by Prince Licaylicay | Dec 10, 2021 | 1031 Exchange, All Articles, Buying, Investing
Yes. When it comes to 1031 exchange, you can buy multiple properties. In fact, you are allowed to buy up to three properties. But if you want to have more than three properties, a corollary rule of 1031 governs. This is actually possible through a couple of 1031 exchange rules called the 200% and 95% rules. These rules can help you with property identification.
Consequently, property identification can create an ease of buying multiple properties in a 1031 exchange. As to the mentioned rules, the 200% rule allows someone to identify more than three properties, provided that the combined value of the properties does not exceed 200% of the value of the relinquished property. On the other hand, the 95% rule provides for a property identification with no reference to the sale price of the relinquished property, provided that an investor actually acquires and closes on 95% of the value identified.
In summary, you can buy multiple properties in a 1031 exchange as long as you follow the applicable rules. After all, buying properties is not subject to unlimited discretion by the investor. Note, however, that it’s a great idea to have 1031 exchange experts and legal counsels to help you out.
Even after outlining all the information above, dealing with 1031 Exchanges can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your 1031 investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need help on your 1031 Exchange? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!
Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
Bookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCRE
by Prince Licaylicay | Dec 7, 2021 | All Articles, Buying, Investing, Selling
Commercial real estate (CRE) property prices are influenced by many factors. Price drops or price increases among these properties may be predicted once these factors are analyzed, which include Supply and Demand, Demographics, Location, Interest Rates, Economic Situation, Government Policies, and Global Shifts.
Supply and Demand
Supply and Demand are two of the most basic concepts in the economy. These factors influence several aspects of the economy, most especially real estate properties. The theory of supply and demand in Economics states that if the demand increases while supply decreases, prices will increase; whereas when demand decreases and supply increases – prices will drop.
If there is a large number of investors looking for commercial real estate (CRE) properties but there are not much buildings, prices will increase. Similarly, when there is a huge supply of buildings but only few buyers, the CRE property prices may probably drop. However, this is still reliant on other factors, as well.
Demographics
This factor is often overlooked but is very crucial in determining CRE property prices. Demographics refer to the characteristics and composition of the population, such as age, income rate, civil status, race, gender, and population growth. The characteristics of the population will influence the kinds of businesses to be built, what businesses will boom, and the prices of CREs. Major changes in the demographic characteristics will greatly affect businesses and CRE prices for years, or even decades.
For instance, is the trend among millennials opting to have 2 or less children. Using this trend, investors, developers and businesses will try to accommodate the needs of this small family.
Location
It is already a given that the location is one of the most critical factors affecting CRE properties’ market value. Different locations mean different demographic characteristics, which would also mean different needs. Furthermore, the location where the property is situated can either detract or add potential investors. The access to amenities, such as power lines and transportation will affect the demand for the property.
Crime rates and doubtful businesses will detract investors. Unpleasant neighbors will also scare off potential buyers. CREs around this area will most likely lower down their value for them to get an offer. On the other hand, low market value of CRE may be the result of sketchy businesses coming into the neighborhood.
It is safe to say that cheaper prices are not always the best option.
Interest Rates
Interest rates also have a major impact on the CRE property market value. Interest rates of CRE loans fluctuate. This is a crucial matter especially when you are the one putting up your property for sale. If banks decide to increase the interest rates for loans, it is a possibility that mortgage lenders will also follow.
Higher interest rates mean higher mortgage payments. This is a huge turn-off for most. Whereas, when interest rates are low, potential buyers may increase because of equally low mortgage payments.
Thus, when interest rates are up, CRE properties are less attractive which would force them to lower their market value. Consequently, when interest rates are low, CRE properties are more attractive, which would mean a higher market value.
Economic Situation
The economy may be favorable to some businesses, but not to some. This situation, unfortunately, is outside of anyone’s control but the government.
But you can analyze the economy and check if it is working on your side for you. You can check the health of the economy by examining the economic indicators: Gross Domestic Product (GDP), employment data, the prices of goods, the manufacturing activities and so many more. Generally, when all of these indicators are down, so will real estate properties. If this is the case, you might want to hold and sell your property only when the indicators rise back up.
