Robert Jennings, Associate Broker Royal LePage Sussex Realty 44 years experience. - The Insider's Guide To Leasing Commercial Real Estate

The Insider's Guide To Leasing Commercial Real Estate

Robert Jennings, Associate Broker Royal LePage Susse age Sussex Realty 44 years experience. xperience.

Table Of Contents

Introduction

Why A Tenant Needs Representation

Why You Can’t Use A Residential Realtor

The Different Types Of Commercial Properties 17

The Different Types Of Commercial Leases

Signs You Need New Office Space

Lease Versus Own

What To Consider While Searching For The Right Space

Conducting A Financial Analysis

10. The Best Way To Evaluate Your Options

11. Factors To Consider In Office Leasing

12. Why Flexible Leasing Is Important

13. The Most Common Mistakes Tenants Make When Leasing Office Space

14. Expenses To Consider

15. Finding The Best Property Management And Ownership Groups To Work With

16. Terms To Get Familiar With

17. Developing Your Request For Proposal

107

18. Surprising Questions To Consider Before Leasing

111

19. Tips For Negotiating Your Lease

117

20. Red Flag Terms In Leasing

125

21. Designing Your Space

131

22. Don’t Overlook These Aspects Of Your Property And Lease

137

23. The Pros And Cons Of Shared Space Agreements

143

24. Inspections

149

25. Insurance, Repairs, And Maintenance Things To Know

153

26. Moving Guide

159

27. Getting The Best Renewal Terms On Your Lease

167

About Robert Jennings, obert Jennings, Associate Broker, SRES, CPC , SRES, CPCA

Over my 44 years in real estate, 16 in commercial real estate and 28 years in residential real estate in BC, my philosophy has never changed. To guarantee this, I start with a customized marketing plan to showcase your property to buyers and follow it up with endless energy and years of experience as a skilled negotiator and knowledgeable realtor with 10 years builder experience.

*Associate Broker licensed in BC * BA Economics, 4 yr degree UBC, 1971

*Urban Land Economics, 4 yr Real Estate degree UBC, 1983. *900 + homes, and townhomes sold, including retail, office and warehouse properties. *5 years commercial leasing and land assembly experience.

vii

CHAPTER 1 Introduction

If you’re reading this book, chances are you’ve just begun or are considering starting your search for new office or building space. Countless variables go into finding, leasing, and moving into commercial office or building space. This book will lay out each step, in precise detail, of the commercial real estate searching, leasing, and lease renewal processes. It’s crucial to understand each step and aspect of the process to find and secure a location that will suit the needs of your business and employees. Because companies typically only address their real estate needs every five years or so, most people involved in the transactions don’t have much experience handling them. The potential for bad moves is high, and bad moves can set a company, its morale, and its employees back multiple years. However, you should be excited about the opportunity to move your office space. Moving could potentially create positive ripple effects throughout your company that you might not even have considered. Perhaps your company is outgrowing its old office, and you want to find the best space to accommodate your current team that will also attract and accommodate future team members. Maybe you’re just getting off the ground, and moving into an office space is the next logical step. Even if you are downsizing, the right move can reinvigorate your company. The whole process can be a lengthy one — one that needs to start 12 to 15 months in advance, at the very least. Ideally, a new lease 1

should be signed 5 to 9 months ahead of your move-out date. This will not only ensure you have leverage over the new landlord in your negotiations, but you will have taken the proper time to fully inspect and vet all of your options. This book is divided into four parts: The Basics, Evaluation, The Process of Negotiating, and After the Lease is Completed. Choosing the right commercial real estate broker can have the biggest impact on your success throughout the process. A good Realtor will navigate the process with you and provide expertise for each step. Whether you’re the owner of the company or an employee tasked with finding a new office space, you might feel like you’ve taken on a second full-time job. A commercial real estate broker is necessary time saving. In part 1, we’ll discuss what you need to know about the process, before starting your search. There are many reasons you should hire a broker that you may not realize, and choosing one with commercial experience and knowledge is key. Unless the real estate agent who helped you buy your home has also handled commercial leases, you’ll want to hire someone else, specifically qualified to help you in your transaction. There are many different property types to consider. They differ in location, price, and functionality. There are also different types of commercial leases. Each has its own distinct benefits and drawbacks. An experienced broker will learn about your long- term plan and understand which type of lease will work best for your company. However, understanding each type for yourself can help you through the process and add value to your search. You may also have received this book in the middle of contemplating whether or not you need new office space. If any of the warning signs outlined in Chapter 4 apply to your current office space, chances are that you do. Companies that wait too

