by Prince Licaylicay | Oct 29, 2021 | All Articles, Leasing
Commercial Lease Agreement, you’ll be bound to a landlord. To maximize this time and generate profit from your business with minimal issues, it’s essential to recognize potential red flags before signing the lease.
1. Signs of Landlord Financial Constraint
One major red flag in a commercial lease agreement involves the landlord’s possible financial struggles. These struggles often manifest through poor property maintenance, reluctance to provide tenant improvements (TI), offering abated rent instead, high vacancy rates, or negative feedback from current tenants. When a landlord faces financial difficulties, they may struggle to fulfill their obligations, leading to potential issues for tenants.
2. Missing Disturbance or Holdover Clause
A commercial lease agreement should include a disturbance clause. If a financially struggling landlord loses their property to lenders, this clause protects the tenant by allowing time to relocate. Without this clause, tenants may find themselves suddenly without a lease. Additionally, a holdover clause is crucial as it provides tenants with time to negotiate before renewing the contract or moving out.
3. Unrealistic Projections
Be cautious if the property is presented with overly optimistic future projections or claims of outstanding business viability despite economic disruptions. When projections seem too good to be true, they usually are. Always ask for legitimate documents to back up these claims before signing a commercial lease agreement.
4. Lack of Demographic or Analytical Study Results
As a tenant, it’s important to request demographic and analytical data from your commercial broker or landlord. This information helps ensure that the property will generate adequate income. If this data is unavailable, it’s a significant red flag. Entering into a commercial lease agreement without this information could lead to costly mistakes.
5. Unclear Financial Calculations
A commercial lease agreement should include clear and detailed financial calculations. If the landlord provides unclear or vague numbers, clarify them before signing. Ambiguous financial terms often lead to disputes and unexpected costs later on.
6. Vague Responsibilities and Obligations
Ensure that the commercial lease agreement clearly outlines the responsibilities of both parties. Vague descriptions can result in the tenant being unfairly burdened with tasks that weren’t explicitly stated in the agreement. Typically, a good commercial broker will work out these details in a Letter of Intent (LOI) before finalizing the lease.
7. No Pass-Through Language on Paper
It’s essential to obtain the property’s operating expenses history for at least two to three years, along with a list of planned capital projects. This data impacts the pass-through terms in the commercial lease agreement—which determine who pays for maintenance costs. If the landlord can’t provide this information or if pass-through terms aren’t documented, it’s wise to consider it a red flag.
8. Unclear CAM Coverage
Common Area Maintenance (CAM) charges should be clearly defined in the commercial lease agreement. Vague CAM terms can lead to unexpected costs for the tenant. Therefore, ensure that the lease specifies what is included in CAM charges and inspect all maintenance facilities and equipment to confirm their condition. Consider requesting a 6-month warranty on maintenance facilities like HVAC systems to avoid future financial burdens.
9. High Tenant Turnover Rates
A high turnover rate among tenants often indicates problems with the property or the landlord. Before signing a commercial lease agreement, try to speak with previous tenants to understand why they left. High turnover typically serves as a warning sign that shouldn’t be ignored.
10. Sloppy Documentation
The quality of the legal and official documents reflects the legitimacy of the landlord. If the commercial lease agreement contains messy corrections, faded printing, or illegible writing, consider it a red flag. Clear, well-maintained documents are crucial to avoiding future misunderstandings or disputes.
11. Overreliance on Verbal Confirmations
While verbal negotiations serve as a starting point, they should always be followed by written agreements. If a landlord relies heavily on verbal confirmations and avoids putting terms in writing, it’s best to be cautious. Ensure all terms are documented in the commercial lease agreement to protect your interests.
Even after outlining all the information above, leasing commercial space and/or renewing your lease can still seem daunting. That’s why the Leveraged CRE Team at Commercial Properties, Inc. is here to help you achieve your leasing goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
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 Prince Licaylicay | Oct 26, 2021 | All Articles, Leasing
When leasing commercial real estate, you may encounter terms like ‘triple net’ (NNN), ‘full-service’ (FS), and ‘modified gross’ (MG). As a business owner, these terms can seem confusing, especially when you’re focused on your core operations. However, understanding these lease types is crucial because they describe how landlords collect rent from tenants.
