Berkshire Hathaway Real Estate Commercial PRESENTS: 21 GREAT QUESTIONS ABOUT LEASING COMMERCIAL REAL ESTATE! (and the answers)
1. What is a triple net lease? A triple net lease (NNN) is one where the tenant pays its pro rata share of the taxes, insurance and common area maintenance on the building and the land associated with it in addition to the base year rental rate. NNN charges range from $1.00 to $3.50 per square foot per year for flex and industrial buildings and $3.50 to $6.00 for office and retail buildings depending on the location, type, and class of building.
2. What is an industrial gross lease? An Industrial Gross lease (I.G.) is one where the base year taxes and insurance are included in the base rent and the tenant only pays its pro rata share of any increases over the base year. In addition, the tenant is typically charged the pro rata share of any common area maintenance costs associated with the building (i.e. snow removal, parking lot cleaning, landscaping, etc.).
3. What does a landlord expect from a prospective tenant before the lease is signed? Before the lease is signed it is customary to provide the landlord with financial information about the company or entity that will be responsible for the payment of the rent. The landlord also wants to know what type of business will occupy the space and what the use will be. Where is the company incorporated? Will the tenant provide references?
4. What about the security deposit? A security deposit in the amount of one month rent and the first month rental payment is usually required by the landlord at lease execution. It is not much different than a residential leasing transaction. The security deposit for a commercial lease does not accrue interest and is returned at the end of the lease subject to any damages or default by the tenant. The better the credit of the tenant, the better the chance of getting the space you want. Poor credit may mean higher security deposits and quite possibly a personal guarantee.
5. Who pays for brokerage services? Broker services are typically paid for by the landlord under separate agreement. Most properties have a leasing agent and offer a co-broker commission to agents representing a tenant in the transaction. The tenant does not typically get involved with commissions.
6. What is the landlord responsibility in leases for industrial and flex buildings? The landlord is responsible for the roof and structural maintenance of the building. Typically, anything that goes wrong with the building outside of the premises is the responsibility of the landlord. The landlord should be responsible for turning the property over to the tenant with all systems in good working order, i.e. electrical, plumbing, HVAC, doors, etc. unless the tenant takes over the premises in an ‘as is’ condition. Any existing damage to the walls, floors, structure, etc., should be noted so the tenant is not held responsible for that damage upon termination of the lease, normal wear and tear accepted.
7. What is the tenant responsible for? In a NNN or IG lease the tenant is held responsible for the maintenance of the interior of the premises throughout the life of the lease, normal wear and tear accepted. It is customary for the landlord to ask the tenant to purchase a service agreement with a certified HVAC contractor in order to maintain the HVAC system for the term of the lease. The tenant is usually responsible for maintaining the plumbing above the floor line (leaky faucets, plugged toilets, etc.), electrical (changing bulbs and repairing damaged fixtures), HVAC (service the system and make minor repairs). If the condition of the HVAC system is in doubt upon lease commencement, the tenant should make sure that the landlord is responsible for replacing the major components of the system should they fail.
8. How much time should be allowed for the search for new space? It can take months to find the right space. It is not uncommon to strategize (broker and tenant) 12 to 15 months before an anticipated move. Set up a time-line for the following: properly estimating the size of your new space to allow for growth or market changes; searching for available properties that meet your criteria; touring the properties; getting proposals from landlords or their representatives; space planning if needed; getting a lease and negotiating lease comments; finalizing the lease; doing any tenant improvements to the space; moving in. Given the higher vacancy rates, the average tenant has more choices for certain types of space than ever before. Tenants may have to make quick decisions to secure just the right available space.
9. How much space will I need? Some tenants have very simple space requirements that do not need much planning. Maybe you have had 5,000 square feet for the past seven years and want to move up to 10,000 square feet for the next five years. On the other hand, growth companies may not know how much office space they need for personnel or how large the distribution space should be to provide for the growth over a five to ten year period. By using consultants it is possible to zero in on your needs. Space planners, warehouse /distribution analysts, and real estate brokers can be very helpful.
