Aug
3rd
5 More Steps to Successful Commercial Investing
By Gary Tharp
Taking Action
10. Learn something new. There is plenty of training out there. Take advantage of what’s available.
11. As you drive your trade area, give yourself a pep talk. Keep yourself pumped up.
12. There will be days when you think that no opportunities are available in your neighborhood. If that’s true, you need to build some.
13. Phone a friend. Perhaps they’ll laugh at you or give you some negative feedback - but phone them anyway.
14. Make yourself accountable for your actions by writing an activity report at the end of every day. It will make a huge difference for you. It takes 21 days to create helpful habits and mould them into your daily activity. Before you go to bed, sit down for five minutes, and write what you did today that shows how you progressed toward your goal.
Journaling is a good motivator. If you have nothing to write down for a couple days, pretty soon you’ll start kicking yourself. You’ll be determined not to have another day of nothing, and vow to make something happen that very next day.
15. Talk to ten businesses that are not currently listed for sale, about buying their building. That represents ten opportunities!
A Matter of Perspective
This shoe company wants to expand into Africa. They hire a salesman and send him over to Africa to sell shoes.
When he gets there, he calls back to his head office and says, “Hey, Boss. You’ve got to bring me home, now.”
Then he says, “You can’t sell shoes here. Nobody wears shoes. This is never going to work.” So they bring him home.
However, they are not convinced that Africa isn’t a workable opportunity. So, they hire another shoe salesman and send him over to Africa.
The very next day, they get a Voice Mail message from him. “Hello, Boss. This is Harry. Send me all the shoes you got, man. Nobody wears shoes here. We’re going to make a fortune!”
The difference between these two salesmen is perspective.
10. Learn something new. There is plenty of training out there. Take advantage of what’s available.
11. As you drive your trade area, give yourself a pep talk. Keep yourself pumped up.
12. There will be days when you think that no opportunities are available in your neighborhood. If that’s true, you need to build some.
13. Phone a friend. Perhaps they’ll laugh at you or give you some negative feedback - but phone them anyway.
14. Make yourself accountable for your actions by writing an activity report at the end of every day. It will make a huge difference for you. It takes 21 days to create helpful habits and mould them into your daily activity. Before you go to bed, sit down for five minutes, and write what you did today that shows how you progressed toward your goal.
Journaling is a good motivator. If you have nothing to write down for a couple days, pretty soon you’ll start kicking yourself. You’ll be determined not to have another day of nothing, and vow to make something happen that very next day.
15. Talk to ten businesses that are not currently listed for sale, about buying their building. That represents ten opportunities!
A Matter of Perspective
This shoe company wants to expand into Africa. They hire a salesman and send him over to Africa to sell shoes.
When he gets there, he calls back to his head office and says, “Hey, Boss. You’ve got to bring me home, now.”
Then he says, “You can’t sell shoes here. Nobody wears shoes. This is never going to work.” So they bring him home.
However, they are not convinced that Africa isn’t a workable opportunity. So, they hire another shoe salesman and send him over to Africa.
The very next day, they get a Voice Mail message from him. “Hello, Boss. This is Harry. Send me all the shoes you got, man. Nobody wears shoes here. We’re going to make a fortune!”
The difference between these two salesmen is perspective.
Jul
26th
9 Action Steps to Success in Commercial Real Estate
By Gary Tharp
Taking Action
Key Point
In life, many people know what to do, but very few of them actually follow through. Knowledge of what to do is not enough. You must be willing to take action and use that knowledge.
To make this training more personally effective, you need to develop an action list:
1. Set a 30-day do-able goal.
Take one minute, right now, and set one sunny day, do-able goal. It should be something that you can accomplish within 30 days, based on the information that you received in this Manual. Once you’ve set a goal to do one task, it empowers you to set more goals and accomplish even more.
2. Obtain a copy of your local city, town, or county planning department’s Comprehensive Development Plan.
3. Look for commercial properties as you drive by or walk around. Become familiar with your neighborhood. Take the time to go “driving for dollars.” Once you become aware of opportunities that you missed before, other things will start to open up. Talk to owners and make a couple of offers. Set up a comfortable, dedicated place for your office.
Pick one specific product and learn how to become very proficient using it.
