Commercial Real Estate Purchasing Tips
Timing Your Transaction There are a number of important questions to ask to accurately define your requirements. Doing this in advance will save you time, and avoid starting in the wrong direction. Committing your requirements to paper will also help as you visit properties to make sure nothing is overlooked.
Timing Your Transaction As a broker, there are a number of questions I ask my clients to help them move from a rough idea of their needs to a clearly defined objective. You will use this information to screen out unsuitable properties once you start to make calls on available sites.
Timing Your Transaction Some examples of Location questions: What kind property are you interested in. Are you going to occupy it or are you buying it strictly as an investment? What area and vicinity is of most interest to you? What are your investment objectives? Are you involved in a 1031 exchange? Are you paying cash for the property if you need to finance it do you have a lender that you work with?
Timing Your Transaction When touring potential locations to lease, you are likely to be asked some qualifying questions. You might want to think about what information you are prepared to give up, and what you will want to hold back. In negotiation, information given too quickly can compromise your bargaining power, especially if time is short.
Timing Your Transaction The best time to drive the market is early Sunday morning. There is virtually no traffic, it is easy to pull over and capture an address and phone number.
Timing Your Transaction In deciding on suitable properties you visit, the super high-tech, using a digital camera with voice recording capability will save you time and effort.
Timing Your Transaction When touring the properties which most closely meet your requirements, it is important to be prepared to ask the most important questions first. Review your list of questions beforehand, and rank them; a 3 beside anything you cannot live without, a 2 beside that which is very important but you might be able to work around, and a 1 next to those desirable-but-not-necessary items.
Timing Your Transaction Gross square footage is most typically used with warehouses, industrial buildings and other stand-alone buildings, such as freestanding retail sites. Typically, the calculation will include the thickness of the sidewalls when measuring the total footprint of the site.
Timing Your Transaction The actual square footage that an office-user may occupy is typically less than the amount upon which the rent is based. The square footage you use exclusively is termed "usable square feet" and the amount upon which the rent is based is called "rentable square feet."
Timing Your Transaction Try to set up your inspection tours in groups of 3-4 buildings at a time; about 30 minutes per property plus travel time will be sufficient. This way you can more readily compare the features and benefits of the properties while the impressions are fresh in your mind. Also, be sure and ask your broker for a Tour Site Checklist.
Timing Your Transaction If you are negotiating for more than one property, I advise you not to go much beyond the 1st round of proposal responses, without informing the property owners. Creating competition in a softer market can work well I your favor, so letting the other side(s) know you have other options can garner some nice concessions.
Timing Your Transaction In preparing letters of intent, I prefer the approach which makes the proposal simple. This means to gain agreement on the big issues first and set aside smaller issues to work out later in the purchase agreement negotiations. This negotiation strategy relieves much of the inherent tension in negotiating, and makes agreement on the side issues easier to obtain.
Timing Your Transaction A well-written proposal to buy will get you well into negotiations. Once the proposal stage is complete, you will be provided a purchase contract for you and your legal counsel to review and fine-tune into a contract that accurately defines your agreement. An experienced broker can help you write a successful proposal to purchase.
Timing Your Transaction A Request for Proposal is a powerful instrument in a negotiation because the tone of the negotiations is set with the owner pursuing your purchase. Not all owners will respond to RFP's ands will encourage you to make your offer first. If you send out several RFP's and most owners respond, use those responses to either encourage the reluctant owner to come forth with a proposal, or if you really want a particular property, to frame your own offer with the other RFP's in mind.
Timing Your Transaction Do not attempt to tackle the Americans with Disabilities Act compliance without the help of a professional. If employing an architect, it will be their responsibility to keep you informed about ADA. At minimum you must go to the planning department and ask that the building file be reviewed and that a building inspector visits the site before you sign the purchase contract.
Timing Your Transaction When negotiating try to limit your exposure to the Americans with Disabilities Act compliance to the premises and put the compliance of the on the owner whenever possible. An error in judgment regarding ADA compliance can be very costly, so do not skimp on professional advice when dealing with this very important issue.
Timing Your Transaction Different properties have different operating expense histories and it is a good idea to ask for a 3-year history of the operating expenses. Well-run buildings possess very stable operating expense histories. Unless there has been a spike in operating expense - energy costs, janitorial contract re-negotiations, insurance crisis, snow removal, etc. - the expenses should be fairly even.
Timing Your Transaction Because there are almost as many purchase contracts as there are buildings to purchase, it is impractical and inadvisable to sign a purchase contract without a review by qualified legal counsel. All purchase contracts define the business terms, which are the smallest portion of a contract: The remaining balance of the contracts seeks to contemplate and prepare for possible future events.