10. How long of a lease term should I consider? This depends on your answer to question #9 above. When rates are dropping it is best to do a short term lease. When the rates are at a low point it is good to strike a long term lease. Lease rates are lower at the present time for warehouse space and there is an abundance of flex space on the market so flex rates have been stagnant. Vacancy rates for industrial buildings in closer in locations have fallen to single-digits but vacancy rates further from the beltway are much higher. It is a tenant market once again for industrial and flex space. For those tenants looking for warehouse space there are not a lot of choices right now. If you can strike a good rate now for the next five to ten years in a building that can accommodate your growth you should do it.
11. How many parking spaces do I get? It depends on how many were provided for on the original site plan. Most counties require the landlord to provide 3.6 spaces per 1,000 sf of office space leased (includes lab and all other ‘improved’ space), and 1 space per 1,000 sf of warehouse/distribution space leased. If you want to build out office or lab space in a true industrial building there may not be enough parking spaces to accommodate your employees. Most new ‘flex’ buildings have provided adequate parking for a mix of at least 50-75% improved space. In some instances, re-striping the loading area behind the building can add much more parking if necessary but reduces the truck access to the building. Make sure you do an employee count and have an adequate number of parking spaces provided for in the lease. It’s all negotiable.
12. Who pays for tenant improvements? One way or the other the tenant pays for the tenant improvements. If no improvements are needed except for repainting and recarpeting the landlord will probably pay for it and there will be no increase in the quoted rate. If structural changes are necessary the landlord may pay for the improvements up front and charge an amortized payment schedule over the term. This payment schedule is added to the base rent and becomes the ‘improved rental rate’.
In some cases the landlord will provide a dollar allowance per square foot for improvements such as painting, carpeting, replacing ceiling tiles and other minor upgrades. A landlord will look to the financial strength of the tenant to determine whether or not the landlord will fund tenant improvements.
13. How can I get out of my lease obligation? Unless an ‘out’ is negotiated up front and included in the lease you are responsible for completing your lease term. An ‘out’ is a right to terminate on a certain date prior to the lease termination date provided you give proper notice and pay any termination fee to the landlord. The termination fee is typically for unamortized improvement costs, unamortized broker commissions, and a modest penalty of some portion of your remaining lease liability. Additionally, it is very important to have sub-leasing rights should you need to move due to expansion or contraction of your business.
14. What about expansion rights within the building I choose? It is a good idea to have ongoing expansion rights for contiguous space as it becomes available in your building. This is usually acceptable to a landlord subject to prior rights of other tenants in the same building.
15. What information should I supply to the broker in order to achieve maximum benefit of the search for available properties? Size; location; image; % of office space, lab space, warehouse space; ceiling heights; truck loading; zoning; electrical requirements; parking; commencement date. Why are you moving? Where do the decision makers live? All of these and more are needed to perform a complete search of available properties.
16. Should I have other professional help in addition to my broker? The more complex your organization is the more you need professional help. Spending a few dollars up front can save you a lot of money and headaches later. Your broker can help you decide which professional services are necessary for a successful transition to new space i.e. attorney, tax advisor, space planner, IT consultant, construction manager, moving company.
17. What happens if the building is sold during my lease term? As long as you have protection from a ‘non-disturbance clause’ in the lease you will be able to continue to lease the space without fear of being asked to vacate by the new ownership entity.
18. How is my space measured? Typically it is measured from the outside wall of the building. Where there is a common wall between tenants the space is measured from the center of the common wall.
There is, on occasion, a small pro-rata common area added on to the size of the premises to account for sprinkler rooms and electrical closets that service the entire building.
19. Who is Berkshire Hathaway? We are a small group of brokers with a lot of experience supported by a national company. We represent both landlords and tenants and buyers and sellers. We know both sides of the table. We have represented small local investors and large pension funds. Our list of clients ranges in size from a few thousand square feet to Fortune 500 companies. It’s a face-to-face business and we pride ourselves in the relationships we have maintained over the years.
20. Why use a broker? Brokers are the most knowledgeable asset you can add to your team. We provide you with all of the up front information to help make your decision process a smooth one. We know the market and we know both sides of the deal-making process. We’re not compensated until the deal is done so we have a vital interest in your corporate well-being until the time you hang your pictures on the wall of your new office. Commercial real estate is a business of relationships and we treat each and every client the way we would want to be treated if we were searching for new space.