4. Stake out your trade area, whether it is office warehouses or a couple of city blocks with Class B office buildings. Figure out the geographical area that you’re going to work.
5. Determine where your selected product is in the real estate cycle. Find commercial agents who specialize in these properties. Sit down and talk with them—take them to lunch.
Discuss last year’s market and where this year’s market is going. Let these agents know that you’re a real estate investor and that you want to start buying property. However, before you do so, you want to learn as much as you can about the business they represent.
6. Pick one “Hidden Market” prospecting technique. You will find more business in the “Hidden Market” than you will on the MLS. However, going to the MLS is a good way to start because it will give you some good ideas. Some great commercial deals are actually listed on the MLS, but that’s not the rule.
7. Write the name of one prospective partner.
8. Make a bad offer. It will give you practice in making the real deals.
9. Call your consultant or speak with someone to get some new ideas. Every new idea is going to be valuable.
Key Point
In life, many people know what to do, but very few of them actually follow through. Knowledge of what to do is not enough. You must be willing to take action and use that knowledge.
To make this training more personally effective, you need to develop an action list:
1. Set a 30-day do-able goal.
Take one minute, right now, and set one sunny day, do-able goal. It should be something that you can accomplish within 30 days, based on the information that you received in this Manual. Once you’ve set a goal to do one task, it empowers you to set more goals and accomplish even more.
2. Obtain a copy of your local city, town, or county planning department’s Comprehensive Development Plan.
3. Look for commercial properties as you drive by or walk around. Become familiar with your neighborhood. Take the time to go “driving for dollars.” Once you become aware of opportunities that you missed before, other things will start to open up. Talk to owners and make a couple of offers. Set up a comfortable, dedicated place for your office.
Pick one specific product and learn how to become very proficient using it.
4. Stake out your trade area, whether it is office warehouses or a couple of city blocks with Class B office buildings. Figure out the geographical area that you’re going to work.
5. Determine where your selected product is in the real estate cycle. Find commercial agents who specialize in these properties. Sit down and talk with them—take them to lunch.
Discuss last year’s market and where this year’s market is going. Let these agents know that you’re a real estate investor and that you want to start buying property. However, before you do so, you want to learn as much as you can about the business they represent.
6. Pick one “Hidden Market” prospecting technique. You will find more business in the “Hidden Market” than you will on the MLS. However, going to the MLS is a good way to start because it will give you some good ideas. Some great commercial deals are actually listed on the MLS, but that’s not the rule.
7. Write the name of one prospective partner.
8. Make a bad offer. It will give you practice in making the real deals.
9. Call your consultant or speak with someone to get some new ideas. Every new idea is going to be valuable.
Jul
12th
Don't Pay Too Much in Property Tax
By Gary Tharp
Valuation Issues
To prevent subjective evaluations, you need to hire professional appraisers. However, they are not without their prejudices, so they sometimes appraise in a very arbitrary way. If they place a value on your property for assessment or tax purposes that you don’t feel is correct, you have the right to appeal the assessed value. However, you may have to wait until the following year. If you can establish comparable sales or values that are less than these new assessments, you may be able to get these assessments lowered, to reflect more realistic values for the following tax period.
Although you can’t fight the millage rate, which is a vote at the county level, you can fight the assessed value. On some commercial buildings, particularly if you are buying run-down properties to fix up, you get a new assessed value based on the purchase price, because you bought a damaged property.
There are attorneys and other firms who can assist you in the appeal process. They specialize in this area of law, so they may not take your case unless they believe they can win for you.
It is possible to get assessed values changed and/or corrected and there are organizations available to help you, if you decide to fight an assessment. However, you must be ready to provide the comparables.
To prevent subjective evaluations, you need to hire professional appraisers. However, they are not without their prejudices, so they sometimes appraise in a very arbitrary way. If they place a value on your property for assessment or tax purposes that you don’t feel is correct, you have the right to appeal the assessed value. However, you may have to wait until the following year. If you can establish comparable sales or values that are less than these new assessments, you may be able to get these assessments lowered, to reflect more realistic values for the following tax period.
Although you can’t fight the millage rate, which is a vote at the county level, you can fight the assessed value. On some commercial buildings, particularly if you are buying run-down properties to fix up, you get a new assessed value based on the purchase price, because you bought a damaged property.