Timing Your Transaction Commercial property leases are a diverse set of instruments designed to meet the needs of office, industrial/warehouse and retail property owners and tenants. Leasing property provides a pragmatic solution to the expansion and contraction of commercial real estate users, allowing flexibility for growth or consolidation. For this reason many businesses prefer leasing over the limitations of ownership.
Timing Your Transaction Leases for more than one year must be in writing to be valid in most states. As a practical matter, make all your leases in writing regardless of how short the term. Remember that the person with whom you are dealing with today may be gone tomorrow.
Timing Your Transaction There are many variations of the commercial lease contract. The spectrum ranges from the fully services gross lease to the absolute net lease or the triple net lease. The type of lease to be used is largely determined by the level of control over the use of the property assumed by the commercial tenant or retained by the property owner.
Timing Your Transaction The full serviced gross lease is the most commonly used lease in multi-tenant office buildings. This is used when the property owner provides a full range of building services to the tenants. These services typically include all utilities, janitorial, systems maintenance or replacement, common area and exterior services and upgrades, security, management and reserves. Taxes and insurance are also included in the rent. The underlying concept for this type of lease is to facilitate the property owner's or manager's need to exercise a high degree of control over the operation of the property.
Timing Your Transaction The absolute net lease is, practically speaking, constructive ownership for a period of years. The tenant pays all expenses for the operation, maintenance, taxes and insurance for the property on behalf of the owner. When this type of lease is for an exceptionally long term, the tenant may be required to upgrade the property to conform to newly implemented governmental regulations, including seismic strengthening or asbestos abatement.
Timing Your Transaction Buying a property as an investment or to house your business is a major decision. Careful market and financial analysis and negotiations are critical to a successful result. Having a highly skilled and experienced professional to provide you the right tools and information will allow you to make the best and most profitable purchase decisions possible.
Timing Your Transaction A local expert with local knowledge and expertise on your side to assist you in purchasing a property will ensure you find the right location, get the best deal possible and guarantee you avoid costly mistakes.
Timing Your Transaction Define and understand your needs. Make sure the decision to buy a building fits in with your business plan. Allow flexibility for growth or contraction.
Timing Your Transaction Evaluate the opportunity as an investment as well as how the property fits your needs. Do a lease vs. buy analysis as a part of your financial analysis. Know the market and your alternatives.
Timing Your Transaction Do space planning and costing prior to removing conditions to purchase.
Timing Your Transaction Evaluate your opportunity costs. Is the investment return comparable to the additional return you could get from investing the money in your business?
Timing Your Transaction Compare value with a build to suit option. How much more would it cost to build your own building if this option is feasible?
Timing Your Transaction Have an exit strategy. Know how you will divest yourself should the need arise.
Timing Your Transaction Obtain the services of a professional representative to avoid costly mistakes. They do this for a living and can help make sure your decisions are sound.
Timing Your Transaction Location, Location, Location is an important key for appreciation and resale.
the Arizona Department of Real Estate
Commercial Real Estate Tips
About Commercial Property Brokers - A full service broker receives as well as initiates transactions. They develop strong problem solving and negotiating skill. Full service brokers often work on more transaction than their tenant rep counterparts.
About Commercial Property Brokers - A qualified commercial property broker will put you in control of your lease transaction. Since you are the one who will live with the lease, control is exactly what you need.
About Commercial Property Brokers - Agency is an action; if a real estate licensee acts as your agent, they become your agent. A broker owes you a fiduciary duty. In other words: an absolutely faithful duty to perform in your best interest, and to do no harm.
See more tipsAbout Commercial Property Brokers - Any broker, even a tenant rep, can inadvertently become a dual agent in a transaction by performing an agency action for the other party.
About Commercial Property Brokers - Brokers are paid upon the completion of the transaction, and not paid if the transaction fails for any reason. Commissions are calculated in two ways: a percentage of the rent for all the years of the lease; or a certain number of dollars per square foot based upon the lease term.
About Commercial Property Brokers - Commercial leasing brokers fall into two categories: full service brokers, who serve as agents for both landlord and tenant; and tenant-only representatives. You will benefit from attaining the skills of a tenant rep.
About Retail Lease Proposals - Operating your business next to a business that may be morally objectionable such as an adult arcade can be a business killer. Have your attorney draft language to protect you from the owner leasing to such uses.
See more tipsAbout Retail Lease Proposals - Take a close look at how your potential neighbors are using utilities in the center and research whether or not you are sharing utility meters with high-demand users. Adjustments may need to be negotiated if separate meters are not possible.