long to notice these red flags are often forced, out of necessity, to continue to work in unfavorable environments. On the other hand, companies who get ahead of the process can have their pick of properties that are tailor-made for their employees, businesses, and futures. Even if you already know the area and size of the space you need, many other factors are at play. Many of those factors are based on the current market conditions, which a broker will help you understand. You may also be tempted to purchase your next office space, something we’ll discuss in Chapter 5. The evaluation phase will take the most time and energy from you or the person in charge of your search. Knowing the needs of your employees is a big factor in this phase, as is knowing their commute times and preferences. There are also many factors at play when it comes to looking at space, and proposing and signing a lease. The four basic costs in a lease are rent, operating expenses, escalations per year, and proportionate shares of real estate tax increases above a base year. But numerous other factors also come into play, such as pricing, time, and design. For larger lease areas, where a showroom or office have to be built, a space planner may prove beneficial. You also need to consider the fees, which many CEOs don’t put in their original budgets when they’re looking for space. Not that these are hidden fees, but there are just so many to account for that it’s easy to leave some out of your initial budget. The experience of a qualified Commercial real estate professional is essential when you’re looking to work with the best property management groups in your area. You don’t want to get stuck with a horrible owner or unresponsive firm. But you don’t know which groups or owners to work with. Doing research on your

own is important, but you should lean on your broker to help you here. You may be tempted to negotiate on your own, but a landlord’s job (especially if he or she is part of a group) is to capitalize on negotiations. Terms could pop up in a lease that should be considered red flags, which you may not be familiar with. Unlike standard residential leases, each commercial lease is a set of complicated legal documents. After the lease is completed, there are several more detailed steps to complete. Inspections, insurance, and the actual move are the final main steps, but there are minor steps often overlooked that highlight the need for a broker. Finally, there are methods for getting the best deal on a renewal that can serve you down the line. Here are some examples of how an experienced commercial broker can save a client’s deal. I heard about an agent and a potential tenant who were going into a space with $30 per square foot to build out a 14,200-square- foot (SF) office. After multiple bids by construction companies, the best appraisal still ended up at $4 a SF over budget, even after previous appraisals before the lease. It was set to cost the tenant an extra $56,800 or so. Naturally, the tenant didn’t want to pay. The tenant was going to walk and blow the deal. However, the deal did give them six months of free rent, and was worth around $75,000. The broker came up with the idea of splitting that amount in half, and have the landlord cover the extra $4 per square foot. So free

rent was traded for over-the-budget tenant improvement dollars (that were already allocated in the lease). The tenant and owner each went to sleep thinking the deal was over, only for the agent to save it the next day. There are so many brokering aspects like that in each deal and lease. Another story I heard about is a tenant who was looking for about 30,000 SF. The only building he liked in town had a floorplan of 37,000 SF, and the owner wouldn’t split up that other 7,000 SF. The broker extended the term of the lease proposal from five to eight years. The key was, the tenant wouldn’t have to pay the extra 7,000 SF until after the first two years. The longer lease favored the owner particularly over a longer term and the longer term helped the tenant while he was getting his business off the ground in a new location. The tenant could use the extra space for the two years, as well. He ended up taking the deal, with the goal to gradually expand into the extra space. The last example pertains to a smaller deal. The tenant only wanted to do a one- or two-year lease. It was tough to find space for that short a term, since it already had to be built out and fit the tenant’s needs. Eventually, the broker found the space that fit, but the previous tenant was leaving the furniture. The tenant would get to use the furniture without paying for it, but in return, the owner demanded a three-year lease, instead of two. The tenant saved about $60,000 in furniture after it was appraised. That was worth more than the extra year on the lease, so it was signed. However, the extra year would backfire on the tenant. The business folded in 20 months, and he was stuck in the lease. Luckily, the broker was able to bail him out, after finding a rare short-term tenant to take on a 16-month sublease.

These stories illustrate the intricacies and details that go into every move, negotiation, and lease signing. The number of aspects that can be (and usually do get) negotiated can seem endless.

CHAPTER 2 Why a Tenant Needs Representation esentation Hiring professional tenant representation is by far the best choice when it comes to starting your commercial real estate search process. You want someone who is only on your side, right? Someone who isn’t tied to you and the landlord at the same time.

THEY ONLY WORK WITH TEN RK WITH TENANTS, AVOIDING LANDLORD CONFLICTS

A prepared broker will lay out a plan with a series of steps the first time you meet them. Their knowledge is geared toward your side of the search and deal. Without professional representation, you may be forced to work with an agent who works with a landlord for their benefit solely. You don’t want that. Or you could end up working directly with a landlord or property management group. You probably don’t want this either. There are too many variables for someone not in the industry to prepare for. A tenant representative will be prepared and guide you every step of the way, working directly for you. Because of that, their advice is unbiased and so are their market updates. Landlords and their agents can skew statistics to favor them. Your broker won’t do that. Each lease scenario is unique in commercial real estate. You need someone who tailors the plan to your unique needs. The broker will ask about your employees, commutes, future plans, and everything else before you hire them. Then they build the plan from there. Commercial real estate is an industry of trust, with countless moving parts. Don’t put your trust in an agent who works for the 7

person you’re negotiating against.

