by Prince Licaylicay | Oct 29, 2021 | All Articles, Leasing
Whether you’re going for a long-term or a short-term lease agreement, you will still be bound to a landlord when signing a lease. Of course, you want to maximize this time to generate profit from your business while tending to minimal problems, or none at all.
So, before signing a lease agreement with a landlord, here are eleven (11) red flags you need to be wary of.
Red Flags:
- Signs of Landlord Financial Constraint
One of the major red flags you need to take note of is the landlord’s possible financial struggles, which can manifest in several ways: poor maintenance of the property, landlord not willing to give TI’s but offers abated rent instead, a lot of vacancy at the project, or word of mouth from current tenants when asking about the project and landlord. As a tenant, you may be wary of financially constrained landlords since unforeseen circumstances may lead you to problematic situations in case your landlord is unable to carry the financial responsibilities of these instances.
- Missing Disturbance and/or Holdover Clause in the Lease
For instance, a financially struggling landlord was forced by their lenders to take possession of his/her property, which a tenant is currently leasing. This will automatically nullify the leasing agreement. So, what will happen to the tenant?
The lack of disturbance clause in an agreement does not provide any security to the tenant to have ample time to find and relocate to another location if this happens. Therefore, a disturbance clause is a major requirement that should be included in the agreement before signing. As a matter of fact, this should be a mandatory requirement to all landlords in the first place.
A holdover clause must also be included to allow tenants enough time to negotiate before renewing the contract or relocating.
- Too good to be true projections
Another red flag to look out for is when a property is presented to have future work to be done or an outstanding business survivability given the major economic disruptions of a particular time or area. If the property projections are too good to be true, chances are they were presented exceedingly beyond their actual numbers or the numbers are indeed true. Either way, tenants must always confirm this by asking legitimate documents to back up these significant claims.
- Not Using Demographic or Analytical Study Results
As a tenant, it is important to ask for data, such as demographic study results and analytics, from your commercial broker or landlord in order to maximize the assurance that the property is bound to generate adequate income. If you are unable to get this data, you may be walking into a commitment that could cost you down the road. Having access and understanding demographic and analytical data is part of your due diligence as a tenant. Most commercial brokers and landlords can provide this information. If not, consider this a red flag. In any case, it is better to consider bailing out before it is too late for you and your business.
- Unclear mechanics on computations
The terms included in the agreement between the landlord and the tenant must be as particular as they can be in order for both parties to clearly understand what each detail entails. This is especially important for fees and calculations as these involve money. If a landlord provides unclear calculations that lack or do not specifically point the mechanics of computations, then make sure that you, as the tenant, clarify this. Otherwise, it can potentially cause problems in the future and you will be left with no choice but to abide since you are bound to the signed agreement.
- Unclear designations and obligations
As a tenant, look out for vaguely described responsibilities of each party in the agreement. You need to avoid being put in a position where an unclear agreement is put against your favour and results to you taking on a role that was not explicitly stated in the agreement. A good commercial broker with work out the larger deal points through a Letter of Intent (LOI) prior to going to a lease.
- No pass-through language on paper
Another important data that a potential tenant should also get their hands on are the operating expenses history of the property for at least two or three years and the list of planned capital projects planned by the landlord within the next year or two. This is significant since this will impact the pass-through terms on the agreement, or the negotiations on whoever shoulders the maintenance costs.
Typically, the landlord will attempt to generate back all these expenses as soon as possible, potentially influencing the rates set on you. So, if the landlord cannot provide the data or if a pass-through language is not set on paper, apply skepticism and inquire about this aspect. What you can do is to negotiate fair terms and put the agreed terms in writing to make everything official and contract-bound.
- Unclear/unspecified CAM coverage
Depending on the type of lease agreement the landlord and the tenant get into, the Common Area Maintenance (CAM) entails important discussion between the two parties. If the CAM coverage appears vague or unspecified in terms of coverage, make sure to clarify this with the landlord. The danger of vaguely written CAM coverage is the possibility of paying the maintenance of items and facilities that may not necessarily be included in the supposed common area maintenance coverage.
In addition, tenants must inspect all maintenance facilities and equipment of the property and ensure that they are all in good condition. Furthermore, have the landlord grant a 6-month warranty to the maintenance facilities and equipment, such as the HVAC, so the tenant can avoid acquiring the financial burden of poor maintenance.
