Commercial Real Estate Lease Agreements
February 1, 2011 Leave a Comment
If you are after copies of the widely used Auckland District Law Society and/or CCH Lease agreements you can purchase them online at VirtualRealty.
The reasons why Commercial Landlords sometimes prefer a vacancy to reducing the Lease Costs
June 17, 2010 Leave a Comment
This is a question that has perplexed me for quite a while and I think I understand why now, it all comes down to the fact that financing is based on the value of the most current lease, so a lower lease means a lower capital value and as such possible difficulties in obtaining new.
A similar question was raised on Linkedin and you can view their discussion HERE.
10. Glossary of Lease Terms
June 9, 2010 Leave a Comment
- Class A Office Space
- Newer properties (built since 1980) of 100,000 square feet or larger in prime business districts. These buildings usually have at least five floors and are constructed of steel and concrete. They offer many business amenities and good access.
- Class B Office Space
- These properties are typically smaller, older and of wooden framed construction. They have usually been renovated and are in good locations. If the buildings are newer then they are typically smaller and not in a prime location.
- Class C Office Space
- Class C properties are older and have not been renovated. Their condition is typically fair but not considered good.
- Escalation Clause
- A clause that allows for increases in rent over time usually determined by an outside source such as the consumer price index.
- Fixed Lease
- A lease that does not include increases, but rather has a flat fixed rate over the term of the lease.
- Gross Lease
- A lease that includes utilities, repairs, taxes or insurance in the monthly payment.
- Lease Term
- The length of your lease.
- Net Lease
- A lease that does not include utilities, repairs, taxes and insurance in the monthly payment.
- Step Lease
- A lease that includes scheduled increases in rent over a specified period of time.
- Percentage Lease
- A lease that has a set rent amount with an additional amount that is determined by your business’s sales.
- Purchase Option
- The right or requirement to purchase the property at the end of the lease.
- Rentable Space (aka Leasable Space)
- The total square footage rented. This includes all common areas so the number will be most likely be higher than what you requested to rent.
- Usable Space
- The space that your business physically occupies. This does not include common areas such as corridors, elevators, lobbies and rest rooms.
- For a complete Glossary of Real Estate Terms click HERE!
- Source: http://money.howstuffworks.com/office-space10.htm
9. Negotiating the Deal
June 9, 2010 Leave a Comment
The most important thing to remember when signing a lease for commercial property is that the lease was written with your soon-to-be landlord in mind — not you. Read it well and have your attorney and insurance broker read it as well. They can help you spot things that are not in your best interest. Remember that much of the success of your negotiating will depend on the current real estate market. Here are a few things to consider before signing:
- The longer the lease the more likely your landlord will be to negotiate on other items. (Just make sure you know the length that is best for your business and your realistic expectations.)
- Always ask for an option to sublet, so if your business does go belly up you have a way to get out of your lease payment.
- Always ask for a rent cap so your lease payment won’t escalate too quickly.
- Always make sure you agree to everything that is included in the rent. Sometimes you come out better if those items (utilities, repairs, etc.) are separate.
Incentives
Work credit, cash allowances, or free rent can be used in the negotiating process too. If there are significant improvements that need to be made to the property before you can use it then these are all issues you should discuss as part of the negotiation process. The current market will probably play a part in which side of the fence you’re on. If it’s a tight market with low vacancy rates and high rents, you’ll probably have a tougher time getting the landlord to pay very much for improvements. If there are a lot of empty buildings and the property needs a lot of work, the landlord may offer these allowances as incentives for you to sign the lease.
Cash allowances can be negotiated for things as simple as paint and carpeting. The points you need to cover when negotiating about improvements include who will be doing the work, who is responsible for damage, and what percentage of the total cost the landlord is willing to pay.
The landlord of the property may also offer additional incentives if the market is currently shaky, but always read the fine print and make sure you’re protected. Read and review everything with the landlord to ensure total understanding and agreement of the terms, and bring in a real estate attorney to work out the details if there is any questionable issue.
Making Sure your Lease Contract is Weather Tight
June 2, 2010 Leave a Comment
Adverse weather conditions can put enormous pressure on even the best of tenant/landlord relationships.
I’ve already dealt with one situation this week where water damage has soured relations between tenant and landlord to the extent that they are exchanging lawyer’s letters; each party is blaming the other for the problem.
The fact is bad weather is nobody’s fault. It is beyond our control. Nature, in all its elements, can take an enormous toll. We just have to look at the impact of the volcanic ash cloud on travel in Europe and Britain last month.