THE LANDLORD PAYS THE COMMISSION, YOU OWE A BROKER NOTHING

This has to be the biggest reason to work with a t h a tenant representative. It doesn’t cost you a single dime. The broker is paid by the owner or ownership group at the end of the deal. In most leases, the landlord is prepared to pay the commission fee. That’s why they could entice you to not use a broker. It will save them money but leave you vulnerable for a worse lease. Hiring a broker also lets landlords know you are serious. A coveted office owner may not care about saving money on the commission fee, he may just want to get a tenant as soon as possible, with no hassles. With no broker, they may be slower to return emails and calls. At no cost to you, you become a true candidate in the eyes of landlords.

YOU MAY ONLY THINK YOU KNOW WHAT YOU NEED

When you go into this process with your vision, that’s before you get your company’s needs analyzed by a professional. The broker may have a completely different idea than you do, and it could be better for the company. They’re experts at this and could even recognize needs you didn’t think were there. I’ve seen many examples of business owners improving or changing their vision after getting their needs analyzed by a tenant representative. Brokers know about aspects that prospective tenants aren’t aware of. They also know how to balance your future needs with your current needs. A great broker will help you look at what you need beyond the transaction. They’ll help you get the best amenities

around your office while building out the best use of space for the inside. All this lets you make the best move for your company while having time to focus on your actual business.

YOU NEED THEIR EXPERTISE IN NEGOTIATIONS

This is one of the most crucial situations with a tenant representative. Your broker is legally obligated to work in your best interests. This will eliminate mistakes, bad negotiations, and anything else that comes up. It’s important that negotiations are done professionally if you want to gain an advantage and a favorable lease. Leases are complex and so are their negotiations. The broker will explain each step of the process and inform you about each aspect of the lease. Plus, they’ll know the market inside and out, knowing what rates are good. Without a broker, you may only know a slice of the current market in your area. Negotiations are where their expertise shines through the most. They may even have an existing relationship with other landlords, so getting direct comparisons from current leases around the area is possible. In these negotiations, brokers also serve as a buffer between you and your landlord. It is much easier dealing with someone who does this professionally, than contacting your opposing party directly. There are many factors that get negotiated that I will touch on more later in the book. You need a professional to fight for the best deal on each of those factors for your company.

A BROKER HANDLES TENANT IMPROVEMENTS

Each future tenant creates a customized buildout for their office space. It is your broker’s job to negotiate for the budget that the landlord pays for this referred to a Landlord improvement

tenant allowance or Landlord loan for improvments, that may be amortized or not over the term of the lease. Creating the most efficient layout and use of space is crucial for using your money in the best way possible. For example, without good representation, a tenant could sign a lease that allows for $36 per SF of improvements. However, the tenant wouldn’t have a way to find out that the market rate right now is $22 per SF. If it’s a 5,000 SF office space, that’s a $7,000 difference in the improvement budget. Also, it takes time and effort to properly manage the budget and plan out the entire process. Most employees or owners don’t have time to do this in a reasonable window, since it can be a full-time job. The broker will use their experience to guide the tenant into the best square footage for their staff and budget. Most brokers have programs that run the numbers for your prospective office and give you the best fit for your best price.

YOU NEED THEM TO HELP WITH LEASE OCCUPATION AND CONSTRUCTION MANAGEMENT

After a lease is signed, it’s time to build out your office and go through with the terms that were agreed upon. It’s the broker’s job to make sure the terms are met in a t et in a timely manner. You don’t want to be the one chasing down your landlord and trying to get construction bids done. The broker will make sure that the buildout is completed properly by the construction company. It is their job to stay on top of that and everything that comes before and after it. If your move- in date is impacted by slow construction or any type of disagreement, they can negotiate some favorable aspects of your early rent with the landlord or just void the lease altogether. Having someone with experience in these situations makes all the

difference.

A BROKER WILL FOLLOW THROUGH ON EACH DETAIL THROUGHOUT YOUR ENTIRE LEASE OCCUPANCY

The broker’s job does not end when you move in. They owe you service throughout the entire lease. It could come about in many forms, usually dealing with the landlord and honoring different aspects of the lease. If your AC goes out and the landlord is slow to fix it, the broker’s job will be to speed up their process. Dealing with a tough landlord can set you back. You may not realize if they violate the lease in any way, but your broker will if you keep them informed.

BROKERS KNOW THE BEST PROPERTY MANAGEMENT GROUPS AND L UPS AND LANDLORDS TO WORK WITH

If you have a responsive landlord, the broker won’t ever have to enforce the terms of the lease to get things fixed. Usually, the tenant doesn’t have a knowledge base and relationships with ownership groups and landlords to know who is responsive and who is not. Your broker will know the background on them, or research it through their contacts. This can set up your business for a smooth occupancy throughout the entire lease. Without the broker’s knowledge, you could end up with a horrible and unresponsive landlord. This is such an important aspect, I’ve written a full chapter later in the book (Chapter 14) that covers how to choose the best landlord.