In case the maintenance expenses are shouldered by the landlord, tenants should have protection if the designated role of the landlord to maintain is not duly executed. Tenants must also secure into writing an annual audit of maintenance expenses to evaluate if the landlord is appropriating adequate amount of expenses for maintenance to sustain quality facilities and operations.
- Alarming Turnover Rates
The rate of tenants leaving the property can speak for itself, and a high turnover rate is very alarming. This implies that there is probably something wrong with the property or the landlord. If possible, talk to the previous tenants to determine the reason for their relocation. Either way, this should be enough to discontinue your negotiations and find a well-recommended property instead.
- Sloppy Documents
How the legal and official documents appear imply the legitimacy of the landlord. If documents are filled with casual and messy corrections, faded printing, and illegible writing, consider this a major red flag to be very wary of. This might appear to be a small consideration to take but in worst case scenarios, an unclear information can lead to consequences on the tenant’s end. It is always better to clarify these terms and ask for more legible copies to avoid future problems.
- Putting assurance on verbal confirmations
Verbal confirmations and negotiations can be done as initial steps in taking the negotiations to writing. But if the landlord heavily relies on verbal confirmations and often disregards legal action, it may be best to find a better alternative or have a commercial broker get involved who can have better documents brought into the deal.
Even after outlining all the information above, leasing commercial space and/or renewing your lease 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
by Prince Licaylicay | Oct 26, 2021 | All Articles, Leasing
If you are leasing a commercial real estate space, chances are, you have encountered these terms: ‘triple net’ (NNN), ‘full-service’ (FS), and ‘modified gross’ (MG).
As a business owner, technical terms like these can often be confusing and overwhelming, when all you just want to do is offer your products or services. But with the right amount of experience and knowledge, you can grapple what these terms technically mean. To oversimplify, they are terms in commercial leasing that provide a variety of ways for the landlord to collect the rent from their tenants.
Now, if you are a beginner in the industry and clueless on what these terms refer to, then this article will give you an overview on what these terms really mean, along with the pros and cons that come with each of these lease types and which one may be the best one for you and your business.
The words “Triple Net” is used commonly when dealing with commercial real estate because no matter which type is used to take a lease, the landlord has the Triple Net’s to deal with. They are getting paid regardless how you, the tenant, feel about it. Typically the Triple Net’s are a pass through cost that the landlord passes on. These costs are seldom marked up as a profit center for the landlord.
Overall, when it comes to these lease types, the main differences are how the landlord collects the rent to be reimbursed for the expenses of the project. In the end, the tenant pays roughly the same amount but with small differences based on the building type and tenant use.
Costs associated with most commercial real estate leases can be broken into three areas:
- Base Rent
- Triple Nets
- Electric and Janitorial
Let us start with the Triple Net Lease or NNN.
Triple Net Lease (NNN)
The Triple Net Lease, or often referred to as NNN, refers to the lease type where the tenant pays for the operating expenses outside of the base rate. The 3 Ns stand for the three “nets” in the lease which tenants are paying, namely:
- property taxes
- building insurance
- common area maintenance (CAM)
- Common area refers to the entire area shared by all tenants and the corresponding facilities that come with it. CAM may include the maintenance of the property’s receiving space, water, parking lots, hallways, elevators, common bathrooms, roof and others. CAM expenses are typically distributed to all tenants occupying the property under the Triple Net Lease.
A triple net lease is one in which the tenant pays all the ongoing operating expenses. The landlord/owner charges an annual base rate plus a pass-through cost of the three major nets. Other costs such as utilities, janitorial, internet, phone, etc. are not included in the lease rent. In its purest form, a Triple Net Lease is where the tenant manages the property/space, doing everything from paying all the operating expenses, property taxes, utilities, insurance premiums, maintenance, and interior repairs. With a triple net lease, the landlord will also pass on utility costs that are not separately metered, as well as all costs related to common area maintenance (CAM). These so-called CAM charges include all expenses involved in maintaining common areas such as water/sewer, trash, restrooms, landscaping, parking lots, fire sprinklers, the roof or anything that all tenants share.
Modified Gross Lease (MG)
Unlike a triple net lease, this agreement includes one, two or all three of the Nets as part of the base rent. It’s important not to assume what’s included and to ask your commercial broker what part of the nets have been included or modified. Typically, a modified gross lease will include all the nets in the base rent, but not include electric or janitorial.
