (mortgage payment)
- Capital expenses and tenant leasing costs
- Costs upon Sale
The timing of cash inflows and outflows is important to know in order to project periods of positive and negative cash flows. Risk is dependent on market conditions, current tenants, and the likelihood that they will renew their leases year‐over‐year. It is important to be able to predict the probability that the cash inflows and outflows will be in the amounts predicted, what is the probability that the timing of them will be as predicted, and what the probability is that there may be unexpected cash flows, and in what amounts they might occur.