So when we strike heavy rain and wind like we’ve had up and down the country in the past week, even supposedly weather-tight buildings can be affected.
It is fair to say that we are all particularly nervous about water getting into buildings these days after the leaky building debacle.
But the reality is there are responsibilities for tenants and landlords alike when bad weather hits.
It is the landlord’s responsibility to keep premises watertight, with drainage, waterproofing and all the correct structures in place. And in many tenancy agreements, it is the tenant’s responsibility to maintain gutters and drains to ensure they are kept clear.
The key point is that both parties need to be clear about their responsibilities and make sure they are met. A healthy dialogue helps to head off any problems before they become major.
It sounds very straightforward, but amazingly I frequently deal with complete breakdowns in communication that could have been averted through conversation.
It is smart thinking to build strong relationships between landlord and tenant to avoid costly legal disputes and delays in righting any problems with premises.
Quick resolution of an issue such as water damage means business tenants can get on with their core business and landlords can continue to receive a steady income from their investment.
Source: http://www.officeblog.co.nz/making-sure-your-contract-is-weather-tight
8. Finding and Inspecting Your Space
May 7, 2010 Leave a Comment
Finding the right property in residential real estate is a little easier than in commercial real estate. For one thing, many commercial properties are not listed in the multiple listing service. This makes it difficult to actually see everything out there without talking with a lot of realtors. It makes sense for most to enlist the services of a buyer’s agent to help you find everything that is available. Agent commissions in commercial real estate are much more negotiable than in residential real estate. They’ll also be able to help you determine the properties that are zoned for the type of business you’re in, parking space requirements, advertising regulations, etc.
Classes of Office Space
Office space is divided into three classes — Class A, Class B, and Class C. The classes are just what they imply, that is higher quality at the A end and lower quality at the C end. The classes are based on the age of the building, the type of construction, the location, the amount of renovation, and the amenities that the building provides. You may also run across what is now being referred to as Class E Office Space in some cities. These are old buildings class B buildings that are being considerably renovated to become spaces with a totally different look. They usually have very high ceilings, lots of large windows, and lots of wood. They seem to appeal to the high tech and dot-com groups. (Hence the “E” designation.)
The dollars per square foot will vary quite a bit from one class to the next, so consider the amenities, location, as well as the “look” you need before starting your search.
See as many spaces as you can, and pull out the list you created earlier in the planning process. Make sure you have prioritized the features that are most important to you and your business, and give them the most consideration when looking over the properties. Don’t let yourself be blinded by one spectacular feature in a property when some of the other equally important features are less spectacular than what you need. You can even create a scoring system to help you compare each property equally. Regardless, of the system you use, take notes about the plusses and minuses of each site, and take photos to help keep them straight in your head. Visit the sites on your short list often and at different times of the day to observe the changes in traffic, noise, and other potential problems. Don’t let your emotions rule your decision!
Don’t forget to also investigate “build-to-lease” options also called “build-to-suit leases”. If you find the right developer you can tailor the space to your needs and then lease it. This option will require a lot of work on your part to make sure you’re getting the quality and structure that will suit your needs. Keep in mind too, that the developer you work with will probably not own the building for the length of your lease.
Cool Features and Extras Besides the typical amenities that most office spaces will have, there are also many new cool features that can help make your office function both more energy efficiently and securely. Here are a few of the latest:
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Inspect the Property
So you’ve found a good spot — you think. You like the location. It’s passed all of the tests so far. So what else do you have to look at before you sign on the dotted line? Here are some things to make sure are on your list of questions.
- First of all, how old is the building? With age can come problems and difficulties in incorporating new technologies.
- Are there structural problems? Talk with other tenants and see if they’ve had any problems either with the building itself, or even with the landlord.
- Does the roof leak?
- How old are the HVAC systems? Will you be dealing with periods of no air in the summer and no heat in the winter?
- Is it wired for computer networks, Internet access, or other electronic items? If not, will you have difficulty wiring it because of the types of wall materials or ceiling?
Is there adequate security? Security features can include:
- steel security doors
- security gates that fold out of the way during office hours
- alarm systems that can be monitored by a security firm or the local police department
- video cameras to watch entrances and exits
- bullet-proof glass
- fenced parking
- external lighting all around the building
- security guards
If you’re buying the property you need to dig even deeper. Sometimes literally! For instance, you may need to do a Phase 1, 2, or 3 site assessment to make sure there is no environmental contamination that you will be dealing with. Sometimes the lending institute you are getting your loan from will require it.
