Frequently Asked Questions
HOW DO COMMERCIAL REAL ESTATE AGENTS GET PAID?
The commercial real estate agent’s commission does not get added to the purchase price or the lease rate. Sellers and Landlords understand that the commission fee is part of the responsibility of being a property owner. As a tenant or buyer seeking a commercial property, the real estate agent’s services are essentially free because the property owner covers the cost. There may be rare cases where a fee is paid by a buyer however, the above generally holds true.
WHAT ARE COMMON STRATEGIES FOR INVESTING IN COMMERCIAL REAL ESTATE
Investing in commercial real estate can be an intimidating venture, but with the right strategies and guidance, it can be a highly profitable one. Investing in commercial real estate requires proper research, diversification, goal setting, efficient cash flow management and strategic partnerships. By following these strategies and utilizing the services that L&P Commercial offers, you can confidently start your journey in the lucrative world of commercial real estate investments.
CAN I DO A LEASE TO OWN?
While this concept is possible, it’s seldom beneficial for an owner: if the property is for lease, the owner wants cash flow not a partner. If for sale, the owner may need the money to pay off a mortgage or buy something else. Better for the seller to finance the purchase if the buyer can’t get bank financing. (NOTE: It is typically a red flag if the buyer cannot get bank financing and they are requesting seller financing). This question tells us a few things; the buyer has no money or bad credit, or both.
Our advice to the buyer is to lease with an “option” to purchase (if the seller will agree to sell), or, save up money for a down payment then get a mortgage. You may miss out on a particular property, but you’ll be better off in the long run.
WHAT ARE THE DIFFERENT TYPES OF COMMERCIAL LEASES?
Gross Lease, Triple Net Lease (NNN), Modified Gross Lease, Ground Lease, Absolute Net Lease
Gross Lease means, your base rent covers all property expenses, including, taxes, insurance, common area maintenance, gas, electric, water, and sewer. If the building has on-site security and nightly cleaning of suites, it is then referred to as a “Full Service” lease. This lease is most common in a Class A Office building.
Triple Net Lease can also be referred to as a Net Lease or NNN. In this situation, the tenant pays a base rent, and they pay an entirely separate fee that goes towards the tenant’s proportionate share of taxes, insurance, and common area maintenance. With this lease, the tenant often contracts directly with the utility companies for gas and electric. This lease type is common in for single tenant buildings.
Modified Gross Lease means something is not included in the base rent. Often times, utilities are the piece that is not included in the base rent. But this situation requires the tenant to thoroughly review their lease to see if the landlord or listing agent threw in an unexpected fee onto the tenant. This lease type is common, in older properties, in Western Mass and the Northern Connecticut area across all property types.
Ground Lease is used for land leases where the tenant does not purchase the land, but they pay the landlord rent for a number of years. In this situation, the tenant often exercises a long-term lease of 25 plus years. In the industry, we jokingly refer to this situation as a mailbox lease for the landlord because their only requirement is to walk out to their mailbox and receive rent checks. The tenant is responsible for all property expenses and typically the tenant will construct a building on the property. If the lease expires, the landlord is now the owner of the building and they receive a property that is much improved from the piece of land they originally leased to the tenant. This is a common lease type for national retailers to enter into because the tenant acquires the property without having to fork over a large sum to purchase it and the rent is used as a tax right off.
Absolute Net Lease is a type of lease used for ‘build-to-suit” projects. A property owner builds a building specifically for a tenant, the tenant is then responsible for all operating expenses, building mechanical systems, and building structure. So, the rent is “absolute” to the landlord. This is also referred to as a “Bond Type” lease because it’s like buying a bond, the owner just collects income.
Each lease is unique and often confusing, so it is always recommended to hire an attorney to review the lease and outline responsibilities for both the tenant and the landlord.
WHAT IS CAM?
Common Area Maintenance bills are typically paid by the landlord and then billed to the tenants for reimbursements. CAM charges will group a number of expenses together, including, taxes, insurance, snow removal, landscaping, cleaning, and a number of others. It is important to have a detailed breakdown of what is included in the CAM charges. If the tenant does not carefully inspect the breakdown of CAM charges, the landlord may attempt to add expenses to the group that have not been agreed upon in the lease. It is also often the case where a landlord assumes the tenant knows what’s included in CAM, so it needs to be discussed in detail.
I WANT TO LEASE SPACE IN A SMALL RETAIL CENTER, BUT THE OWNER SAYS I HAVE TO TAKE THE SPACE IN “AS IS” CONDITION. WHY DO I HAVE TO IMPROVE THE OWNER’S PROPERTY?
Unless a tenant is a “Credit Tenant”, meaning financially very strong, it’s a bad financial move for a landlord to pay for the tenant’s improvements. Also, it will be the tenant’s space once a lease is signed, not the landlords. A lease is like ownership. Plus, every tenant wants different improvements making it hard for a landlord to continue doing the improvements. One may assume all tenant improvements add value to the property, but in reality, tenant improvements add value for the tenant, but they may not add value to the property. Tenant improvements for one tenant are typically different for the next tenant so unless a tenant is signing a long-term lease and the landlord has been assured by the tenant’s financial situation, most landlords will attempt to pass the tenant’s specific improvement costs onto the tenant.
WHAT SHOULD I CONSIDER BEFORE INVESTING IN COMMERCIAL REAL ESTATE
Investing in commercial real estate can be a lucrative venture, but it is important to approach it with caution and careful consideration. There are several factors that you should keep in mind before making any investments in this market.
- Have a solid understanding of your financial position (i.e. Can you survive a vacancy?)
- Find the current state of the type of asset (i.e. Is it a buyer or seller’s market?)
- Consider the location
- Determine which property aligns with your long-term investment goals
Consider seeking guidance from L&P Commercial to assist with proper planning and diligence to ensure you are on the right path.
DOES IT MATTER HOW I TAKE OWNERSHIP OF A COMMERCIAL PROPERTY
Yes, it absolutely matters how you take ownership of a commercial property.
The process of acquiring a commercial property can be complex and overwhelming, but choosing the right method of ownership is crucial for the success and profitability of your investment. We understand that every individual’s financial goals are unique and we work closely with our clients to create customized solutions that align with their objectives. Our experienced professionals will guide you through selecting which type of LLC would best suit your needs based on factors such as the desired level of involvement in management duties and number of members involved in owning the LLC.
WHAT IS A LETTER OF INTENT FOR LEASING A COMMERCIAL PROPERTY
A letter of intent for leasing a commercial property is a crucial document that serves as the first step toward securing a lease agreement. It outlines the terms and conditions of the lease, including the lease duration, rental amount, and any special requests or clauses.
When leasing a commercial property, both parties involved want to ensure that their interests are protected. The landlord wants to secure a long-term tenant who will pay rent on time and take good care of their property. On the other hand, tenants want to ensure they are getting fair rental rates and have all their needs met during their lease term. The letter of intent acts as a blueprint for the lease agreement negotiations between both parties.