Brian Smith, founder of Regent Real Estate CRE, was a recent guest on Loc-Doc Security’s Coffee Break podcast (Loc-Doc has been a long-term client). Brian sat down with Chad Lingafelt, Managing Partner of Loc-Doc, to discuss the space planning process they went through during the expansion of their office/warehouse/showroom in Charlotte, North Carolina. Specific examples are given that relate to Loc-Doc’s deal, but most of the podcast is a very informative conversation that will interest anyone who has commercial space or will be looking for commercial space. It is a great testament to the benefits of having a partnership with a tenant rep broker. Plus, it’s a great way to get to know a little more about Brian!
Brian Smith, CCIM, is the owner of Regent Commercial Real Estate. He excels at assisting his clients find the best space for their needs.
Loc-Doc Security serves all of North and South Carolina. Their services include key card systems, cameras, doors, locks, and keys
There are a number of ways to structure a commercial lease, and it comes down to how expenses are shared between the landlord and tenant. Here is a quick overview of the most common ones. However, it should be noted that there can also be some variations of these categories.
Gross Lease (also known as a Full-Service Lease)
In a Gross Lease, the tenant pays a fixed rate that will only increase with predetermined annual increases agreed to in the lease agreement. The landlord is responsible for paying all the building expenses (taxes, insurance, maintenance, etc.). Because they assume all the risk, gross rents tend to be higher than other types of leases. This is attractive to tenants because they can plan on a consistent rent payment as there are no surprise expenses.
For example, if utilities were higher than the landlord anticipated, they must absorb that cost.They cannot ask the tenant to pay the difference. However, if utilities are lower than they anticipated they get to pocket that money. They do not pass on those savings to the tenant.
With a Net Lease, the tenant is responsible for paying a fixed base rate, plus some (or all) of the operating costs of the building. These expenses can include taxes, insurance, and common area maintenance (TICAM). TICAM charges can include janitorial, property management fees, utilities, landscaping, and maintenance of commonly shares areas/services. Expenses are reconciled yearly, so the TICAM rate will fluctuate. The tenant’s cost is proportionate with their square footage. Meaning if they occupy 1,000 square feet in a 250,000 square foot building, their proportionate share of the building’s expenses will be 4%. **
For example, if expenses were higher than expected after reconciliation, the landlord will give the tenant a bill for the difference. However, if expenses were lower than expected the landlord will give the tenant a credit.
Net leases can be further classified as:
All leases are unique. Some may contain a gross up clause that will increase your proportionate share of expenses. Please consult with a tenant rep broker who can explain your rights within a lease.
Modified Gross Lease
A Modified Gross Lease requires the tenant pay a fixed base rent and their proportionate share of some, but not all, of TICAM expenses. It is typical for the tenant to pay janitorial and utilities directly, and these out of pocket expenses are determined during lease negotiations. This type of lease is a nice compromise for tenants that are looking for a consistent lease payment, while still being able to have control over some of the expenses.
Ultimately the landlord has control over the type of lease they require for their property, but you have some control over the terms. An experienced tenant rep broker will be able to walk you through all the proposed terms of a lease and advise you during lease negotiations.
Brian Smith, CCIM, is the owner of Regent Commercial Real Estate. He specializes in the Charlotte area.
You may be familiar with the basic types of commercial real estate, like office, retail, and industrial. But in reality, there is so much more. I’ve broken out the most common.
Office buildings can range from single story to high–rise buildings and can have one tenant, or multiple tenants. Typical tenants would be business, medical or dental professionals. Executive suites and coworking spaces also fall into this category. Office buildings are further broken down into Class A, B, or C.
Industrial properties have several categories that are broken down based on their specific use.
Retail properties come in many forms and are broken down into subcategories. Although they can be broken down further, these are the most common types:
Multi-family residential buildings include apartment buildings, condos, and townhomes. Generally, anything residential that is larger than a fourplex is considered a commercial property.
Mixed use properties can be a combination of any of the types of properties mentioned above. The most common form is retail/restaurant on the first floor with office and/or residential in space above. But really it could be a combo of just about anything.
There are some properties that just don’t fit into any of the above property types. This catch all category includes self storage, hotels, medical, and anything else not defined in any of the above categories.
This is undeveloped and raw land to be used for future development. City zoning codes will determine the type of commercial property that can be built here.
I hope this helps shed some light on the vast range of commercial property definitions. Every tenant is unique and has specific needs—a local tenant rep broker can help you determine the best space that will meet your needs.
Lease Terms You Should Know
Commercial leases can be complicated and full of legalese. A tenant rep broker can offer guidance, but it is always helpful to have a basic understanding of some common lease terms.
Lessor: The person/company granting the lease and assuming legal responsibility for the property. It is usually the building owner or a leasing management company. May also be referred to as the Landlord.
Lessee: The person/company leasing the space. May also be referred to as the Tenant.
Lease Term: The length (in years and months) of your lease.
Lease Commencement Date: This is the date your lease begins and you can occupy the space.
Rent Commencement Date: This is the date your rent starts. This will most likely be the same as your Lease Commencement Date unless you have negotiated free rent.
Base Rent: The agreed upon rental rate for the entire Lease Term. Will also show escalations if applicable. Renewal rental rates may also appear here.
Renewal Option: Rights that the Lessee has that will extend the term of the lease when it expires. In some cases there may be multiple options. Rates may have already been negotiated before the initial Lease Term or they may be determined by current market rates at the time of lease renewal.