This article explains what each lease type means, highlights their pros and cons, and helps you decide which one might suit your business best.
Triple Net Lease (NNN)
A Triple Net Lease, often called NNN, requires tenants to pay operating expenses in addition to the base rent. The three “Ns” represent the following:
- Property Taxes: Tenants cover their share of property taxes.
- Building Insurance: Tenants contribute to the building’s insurance costs.
- Common Area Maintenance (CAM): Tenants pay for maintaining shared areas, including parking lots, hallways, and elevators.
In a Triple Net Lease, tenants manage their own space and handle all operating expenses, including property taxes, utilities, insurance, maintenance, and interior repairs. The landlord passes on costs that aren’t separately metered, along with expenses related to common area maintenance.
Advantages of a Triple Net Lease:
- Tenants may save money if costs for insurance, taxes, or CAM charges decrease.
- However, tenants are responsible for covering any increases in these expenses.
Modified Gross Lease (MG)
A Modified Gross Lease (MG) includes some or all of the “nets” (property taxes, building insurance, and CAM) as part of the base rent. It’s important to clarify which costs are included. Typically, a Modified Gross Lease includes all nets but excludes costs like electricity and janitorial services.
Full-Service Lease (FS)
A Full-Service Lease (FS) covers all costs, including taxes, insurance, maintenance, utilities, and janitorial services. Tenants pay a fixed lease rate each month, with no additional pass-through expenses. This lease type is particularly beneficial for tenants such as medical offices, as it simplifies payments and minimizes financial surprises. Rent usually increases by about 3% to 4% annually, although this can be negotiated.
Key Consideration:
- If CAM costs decrease, the landlord benefits from the savings, not the tenant. However, tenants may need to cover cost increases at the start of each year based on the base year established in the lease.
Important Considerations Before Signing a Lease Agreement
Understanding the differences between Triple Net (NNN), Modified Gross (MG), and Full-Service (FS) leases is essential. However, before you sign a lease agreement, consider the following:
Don’t Rely Solely on Verbal Agreements:
Landlords may describe the lease verbally, but what matters most is the written contract. As a responsible tenant, thoroughly review your lease agreement. Ensure you understand all provisions, and confirm that the lease type aligns with your business needs. Look out for any terms or conditions that might disadvantage you in the future.
Even after outlining all the information above, writing a letter of intent (LOI) can still seem daunting. That’s why the Leveraged CRE Team at Commercial Properties, Inc. is here to help locate commercial space for lease and assist in using a letter of intent to land such space. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
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 Prince Licaylicay | Oct 22, 2021 | All Articles, Leasing
Renewing your commercial lease agreement might seem like a simple task. However, as a savvy tenant and business owner, you must recognize that there’s more to it than merely signing for another term. To ensure your requests and needs are met by the landlord, there are important steps you should follow—and some you should avoid.
Conduct Thorough Market Research
Market research is a crucial step whether you are satisfied with your current location or considering a move. It involves studying the current status of commercial real estate in your area, including rental rates, agreement terms, and available incentives.
Compare Your Current Status with the Market
Engage with other tenants in your building or nearby properties. Ask them about their rent, lease agreement terms, and any perks they receive. Approach these conversations professionally to encourage them to share useful information.
Evaluate Your Current Location’s Sales Performance
Market research should also include exploring new locations if you’re considering a move. Don’t fall into the trap of false optimism; if your current location isn’t benefiting your business, it might be better to relocate. Although moving may incur costs, finding a more advantageous location can lead to long-term success.
Work with Commercial Real Estate Experts
If market research isn’t your strength, consider working with a commercial real estate broker. These professionals understand the market and can help you find better leasing options, amenities, or even guide you toward making a well-informed decision.
Plan Ahead
To make the most of your market research, start planning six to nine months before your lease expires. This timeline allows you to explore options and prepare the necessary paperwork. Additionally, keep critical dates, such as your lease expiration, top of mind.
Benefits of Market Research:
- Compare your rent, lease terms, and amenities with other tenants.
- Determine whether your current deal is fair or if you’re paying more than others.
- Use this information to negotiate better terms or request additional incentives.