Government Policies
Government action and legislation greatly affect the demands and prices of commercial real estate properties. It can impact CREs through tax credits, deductions, and subsidies. These policies can temporarily boost the demand for real estate properties until they are withdrawn.
However, the decline in GDP and other economic indicators may opt for the government to increase taxes from other businesses to keep the economy afloat. This will definitely negatively affect CRE property prices.
Therefore, being aware of the current government policies, legislation, and programs sure is an advantage. It can help you determine the changes in the supply and demand of CRE and identify false trends in the economy.
Global Shifts
The contemporary world suggests that when you make business, you must not focus only on your community but for a global scope. Entrepreneurs are connected despite the geographical proximity. When a country’s economy spirals down, one must also look into the possibility that it may affect their business. Take note that your products do not come from one country alone, and when one country’s economy is down, you should also look at the economic indicators of your country. The effect may not be immediate, so it would be best when you look at the trends from time to time.
Pandemics can also greatly impact the demands for real estate properties. For example, the COVID 19 pandemic made major changes in work and school arrangement. Majority of the population practiced working from home. It greatly made an impact on the demand for commercial real estate.
Another global shift to take note is the boom in online shopping platforms. Physical stores are no longer necessary. Customers are buying straight from the warehouse and shipped directly to their homes. This can negatively impact CREs.
So, will commercial real estate prices drop?
There is no definite answer to that. This is a changing world. Trends may continue to evolve. Government policies and programs also adapt to these changes. Furthermore, the economy is a cycle. It may drop now due to the innovations and current events, but it will rise back up, just like how the world overcame the great depression. The key to better anticipate these price fluctuations is to be well-informed of the current situation and of the factors listed above to know the market value of your property.
Even after outlining all the information above, investing in CRE can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your business and investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!
Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
Bookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCRE
by Prince Licaylicay | Dec 2, 2021 | All Articles, Leasing
More often than not, investors in the commercial real estate sector are looking for net leases. Here, we have rounded up everything you need to know about Single Tenant Net Lease as well as some tips and strategies to give you an edge in the game.
What is a Single Tenant Net Lease?
Simply put, a single net lease is a commercial real estate lease agreement in which the tenant agrees to pay property taxes in addition to the rent. It is a form of pass-through lease in which the taxes associated with the property become the tenant’s responsibility instead of the landlord’s. However, under a single net lease, the landlord is still responsible for the operating expenses involved with the property.
Understanding Single Net Lease
A single net lease is a type of net lease where the tenant takes on some or all of the operating costs of a building. However, it should not be confused with a net lease. Net lease refers to all types of leases, e.g., Single net lease, double net lease, and Triple net lease; whereas, the single net lease is a specific type of lease where the tenant shoulders only one operating expense (primarily property taxes).
How Does a Single Net Lease Work?
As a landlord, you can collect rent for all your commercial tenants, and depending on the type of lease, and you may also be able to bill them for any additional expenses incurred. These expenses are (a) Property taxes, (b) Insurance costs, and (c) Repairs and Maintenance costs. In a single net lease, the tenant is responsible for paying one of the expenses mentioned above: the net property tax. The amount to be paid, however, will ultimately depend upon the agreement between the parties. For example, the agreement may include paying the property taxes as part of the rent, or it may be a separate payment that changes depending on the flow of the current tax rates.
Insofar as multi-unit buildings are concerned, the payment of the taxes will depend on the size of their unit. Hence, if a tenant rents half of the property, they will pay half of the property taxes thereon, and the other tenants will pay the remaining balance.
What are the Pros of Using a Single Net Lease? A single net lease provides you with two main benefits:
- Increased Profits. In a single net lease, you do not have to use the tenant’s rent to pay the property taxes since the tenant pays for them. As such, you can keep more of the rent as profit; and
- Protection against Tax Increases. If there is an increase in property taxes, you are not affected because you merely pass the responsibility of paying these taxes to the tenant(s). This ultimately means that while property taxes do indeed go up, your income from the collection of rent will be unaffected.
What are the Cons of Using a Single Net Lease? While a single net lease may have its benefits, it also has its downsides, such as:
- Hands-on approach. While the tenant shoulders the property taxes, there are still costs that should be taken into consideration. Moreover, this type of lease also requires you to manage the property proactively.