There are attorneys and other firms who can assist you in the appeal process. They specialize in this area of law, so they may not take your case unless they believe they can win for you.
It is possible to get assessed values changed and/or corrected and there are organizations available to help you, if you decide to fight an assessment. However, you must be ready to provide the comparables.
Jul
6th
Hey Property Owner You're Liable
By Gary Tharp
Owner’s Liability
As a property owner, you must take reasonable precautions to ensure the safety of anyone on your property. As the owner of a business that is open to the general public, you must take extra measures to maintain a safe environment, both inside and around any buildings. Therefore, parking lots and privately owned paths and walkways must also be inspected for any safety hazards.
American with Disabilities Act (ADA) of 1990
ADA guidelines are something that you need to consider on a regular basis. Your facility must have unobstructed access for handicapped individuals.
A use change could be space that was an office and now it’s going to be something entirely different—for example, a hair salon. If the use changes, many counties in this country today will demand that you bring the building up to ADA standards. This doesn’t just mean it is wheelchair accessible from the outside to the inside—it’s ingress and egress.
These standards also apply to the interior layout of a space as well. Bathroom doors must be wide enough to accommodate wheelchairs, with a specific clear span in which to circle. ADA requirements could even make you move walls. So, you need to be aware of what the ADA requirements are. You can look up this information online at www.ada.com.
Environmental Issues
The major environmental issue today is mold abatement. It’s such a huge issue. Remember lead-based paint in the late 70’s and, early 80’s—in which people were sickened?
Workmen came in, dressed in white hazard suits and masks, and sanded down all of the walls to abate the problem. Today, lead-based paint is not a big issue. Walls can be sanded, primed, and another coat of paint applied to seal it. Perhaps sometime in the future, you may be able to abate mold in a similar manner.
If you are considering buying a building that’s been vacant for a couple of years and has had any leakage or water damage inside, mold may still be a huge problem.
In that case, the first thing you ought to do in your due diligence period, is spend $300 to $500 to address the problem. Have a mold abatement and inspection technician evaluate it and give you a professional opinion as to cost and procedures for abatement.
If you don’t properly treat a building for mold, and months or even years later, somebody gets sick from it, you may have a costly issue on your hands. If tenants can show that you knew the building had mold when you bought it, but you can’t prove that you paid for the proper abatement procedures, you may be liable.
Sick building syndrome is another extensive environmental issue that is usually related to mold issues in air conditioning ducts. In your due diligence period, you need to check all of these issues to make sure that you are not leaving yourself vulnerable for an expensive law suit. Also, be sure to look for hazardous materials, such as asbestos, when you’re performing your preliminary inspections.
Common Area Liability
Liability is an insurance issue. You should carry solid insurance policies on your properties with reputable insurance companies and carry at least a $1,000,000 to $2,000,000 blanket policy to protect yourself. When you buy protection of this nature, you also buy some of the best attorneys in the world to be on your team.
Make sure that your leases include a clause stipulating that people must conduct business in your buildings, according to local building codes. Be especially wary of signage, since many of these may not be code compliant.
ADA Compliance
Go straight to the ADA website, www.ada.com for this information. You can download their extensive regulations for details.
As a property owner, you must take reasonable precautions to ensure the safety of anyone on your property. As the owner of a business that is open to the general public, you must take extra measures to maintain a safe environment, both inside and around any buildings. Therefore, parking lots and privately owned paths and walkways must also be inspected for any safety hazards.
American with Disabilities Act (ADA) of 1990
ADA guidelines are something that you need to consider on a regular basis. Your facility must have unobstructed access for handicapped individuals.
A use change could be space that was an office and now it’s going to be something entirely different—for example, a hair salon. If the use changes, many counties in this country today will demand that you bring the building up to ADA standards. This doesn’t just mean it is wheelchair accessible from the outside to the inside—it’s ingress and egress.
These standards also apply to the interior layout of a space as well. Bathroom doors must be wide enough to accommodate wheelchairs, with a specific clear span in which to circle. ADA requirements could even make you move walls. So, you need to be aware of what the ADA requirements are. You can look up this information online at www.ada.com.
Environmental Issues
The major environmental issue today is mold abatement. It’s such a huge issue. Remember lead-based paint in the late 70’s and, early 80’s—in which people were sickened?