YOUR BROKER WILL H KER WILL HAVE A TEAM OF RESOURCES FOR YOUR USE

If you’re doing this alone, this is what you’d have to do:

• Find real estate attorneys to look over each and every one of the many documents involved in the process. • Research and find an architect or space planner to design your space. • Find a construction company to bid on the buildout price, before construction started. • Find the best insurance. • Find the best people to inspect your space. Finding each of those experts would be incredibly time- consuming. But when you work with a experience commercial lease broker, you already have all of these resources at your disposal. If you trust your broker, he or she will lead you to the right experts. There are many benefits to hiring a tenant representative. The main benefit is the time you save. Plus, you incur no costs, and you’ll most likely save a lot of money. All of the steps I’ve outlined in this chapter can add up to a full-time job. No one can handle all of these tasks by themselves and stay on top of their business.

CHAPTER 3 Why You Can’t Use a Residential Realtor

I’ve occasionally come across business owners or decision makers trying to get residential realtors to help them navigate the world of commercial real estate. They each sell property. They each have a license. They are each experienced in navigating a deal. There are a few similarities for sure. But they don’t carry over the way you might think. Though each of these careers facilitates leasing and selling properties, the function of the properties differs greatly, as do the different variables. The greatest differences are the leases and terminology First, residential agents usually aren’t required to have a college degree. Commercial agents are. There is a reason for this. They need to have a full understanding of terms like capitalization rate, real estate analytics, gross rent multiplier, and internal rate of return. Commercial real estate has detailed financial aspects that are impossible to jump into if you aren’t an expert. That works both ways. Most commercial agents also aren’t experienced enough in the residential field to jump right into a home sale (though some commercial brokers started as residential realtors and could do that.) Second, as stated before, the biggest difference shows in the types of leases. Though each state has its own laws, the commercial lease is extremely detailed. A residential lease agreement, on the other hand, is simply an agreement between the landlord and a 13

tenant to use the property for a living arrangement.

Most residential leases are standard and can be used for different tenants. What varies the most, obviously, is the time and price. The landlord is usually responsible for repairs and any renovations that are needed. For the most part, these leases are cut and dried without much room for negotiations. A COMMERCIAL LEASE IS A S E IS A SIMILAR AGREEMENT IN GREEMENT IN PRINCIPLE, BUT MUCH MORE DETAILED Creating a working environment for a group of employees is different for each business. Some aspects may be standard but usually leases have to be customized to each business. The rent for commercial properties is based on the amount of square footage occupied by the tenant, plus, in some instances, a percentage of the gross income earned by the tenant. The leases are always longer and there is usually an option to renew for another term when they end. All the reasons we listed in Chapter 1 about the benefits of using tenant representation, are the reasons why realtors don’t work in the commercial industry. You may have a friend or relative who convinces you to let them try. For all those reasons and the expertise needed down to the last detail, it is not the best idea. Still, it is not uncommon to run into an agent who has practiced both in the past. They could be working in both fields now and you like them. Here are some questions to ask them or any commercial agent to see if they are the right person for the job. • Do you list commercial properties? How much time do you spend on that per week? And how much do you spend on residential real estate?

• When did you last sell or lease a commercial property? How long has it been? The market changes weekly. Did you know that? • Do you have the proper documents ready for use? Do you have experience writing them? There are no set contracts as for residential ones, so could you write out a full “Letter of Intent” or lease that is specific for my company? • How familiar are you with the leasing prices in the area? Do you know what the price per square foot in my area is going for? Do you know the difference between a net and gross lease? • Are you a member of any commercial real estate organizations? The best real estate professionals (in residential or commercial), only work on one side and are experts in their area. It’s too much to do both and master each side. Residential sales are usually based on emotional moments. Commercial sales and leases are all done to eventually make a bigger profit and improve a company. Besides the technical aspect I’ve mentioned, this makes negotiations much more bottom-line driven. Commercial agents rely on numbers, software that produces those numbers, and their market knowledge to get that done. You can’t dive into commercial leasing without training and a deep understanding of all the terms, the variables of the lease, and eventually the buildout. This requires a good amount of math, done on the spot at times, to price out square footage, building costs, and everything else. Those scenarios won’t be familiar to residential realtors when a quick answer is needed.

CHAPTER 4 The Different Types of Commercial Properties operties

When you start your commercial real estate search, the first part is identifying what type of property is best for your business. Most likely you are just looking for a standard office, but knowing each property can be beneficial and could even come into play if you end up doing something unorthodox. There are six different types of commercial properties. They can be broken down into a few levels. You may want to work with your broker and consider what is best for you. Even if the choice is clear, vetting all options is the smartest way to go.

OFFICES

Office buildings are separated into a few classifications of their own. They can be multi-tenanted or single-tenanted and are usually built out to fit tenants’ wants and needs. They come in all shapes and sizes and are distinguished by height, location, and use.