Early Termination: The right of Lessee to vacate the premises before the end of their Lease Term. Most often there will be a monetary penalty for this.
Security Deposit: The amount of money the Lessor requires when you sign the lease. Is typically one month’s rent—but is ultimately determined by the Lessor.
Subletting: The right to sublease all or a portion of your space during your Lease Term. The Landlord typically needs to be notified of your intent and will need to approve the them. Also known as the subtenant.
Tenant Improvement Allowance: The amount of money the Lessor agrees to contribute to the construction/improvement of your space. This could be as simple as paint and carpet or as extensive as building out walls or upgrading tech.
Common Area Maintenance: The cost for maintaining building areas that are shared by all tenants. It can include lobbies, elevators, restrooms, landscaping, etc. It is a cost per square foot expense so Lessee’s pay a proportionate share.
Holding Over: If you don’t leave at the end of your Lease Term, the Lessor will begin charging inflated lease rates. It is typical for it to be 1.5 times your old lease rate.
Substitute Premises: This means the Lessor has the right to move you to a similar space within the building if they have another use for your current space. This could happen if they have a tenant that wants to expand into your space. The landlord would typically absorb the costs to do this.
Should you stay or should you go? Things to consider when deciding if it’s time to renew your lease or relocate.
The most critical step is to understand all your options in your current lease. Leases can be complicated and overwhelming, so this would be an ideal time to engage a tenant rep broker and get their advice. They can easily break down your options and help you formulate a plan. Having a broker on your side will let the landlord know that you are serious about finding the best deal and that you have other options if they aren’t willing to negotiate a fair deal with you.
You will also need to start early, sometimes really early. Most leases require a 6-12 month notice if you intend to renew. Miss that window and you may be scrambling to find new office space. The landlord may have other plans for that space (and those plans might not include you), so if you do not give notice, you lose your renewal right. Have a tenant rep broker engage the landlord―they will get valuable insight on the landlord’s future plans.
Should you Stay?
- If you have a favorable renewal rate and the current space is still working well for you, then you will probably want to stay put. You might even want to consider renewing early.
- If you are pretty sure you want to stay but are not sure you will have a favorable renewal rate, you will want to have a broker do a market analysis. You may find a property thatsuits you better and has more favorable terms. Plus, your current landlord will know you are serious about getting the best deal.
- If you like your space, but it doesn’t meet your square footage needs anymore, talk to your landlord early. The landlord will most likely work with you to either expand/reduce your space, but it will take some time. Unfortunately, it won’t always be possible for them to accommodate you, so you will need ample time to find a new location.
- If the renewal notice date snuck up on you or you don’t have a renewal option and you are unsure of future needs, you may want to do a short-term lease. That will buy you some time to address your future needs and do a market evaluation.
- If you have an automatic renewal clause and you missed the notice date, you may be forced to stay in the space for the renewal term.
Should you move?
- If you do not have a renewal option or your current renewal option is not favorable, it may be in your best interest to look at other alternatives.
- Sometimes you may not have a choice. If you do not have a renewal right and the landlord wants your space to accommodate another tenant, they can make you leave at the end of your term.
- Evaluate your current space. Does it still meet your needs? Will it meet your future needs? If your current building can no longer accommodate your needs, you should consider moving.
- Outdated systems and amenities in your current building. Unless the landlord has a plan for upgrades, you will probably need to look elsewhere to meet those needs.
- If you have an unreasonable landlord.
- If you are not in your ideal location. You may have gotten a great lease rate, but at what cost? If you are off the beaten path with little or no access to public transportation or retail amenities, you may want to consider moving. Talk to your employees and clients and find out what is important to them.
Deciding whether to renew your lease or move doesn’t have to be a daunting task. Let a tenant rep broker do the heavy lifting for you. They can analyze your current lease, do a thorough market evaluation, and negotiate your new lease or lease renewal.
Looking for new space or renewing your current space can be very time consuming and will probably be costly. If you don’t have an expert looking out for your best interests, you are at the mercy of a landlord. If you want to save time and ensure you get the best deal, you need to hire a tenant rep broker. Here are just a few reasons why.
They are specialists. An experienced tenant rep broker is well versed in their market. They know the area, know the comps, and know what a fair deal looks like. They are your first line of defense—giving you the leverage you need to successfully negotiate with a landlord. Lease negotiation and review, space plan consultation, and market analysis are just a few of the skills they will provide to you.
They work for you. A tenant rep broker’s sole purpose is to find and negotiate the best deal for you. After discussing your current (and future) needs, they will provide you with a comprehensive market analysis with options that would best fit your requirements. By remaining objective they are able to advise you on the best plan going forward.
They will save you time. More than likely you don’t have the time or inclination to educate yourself on current market conditions. And where are you going to find lease comps? You’ll need those to make sure you are getting a fair market deal. Sure, you could do your own search for available space on Loopnet or something similar, but did you know that there are many spaces you won’t see there? A tenant rep broker will know about options that may not be available to the public. They will also know exactly what you need so you won’t waste time looking at spaces that are not a good fit.
They are paid by the landlord. Tenant rep brokers typically do not charge a fee to their clients. The landlord pays their commission after a lease is signed. The commission is factored into the leasing cost, so trying to do a deal by yourself will not save you any money. In fact, the landord’sbroker will just make a larger commission.
Now you are ready to hire a tenant rep broker. Great! But do you renew your lease or find a new location? In our next post we will talk about the factors to consider when making this decision.