Workmen came in, dressed in white hazard suits and masks, and sanded down all of the walls to abate the problem. Today, lead-based paint is not a big issue. Walls can be sanded, primed, and another coat of paint applied to seal it. Perhaps sometime in the future, you may be able to abate mold in a similar manner.
If you are considering buying a building that’s been vacant for a couple of years and has had any leakage or water damage inside, mold may still be a huge problem.
In that case, the first thing you ought to do in your due diligence period, is spend $300 to $500 to address the problem. Have a mold abatement and inspection technician evaluate it and give you a professional opinion as to cost and procedures for abatement.
If you don’t properly treat a building for mold, and months or even years later, somebody gets sick from it, you may have a costly issue on your hands. If tenants can show that you knew the building had mold when you bought it, but you can’t prove that you paid for the proper abatement procedures, you may be liable.
Sick building syndrome is another extensive environmental issue that is usually related to mold issues in air conditioning ducts. In your due diligence period, you need to check all of these issues to make sure that you are not leaving yourself vulnerable for an expensive law suit. Also, be sure to look for hazardous materials, such as asbestos, when you’re performing your preliminary inspections.
Common Area Liability
Liability is an insurance issue. You should carry solid insurance policies on your properties with reputable insurance companies and carry at least a $1,000,000 to $2,000,000 blanket policy to protect yourself. When you buy protection of this nature, you also buy some of the best attorneys in the world to be on your team.
Make sure that your leases include a clause stipulating that people must conduct business in your buildings, according to local building codes. Be especially wary of signage, since many of these may not be code compliant.
ADA Compliance
Go straight to the ADA website, www.ada.com for this information. You can download their extensive regulations for details.
Jun
21st
How to Manage Tenants for Success
By Gary Tharp
Managing Tenants
To manage tenants effectively, proper and prompt communication should be your first order of business. You also have a variety of primary tasks to handle:
• Tenant complaints
• Pre-emptive management
• Renewal programs
Tenant Complaints
Usually you have the responsibility for major equipment in your buildings, such as a working elevator. If your tenants keep reminding you that something isn’t working and you don’t fix it, you are responsible for any problems or injuries that occur.
When their lease comes up for renewal, they probably won’t move out. Businesses don’t move as often as people in residential situations because moving involves some major expenses, such as business cards, letterhead stationery, and telephone service. However, if they become dissatisfied enough, they will move.
Therefore, handling complaints becomes a critical issue. This is especially true when the market slows down, because happy tenants normally stay. Otherwise, they wouldn’t consider moving unless they are expanding and need more space, or perhaps they are extremely successful and profitable and they’d like a more prestigious base, perhaps from a Class B to a Class A building.
Tip: Handle complaints promptly and communicate effectively with your tenants to avert any troublesome situations.
Pre-emptive Management
If you buy a building that already has tenants be sure to determine when each lease expires. This will immediately show if there might be any vacancies occurring at about the same time. If you have only a few tenants and even if only two of them have leases expiring about the same time that could possibly represent a huge loss for you.
What you need to do in this type of situation is meet with each of these tenants separately and discuss the expiration date now, before it occurs. If a tenant in a commercial building is going to move, they usually decide that at least six or eight months before the lease expires, so they can create detailed planning and scheduling.
When you meet with them, be prepared to talk about renewing their lease immediately. If they are willing to renew this far ahead of schedule, you should consider granting them extra concessions. Offering three or more free months when the lease expires is usually a deal that most commercial tenants would certainly appreciate.
It’s also a good deal for you, because it could be significantly more than three months of vacant space if a tenant leaves. You might even have to include the cost of cleaning and re-renting and possibly remodeling the space, by moving walls or adding extra tenant improvements, like new carpeting. Those costs could be far beyond what you would be giving away with three months of free rent.
Sometimes the conversation with tenants turns up the fact that they would like some more space, perhaps a few thousand square feet. If your meeting with the second tenant helps you to determine they need more space, but it’s more than you can provide, they may need to move. This will allow you to offer some of their space to the first tenant.
If the first tenant signs the new lease that includes the extra square footage, you could have less of a tenant vacancy problem than you had earlier. Sometimes this solution will work easily because it’s contiguous space.