Class A Offices

These are the most luxurious offices in each area. Their cost for rent is above-average and they usually have high-quality finishes, are in the busiest areas, have the best security and IT systems, and are easily accessible (despite their surroundings.) These are built to impress and often have their own amenities inside lobbies and on different floors. They don’t always have to 17

be new, as older and distinguished buildings can fall under this category as well. While Class B buildings can have their own amenities, there won’t be as many and they won’t be as high of quality.

Class B Offices

This is your average everyday working office. The landlord competes for a wide range of tenants in a variety of industries. The building does not compete with Class A buildings but can often stand out in the area. The area around it is adequate and so are the amenities. There may not be the number of amenities as in Class A buildings, but the lobby and common areas are pretty upscale. Some finishes may be outdated but these offices can have a few high-quality tenant improvements done to them. Maintenance and janitorial services are pretty good. The HVAC systems are usually functional but not top of the line. There is usually on-site parking, though it’s not as convenient as Class A.

Class C Offices

These are mainly for tenants in a p ts in a pinch, either time-wise or financially. They are in a s e in a shorter lease, for less than the market average, and in a l d in a lower-end area. These buildings are often more than 20 years old and pretty run down. The technology in the building is often outdated. There’s usually no tenant parking and each office has its own older HVAC unit, inside one central unit for each floor. Upkeep and maintenance is lower quality. Also, if a tenant wants to maximize on the low price but add in fancier improvements inside, that’s often not possible and the building can’t handle it.

URBAN BUILDINGS OR

CENTRAL BUSINESS DISTRICT

These buildings are located in the heart of a city’s downtown area. They often include high-rises found in some of the most heavily congested areas. Tenants attracted to these offices are often more client-based or tech firms. The rents are higher than in the suburbs. Some of these buildings may total over 1,000,000 square feet.

SUBURBAN OFFICE BUILDINGS

These are usually mid-rise structures that range anywhere from 80,000 to 400,000 square feet and are located outside the city’s downtown and high-rise areas. They could be part of an office- park-like area. The rent is lower than in the Central Business District. Tenants here can come from many industries. This grouping can be single-tenant or multi-tenant properties, depending on the location. Choosing between areas and classes needs to be done after analyzing your staff’s needs, commutes, and preferences. An experienced commercial agent will help you determine the best fit.

INDUSTRIAL

These buildings can house operations for a wide range of tenants. They tend to be located outside urban areas, especially along major transportation routes. Companies that rent this space usually need some office space to go along with their storage, manufacturing, and distribution areas. There are four different types of buildings in this category. Any of these can have loading docks for 18-wheelers to load and unload goods.

HEAVY MANUFACTURING

The largest manufactures fall under this. They are almost always heavily customized to the company’s needs. They usually need heavy renovation for a new tenant. Their office space usually takes up 20% of the total area.

LIGHT ASSEMBLY

These are much simpler buildings than the heavy manufacturing classification and can be reconfigured for new tenants much easier and more quickly. They aren’t as customized and can be used for light assembly or storage. They can have less than 15% office space and include higher ceiling heights than other buildings in order to stack and store products. Most of these buildings can include production, storage, and office space.

BULK WAREHOUSE

These properties are most likely used as distribution centers. They are the largest of the industrial properties and can range from 50,000 to 1,000,000 square feet. They require the easiest access for loading trucks and the easiest path for those trucks to the highway.

FLEX INDUSTRIAL

These types of industrial buildings are made to give tenants flexibility in how they use the space. They can also be referred to as flex/tech space. They are office and industrial hybrids that can have anywhere from 30% t m 30% to 100% office space. They aren’t usually found in downtown and office areas because of their size, low-density parking, and the potential need for loading and unloading goods. These can easily be converted and prepared for new tenants and their needs.

RETAIL

These range from single-tenant buildings (restaurants), to strip malls that have multiple tenants. They don’t usually include any high-rises.

STRIP CENTERS

These are usually less than 30,000 square feet and may or may not have co-tenants next to a large retail chain. These chains are Walmart, Target, Home Depot, and others. Many will contain a mix of small retail stores around them like dry cleaning, barbershops, and delis.

COMMUNITY RETAIL CENTER AIL CENTER

These can range anywhere inside of 150,000 t f 150,000 to 350,000 s o 350,000 square feet. They have multiple anchors, such as grocery stores and restaurants. An example is a shopping plaza with a Walmart and a large grocery store chain separated by a few smaller retail tenants. Usually you will see one or more restaurants in these centers.

POWER CENTER

These usually include a few smaller retail stores like Lowes, Best Buy, or Walmart. These major retailers are usually in supersized stores and can take up abut stand out due to the presence of a couple of major box retailers,nywhere from 20,000 to 200,000 square feet. The entire area is smaller than a community retail center and is more focused on the big chain. These usually include an out parcel, which is a separate building in the area reserved for a drive-thru or a bank.