About Retail Lease Proposals - When proposing your lease term, think about the best month for your lease to terminate. If your business thrives during the year-end holiday season and you open your business before the holidays, you may want the lease to end in January or February, rather than an annual anniversary of the commencement date.
About Retail Lease Proposals - Within the operating expense budgets for shopping centers you are likely to pay for promotion and media fees. Be sure these are reasonable and will benefit your business. You may want to have limits placed on how much these can increase annually, or you may find a weak center spending more than you can afford in order to save the center if business falls off.
See more tipsAmericans with Disabilities Act - Do not attempt to tackle the Americans with Disabilities Act compliance without the help of a professional. If employing a space-planning architect, it will be their responsibility to keep you informed about ADA. At minimum you must go to the planning department and ask that the building file be reviewed and that a building inspector visits the site before you sign the lease.
Common Lease Clauses - Most leases contain a provision stating that this is the entire agreement and that you have not relied upon any other representation and that there are no other outside agreements. To make sure this is accurate, review all your proposals and notes on the transaction and check to see everything you have been promised is in the lease.
Common Lease Clauses - Normally you will have access to your premises 24 hours a day, 7 days a week, 365 days a year. And you can expect the electrical plugs and lights and elevators to operate. Many of the other services the owner is obliged to provide will only be available during the building operating hours - these include HVAC, guard services, building engineers, etc. If you need any of these types of services to be extended beyond the buildings operating hours, the cost of these, if even available, will be passed on to you. This is a big issue for some properties, and a footnote for others.
See more tipsCommon Lease Clauses - Regardless of whether or not you are reimbursing the owner for their insurance policies, you will be required to provide your own insurance. Start by sending this part of the lease contract to your insurer along with any clauses that deal with attornment, indemnification and/or subrogation.
Common Lease Clauses - Some forms describe the premises by defining both the rentable and usable square footage, while others just give the suite number and refer to an exhibit: an architectural drawing of the space. Always ask how recently the space was measured and by whom. When an architect is involved it should be easy to obtain accurate area calculations.
Common Lease Clauses - Some of the aspects of assignment and subletting are becoming more and more restrictive. Be sure you know your rights and obligations as well as the rights retained by the owner. The owner will always require that they consent to any assignment or subletting.
See more tipsCommon Lease Clauses - Some smaller properties, owned by individuals, will not want to go through all the calculations and ensuing discussions with tenants about increases in rent. Instead they might simply ask for a flat percentage increase annually. While this is easier for both parties, typically this kind of increase is based upon the entire rental payment. Expense increases are only applied to that portion of the rent that goes toward a particular expense - you could pay more for the convenience of flat percentage increase.
Common Lease Clauses - Sometimes tenants are concerned with outgrowing the space before the lease expires. Usually the solution is to sublet or assign the lease. However, if the sublease and/or assignment provisions are too restrictive, you may want to negotiate an early termination of the lease. There are costs associated with the right to terminate early. Normally you will be expected to pay several months of rent while the owner finds a substitute tenant. If the owner provided you substantial amounts of improvements, you should expect to repay the unamortized portion of that fee. While early termination penalties are expensive, for some tenants this is preferable to being a sublessor and the potential liabilities of those duties.
See more tipsCommon Lease Clauses - The "drop-dead-date" is the date by which, if the premises are not delivered, a tenant has the right to cancel the lease and reclaim any money on deposit. How long a tenant may have to wait to cancel a lease is a negotiable item, but 60-100 days is typical. Frequently a delay in possession does not extend the term of the lease, leaving the tenant with a shorter term than anticipated. Be sure any delay in possession automatically extends the expiration of the lease term to get the full benefit of your bargain.
Common Lease Clauses - The balance of the lease must be reviewed by your legal counsel and discussed thoroughly to make sure you understand what you are signing. Do not get lulled into thinking the bulk of the lease is boilerplate; you never know what may be buried in the miscellaneous provisions.
Common Lease Clauses - The late charge is used to offset the cost incurred by the owner in collecting late rent and as a preventative measure against late rent. Most leases do provide a grace period: 3-5 days is typical. You can often negotiate more days, but I think it might be better to negotiate one or two forgiveness' of late charges per year as this will probably save you more money if you forget to pay on time. The interest rate is for longer, uncured monetary defaults and is applied to those overdue amounts in addition to any late charges.
Common Lease Clauses - The lease will set out the obligations of the parties for maintenance and repairs of the premises and you must be sure this accurately reflects your understanding. As a general rule, in a full service gross lease used for office space, or in any kind of lease covering multi-tenant property, the tenant will be responsible for the interior and the owner for the exterior and common areas.