The whole point of this is to be proactive in your leasing. To ensure that you don’t have too much vacant space and reduced cash flow, pay particular attention to your tenants’ needs. Be careful to monitor your leases.
Preemptive management includes offering these renewal programs to balance your turnover, and make sure you’re on the top of your game.
To manage tenants effectively, proper and prompt communication should be your first order of business. You also have a variety of primary tasks to handle:
• Tenant complaints
• Pre-emptive management
• Renewal programs
Tenant Complaints
Usually you have the responsibility for major equipment in your buildings, such as a working elevator. If your tenants keep reminding you that something isn’t working and you don’t fix it, you are responsible for any problems or injuries that occur.
When their lease comes up for renewal, they probably won’t move out. Businesses don’t move as often as people in residential situations because moving involves some major expenses, such as business cards, letterhead stationery, and telephone service. However, if they become dissatisfied enough, they will move.
Therefore, handling complaints becomes a critical issue. This is especially true when the market slows down, because happy tenants normally stay. Otherwise, they wouldn’t consider moving unless they are expanding and need more space, or perhaps they are extremely successful and profitable and they’d like a more prestigious base, perhaps from a Class B to a Class A building.
Tip: Handle complaints promptly and communicate effectively with your tenants to avert any troublesome situations.
Pre-emptive Management
If you buy a building that already has tenants be sure to determine when each lease expires. This will immediately show if there might be any vacancies occurring at about the same time. If you have only a few tenants and even if only two of them have leases expiring about the same time that could possibly represent a huge loss for you.
What you need to do in this type of situation is meet with each of these tenants separately and discuss the expiration date now, before it occurs. If a tenant in a commercial building is going to move, they usually decide that at least six or eight months before the lease expires, so they can create detailed planning and scheduling.
When you meet with them, be prepared to talk about renewing their lease immediately. If they are willing to renew this far ahead of schedule, you should consider granting them extra concessions. Offering three or more free months when the lease expires is usually a deal that most commercial tenants would certainly appreciate.
It’s also a good deal for you, because it could be significantly more than three months of vacant space if a tenant leaves. You might even have to include the cost of cleaning and re-renting and possibly remodeling the space, by moving walls or adding extra tenant improvements, like new carpeting. Those costs could be far beyond what you would be giving away with three months of free rent.
Sometimes the conversation with tenants turns up the fact that they would like some more space, perhaps a few thousand square feet. If your meeting with the second tenant helps you to determine they need more space, but it’s more than you can provide, they may need to move. This will allow you to offer some of their space to the first tenant.
If the first tenant signs the new lease that includes the extra square footage, you could have less of a tenant vacancy problem than you had earlier. Sometimes this solution will work easily because it’s contiguous space.
The whole point of this is to be proactive in your leasing. To ensure that you don’t have too much vacant space and reduced cash flow, pay particular attention to your tenants’ needs. Be careful to monitor your leases.
Preemptive management includes offering these renewal programs to balance your turnover, and make sure you’re on the top of your game.
Jun
14th
Commercial Lease Clauses
By Gary Tharp
Commercial Lease Clauses
You should include introductory clauses in your lease that do
the following:
• Describe the premises
• Specify the lease term
• Indicate the rental or lease payment amount
Many times, you will be dealing with a five-year lease. Therefore, you need to explain in the lease, how rental increments will happen every year over the period of the lease.
You could also include additional tenant conduct, indicating what tenants can or cannot do. This is where you would specify whether they could assign the lease, sublease it, or limit it to subleasing—subject to landlord’s approval.
Signage
Signage becomes a problem in some places such as Florida, because of hurricanes. One of the most serious threats to life and limb in a hurricane is not the wind per Se, but the debris that the wind blows around.
If you have a sign that is not well anchored and a hurricane comes along and tears off chunks of glass or plastic, these can become deadly projectiles.
Hence, you get into a lot of code issues about how signage has to be constructed, type of materials, and other similar issues. So, in your lease, you must ensure that it includes a clause that specifies that no signs can be erected on the property without:
1. Landlord approval
2. Proper permitting through the local county officers or local city officers, so that signs
— Meet code
— Conform to local rules and regulations
Additional Tenant Expenses
Include language in the lease that itemizes the expenses for which the tenant will be responsible, such as taxes, utilities, and insurance. A prudent policy is to require that all your tenants carry a million dollar liability policy on anything that happens on the premises.