Full-Service Lease (FS)
This agreement is where the base rent covers all costs of taxes, insurance, maintenance along with the utilities and janitorial. The tenant pays a pre-determined lease rate each month and there are no pass-through expenses for operating expenses. A pure full-service lease is the best of all worlds for a tenant, particularly for a medical office tenant. The tenant only has to write one check per month, and the amount only goes up incrementally over time with the normal progression of rent. Monthly rent typically rises about 3% to 4% per year (although that’s negotiable). The tenant doesn’t have to worry about getting hit later for extra costs such as utilities, and the landlord handles all of the maintenance so the tenant can focus on growing their business. One thing to note is if the yearly costs for CAM’s go down, the savings go directly into the landlord’s pocket. If the costs go up, the tenant is responsible for paying the difference at the beginning of each year over the base year that was established in their lease.
Benefits of a Triple Net NNN Lease
The nice thing about a triple net lease is the potential savings you could have in the event the costs for the insurance, taxes, or CAM charges were to come down. In this case those savings are passed on to the tenant. Likewise, the downside of a triple net lease is that if expenses go up, those expenses as well are passed on to the tenant as a higher net cost.
Other things to Consider Before Signing Lease Agreement
By now, you may have already understood the three basic lease structures in the market and what each entail on you, based on your business type or preference. You may have also decided by now on the lease type to employ for your business.
But before signing your lease agreements, here is one more crucial thing for you to consider: never solely rely on verbal agreements on what your landlord identifies the lease type to be. At the end of the day, these are just terms that may be used to verbally characterize a lease type, but what is more important is what’s on paper.
As a sensible tenant, you still need to thoroughly go through your lease agreement before signing, understanding all the provisions included, and making sure that indeed, you are signing into a lease type of your choice without any suspicious terms and conditions that may put you on a disadvantage in the future.
Even after outlining all the information above, knowing these lease types in commercial real estate (CRE) can still seem daunting. That’s why the Leveraged CRE Investment 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
by Prince Licaylicay | Oct 22, 2021 | All Articles, Leasing
Renewing your commercial lease agreement seems like a pretty simple task. But as a wise tenant and business owner, you must know that there is more to the task than merely signing your lease agreement for another set of years. There are actually things you can do and must not do in order to ensure that your requests and needs are met by the landlord.
Here are three (3) of the most crucial do’s and don’ts when it comes to renewing your commercial lease agreement.
-
Market Research
Whether you find yourself contented with your current location or not, market research is a significant step in exploring your rights and demands as a tenant. Doing market research entails studying the current status of commercial real estate properties in your area, including rental rates, agreement terms, incentives, and perks.
Compare your current status vs. the market
Communicate with other tenants in your location or in neighboring properties and asking how much they pay for rent, what their lease agreement inclusions are, and the incentives and perks they enjoy, if there are. Of course, you need to remain professional in your approach for them to disclose these pieces of information.
Consider sales on current location
Market research may also include finding options if you are deciding to transfer. Never dwell on false optimism, which means that if you feel that the location is not working for your business given the time of your stay, it is often better to transfer to a more advantageous location than stay and wait for progress to happen. Moving out and transferring may initially cost you money but once you secure a better location, it will prove to be a correct move in the long run.
Work with experts
For some business owners, it may benefit to recognize that doing market research is not your cup of tea. There’s an apparent reason why commercial real estate brokers exist. Therefore, you can acquire market research by working with a commercial real estate broker who knows the market very well to find leasing details, better locations, amenities or help guide you in the right direction on making a quality decision to attain positive results in the long run.
Provide time to plan
Remember that market research will benefit you as a tenant and as a business owner. Therefore, you need to invest ample time to plan out your actions. It is recommended to have things in mind at least six to nine (6 – 9) months before your lease expires. This should give you enough time to explore and prepare your necessary paper works for whatever you decide to do.
Another side note: always keep critical dates in mind, such as your lease expiration date.
So, what’s in it for you and your business?