- Expenses for Maintenance and Repairs. Probably the most time-consuming part of owning a commercial building is handling all the maintenance costs and repairs. In a single net lease, you may either manage all of this yourself or hire someone to do it for you. In either case, payment of maintenance and repairs are almost always present.
- Sudden Increase in Expenses. It should be noted that the tenant only pays for the property taxes, you must still pay for the other costs such as maintenance, repairs, insurance, etc. Insurance hikes and unexpected or sudden repairs sometimes happen, and the burden of paying these extra costs rests on you. Hence, proper budgeting is needed; otherwise, these costs will negatively impact your earnings.
When to Use a Single Net Lease
As a landlord, if you negotiate a lease contract with a tenant, you may wonder what the best type of lease you should use is.
If you desire more control over how the property is run, then a single net lease might be the best for you. Indeed, looking after the repairs and maintenance is a big responsibility since it allows you to control how things are done according to your schedule and are done your way. Furthermore, if you want to have your property taxes covered and paid for you the single net lease is the best choice. Since the tax rates are covered, you need not worry about any fluctuations in the payment of these taxes and how it affects your property; you transfer its charge to the tenant. Conversely, suppose you want to take an active role in managing your property. In that case, a double net lease is probably the better choice since this allows you to control how the property is managed whilst providing the additional benefit of having your property insurance covered for you.
When Not to Use a Single Net Lease
If you do not want to be responsible for the day-to-day property management, then a single net lease is not a good idea. This is because, in a single net lease, you still have to collect the payments, pay the property insurance, schedule the maintenance, and deal with sudden and unexpected repairs. You will either do this all by yourself or hire someone to do it for you (which is another expense), but the fact remains that this type of lease requires day-to-day management of the property.
Hence, a triple net lease is the better choice and typically the preferred lease type for those interested in investing in properties rather than managing them. Since this type of lease leaves almost everything to the tenants, therefore, it frees up your time to be allotted to other areas of your business.
Tips for Investing in a Single Net Lease
If you are looking at a property that has a single net lease, here are some things to take into consideration:
- What’s included in the lease. Since every lease type is a little different, there may be additional clauses on the lease that may have been agreed upon. Therefore, you have to make sure that you read through the “fine print” of the lease and understand your responsibilities to avoid unnecessary misunderstandings that could ultimately lead to litigation.
- The Condition of the Property. Since you will be responsible for all the repairs, maintenance, insurance, etc., it is imperative to understand what you are getting into. Hence, you have to inspect the property to have an idea or a good understanding of the amount of expenses for repairs and maintenance that you will eventually have to incur. This can be done through an ocular inspection of the property or a tour thereof. But no matter the inspection modality, it is rather essential to keep in mind that as a general rule: “The older the property, the more repairs and maintenance costs will be incurred; conversely, the newer the property, the less repairs and maintenance is required”.
- How much work are you willing to take on? Since a single net lease requires the active management of the property, you have to ask yourself then how much effort of work you are willing to give/do. If you can handle all the repairs and maintenance costs, repairs, and the payment of insurance, then this lease type is for you. It must also be remembered that you need not manage or take the necessary property taxes as the tenant covers these.
Summary of the key benefits of a Single Tenant Net Lease:
- A single net lease is a commercial real estate lease agreement where the tenant agrees to pay the property taxes in addition to rent.
- A single net lease is a form of pass-through lease wherein the taxes associated thereto become the responsibility of the tenant instead of the landlord.
- Under a single net lease, the landlord is still responsible for overhead costs related to the maintenance of the property.
- The landlord is not affected by the fluctuations of property taxes since the tenant handles them.
- Due to the landlord not considering the property expenses, the landlord can fully utilize rent income and, therefore, increase his profit.
Even after outlining all the information above, leasing commercial real estate can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!
Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
Bookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCRE
by Prince Licaylicay | Nov 24, 2021 | All Articles, Buying, Investing, Leasing, Selling
In a leasing project, it is likely you will come across a Letter of Intent (LOI). In this article, we have rounded up everything you need to know about a Letter of Intent.