REGIONAL MALLS AL MALLS

These range anywhere from 400,000 t m 400,000 to 2,000,000 s o 2,000,000 square feet.

They have a few anchor tenants that are big chains or department stores, and a high number of smaller tenants. Some of these can be “lifestyle centers,” which are basically open air malls with more dining choices. Every one of these retail spaces is completely dependent on parking and traffic. All retail tenants need a minimum number of available parking spaces related to their square foot ratio.

OUT PARCEL

As mentioned under power centers, these are set aside for fast food or banks. They are attached to most power centers but could be attached to any type of retail area. All of these retail options are meant to provide the most visibility to future clients or customers.

MULTIFAMILY

This group entails any residential real estate that is not a single- family home. They include townhouses, condos, and apartments. They can come in almost any shape and size and any location. They usually include swimming pools, outdoor patios, and fitness centers.

You can separate them into five separate groups:

• High-rise apartments — Buildings with nine or more floors and at least two elevators. They are usually found in large markets and are professionally managed, with 100 or more units. • Mid-rise apartments — These contain 30 t in 30 to 110 units and are 5 to 9 storeys. They are often in urban locations and sometimes have an elevator.

• Garden apartments — These are almost always located in suburban areas and are usually three to four storeys with 50 to 400 units, surface parking, and no elevators. • Walk-up apartments — These can be anywhere from a 2- to 6-storey complex without an elevator. • Special-purpose housing — These are complexes that target a specific part of the population, such as seniors, students, and low-income families.

HOTELS

There are five main types of hotels:

• Full-service — These are stacked with guest services and top amenities. Those can include top restaurants, conference rooms, convention space, spas, shops, and gyms. They are usually located in the central business districts or downtown areas that see the most tourists. Examples are the St. Regis, Westin, and Hyatt. Their success usually depends on the quality of their on-site amenities. • Limited-service — These are a step down in amenities and service but still includes meeting rooms, high-end pools, and gyms. These may not have on-site dining or convention areas like full-service hotels do. Buildout operations are more predictable than full-service hotels on the real estate side. Examples are Holiday Inn and Hampton Inn. • Budget — These could have one or two amenities for guests but mainly just get by with providing the basic necessities for a low rate. Examples are Super 8 and Red Roof Inn.

• Extended-stay — These have larger rooms and better kitchens because it is designed for people staying a week or more. • Resorts — These are on the biggest pieces of land, and are usually in a travel destination (Hawaii or Orlando). They often come with their own golf course.

LAND

These are undeveloped, rural, or raw areas. You see these on highways and travel routes. You can see many of them for sale when you drive past. There are three types: • Greenfield land — These areas are undeveloped and haven’t been touched yet. They are often surrounded by farms and pastures. • Infill land — These are located in city areas and have already been developed, but are currently vacant. This type of land is sometimes an option for tenants if a buyer is in the process of purchasing the land. • Brownfield land — These are pieces of land that were used for commercial industrial purposes, but are now available for reuse. They can also be contaminated lands that have been restored and are ready for commercial use again.

SPECIAL PURPOSE

This is land that may be owned by commercial real estate investors but can’t be classified into one of the categories mentioned in this chapter. Examples of this are self-storage, churches, community centers, marinas, bowling alleys, theaters, funeral homes, car washes, and theme parks.

CHAPTER 5 The Different Types of Commercial Leases cial Leases

There are three different types of commercial leases used by landlords. They differ in how they are structured and what fees are assessed. They all offer different pros and cons, each providing a base rent and having different ways of using the other costs. Landlords are always the party that chooses what lease is used. It’s cut and dried. The tenant doesn’t get a say in what type of lease a landlord prefers. When you search for properties, you must know what type of lease each has before you contact the landlord. The main types of leases are full-service leases, net leases, and modified gross leases. If you start your property search early enough, you’ll have time to find enough preferred spaces. Then you can weigh the pros and cons of each space and their accompanying lease against each other. Going into the process looking for specific types of leases is smart as well. Tenants who start their search late or are unprepared may be forced to take a type of lease that doesn’t work best for them and their company. Terms will vary with every landlord and property, but the leases generally stay within these few categories.

FULL SERVICE LEASE

This is the most common type of lease for office space. In this lease, the rent is all-inclusive. It can also be referred to as a gross 25

lease. The tenant’s rent covers every operating expense for the building. The landlord is responsible for paying every expense that relates to the property. This includes janitorial service, utilities, any maintenance, property taxes, insurance, and anything else associated with the property. Most tenants prefer the landlord being fully responsible for the handling and maintaining of the property. The base rent is usually higher in this situation, in order to help the landlord pay off these fees. This is favorable to tenants because they avoid getting involved in the day to day operations of the property. They have less on their plate. This type of rent is popular among more leases than just those for office space for that reason. During a cold winter, the electric biThe rent is fixed and that’s all they need to worry about. ll may go up but the rent won’t and the tenant won’t be responsible for any increase. These types of leases are some of the best for tenants because of what I’ve said so far, but there are no hidden fees. So it’s easier for companies to budget out their monthly and annual expenses when the rent is fixed like this. Landlords can try to include some cost flexibility in some cases for these types of leases. The “escalation clauses” would be needed in case of increases for insurance and property taxes. Sometimes language can be included in a lease that increases rent due to variable costs. During a cold winter with a higher electric bill, the next month the rent could be higher to cover that. Of course, these provisions take away the positive aspect of a completely fixed rent. However, in these scenarios there usually isn’t that much of a price difference. The tenant is still responsible for their own insurance for their items.