So what do these assessments entail? A Phase 1 assessment involves reviewing the past uses of the land, and government environment records concerning the property, and a simple observation of the property. If this first assessment shows up any potential contamination or problems then a Phase 2 assessment is needed. Phase 2 involves air, water, and soil samples. The third type of assessment, sometimes referred to as a Transaction Assessment, only takes into account the use you are proposing for the site. It does not take into account any past uses or problems. This is the assessment you would need if the site has previously passed a Phase 1 assessment and had no problems.
It is also recommended by most in the real estate profession that any property, whether it is being leased or purchased, be inspected by a professional inspection firm.
7. Location, Location, Location
May 7, 2010 Leave a Comment
Deciding where you lay your brief case is a tough decision to make. Where can your business find the best opportunities? If you’re foot loose and fancy free you may be able to pick up and go wherever you expect to find that pot of gold. If so, do your homework. Check out the market data available on many commercial real estate web sites. Go to the U.S. Census Bureau and see which areas have the most growth and the highest numbers of your target audience.
If you’re staying right where you are, you still need to do your homework when it comes to locating your business. Where are your customers? That is probably your biggest challenge. If they come to you then you’ve got to be in a convenient location. If you go to them then consider what is convenient to you and your employees. A lot of the decision is made by the type of business you are in. Here are some other location issues to consider:
- Where is your competition? Does it matter? Maybe, maybe not.
- Will you be able to find good employees nearby? Convenience of location is important to them too.
- Is the building you are considering in an area that is growing?
- Are the surrounding buildings in good shape and attractive?
- Is it a safe area?
- Is there sufficient free parking or will you have to pay to rent spaces for your employees?
- Are there zoning restrictions that might have an affect on what you can do with your business?
- Is the building you are considering renting at the going rate?
- Will you have convenient access to the suppliers and other vendors your business will need?
- Is it the area accessible by public transportation?
- Are there restaurants and other services nearby for you and your staff?
6. Lease Pitfalls!
May 7, 2010 Leave a Comment
Losing the Terminology War
Remember when I mentioned that you need to familiarize yourself with the commercial real estate lingo? Well here’s why. When you ask to see properties of a certain size, what the agent will show you is usable space. But, usable space is just the space you actually occupy physically. It doesn’t include the common areas such as the entrance hallway into the building, rest rooms, etc. The square footage these areas occupy is indicated as a percentage of the usable space, and if you add the amount of square footage for this common area space to the usable space you are asking to see, you’ll get the rentable space (aka leasable space) WHICH IS WHAT YOU WILL PAY FOR. So, don’t stroll around with the real estate agent while figuring the price in your head based on the amount of space you are asking for and assume that’s what you’ll pay, because it’s not. You have to pay for the common area space as well. That’s our first warning.
Creeping Leases
Don’t forget that your lease will probably also have an annual increase built into it right from the start. That’s right. These are called escalation clauses. Your landlord has to account for inflation, increases in the market value, etc. The landlord may offer a fixed increase, or a percentage based on the consumer price index. Don’t hesitate to negotiate those points.
Read the Fine Print!
Make sure you’ve read every word of your lease before you sign it and negotiate with the landlord to reword any sections that are going to be unrealistically hard to abide by. Remember the lease was written with the landlord’s interests in mind. Watch out for things like:
- limits on hours of use for the property
- requirements that state you have to leave the property exactly as you found it without accounting for typical wear and tear
- limitations on alterations to the property
- subletting restrictions (Remember that you may not need all of the space you have leased, or you may be acquired by or merged with another company changing your legal ownership.)
- restrictions on lease renewals. Make sure there is a provision that will allow you to renew the lease if you so choose, so the building is released to someone else out from under you.
- common area maintenance. Negotiate, negotiate, negotiate.
- landlord administrative charges. You may be able to get the landlord to drop this.
Watch your Bills!
According to an article entitled “Commercial Real Estate,” by Ed Eriksen published at the Online Women’s Business Center, your landlord may charge you for after-hours increases in utility costs like heating and air conditioning. If you find this is the case, make sure you review the bill closely and make sure the electric rate you are charged is truly the rate for that period of time. Typically, the after-hours rates are lower. Check with the local utility company to verify the charges before you pay.
If you are entering a building that houses some much larger businesses than yours, also make sure you’re not paying for some of their expenses. Landlords will often have special deals arranged with large tenants that provide them with longer operating hours, which will in turn mean higher utility bills, higher security bills, etc. Make sure you’re not paying for those services. Check the bills you receive from your landlord and make sure all of the expenses are yours.
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