A Letter of Intent (LOI) is a written non-binding document between two parties that serves as the basis for a contemplated future agreement. It is a preliminary agreement that is negotiated between a tenant and landlord or buyer and seller. The Letter of Intent stipulates the dominant economics and key points with proposed terms in a lease agreement. They are designed to describe or draft the essential items that both parties can assess to decide whether to proceed or continue to an official contract. Thus, a letter of intent is a nonbinding document that encapsulates the basic terms of the offer and the initial goal of the parties without the extensive legal norms included in a real estate contract. This gives the seller or the landlord a concise picture of the scope and terms of the real estate purchase or lease agreement. It is rather important to note that a letter of intent could be binding if the parties decide that it is binding.
When is LOI used in real estate?
A letter of intent is submitted by a serious soon-to-be tenant, buyer, or representing broker in a commercial real estate transaction as an initial offer. It is planned based on basic preparatory information furnished by the landlord as well as the introductory due diligence of the property. Negotiations and formal due diligence begin after the Letter of Intent has been conveyed and prior to a formal purchase or lease agreement is entered into. It is not infrequent for Letter of Intents to be submitted and agreed upon, only to have the terms and conditions subsequently changed or even withdrawn altogether. This is so because a Letter of Intent, at its core, is a nonbinding document that merely states the buyer’s intent subject to verification and due diligence, all of which can be amended or changed any time.
A letter of intent is used in commercial real estate to put the major points of a proposed lease into writing. The party submitting the letter of intent should research, inspect, or even tour available properties on the market before submitting a letter of intent to the landlord. Generally, a letter of intent will be drafted by a commercial estate broker representing the buyer or tenant after the inspection or tour of the property and conducting a spontaneous discourse or conference with the owner or landlord. The Letter of Intent will, therefore, serve as a vehicle to outline the key points of the deal, such as but not limited to: (a) the rent; (b) due diligence period; (c) financing; and (d) the close of the escrow date or date of possession.
And while a letter of intent is a non-binding document, the act of furnishing one certainly demonstrates that the buyer or tenant is committed to moving forward on a deal and intends to advance in good faith the deal. However, there are instances where a party may change the terms of the Letter of Intent or even withdraw from the deal altogether based wholly on desired terms not being agreed to, new information after performing due diligence and after verifying information provided by the parties.
All in all, a Letter of Intent is used to convey the key points of the parties from the lease price to the close of the escrow date or date of possession. To this end, the potential tenant must be diligent in researching or inspecting the properties since new information may serve as a basis for continuing or even withdrawing from the potential deal. In the same vein, the landlord must likewise be diligent in taking care and preserving its properties so that potential lessors will not be discouraged.
What is the importance of the Letter of Intent?
A letter of intent is one of the essential documents in commercial real estate leasing/buying. This is because buying, selling, or leasing commercial real estate is, most often than not, a tedious, convoluted, and costly process even to the most experienced investors and tenants. Hence, a Letter of Intent guides the parties to ensure that they have a meeting of the minds or that the contract conveys what they genuinely intend before going into the intricacies of contract making regarding leasing commercial real estate.
A letter of intent will serve as a stepping stone between introductory discussions with the property owner and the drafting of a legally binding lease contract. The Letter of Intent serves as a modality for the parties to put their key points and provides them with a quick and easy way to familiarize themselves with the basic terms of the proposed transaction. This is crucial before negotiating the contract terms and before paying a real estate attorney to draft or review a lease agreement.
Likewise, letters of intent are an excellent way for the landlord to determine who the prospective tenant is. Furthermore, making a letter of intent does not entail any costs; hence, a prospective lessee or buyer may submit as many Letters of Intent as possible, expecting that at least one is accepted. However, suppose the terms of the prospective lessee significantly deviate from that of the property owner’s. In that case, this could be a tell-tale sign that such prospective lessee submitting the Letter of Intent may not be a good fit for the owner to move forward with or be serious about completing the proposed transaction.
What are the contents of an LOI?
A Letter of Intent generally includes:
- The parties: (a) the name of the tenant; (b) the address of contact information; (c) the party authorized to execute a final sales or lease agreement.