By doing market research you can:
- compare your current rent, agreement inclusions, incentives, and amenities with that of other tenants
- evaluate if you are on a fair trade with your current landlord or you are on a disadvantaged position with higher rental rate than the other tenants
- use these bits of information to negotiate better terms or request incentives, perks, or additional amenities
- find a better location for your business
-
Negotiate
Negotiate from first offer
During your lease renewal, never settle with the first offer. Your landlord may retain the same rental rate or discuss with you any changes in your rent or expenses. The first offer is often a rate the landlord has set for all tenants at the project. Therefore, you need to start negotiating for a better trade from your standpoint.
Some tenants are scared of negotiating terms with their landlords, while some simply settle with their current rate. As they say, “Don’t fix something that’s not broken.”
But as a business owner, your goal is to maximize your resources and generate higher income, and if that means saving a certain amount from your rental expenses, then that is already significant. This is where your gathered information from market research enters the picture.
Have operating costs audited
When negotiating, make sure to have your operating costs audited to assess whether all your operating expenses are properly managed and is spent on the appropriate items.
What’s in it for you?
- can negotiate for reduced rental fee, especially when other locations offer lesser rate or other tenants in your location are offered less
- can request for perks or incentives offered to new or other tenants in the same location
- can negotiate better terms on lease agreement, particularly on operating costs, based on your business or space’s needs in the present
- discuss flexible arrangements with your landlord, considering the potential changes or expansion your business or space may undergo in the future. These arrangements may include terms on space expansion and additional amenities or share-spacing options should your business require financial or spatial compression in the future
-
Don’t disclose profit increase with your landlord
Landlords are businessmen like you, and they are also looking for ways to be profitable. With this being said, never share details of your sales to your landlord, especially your increased sales. Some landlords may take this to their advantage to increase your rental fee knowing that you can afford this increase and how inconvenient and impractical it is to transfer to a new location when sales are booming in your current one.
Understandably, some tenants can and do develop a great relationship with their landlords, but there is something to be said keeping such details about your business close to the vest.
We hope this guide enlightened you on what you must and must not do when renewing your lease renewal agreement. Indeed, there are a lot of things to consider before signing a lease renewal agreement. It’s a given that as a business owner, you want nothing but the best for your business in all its aspects. With this being said, it is part of your responsibility as a business owner to study the ins and outs of managing your enterprise, particularly on the space where your business stands.
Considering buying your own building versus leasing? If you would like information on the next steps to get started, consider reaching out to us. We’re here to help you achieve your commercial real estate 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 | Oct 15, 2021 | All Articles, Leasing
The length of time someone considers a short-term or a long-term lease may vary on individual perspectives. But on average, a short-term lease typically is any term under three (3) years, while long term leases range from five to ten (5 -10) years and onwards. Some professionals within the real estate industry often tag the time within these two periods as medium term.
Let’s focus on the differences between short-term and long-term leases discussing both their advantages and disadvantages. Finding the right lease span for you and your business vary on your needs and potential growth. This article will guide you to choose which among the two suits your needs and the anticipated direction your business may take.
Advantages of Short-Term Leases
Less commitment, Less Risk
Short-term lease is perfect for startup business which is still unable to commit to longer lease agreements. Opting for a short-term lease agreement reduces financial risk for these startup businesses. With this, business owners can also venture on experimental endeavors with relatively lower risk.
Flexibility & Contingency
Growth is what a business pursues to attain, and often, this involves expansion in space, workforce, or service coverage based on how finances are turning out.
Should your business need space expansion to cater to your growing demands in the future, it is relatively easier for you to transfer to a much bigger or more efficient location with a short-term lease.
For businesses that may not be fortunate enough in their run and decide to stop operations and shut down, short-term leases can also provide easier and much faster freedom from rent expenses.
Disadvantages of Short-Term Leases
Lack of security
Simply put, landlords prefer long-term leases than short-term ones as the former generates security in cash flow for a longer period of time. With this being said, leasing on a short-term basis puts you on a vulnerable position for possible eviction once your lease expires and your landlord decides to lease your current location to an entirely new long-term tenant or a long-term tenant expanding their business.
Therefore, if you are getting more serious and invested on your business, a short-term lease is not for you since it entails uncertainty on your business, additional stress to you as a business owner, and the potential inconvenience of finding and moving your business to a new location.
Moving costs and business instability
Take note: transferring to a new location can be costly. Furthermore, transferring to a new location affects your business stability, as it can lose a portion of your established clients or customers and will also require you the additional time, effort, and resources to re-establish your business at your new location.