- Identify a better location for your business if needed.
Negotiate Effectively
When renewing your commercial lease agreement, never settle for the first offer. Landlords may present a rate they’ve set for all tenants, but you should negotiate for a better deal.
Start Negotiating from the First Offer
Some tenants hesitate to negotiate, fearing it might strain their relationship with the landlord. However, as a business owner, your goal is to maximize resources and reduce expenses. If negotiating can save you money, it’s worth pursuing.
Audit Operating Costs
As part of your negotiation, request an audit of your operating costs. This will help you determine whether all expenses are being managed correctly and spent appropriately.
Benefits of Negotiation:
- Potentially secure a reduced rental fee, especially if other locations offer lower rates.
- Request perks or incentives that other tenants enjoy.
- Negotiate better lease terms, particularly concerning operating costs.
- Discuss flexible arrangements that account for potential business growth or changes, such as space expansion or additional amenities.
Avoid Disclosing Profit Increases to Your Landlord
Landlords, like you, are in business to make a profit. Never disclose your sales details, especially any increase in profits, to your landlord. Doing so might prompt them to raise your rent, knowing that you can afford it and that moving would be inconvenient during a period of success.
While building a good relationship with your landlord is beneficial, it’s wise to keep certain business details confidential.
Even after outlining all the information above, writing a letter of intent (LOI) can still seem daunting. That’s why the Leveraged CRE Team at Commercial Properties, Inc. is here to help locate commercial space for lease and assist in using a letter of intent to land such space. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
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 Prince Licaylicay | Oct 20, 2021 | All Articles, Exchanges (1031 & DST), Investing
What is a 1031 Exchange and Why Does it Matter?
A 1031 exchange, or like-kind exchange, lets you swap one investment property for another without triggering immediate taxes. Normally, property sales incur taxes, but a transaction that qualifies under Section 1031 of the IRS Code defers these taxes. This allows you to shift your investment while delaying capital gains tax, giving it time to grow.
There’s no limit to how often you can use a 1031 exchange. You can continuously move gains from one property to another until you sell for cash, when taxes become due. This process helps real estate professionals grow and diversify portfolios with minimal tax burden. To qualify, the exchange must involve real property used for business or investment, swapped for another like-kind property.
While 1031 exchanges don’t eliminate taxes, they delay them. This allows investors to grow their portfolios before paying taxes when they eventually sell the exchanged property.
Proposed Changes to Section 1031 Under the Biden Administration
The Biden administration has proposed limiting the benefits of 1031 exchanges. The proposal caps tax deferral at $500,000 for individuals and $1 million for married couples filing jointly. This cap aims to help fund the $1.8 trillion American Family Plan.
If Congress passes this proposal, any gains above these limits will face capital gains taxes. The plan also suggests raising long-term capital gains taxes for high-income earners, which could significantly increase the tax burden on wealthy real estate investors.
Impact of Proposed Changes on Investors
These proposed changes may lead high-net-worth investors to rethink their strategies. Many might consider alternative structures, like Tenancy in Common (TIC), to limit taxable gains. Removing or restricting 1031 exchanges could reduce real estate values and slow investment activity. Smaller investors, who rely on these tax deferrals to grow their portfolios, would feel this impact most.
The real estate market could also see shifts in behavior. Investors may adopt more complex tax strategies, slowing down reinvestment and overall economic growth.
Will Section 1031 Be Eliminated?
It’s unclear whether repealing Section 1031 would achieve Congress’s goals. Removing this tax deferral may not increase fairness or raise significant tax revenue. Instead, it could reduce property values, limit transactions, and even slow economic growth.
Keeping Section 1031, on the other hand, encourages reinvestment in U.S. communities and creates jobs. Like-kind exchanges drive activity in industries like real estate, construction, and finance. By preserving this provision, the economy continues to benefit from these transactions, while taxes are simply deferred.
Risks of Repealing Section 1031
If Congress repeals Section 1031, the real estate market could experience significant setbacks. Property values might drop, and fewer transactions could result in job losses across various sectors. The repeal would also tax cash flow rather than wealth, which could pressure business owners. Some may need to downsize if they can’t afford both reinvestment and the taxes on gains.