- The property: (a) the address and the suite number of a lease of the negotiated lease; (b) the building description including lot size and square footage; (c) Type of rent, whether Full Gross Service (FSG) or a Triple Net Lease including any Common Area Maintenance (CAM).
- The offer: (a) The lease price as well as any down payment thereof; (b) Due diligence period and general description of documents that the landlord will provide; (c) Lease Terms, including rent and any annual increase; (d) rent abatements or tenant improvements; (e) length of lease; (f) target for signing the purchase contract or lease agreement; (g) Expiration date of the Letter of Intent.
- Any Disclaimers: (a) that the Letter of Intent is not binding, and any (b) preconditions in signing the lease.
How To Write an LOI
The typical structure of a Letter of Intent is as follows:
- Introductory paragraph. The preceding paragraph serves to describe the purpose of the LOI, such as your interest in leasing the property;
- The parties to the proposed transaction. This includes entities which are involved, the legal and home state to reduce the risk of the wrong information being used in the lease agreement;
- The key points in the deal. This includes the description of the property, the terms of the offer, and the disclosure of any commercial real estate brokers involved in the lease transaction, as well as any other key terms and conditions specific to the proposed transaction.
- The Closing Paragraph which includes whether or not certain parts of the LOI are binding, a non-disclosure agreement of confidentiality clause, remedies for breaching any binding provision in the LOI, as well as a request that the party receiving the LOI to sign and return a copy thereof proper to the expiration date of the LOI.
Conclusion
A letter of intent is a non-binding document that serves as a guiding light for the parties before entering into any formal lease or purchase agreement. It details the key points the parties want to convey to the other party to the end that they would have a meeting of the minds. Furthermore, considering the letter of intent is not binding, it is not infrequent that the offer may be withdrawn before the commencement of the formal agreement.
Even after outlining all the information above, writing a letter of intent (LOI) can still seem daunting. That’s why the Leveraged CRE Team at Commercial Properties, Inc. is here to help locate commercial space for lease and assist in using a letter of intent to land such space. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!
Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
Bookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCRE
by Prince Licaylicay | Nov 22, 2021 | All Articles, Leasing
As a tenant or a business owner looking for a commercial real estate (CRE) property to lease, you are often on the advantage of being sought out by CRE property owners or landlords. These property owners typically employ strategies to entice potential tenants, like you, to sign with their property, or in the case of their existing tenants, to renew their contracts. These strategies include incentives that you can enjoy as perks.
In a competitive market, incentives are used by landlords to put their best foot forward. However, as encouraging as these incentives may be, they also require careful studying and examination to ensure that they do not cause major drawbacks. It is still wise to hire a real estate broker or lawyer to have the agreement examined before you ink your signature in.
Now, before you explore the numerous incentives in the market, you need to understand the two types of rent: face rent and effective rent.
Face rent refers to the baseline payable amount of rent, excluding incentives, whereas effective rent is the total amount of rent after all incentives are taken in. Effective rent pretty much sums up the amount of money you will be spending on the property, and is the amount subject to comparison with the properties in your option list. These two are also often used to compute the total savings a tenant can generate over the period of time indicated in the agreement.
There are numerous incentives in the market, but the three (3) most common ones are the rent-free period, rental rate reduction, and fit-out contribution.
LEASE INCENTIVES
Rent-free period
As the name suggests, rent-free periods, also called abated rent, are incentive schemes that allot a specific time period when tenants do not need to pay for rent. Rent-free periods are often employed in the first few months of the lease. This, indeed, is a cost-saving incentive, making it particularly popular in the market and relatively effective in enticing potential clients.
Rent-free periods are not only beneficial to tenants in terms of saving money within a specific time period, but also in allowing tenants, especially newly established businesses, to generate sustained cash flow in their initial operations in the property in a time when they are still establishing their presence at the spot.
Note that tenants must still remain cautious when working on these incentives. Make sure that you study the lease agreement and hire professionals to examine its technical elements to ensure that the scheme bears no unnecessary drawbacks in the long run.
Rental Rate Reduction
Rental Rate Reduction is part of the negotiation to pay a lower lease rate distributed within a period of time or all throughout the lease.
