by Phill Tomlinson | Sep 6, 2021 | All Articles, Leasing
A commercial lease can feel intimidating, especially if you don’t deal with real estate regularly. Carefully reading your lease is crucial to ensuring you’re getting the best deal. While all parts of a lease are important, certain terms and clauses deserve extra attention. Here’s what you need to focus on:
You don’t want any surprises when it’s time to pay your first month’s rent. Carefully review the rent terms. Are there additional fees beyond the rent? When is the rent due, and how must it be paid? What are the penalties for late payments? Also, check the details of the common area maintenance (CAM). What exactly does it cover, and what doesn’t it include? Understanding these points helps you avoid unexpected costs later on.
Right of First Refusal
If you love your office space, you’ll want the option to stay when your lease expires. The Right of First Refusal clause gives you the opportunity to renew before the landlord offers the space to new tenants. Make sure this clause is clear in your lease to protect your future.
Definition of the Premises
This section outlines exactly what space you’re renting. Ensure the lease accurately states the office’s square footage. If the landlord has promised access to shared areas—like restrooms, reception areas, or break rooms—these should also be clearly listed. Verbal promises are not enough; everything must be in writing.
Subleasing and Assignment
Business needs can change unexpectedly. A Subleasing and Assignment clause allows you to rent out part or all of your space to another tenant if necessary. Make sure your lease offers flexible subleasing terms to give you more options if your situation changes.
Use and Exclusives Clause
Some leases restrict what type of businesses can occupy the building. Be sure to check if these restrictions will limit your business growth. You don’t want to be blocked from expanding into a new industry or niche due to the lease. Additionally, the Exclusives Clause can protect you from competitors moving into the same building, which might be crucial depending on your line of business.
Maintenance Clause
What happens if something in your office needs repair? The Maintenance Clause defines who is responsible for maintenance and repairs. Make sure it clearly outlines whether you or the landlord is responsible for handling maintenance costs and arrangements. Clear responsibilities can save you from future disagreements and headaches.
Need help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!
Meet The LeveragedCRE Investment Team
Phill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets.
The team leverages their extensive knowledge and expertise to help investors and property owners maximize their returns and navigate complex real estate transactions with confidence.
Stay informed with the latest in Commercial Real Estate strategies designed to enhance your income property investment results by bookmarking www.leveragedcre.com. Let us help you stay ahead in the market!
by Phill Tomlinson | Sep 6, 2021 | All Articles, Leasing
Negotiating a commercial lease often involves compromise. However, it’s important to ensure the agreement isn’t skewed entirely in favor of the landlord. Follow these 10 tips to secure the best deal when leasing commercial real estate:
1. Have an Expert by Your Side
A tenant rep broker can protect your interests during negotiations. They have in-depth knowledge of the market and can guide you toward a fair deal. Best of all, the landlord typically covers their fees, meaning you won’t have to pay for their services.
2. Think Beyond the Initial Contract
The first draft of the contract will always favor the landlord. While they might claim it’s a “standard” lease, don’t assume it’s non-negotiable. Treat it as a starting point for discussions, not the final word.
3. Calculate All Costs
Don’t just consider the rent. Include Common Area Maintenance (CAM) fees and any other costs when assessing if the total monthly payment fits your budget. This will help you determine if the offer is truly fair.
4. Start Early
Begin your search for office space well in advance. If you wait too long, you may feel pressured to accept a deal out of urgency. Having more time gives you leverage and allows you to walk away if the terms aren’t favorable.
5. Read the Contract Carefully
Review every detail of the contract. Ensure you understand each term and clarify anything that’s confusing. Never sign until you’re confident about every aspect.
6. Prioritize Your Needs
Create a list of amendments and concessions you want to include in the contract. Rank them in order of importance, so you know which are deal-breakers and which are negotiable. This will help you navigate the give-and-take of negotiations more effectively.
7. Know the Market
Understand what other tenants in the area are paying and what lease terms are genuinely standard. This knowledge will strengthen your position and show that your requests are reasonable.
8. Involve Your Team
Before signing, involve key members of your management, finance, legal, and operations teams in reviewing the contract. Fresh eyes may catch important details you missed.
9. Fight for Flexibility
Wherever possible, push for flexible terms. Consider subletting options, renegotiation rights, or early termination clauses. These can save you from future complications if your business needs change.
10. Be Ready to Walk Away
If the landlord refuses to meet you halfway on your key requests, don’t be afraid to walk away. You’re better off pursuing another property with more favorable terms than settling for an unsuitable deal.
Need assistance with your 1031 Exchange or DST? We’ve got you covered!