See more tipsCommon Lease Clauses - The operating expense increase clause, or additional rent clause, allows the property owner to pass through increases of operating expenses to the commercial tenant. Normally the pass through begins in the 2nd year of the lease term. The 1st year is referred to the base, or comparison, year and increased expenses are compared to the base year - the difference is apportioned to all the tenants and passed through as an operating expense increase.
Common Lease Clauses - The term includes the commencement date, expiration date, and contemplates a possible delay in possession. If the space is vacant and in move-in condition, then barring strikes, riots, natural disasters or other acts of God, you will likely not have any delay in possession of the premises. If the space is subject to construction work, you may need to anticipate delays, or even establish a "drop-dead-date."
Common Lease Clauses - The use clause will appear with the basic business points and is important because if too tightly written it can affect what you are permitted to do in the premises later if your business model changes and your rights to sublease or assign the lease at a later time. Think about the ramifications of this clause with respect to your business, particularly if you are a retail or industrial tenant.
See more tipsCommon Lease Clauses - There are many erosive forces at work that can silently reduce a commercial property value. Property taxes increase annually, insurance costs constantly creep up, utilities and other operating expenses must be monitored and re-negotiated. The lease contract rent is a promise to pay, and is paid in future dollars. Inflation causes the future value of money to have less purchasing power - this is why commercial leases contain protective clauses against income erosion. These are known as escalation clauses.
Common Lease Clauses - You are likely to encounter the term "Substantially Complete" with respect to the owner's delivery of the premises. This is intended to mean ready to occupy, with only a punch-list of items to be completed or corrected. Make sure you negotiate for at least 30 days to submit your punch-list to the owner, as you will certainly be too busy with other matters to do it in less time.
Common Lease Clauses - You may receive assurances that the owner has no intention of selling during your lease term; that is not enough. The property may be transferred for estate planning reasons or by reason of death. If the owner says they have no intention of selling, then giving you a cap on tax increases should not be a problem.
Common Lease Clauses - You will be required to sign up to four copies of the lease in original signature. I suggest you initial every page of the lease when you are signing to prevent any accidental substitution of pages. You will next need to provide good funds to cover the first month's rent and any security deposits, or contribution to tenant improvements. You also need to deliver an insurance binder from the insurer.
See more tipsCommon Lease Clauses - Your lease will start with the basic business points, either in an outline form or using fill-in-the-blanks as with form leases. The lease will describe the legal entities involved in the transaction - be very sure this is done correctly, as mistakes here can be costly. If your business is a corporation or limited liability company, you certainly want to maintain the protection that theses business structures afford.
Creating a Proposal to Lease - A well-written proposal to lease will get you well into lease negotiations. Once the proposal stage is complete, you will be provided a draft lease for you and your legal counsel to review and fine-tune into a contract that accurately defines your agreement. An experienced broker can help you write a successful proposal to lease.
Creating a Proposal to Lease - Be aware that if you are offered a reimbursement for tenant improvements provided by you, it could cause a taxable event. Consult a tax advisor before agreeing to any cash allowance that comes as a reimbursement.
Creating a Proposal to Lease - If the property is a multi-tenant property you will need to define the owner's obligations related to the common areas.
Creating a Proposal to Lease - If you are negotiating for more than one space, I advise you not to go much beyond the 1st round of proposal responses or into multiple space-planning sessions without informing the property owners. Creating competition in a softer market can work well I your favor, so letting the other side(s) know you have other options can garner some nice concessions.
Creating a Proposal to Lease - If you have been provided with a floor plan of existing conditions, mark it up and include it with your proposal.
See more tipsCreating a Proposal to Lease - If you use hazardous materials, it is important to discuss that up front to avoid wasting everyone's time. In industrial space you will want assurances the space is clean before occupancy: Be sure to ask the owner for a complete written disclosure about prior uses of the premises.
Creating a Proposal to Lease - In preparing letters of intent, I prefer the approach which makes the proposal simple. This means to gain agreement on the big issues first and set aside smaller issues to work out later in the lease negotiations. This negotiation strategy relieves much of the inherent tension in negotiating, and makes agreement on the side issues easier to obtain.
Creating a Proposal to Lease - Most tenants are concerned about expansion rights so they can avoid moving if they outgrown the space. Owners are reluctant to grant any options since options never serve the owner's interests. Options to expand or renew are definitely considered concessions by property owners. Ask for what you want, but expect the owner's attempt to water down your rights as much as possible. In tight markets, option concessions tend to dissipate.
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