These are some aspects to bring up during negotiations. The tenant should also ask how often the janitorial services are offered. This lease is the most common for a reason. It lets the tenant focus solely on their business plan, and puts the responsibility for everything else on the landlord. Having a landlord who is responsive and easy to communicate with is key in this type of lease. Your broker should know their history and help guide you with it.

NET LEASE

These types of leases are highly adjustable. The base rent for a net lease is lower than a full-service lease. This is because the tenant is responsible for operating expenses that can fluctuate. These can include property taxes, property insurance, repairs, maintenance work, trash collection, landscaping, parking, water, electricity, sewer, and any shared common space services. There can be benefits for this type of lease if it is used in the right office situation. There can also be negatives. The following are a few types of different net leases that landlords use.

SINGLE NET LEASE

The tenant pays a fixed rate plus a share of the property taxes. That percentage of the property taxes can be negotiated with the landlord in some situations. The tenant is responsible for janitorial services and utilities directly while the landlord pays the other costs associated with the property. While the property taxes are built into the rent and could fluctuate, you have to pay the other two costs separately. Depending on those costs will determine if this style of lease costs less or more than a full-service lease.

DOUBLE NET LEASE

This is almost the same thing as a single net lease, with one more addition: the tenant is also responsible for property insurance, as well as the property taxes. It is built into the lease as well. Once again, the tenant is responsible for paying utilities and janitorial services on their own.

TRIPLE NET LEASE

This is the other common type of lease and you see it the most in retail and restaurant locations. It includes property taxes, insurance, and common area maintenance. The tenant can pay some or all of these costs on top of the base lease. The base rent is the lowest here, due to the other fees the tenant will end up paying. Common area utilities and other operating expenses are included here as well. Any services the building provides will cost the tenant. The tenant pays every other cost that relates to the space. These expenses are estimated by the landlord and charged per the space percentage the tenant occupies. A tenant with 2,000 square feet of a 20,000 square foot building is responsible for 10% of the property taxes, common area utilities, and insurance. These leases are friendlier to the landlord than other types. They need to be carefully reviewed, especially in how much the fees can be raised annually. Since they fluctuate from month to month, budgeting is tougher to forecast. The benefit is being able to see and change the operating costs if possible. Tenants can work to lower their utility bill or get a cheaper janitorial service. The transparency provides that opportunity.

The cons of this are the variables you could be on the hook for. If the HVAC unit goes out, you’re responsible for it. You could also be exposed to a property tax hike as well.

ABSOLUTE TRIPLE NET LEASE

This less common option is much more binding than a normal triple net lease. The tenant is responsible for anything at all associated with the property in this type of lease. They are solely responsible for the building. It’s not common and because of this, many tenants might as well just buy the entire building if it’s free- standing. It’s a better investment. You own the building or space without buying it in this situation. If a disaster or something happens, it’s all on you. This lease has been referred to as the “hell or high water” lease.

MODIFIED GROSS LEASE

The full-service lease is tenant-friendly, the net leases are landlord-friendly, and this type of lease is a compromise in the middle of both of them. There is a fixed base rent and each side can negotiate which types of other fees are each party’s responsibility. Utilities and janitorial services are usually excluded and picked up by the tenant but it can be the other way around. Everything else is usually negotiable. Tenants often prefer this because of the flexibility in the eventual lease terms. Unlike net leases, the fees for taxes or insurance are fixed. If they increase, the tenant won’t pay more, but if they decrease the landlord gets those savings. Having no hidden or changing costs is a great benefit for the tenant and their long-term budgeting. You often see these leases being offered in multi-tenant buildings so the tenants don’t have to deal with the hassle of not getting the

fair distribution for utility build and shared area costs.

One con of this is that landlords have been known to be lazier in these leasing agreements. So if the tenant works out a lease making landlords responsible for maintenance, the landlord may be less motivated to get something fixed (or be cheap about it), as opposed to other types of leases. That’s because in this lease some landlords are motivated by spending less on it to save themselves money.

PERCENTAGE LEASE

This is only for retail or restaurants. The tenant will pay a portion of their rent that is based on a certain percentage of gross sales each month. This lease helps the tenant when sales are weak and helps the landlord when sales are strong. It’s important to know what type of lease you prefer before going into your property search. Even though your first choice for office space may not offer the type of lease you want, you can sort your other options by weighing the different types of leases they offer.