Higher costs
Yes. Short-term leases are higher in cost compared to long-term leases. This goes back to the notion that landlords get more security in terms of cash flow with long-term leases. Therefore, landlords, as business owners that they also are, often charge higher rates for short-term leases. Rates may also be affected by the current market, which means that your rental rates can increase every renewal based on current market standards.
Financial unpredictability
With short-term lease rental rates dependent on market standards, there is much unpredictability on the amount you need to shell out. Not having a definite amount for rent can limit your strategies and interfere with your financial plan.
Limited Negotiating Power
If we have not yet established landlords’ preference for long-term leases over short-term ones, then here is another reason that puts short-term lease on a disadvantage from its long-term counterpart.
Short-term tenants are rarely granted their requests or demands, including expansion, renovation, cost sharing, etc. This is not to say that short-term tenants cannot negotiate. However, as compared to the highly favoured long-term tenants, short-term ones are perceived by landlords as less valuable due to lesser time of tenure.
Advantages of Long-Term Lease
We’ve quite established how landlords prefer long-term lease over short-term ones, and the many perks that come with this preference. But let us dig deeper into the pros and cons of long-term lease to help you decide whether this is the best-suited one for you.
Lower costs & easier to find
One of the major advantages of long-term lease is lower rental rates. Since long-term lease generates security of steady cash flow for a long period of time to landlords, many landlords are leasing their commercial real estate properties for relatively lower costs. Furthermore, long-term lease agreements also spare you, the tenant, from rate fluctuations, ensuring a definite amount paid all throughout the time of lease.
Additionally, since this is preferred by landlords, they often welcome long-term tenants with open arms, willingly evicting short-term tenants for those who can commit for a long run.
Anticipate Rental Costs
With long-term lease, you will be able to anticipate your rental costs and can efficiently plan out your finances and business strategies for a long run, regardless of market rate standards.
Better Negotiating Power
Landlords put so much value on long-term tenants that they are privileged with certain negotiation power. Demands, requests, and forwarded terms, such as renewal options, expansion options, renovations, cost sharing, subleasing, etc., are often granted, along with additional perks, like free covered parking.
Remember: from a landlord’s point of view, a long-term tenant is for keeps. As much as possible, they want to maintain a good relationship with long-term tenants than go through the entire process of looking for a new one.
Business stability
Once you sign for a long-term lease, you get to run your business with peace of mind, not having to worry about eviction and moving to another location, even after your lease expires. With long-term lease, you can effectively establish your business on your location and work to steadily grow your operations. Furthermore, long-term leases can provide security. If the property is sold by the landlord, you are still ensured that you can retain your spot until the lease expires.
Disadvantages of Long-Term Lease
Bound for years
This is a matter of perspective. While being secured of space for a long time can be seen as an advantage, it can also have negative implications. You cannot easily move to another location when unforeseen changes force you to do so. Terminating lease agreements or paying for the remaining time within the agreement may cost you a huge sum of money.
You need to understand that a long-term lease is a financial risk that you need to carefully examine before deciding to take, taking into consideration both possibilities of success and failure.
Complex negotiations
While long-term tenants have more privilege in the negotiation table as compared to short-term ones, the process is more complex and tedious, therefore, taking both parties longer time to settle on agreed terms.
Limited terms for expansion, unless otherwise provided
Finally, you need to carefully examine the terms within the agreement to ensure that you, the tenant, and the physical space, are both viable for expansion if ever your business needs it in the future. Otherwise, you may need to find a bigger or better space in the future to cater to the needs of your growth.
All in all, both options have their own benefits and disadvantages. Deciding which option is best for your business is a matter of thoroughly studying your financial capacity, business needs, and potential up/downscaling in order to reduce, if not totally eliminate, your risks.
Even after outlining all the information above, leasing commercial real estate (CRE) can still seem daunting. That’s why the Leveraged CRE Investment 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
by Prince Licaylicay | Oct 1, 2021 | All Articles, Leasing
The best deal in lease negotiations, in the end, favors only one side. Whether it goes to the landlord or the tenant, you might think the answer is obvious. However, what if I told you that with the right approach, you – be it the landlord or the tenant, can take it for yourself? There are secrets as to how they get the better end after all. And by knowing these secrets, could actually be the key to winning the negotiation for yourself.