21. Why should I spend my time talking to you?
22. What makes you different from your competition?
23. What percentage of your commission are you willing to share with us?
24. Why should I switch from the broker that I use now?
25. Who pays your fee? How can you represent me objectively?
26. Do you provide space planning, construction management and moving services?
27. Are you lawyers? How can you negotiate my lease?
28. Doesn’t your firm also represent landlords?
29. How do you know which buildings have space in this market?
30. We are paying such a low rent here, why would we think about moving?
31. We have a cordial relationship with our landlord. Why would we risk that by bringing you into the mix?
32. How can you represent us in another city? How do you know what’s going on there?
33. What is a Tenant Representative?
A: A Tenant Representative is a licensed real estate professional who only represents tenants and buyers of real estate. The advantage of working with a Tenant Representative is that there are no conflicts of interest such as building listings or landlord contracts. Retaining a Tenant Representative is like adding a partner devoted to your company’s success and future expansion needs. They are on your side and represent your interests only.
34. What do Tenant Representatives Do?
A: Tenant Reps address your space needs based solely on your unique business requirements and potential future expansion. Hallmarks of service provided by Tenant Reps include:
1. Working with you to target the best location, amenities, size and configuration that will meet your company’s needs, both now and in the future.
2. Searching beyond the normal databases to find the best possible options that ensure the maximum number of location choices. Frequently the best space is not currently in the market and it is a Tenant Rep’s business to know of vacancies before they become generally available.
3. Performing site inspections, market rate comparisons and term comparisons to ensure that you receive the best price and terms possible.
4. Preparing and issuing Request for Proposals (RFPs) or issue Letters of Intent (LOIs) to all applicable Landlords once you have decided on one or more facilities. The responses are then analyzed and in-depth lease negotiations are preformed on your behalf.
5. Researching the market when your lease comes up for renewal or you need to expand to determine a fair renewal rate and terms, including new Landlord upgrades and new Lease Clause protections, if necessary.
35. Can I do it myself?
A: Generally the savings Tenant Reps like Rich Commercial Realty net for you are around 20% or 30% compared with what you might obtain on your own. It takes an average of six to nine months to handle a commercial real estate transaction, and it is to your advantage to use a professional to effectively negotiate the complex and legally-binding terms. You’ll find it is well worth the time and effort we put into the transaction and the best part is it doesn’t cost you a thing!
36. Do Tenant Reps work with other real estate companies, too?
A: Tenant Reps routinely work with other real estate companies and property owners, many of whom are known on a first name basis. While it is most common for the Tenant Rep to contact these companies on your behalf, you may call these companies directly when circumstances dictate. Just be sure to mention that you are being represented by a Tenant Rep who will be negotiating the transaction on your behalf.
37. What if I see a good location myself?
A: Wonderful! Simply contact your Tenant Rep who will check it out and negotiate the best terms possible for you. It is likely that the Tenant Rep is already familiar with the building and too many inquiries will only encourage Landlords to increase their rates.
38. What will it cost?
A: Nothing! Normal site selection or acquisition tasks require no fees from you since Tenant Reps are compensated through a share of the leasing or brokerage fee that the Landlord pays. In fact, since Tenant Reps commonly obtain better terms for their clients than the clients would have obtained themselves, you will spend less time and money by working through one. Other services such as market research, consulting, lease analysis and lease termination negotiations are available and billed on an hourly or fixed-rate basis.
39. Is it fair and legal for you to represent us and be paid by the Landlord?
A: Yes. Real Estate Commission regulations are clear that it is both legal and ethical to represent the Tenant or Buyer and be paid by the Landlord.
40. Is an exclusive agreement necessary and in my best interest?
A: Hard working Tenant Reps contact all other commercial real estate brokers and owners on your behalf. If other brokers do the same thing, confusion results. An experienced Tenant Rep will not invest the time and resources necessary to do a superior job without your exclusive commitment. And when it comes to making a purchase, the North Carolina Real Estate Commission requires that an exclusive agreement be executed prior to a licensed broker writing a purchase or lease agreement.
41. What is the market doing? Is now a good time to make a move?
42. Can I re-negotiate my lease before it expires?
43. What’s the difference between a full service lease and a net lease?
44. What is TICAM?
45. How big of a space do I need?
46. Where is the best place to locate my business?
47. Do we sign an agreement for your services?
48. How long does the process take?
49. What other services will I need before and after the lease is signed?
50. Who pays your fees?