What You Need To Know Before Signing A Commercial Real Estate Lease

Many business owners make a mistake by rushing into signing a lease after making a seemingly fantastic deal. They forget that after signing, there's no going back. That's why it's essential to make sure everything is in order before doing so.

With that in mind, we wanted to tell you all the things you should look into before you finally sign any real estate lease.

Read and Understand the Entire Lease

Nobody likes reading long contracts, but when it comes to real estate leases, you need to. Many landlords use standard leases with general terms, but they can still make mistakes and forget to add something specific to your deal. What’s worse, they can easily add a clause that you might not like.  Also, even if the lease is a “standard” form, you can still negotiate the language to protect you better.

So make sure you read the entire lease and check with a commercial real estate lawyer that specializes in leases to see that everything is in order. 

Don’t Rush the Negotiations

The negotiations are crucial in any real estate deal. You should never rush them, and you should never accept the first offer you get from the landlord. Refuse and try to negotiate the price or other concessions like facility costs, pass-through protections or tenant improvements. 

Important advice: Always be prepared to walk away. If you portray that willingness, the landlord will look at you in a different light, and you'll be in a position from which you can get much more than you have previously hoped to get. 

Are the CAM Fees All Right with You?

The common area maintenance or CAM fees are an essential part of any commercial real estate lease. They state how much of the building’s maintenance you’ll have to cover and how much the landlord will cover. The fee should be based on the percentage of the building you’ll rent, but some landlords try to increase the fees even if that doesn’t correspond to the percentage of your part. Also, what fees should be included in the CAM fees should be reviewed and approved.

Remember, you can, and you should negotiate CAM fees.

Is There an Arbitration Clause?

Disputes can always happen, which is why your lease should have an arbitration clause in it. Most do, but not all will contain this clause. Make sure you check if yours does and if it gives you the right to participate in the selection of an arbitrator and other decisions that relate to arbitration.

Make Sure You Do a Professional Assessment of the Property Beforehand

Even if the property looks good, it's still essential to get a professional to assess the location and the building itself. It will ensure everything is the way it was promised. What's more, only an expert can do a proper assessment of the building. 

Hire Experienced Agents

Before reaching any deal, it’s best to hire the service of an experienced real estate agent. They are not only great at finding you the best deals possible, but they can also assist you in the negotiation process. A good agent will advise you, make recommendations for service providers that specialize in this field (attorneys, inspectors, expeditors, etc…), and ensure you cover everything that matters before you sign the lease.

For more information, you can reach us at jkillinger@cbicommercial.com.

Ready To Buy A Building For Your Business?

Ready To Buy A Building For Your Business?

Many business owners opt for renting a property for their business instead of buying it. The most common reason is that it costs less. However, purchasing a building has its own set of benefits and advantages.

Yet it's not easy to determine which road you should take. That's what we aim to help you with, which is why we'll explain in this piece when is the right time to stop leasing and the time to buy a building for your business.

The Economics of Buying vs. Leasing

First and foremost, we have to look at the economics of both options as they play the biggest part in your decision. 

So, what are the main differences:

• When you lease, you initially pay a much smaller amount, but you end up paying more in the long run

• When you buy, you initially spend more, but your long-term costs are significantly lower

Both options have their advantages, so you have to reconcile the two and find which one is better. You can do that by analyzing the cash flow of both options. That way, you'll see if you stand to lose more or gain more when you buy the property. 

To do this, you need to look at the following facts:

• The terms of the lease

• The combined federal and state income tax rate

• How long your business will use the building as that affects depreciation

• The estimated value of the asset for when you decide to sell it

• Cost of capital

• All the other expenses you'll have once you buy the building

In addition to this, you need to take a look at what your long-term plans are for the business and the building you’re considering to buy. Most business owners look at the short-term, which is why you need to get out of that mindset and consider the future. Will it be necessary for your business to stay in the same location in the future? Do you think your business will require modifications to the building that the landlord might not accept? If the answers to questions like these end up being positive, then it will be best to buy the building.