We’ve prepared a comprehensive, free e-book designed to guide you in achieving your long-term business goals or acquiring that dream property you’ve been eyeing.
Meet The LeveragedCRE Investment Team
Phill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets.
The team leverages their extensive knowledge and expertise to help investors and property owners maximize their returns and navigate complex real estate transactions with confidence.
Stay informed with the latest in Commercial Real Estate strategies designed to enhance your income property investment results by bookmarking www.leveragedcre.com. Let us help you stay ahead in the market!
by Phill Tomlinson | Sep 3, 2021 | All Articles, Investing
Commercial Real Estate (CRE) has gained significant popularity as a valuable investment class. While it offers lucrative opportunities, it’s essential to understand both the risks and benefits involved. One key aspect of CRE investing is generating passive income. In this guide, we’ll simplify the concept of passive income and explore how it applies to commercial real estate.
What is Passive Income?
To begin with, passive income refers to earnings derived from a rental property, limited partnership, or other business ventures where you are not actively involved. While the term is often loosely used, it specifically refers to income generated with minimal to no active effort. In real estate, this typically includes “net rental income” or “income in which the taxpayer does not materially participate.” The key point is that you can earn money without constant involvement. How great is that?
For CRE investors, the primary goal is to invest in properties that consistently generate passive income. Ideally, this passive income surpasses active income, leading to greater financial freedom. Let’s explore two main ways to generate income from commercial properties: rental income and appreciation.
Generating Income Through Rentals
Commercial properties—such as retail buildings, multifamily apartments, medical office spaces, and industrial warehouses—offer returns through monthly rental income. Tenants pay rent, and a portion of this income is shared with investors as part of the ongoing cash flow. If you’re looking for immediate passive income, you may want to focus on fully leased properties with stable cash flow. On the other hand, properties requiring significant upgrades or renovations can reduce upfront passive income due to higher costs.
Generating Returns Through Appreciation
Appreciation refers to the increase in property value over time, driven by favorable market conditions or improvements made to the property. Investors realize full returns from appreciation when they sell or refinance the property at a higher value. Thus, properties that experience significant appreciation can provide a strong source of long-term passive income.
Key Metrics for Passive Income in CRE
In commercial real estate, several key metrics are used to assess and compare investment performance. Understanding these metrics can help you make informed decisions when investing.
Targeted Cash Returns
To maximize investment, investors should focus on targeted cash returns. This refers to the income earned from the property relative to its value. Higher cash returns are particularly attractive when the net operating income of the property increases over time.
Targeted Internal Rate of Return (IRR)
The Internal Rate of Return (IRR) measures the annual rate of return a real estate investment generates over its holding period. This metric factors in the time value of money and the opportunity cost of having capital locked in the investment. Since real estate assets are generally illiquid, IRR helps investors evaluate whether the investment is worthwhile.
Benefits of Passively Investing in Commercial Real Estate
Investing in CRE offers several benefits beyond just earning passive income. Here are some advantages of passive CRE investments:
Increased Purchasing Power Through Leverage
Leverage, or using borrowed capital, allows investors to increase their purchasing power. For example, an investor could use a 50% down payment to acquire two properties instead of investing the full amount into one property. This approach enhances the potential for greater returns.
Risk Diversification
Risk diversification is another benefit of passive CRE investing. By spreading investments across different types of properties and tenants, investors can reduce their exposure to risk. For example, having multiple tenants reduces the likelihood of missed rent payments. Additionally, investing in various asset types—such as retail, industrial, or office spaces—further diversifies the risk.
Property Appreciation
In CRE, property value directly correlates with its net operating income. By increasing this income, property value rises, leading to appreciation. Unlike stocks or bonds, commercial real estate allows investors to influence the property’s performance, providing more control over the investment.
Tax Benefits
CRE investments come with tax advantages. Investors can deduct interest payments on mortgages, and depreciation on the property is also tax-deductible. These deductions lower the overall tax burden for investors, making CRE a tax-efficient investment.
Passive Income
Finally, the most attractive aspect of CRE is the ability to generate passive income. As passive income grows, investors gain financial freedom and no longer need to rely on active work to generate profits.
Need assistance with your 1031 Exchange or DST? We’ve got you covered!
We’ve prepared a comprehensive, free e-book designed to guide you in achieving your long-term business goals or acquiring that dream property you’ve been eyeing.
Meet The LeveragedCRE Investment Team
Phill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets.
The team leverages their extensive knowledge and expertise to help investors and property owners maximize their returns and navigate complex real estate transactions with confidence.
Stay informed with the latest in Commercial Real Estate strategies designed to enhance your income property investment results by bookmarking www.leveragedcre.com. Let us help you stay ahead in the market!