Conclusion
While changes to Section 1031 are under discussion, a complete repeal seems unlikely. The tax deferral provided by 1031 exchanges plays a crucial role in real estate growth and economic stability. Real estate professionals should stay informed, as any major reforms could significantly impact their long-term strategies.
Even after outlining all the information above, writing a letter of intent (LOI) can still seem daunting. That’s why the Leveraged CRE Team at Commercial Properties, Inc. is here to help locate commercial space for lease and assist in using a letter of intent to land such space. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
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 Prince Licaylicay | Oct 15, 2021 | All Articles, Leasing
Commercial Lease short-term and long-term can vary based on perspective. However, a short-term lease generally refers to any term under three years. On the other hand, long-term leases typically range from five to ten years or more. Additionally, some real estate professionals classify terms between these as medium-term.
In this guide, we will explore the differences between short-term and long-term leases, discussing both their advantages and disadvantages. Choosing the right lease for your business depends on your needs and growth potential. This article will help you decide which lease duration suits your goals.
Advantages of Short-Term Leases
Less Commitment, Less Risk
For startups that cannot commit to long agreements, short-term leases are ideal. They reduce financial risk, allowing business owners to explore new opportunities with less pressure. Furthermore, these leases provide an opportunity for business experimentation without long-term consequences.
Flexibility for Growth
As businesses grow, they often need more space, staff, or services. Short-term leases, therefore, offer much-needed flexibility. This makes it easier to relocate to a larger or more efficient space if required. Additionally, if your business doesn’t succeed, a short-term lease allows for a quicker exit, reducing ongoing rent expenses.
Disadvantages of Short-Term Leases
Lack of Security
Landlords usually prefer long-term leases because they guarantee steady cash flow. Consequently, short-term leases can leave you vulnerable to eviction once your lease expires. If the landlord finds a long-term tenant or needs your space for expansion, you may have to relocate. As a result, if you’re serious about your business, a short-term lease may introduce unnecessary stress and uncertainty.
Higher Costs
Since landlords favor long-term leases, short-term agreements often come with higher rent. This is because landlords charge more to compensate for the lack of long-term security. Moreover, your rent may increase with each renewal, depending on the market conditions.
Moving Expenses and Business Instability
Relocating can be costly and disruptive to your business. Not only can moving result in the loss of established customers, but it also requires significant effort to set up a new location. Furthermore, short-term leases make it harder to negotiate lower rates or request improvements, as landlords prioritize long-term tenants.
Advantages of Long-Term Leases
Lower Costs and Stable Rent
Long-term leases usually offer lower rent because they provide landlords with financial stability. Tenants also avoid fluctuations in the rental market, ensuring a consistent rental amount throughout the lease term. As a result, long-term leases allow businesses to plan their finances more effectively.
Increased Negotiating Power
Because landlords value long-term tenants, these tenants often have more leverage in negotiations. Requests for expansion, renovations, or cost-sharing agreements are more likely to be granted. Additionally, landlords may offer extra perks, such as free parking or favorable renewal terms, to keep long-term tenants.
Business Stability
A long-term lease provides business owners with peace of mind. You don’t have to worry about eviction or relocation, even when the lease expires. This stability allows businesses to establish themselves in one location and grow steadily. Moreover, if the property is sold, the lease still protects your business until its term ends.
Disadvantages of Long-Term Leases
Commitment and Risk
While long-term leases provide security, they also come with risks. For example, if unforeseen changes occur, such as the need to relocate, breaking a long-term lease can be costly. Thus, long-term leases require careful consideration before signing.
Complex Negotiations
Negotiating a long-term lease can be more complex than short-term agreements. Both parties may need more time to reach an agreement. Therefore, it’s important to ensure the lease covers all potential needs, including space for future expansion.
Limited Expansion Options
If your business grows, you might need more space. Without provisions for expansion, you could find yourself needing to relocate before the lease ends. Hence, it’s essential to review your lease terms carefully.
Even after outlining all the information above, writing a letter of intent (LOI) can still seem daunting. That’s why the Leveraged CRE Team at Commercial Properties, Inc. is here to help locate commercial space for lease and assist in using a letter of intent to land such space. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
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!