Other Questions to Consider

Several other questions can help you decide whether or not you should buy the building:

• Do you need to control the building for your business to operate smoothly and advance?

• Are you able to cover the potential losses you might have in the first year or so?

• Are most buildings that you find suitable for your business only offered for sale, and not for renting?

• Are you ready to take over all the maintenance duties and expenses that would otherwise be covered by the owner?

• Is the value of the land where the building is located increasing, and will it most likely continue to do so?

• Is the building located in an opportunity zone or in a location that offers tax incentives for owning properties?

If your answer to most or all of these questions is a resounding yes, then there's no need to continue to deliberate. The decision has already been made – you should buy the building. However, if the answers are mostly negative, then you should choose to lease instead. 

If you require some further assistance in your decision-making process, you may reach me at jkillinger@cbicommercial.com.

Can I Modify My Space in a Commercial Lease?

Commercial leases are a complicated business for most landlords and investors. Much of it is legal talk and almost always requires help from a lawyer, in addition to the help you get from your commercial real estate agent. 

A lot goes into a regular commercial agreement, and there is much you need to understand before we can answer the question. By the end, you will know whether or not you can modify the space you have per your commercial lease, and who will be responsible for the modification.

Using a Commercial Lease Amendment 

Naturally, if any party contained in the lease were to modify the space listed in the contract, they need to change the very agreement. Doing this is possible with the use of an amendment. If both the landlord and the tenant agree, a single paragraph or a whole section could be changed in the agreement. The change is made to allow for modification or other improvements that were not previously mentioned in the lease.

This change is called a commercial lease amendment, and it is not to be confused with a commercial lease addendum. An addendum is a separate document that goes together with the lease once it’s signed. 

If you decide to go this road, proper negotiation between the owners and renters must take place. 

What Does an Amendment Change and What Does It Allow?

Several things can be achieved with a commercial lease amendment:

• The terms of the lease can be extended

• An adjacent space can be included in the lease and occupied by the tenant

• Modifications and improvements to the space from the lease can be made

The last part is of interest to us. In addition to modifications and improvements, an amendment can allow for the space to be increased or decreased in size. All of these things are very important for commercial leases because the business occupying the space leased can grow or struggle through time. That makes changes to the actual physical space necessary.

Many of these changes are often allowed by the initial lease as tenants may want to make changes to the building from the very start. The changes are outlined in the lease, and the tenant makes the changes upon signing the contract. 

However, as we’ve already mentioned, changes might be required over time – most of which are rarely planned in advance. For the desired modifications and improvements to take place, both parties need to agree and change the lease appropriately. What’s more, the amendment should also clearly state who is responsible for these changes. In most cases, it is the tenant, but sometimes it could be the landlord as well. 

Key Takeaway

All in all, almost any kind of modification or improvement to the space from the lease is possible. As long as both parties can agree, they can make it work. They only need to make sure the lease acknowledges their deal to the letter so that no future disputes will occur.

For more information, you may reach me at jkillinger@cbicommercial.com

Best Tips for Finding the Right Assets in an Emerging Market

I constantly hear of people that want to invest in an emerging market, the proverbial golden goose of the real estate industry. I believe much of this has been stoked by the somewhat resent opportunity zones that many are trying to invest in. To find the right area, there are many factors to take into consideration. Some of these are time-proven techniques that developers have used for decades to forecast rent growth and desirability to a neighborhood, others are more common sense, and straight economics. 

1) Risk Appetite - Being part of the first wave into a new market can be daunting, you will need to be prepared for the long haul.  Are you willing to be the first trailblazer into a sub-market, where you may get the lowest cost, but also potentially the longest time to see the change, if at all?

2) Look for City programs - Most cities are seeking ways to drive business to these communities, check with your city to see what programs are in place to drive business to this community, there are cities that have programs that incentivize non-profits to help turn an emerging community around.