Essentially, deciding whether to opt for a rent-free or rent reduction is a matter of calculating whichever can provide more savings in your end. In calculating these, also make sure to consider some factors that come in play, such as rent increase per annum, market stability, negotiations with the property owner, etc.
Fit-out contribution
A fit-out contribution incentive, also called tenant improvement allowance, allows the tenants and the property owner to share identified charges, which may include maintenance costs, installation of fixtures and other decorative elements to the property, and other space improvement costs.
This incentive may transpire using reimbursement basis on a certain percentage of total costs identified. Before signing up for this, the tenant is typically required by the property owner to secure the following:
- Duly signed commercial lease contract or agreement
- Required insurance taken out
- Submission of all the necessary receipts of identified expenditures for reimbursement
- A bank guarantee or security deposit
- Detailed plans for the works subject to the landlord’s approval, including quotes/price
In a fit-out contribution, the tenant and the property owner must negotiate clear and specific terms, such as:
- Ownership by tenant or landlord of completed fit-out, either full or partial
- Whether the landlord is required to provide ‘incentive guarantee’ to cover the incentive
- Mode of payment, either reimbursement basis or other mechanisms
Aside from these three, here are other commercial lease incentives that may be offered by a property owner:
- Cash payments
- Cash-convertible benefits, such as cars, equipment, etc.
- Fixed rent rates which do not arise during the lease period
- Reimbursement of relocation costs
- Reimbursement of a penalty
- Reimbursement of legal fees
- Free provision of furnishings and equipment
- Lease incentives for exceeding lease liabilities
- Lease incentive on a low value equipment
- Incentive for the inconvenience generated by refurbishment works
- Interest-free loans
- Holiday packages
- Pay-out of tenant’s pending lease commitment to another property
Other important reminders on commercial lease incentives
Incentive taxation
Case laws often consider cash incentives given to tenants as taxable income. However, if such incentives are provided at the initial stages of a business, the incentive may be declared as capital, and is therefore voided of tax. Incentives in the form of reduced rent and entertainment incentives, such as holiday packages, are also spared from being taxed.
Repayment clauses
One of the most important reasons as to why tenants must study the lease agreement before signing is due to the repayment clauses that are indicated in the contract. In some cases, a sub-clause is included which requires tenants to repay an identified portion of the incentives in the occasion of assigned, surrendered, or terminated agreement before the lease expiration.
Fit-out ownership
Tenants must clarify ownership mechanisms of the agreement when it comes to fit-out, especially when specifying the roles and duties of both parties in fit-out taxation and ownership, particularly in the event of lease expiration.
Incentive disclosure
Finally, never hesitate to employ professional help to carefully examine the inclusions and exclusions of lease agreements and in negotiating for better terms.
As cliché as it may sound, it is indeed better to be safe than sorry. After all, a lease agreement is a legal document, and your signature binds you and the landlord to the law. These incentives are nevertheless enticing, but never let that spur of excitement lead you to sign an agreement without careful consideration, which might lead you to undesirable consequences and loss in the long run.
Even after outlining all the information above, knowing your commercial lease incentives when leasing CRE can still seem daunting. That’s why the Leveraged CRE Team at Commercial Properties, Inc. is here to help you achieve your business and leasing goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!
Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
Bookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCRE
by Prince Licaylicay | Nov 19, 2021 | All Articles, Leasing
A crucial part in leasing commercial real estate (CRE) is the lease agreement, These agreements sum up all the terms and conditions that will govern the lease within the period of occupancy.
Business owners and tenants can negotiate a number of provisions. This allows the landlord and the tenant to customize the provisions according to their needs. Since a lease agreement is a legal document that determines the finances and the duties of both tenant and landlord, a tenant is recommended to always employ the help of a commercial real estate broker or lawyers in reading through the document to ensure that provisions are fair and justified.
From your end, as a tenant, here are the provisions that must be present in your lease agreement.
Commercial Lease Provisions
RENT
A rental rate is the obligation of the tenant to fill at the agreed number of days or months. Regardless of the lease type (full-service (FS), modified gross (MG). or Triple Net (NNN)), the rental or lease rate can be negotiated, depending on the length of the term, strength of the tenant, the amount of tenant improvements needed and demand for the space. Most lease agreements include annual increases, causing the rental rate to go up each year, depending on the lease agreement.