CHAPTER 6 Signs You Need New Office Space ou Need New Office Space An overcrowded office can affect the morale and effectiveness of your employees. It can contribute to building a negative work environment. It’s important to keep your employees’ needs satisfied. It can be difficult to realize that you need to look for more space and not renew your lease. You’re working in the office every day and have become accustomed to it. This chapter will go over some aspects of your current space to analyze. You may have plans to expand your staff in the near future, or you may have way too much empty space you are paying for. Downsizing can help a business when it’s right. If you’re not sure about moving and your lease is coming up, now is the time to think about it. Here are a few of those warning signs to look out for. YOU'VE OUTGROWN THE B WN THE BUILDING OR SPACE AND THERE'S LITTLE TO NO VACANCY NOW. Do desks seem to stack up near each other in small spaces? Are conference rooms crowded? Storage closets unable to shut? Those are the most obvious signs that it’s time to get a bigger space. How much parking is there every day? You really need to avoid prospective clients coming to your office and taking a while to find parking. Are meetings ever scheduled outside the office to get into a less cramped environment? Working in these cramped areas will drain employee morale and 31

productivity as well. Feeling like a bunch of sardines crammed in will only distract their efforts to work. You want to avoid situations like this as quickly as possible. If you aren’t sure this is a problem, simply reach out to your employees. They’re going to give you honest feedback here. If it is a problem, they will want to move to a bigger office. If it isn’t too small, they won’t want to move since that would just be unnecessary effort. A minimum of 40 square feet per employee is a good guideline as well. So if you don’t meet that, then it’s time to make a move. If you are an expanding company, moving and growing into a larger office space can help fuel that expansion and keep your company on a steady positive trajectory. You also don’t have the ability to add any new talent if your office space is running low. Here are a couple of ways to realize if you are running low on space: • Sick days are way up. Germs spread like crazy when everyone is working on top of each other. • There are more employee conflicts and complaints than normal. Just like siblings sharing a room, employees sharing close space could lead to bickering. • Meeting rooms are constantly full and booked up, or people are standing up during meetings. Another easy to notice sign. You may have multiple departments that have to jostle for their time. When this happens it’s time to expand.

YOUR COMPANY IS PAYING FOR SPACE THAT IT DOESN'T USE.

Downsizing isn’t always the worst possibility. You don’t want to be paying for office space that you aren’t using. That makes no sense. Unless you plan on adding more people, it is a waste of money. Companies cut back all the time. It’s normal and part of everyday business. If your company had to do that and the lease ends soon, you probably want to look into moving.

YOU'RE PAYING TOO MUCH FOR YOUR SPACE OR AMENITIES. R AMENITIES.

Maybe you’ve spoken to a commercial agent or other business that has comparable amount of office space. If you’re paying too much and can’t get a lease renewal at market value, it’s clearly time to look for new space. What if new amenities were added to common areas or your office that affected your rent? Make sure you’re not paying too much for them. This is another factor to consider.

YOUR OVERALL INTERI ALL INTERIOR DESIGN NEEDS TO BE COMPLETELY REWORKED.

This doesn’t just mean that you have too many employees for your space. It may just not be working the best for your company and your employees’ work-style. A bunch of isolated cubicles may not be the best for your staff. They may respond better to working in an open space. Ask them what they prefer. Then weigh what works best for the future and your budget, to remodel the inside as quickly as possible under a new lease, or move. The landlord may not even let you remodel. It could be the other way around. If there’s a lack of privacy for employees, cubicle or solo offices may be better-suited and

preferred by your employees.

If your interior is run down and the landlord hasn’t kept up with repairs, that’s another clear sign that’s it’s time to move. You may not want to stick around for any renovations that could affect working spaces either.

EMPLOYEES HAVE TROUBLE FINDING PARKING AND TRAFFIC IS ALWAYS HEAVY.

This is an obvious one. These two factors have a dramatic effect on everyone’s morale and productivity. It is completely worth moving if it helps your employee’s commute while making parking for everyone easier.

YOU NEED TO IMPRESS MORE CLIENT RE CLIENTS. FIRST IMPRESSIONS MATTER.

Having a meeting in a crowded, run down, or not impressive conference room doesn’t do much for prospective clients. You want clients to come into your office and have an amazing first impression. If your office looks out of date, it could hinder you. A clearly outdated office may lead clients to think you are behind the times. Now, they may later find out you aren’t, but that could be their first impression. Offices with modern features leave the opposite impression.

YOU AREN'T ATTRACTING NEW TALENT (OR RETAINING IT) AND Y G IT) AND YOUR SPACE HAS A LOT TO WITH IT O WITH IT.

Is your turnover rate higher than in years past? Are you not pulling the high-level employees you used to? Your office space, amenities, and location may have a lot to do with this.

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