Secret #1: Familiarity of the Subject Property for Lease
“Knowledge is power”, as the adage would have it and that about sums up why landlords hold the bigger advantage over tenants in lease negotiations. The first secret is the landlord’s familiarity with the property itself. Most landlords know what’s happening with the tenant mix and they feel they have the upper hand. However, when it comes to negotiating lease terms there are other factors that come into play that can be in your favor. Since negotiations mainly involve holding the ace card to throw at the deal, you will need to know what’s important to the owner and which feature you could use fully in order to undermine the proposal that the opposing party is throwing at you.
Secret #2: Understanding the Trade More
The second secret isn’t even a secret at all. Everyone knows that anyone who’s been in business longer than you will have the upper hand most of the time, especially in real estate. They know the ins and outs of property negotiations, and will not hesitate to use them. Winning in lease negotiations call for a full understanding of the “works”, so to speak so if you are an inexperienced tenant, never throw yourself in the battle without arming yourself. Real estate is not such a complex business as long as you know what you must and must not do in dealing with negotiations. As mentioned below, having a CRE Broker help negotiate your lease or renewal can save you time and thousands of dollars.
Secret #3: Having the upper hand
Yes, landlords most often have the upper hand or control over negotiations given the premise that tenants need the property more especially if the subject property fits perfectly with what they really need. It’s a world of supply and demand, and in most cases, it’s the suppliers that control the prices and how much you get from it. Real estate isn’t different, and with the property being a base desire for every person, it’s hard for the ones with demands to be in control. This is especially true when the landlord has exactly what you need. And so, one of the strongest points in lease negotiations goes to most landlords, however, not necessarily one that could be the winning thrust in any given dispute or concern to disclose.
If you are the tenant, on the other hand, wouldn’t you want to have the upper hand in dealing with these negotiations as well? Well, here are some tips to get you some of the upper hand over the landlord:
- Get an agent to negotiate for you
Getting an expert to do the lease negotiations for you is the wisest move for any inexperienced, yet interested tenant. A real estate agent is an expert in this field and so you will know that you are in good hands if you hire one. Sometimes, interested tenants tend to think that getting a real estate agent is simply an expense and not necessarily a help to cut the cost or close the best deal there could be. Truth be told, having an agent on your team is one of the best solutions to winning that negotiation for the exact lease you are after.
Negotiate over more than just one location at the same time – this could be the advice you get to hear from those who have experienced negotiating with a landlord over a lease. If you are to consider having an upper hand at lease negotiations, more options is more power. It is wise for you to consider negotiations over more than just one property for lease, be it with the same landlord, just so you could create a more open option for the property which your budget and requirement fit most perfectly.
- Better base rent equates to negotiating for a longer lease term
Learning how to negotiate better lease rent is one of the secrets to nailing it in any lease negotiations you could possibly face. Keep in mind that you need to achieve a base rent where there is minimum lease length however with maximum benefits. It is not a bad idea for you to work with your probable landlord in order to come up with whatever you are both willing to give just to get into what you may refer to as a “committed tenancy”.
What you need to do is to come up with a negotiation over future renewal options, like maybe getting to agree on a compromised 2-year lease with the option to renew with a minimal rent increase as opposed to that full 3-year lease. It is quite inevitable for future rent increases to come anyway so why not compromise capping it into the agreement you are going to get into? Note that most brand new retail businesses could be better off accepting the higher price of a short-term lease the first time around. This, coupled with being able to focus on getting favorable termination and subleasing clauses, could definitely offer them peace of mind.
Knowing is actually just half the battle. How you handle it will be another. Just know that in commercial lease negotiations, all will be fair and the difference will be in how you handle things or what approach to take in order to get the upper hand. So whether you are the landlord or the tenant, such negotiations will go in your favor if you know exactly what you are getting into and then follow through with how you should do it.
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 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 | Sep 17, 2021 | All Articles, Leasing
Leasing commercial property is one of the critical engagements in which a business owner must take into consideration. Hence, getting there and knowing the steps for leasing serves as guidance essential to every business owner, especially in attracting investors or tenants alike. And while leasing commercial lease estate is confusing and intricate, here are the following steps that will guide potential lessees through the critical stages of the lease process.