For instance, as a tenant, you should be wary of how your rental obligations may affect your overall rental amounts over time. This primarily happens due to what’s called a base-year in both full-service and modified gross leases. This unexpected increase in the rental amount is the difference from what the operating expenses were when you first signed the lease to where they end up each year after the accounts have been reconciled. Typically, this increase is no more than 1% or 2%, but it’s worth noting so there are no surprises.
Lease incentives can also affect the lease rate, and if this is offered by your landlord, you must ensure it is stated in the lease agreement.
REPAIRS, MAINTENANCE, AND IMPROVEMENT CLAUSE
This part of the agreement explains the improvements made in the property before you take possession of the space, along with the terms identifying who is required to pay for the improvements made. For this reason, this clause is a crucial entry-level consideration as this involves money. Always check for this clause in your agreement to make sure that you are in a fair position within the agreement.
Additionally, this clause in the agreement covers the improvements you are allowed to make in the CRE property. This is significant if you wish to do some renovations in the space to cater to the type of business that you have.
If there is no improvement clause and you wish to renovate your space, you can negotiate to include one or write a letter to your landlord or the property manager asking for permission.
In leasing commercial real estate properties, you must always understand the nature of your lease agreement. More importantly, and we cannot stress this enough, you must always read the terms in the agreement before signing. If you deem some terms in the agreement unfavorable, never hesitate to negotiate. As a tenant, it is your prerogative to do so in the appropriate means, and as an entrepreneur, it is a crucial step that can determine the success of your business venture.
SUBLEASE CLAUSE
Entering the world of business means you are ready to take risks. As a business owner, you should be ready to encounter failures and losses just as you are ready for success. In case of troubling times, one should be ready for a back-up plan. A sublease clause can protect you from bankruptcy and debt.
The sublease clause in your lease agreement must be reviewed. It is stated in that clause, whether or not, you – the existing tenant, can sublease the space to another tenant. This clause will be able to protect you from having to continue to pay rent for unused areas of your property or from having to terminate your lease in case you want to relocate your business or entirely stop operations.
However, not all lease agreement has a sublease clause. That is why it is important for you to consider your long term need and future plans. Landlords, typically, have certain pessimism on this clause in leasing agreements. However, you can always negotiate for a sublease clause to be included to also secure your business and finances.
PERMITTED USE
As a tenant, you should be aware of the allowable or permitted uses of the commercial real estate you are eyeing. Permitted use means the enumerated activities allowed in the property. These activities are usually described in the terms of the lease agreement, the CC&R’s, or on a larger scale the zoning requirements. Be sure to call your city and verify if your business use is allowed at the CRE project you want to lease at. A permitted use may still require permission. Take for example – a dog grooming use may not be allowed in the CC&R’s, while a welding company is required to be in a project with specific zoning.
This is something you need to check on prior to signing a lease agreement as there may be a chance that the property you are considering to lease will not allow your business use. This can be a deal-breaker, especially if the nature of your business requires a lot of activities that are limited by the landlord.
But the good thing is, as a tenant, you can always negotiate the permitted use provision of your lease agreement to be as broad as possible.
RENEWAL CLAUSE
It is always a possibility for a tenant to forget to renew the contract and might lead to consequences, such as eviction. In this case, a renewal clause can save you all the worries. A renewal clause in the lease agreement gives the tenant the right to renew and/or the right to extend the agreement, but in totality, the particulars of this clause may vary from contract to contract.
A renewal clause should be able to include the steps needed for a tenant to renew their lease agreement when their term ends. There are also instances requiring tenants to write to the landlord of the former’s intent to renew the agreement.
Nevertheless, when it comes to renewing contracts, negotiate for convenient methods for both tenants and landlords to make sure that both parties are spared from inconveniences.
This article serves to introduce you to the basic clauses that need to be included in your lease agreement. This said, you are still recommended to employ professional help as you negotiate your way to business success.
Even after outlining all the information above, dealing with commercial lease provisions can still seem daunting. That’s why the Leveraged CRE Team at Commercial Properties, Inc. is here to help you achieve your leasing goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!
Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
Bookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCRE
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