3) Has there been a dramatic change in the demographics for the immediate neighborhood? Is there new residential construction that is driving higher prices, and denser neighborhoods? If so, it is likely that the commercial market will follow within a few short years.

4) Check the affordability - Can the community afford higher rents at this time, if not, you will want to consider the upgrades to your property and how much you spend on them.

5) How is the job market - If jobs are coming to the community you will then see growth and it will create need for more housing, retail and services to support the community.

6) Other buildings coming to the market - Are you seeing several other properties coming to the market or have there been more permits pulled to upgrade properties. You will want to check these by talking to the city and of course driving the area that you are looking to buy. Also, this may give you insight into what types of properties are in demand and where yours might fit into attracting the right tenants that may be willing to pay higher rents.

7) Vacancies and how fast they lease up - Look at the existing properties in the area, check their lease rates, condition of property and how long they stay on the market. If the vacancy rate is lower than the industry standard then it shows that there is room to raise rents, as the area is in high demand.

8) Infrastructure - You always want to check and see if there is enough infrastructure in place to handle the amount of people that you are expecting to move into this community, are there grocery stores, hospitals and schools.

9) Nightlife - Depending on your asset class, if you are looking at multifamily you may want to see if there is any sort of nightlife that your potential new residents may find appealing, after all, people generally like to eat, and go out in the neighborhoods in which they live.

I hope these tips help, please check out our blog https://www.joekillinger.co/joekillingerblog for more real estate investing tips

Finding The Best Rate Of Return On Your Commercial Property

Capitalization rate, or cap rate for short, is a measurement used by all real estate investors, whether they are commercial or residential investors. It shows them the potential rate of return on a property. Knowing the cap rate is advantageous in deciding whether or not a property is worth investing in or purchasing. 

In this article, we wanted to go deeper into everything you need to know about the cap rate and what a good one is.

How the Cap Rate Works and Why It Matters

The cap rate is a formula, and a very simple one as well:

            Cap rate = net operating income / current property value

The rate is based on a one-year period, and this simple measurement is usually enough for most investors to determine how valuable a property is.

Naturally, something so simple can’t always be enough for determining the value of a building. For that reason, we highly advise you to use the cap rate together with a few other evaluation tools. By doing that, you can get a more clear picture of how valuable a property truly is.

We advise this because the cap rate is based on annual returns, which can't always reflect the actual value of a property. Sometimes they only have a single good year, and you can end up investing in a property without the full picture. Plus, cap rates don’t take into account things like mortgage payments, lender fees, closing costs, and more. 

Despite its flaws, the cap rate is still an essential part of determining the value of a property. A long-term investor should always look into the cap rate of a residential or commercial property. On the other hand, those looking to flip the property quickly need not rely on it at all as they won't be renting it.

Cap rates matter mostly because:

• A rising cap rate shows that there is a rise in the income of the property relative to its price

• A falling cap rate indicates that the income of a property is lower compared to its price.

What Is a Good Cap Rate?

Now that we’ve covered everything important you need to know, we can give you an adequate answer to this vital question. 

A good cap rate is usually very subjective, but many investors tend to agree that it is somewhere between 4% and 12%. In high-demand areas like Southern California and New York, a 4% cap rate is usually the norm. In less demanding cities and rural neighborhoods, it's usually well above that.  Just remember, generally speaking, the higher the return the higher the risk associated with the investment. 

Naturally, it always depends on how you’re using the cap rate, but this answer should satisfy most investors not looking to delve too deep into cap rates. 

If you do want to delve deeper, you need to consider the amount of risk you are willing to take, as cap rates are proportional to the amount of risk involved. The lower the cap rate, the lower the risk, and the higher the cap rate, the higher the risk. So, when you start to think about what a reasonable cap rate is for you, it's necessary to determine how much risk you are willing to accept. By determining that, you'll know precisely what cap rate will be suitable for you.