Eight (8) Steps in Leasing Commercial Real Estate
STEP 1: KNOW AND DETERMINE YOUR NEEDS
It is essential to have an idea of what specific needs and wants you have in mind. This is so because knowing the particular details of your wants and needs narrows down the search for spaces that will work for your business. There are three significant factors in helping you make the right decision: location, rent budget, and type of space.
Location is essential since this affects the viability, quality, and value of your space. Considering the area, the environment, where the customers are located, is the place accessible, what other businesses offer a synergistic relationship, and most importantly, where is the competition found?
Cost or Rent budget is another factor that must be considered. Monthly rent is determined by various variables, such as lease rate per square foot, utilities, additional tenant improvements that are amortized into the rent, and annual rent increases as provided in the lease contract.
Type of Space. The kind of space is going to be determined by the type of product or service provided. Various types of commercial properties fall under the umbrella terms: Industrial Office, Office Properties, and Retail Properties. Getting to know these different commercial spaces is integral before beginning the search for the commercial space to lease.
STEP 2: RUN YOUR NUMBERS
Before you start looking for a commercial property to lease, you must first determine the costs thereof. Therefore, you should always bring a broker into the discussion to assure and provide detailed results concerning the estimated costs of leasing a commercial property since your overhead might be going from zero to a million. Hence, it is always important to be realistic and confirm that the business can weather the change.
STEP 3: TOUR THE SITES
Brokers will most certainly prequalify sites for you based on your specified requirements. They will bring together as many properties as possible to help you narrow the list. As such, it is your responsibility as the lessor to tour the optimal sites, preferably on the same day, since you will be able to make a reasonable comparison based on the specific criteria you have set up. It is rather vital to be reserved while touring the spaces to keep your negotiation leverage in the properties and the brokers.
STEP 4: WEIGH THE OPTIONS
After you have toured the sites, varying options will now be put before you. To make a better result that caters to the preferences of your tenants and employees, you must be able to make all the proper choices that will guide you in choosing optimal property—the competition, accessibility of the place, the ambiance, and the environment where the property is located. You are not opening a house but rather a business. Hence, while there are always properties that cater to your needs specifically, you must also consider certain factors that will affect your business as a whole.
STEP 5: CREATE A LETTER OF INTENT
Once you have chosen the property that suits the criteria of your needs, have your commercial real estate broker create a letter of intent (LOI) on your behalf to send it to the owner of the property. This LOI will state your eagerness or desire to enter into a lease agreement along with your expected terms. The LOI is not the actual leasing agreement; instead, it is heads of terms to start the conversation. Heads of terms refer to those terms which the brokers/agents will engage to facilitate and inspect field questions and agree on the critical points for any inclusion on the lease. And while the heads of terms are not legally binding, they form the basis on which any lease document is ultimately prepared.
STEP 6: BEGIN LEASE NEGOTIATIONS
Many sections of a lease establish the terms of an agreement between you and the owner. Lease negotiations is comprised of several factors including, namely:
- Length of the term;
- Lease rates;
- Concessions,e., a reduction in price, rent, or other benefit provided to a tenant or buyer as an inducement to buy or lease;
- Rate bumps or Rate increases; and
- Renewal options
These negotiations can take anywhere from a few days to several weeks or even months to complete, depending on the complexity of the lease.
An owner will also want to establish your financial credibility as a tenant. In other words, you’ll need to develop your trustworthiness to pay the rent due to the owner as a part of your agreement. Again, financials and other documents are used to establish this credibility.
STEP 7: IDENTIFY TARGET DATE OF OCCUPANCY
The date set for occupancy may be subject to change depending on the aggregate amount of Tenant Improvements that may be made. These improvements come in many forms, such as simple paint, carpet, constructing or demolishing walls, plantation improvements, landscaping, etc. The more complex the Tenant Improvement, the more likely the date will be adjusted. The important stage in the operation is when the tenant improvements are completed, and a Certificate of Occupancy has been issued for space.
STEP 8: MOVING IN
After signing the lease, you are ready to move in unless, of course, a “build-out” is necessary. A build-out occurs when the space is not designated to suit your needs, a build-out is required to get it to working condition and be ready for the occupant. After the build-out is finished (if needed in the first place), you are prepared for business. However, it is essential to remember that there is a continuing responsibility to comply with the lease terms. If you are in default, you could get evicted from there. So be careful and read the terms and conditions lest you are ousted from the property leased.
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 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
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