Otherwise, if something happens as a function of their business and they are not sufficiently covered, the problem rebounds to you, because it’s your building. Be sure that your tenants furnish proof of insurance before you allow them to occupy the premises.
Tenant rights, landlord services, common areas, and common area expenses that you are going to incur and pass on to the tenant, are all standard clauses. Other clauses may pertain to preserving the premises, making repairs, maintenance, and surrender of the property.
Tip: If your tenants want to change something in the building, they must come to you for approval. After all, it’s your building!
You should also consider the rules for alterations, surrender, damage destruction, and protecting the landlord’s subordination. Be sure to specify that you have the right to enter and inspect the premises.
Other clauses to consider are those for indemnification— being held harmless, evidence of default and remedies, security for performance, security deposits, and other similar rights. Obtain an experienced real estate attorney who specializes in commercial leases, and can review and revise your lease appropriately.
Building Owners and Managers Association (BOMA)
BOMA publishes standard methods for measuring floor area in industrial buildings. You may not think this subject is an important issue, but there are many ways to measure that can affect your rental income.
Landlords have been sued, sometimes after many years, for leases that were found to include inaccurate square footage descriptions. To protect yourself always use the BOMA method and include that description in one of your lease clauses.
You should include introductory clauses in your lease that do
the following:
• Describe the premises
• Specify the lease term
• Indicate the rental or lease payment amount
Many times, you will be dealing with a five-year lease. Therefore, you need to explain in the lease, how rental increments will happen every year over the period of the lease.
You could also include additional tenant conduct, indicating what tenants can or cannot do. This is where you would specify whether they could assign the lease, sublease it, or limit it to subleasing—subject to landlord’s approval.
Signage
Signage becomes a problem in some places such as Florida, because of hurricanes. One of the most serious threats to life and limb in a hurricane is not the wind per Se, but the debris that the wind blows around.
If you have a sign that is not well anchored and a hurricane comes along and tears off chunks of glass or plastic, these can become deadly projectiles.
Hence, you get into a lot of code issues about how signage has to be constructed, type of materials, and other similar issues. So, in your lease, you must ensure that it includes a clause that specifies that no signs can be erected on the property without:
1. Landlord approval
2. Proper permitting through the local county officers or local city officers, so that signs
— Meet code
— Conform to local rules and regulations
Additional Tenant Expenses
Include language in the lease that itemizes the expenses for which the tenant will be responsible, such as taxes, utilities, and insurance. A prudent policy is to require that all your tenants carry a million dollar liability policy on anything that happens on the premises.
Otherwise, if something happens as a function of their business and they are not sufficiently covered, the problem rebounds to you, because it’s your building. Be sure that your tenants furnish proof of insurance before you allow them to occupy the premises.
Tenant rights, landlord services, common areas, and common area expenses that you are going to incur and pass on to the tenant, are all standard clauses. Other clauses may pertain to preserving the premises, making repairs, maintenance, and surrender of the property.
Tip: If your tenants want to change something in the building, they must come to you for approval. After all, it’s your building!
You should also consider the rules for alterations, surrender, damage destruction, and protecting the landlord’s subordination. Be sure to specify that you have the right to enter and inspect the premises.
Other clauses to consider are those for indemnification— being held harmless, evidence of default and remedies, security for performance, security deposits, and other similar rights. Obtain an experienced real estate attorney who specializes in commercial leases, and can review and revise your lease appropriately.
Building Owners and Managers Association (BOMA)
BOMA publishes standard methods for measuring floor area in industrial buildings. You may not think this subject is an important issue, but there are many ways to measure that can affect your rental income.
Landlords have been sued, sometimes after many years, for leases that were found to include inaccurate square footage descriptions. To protect yourself always use the BOMA method and include that description in one of your lease clauses.
Jun
7th
More Commercial Lease Terms You MUST Know
By Gary Tharp
Commercial and Industrial Property Turnkey
This type of operation basically means that you construct a building the way a prospective tenant dictates, and then you rent it to them. You pay the initial cost of setting it up as turnkey, in that you put up the capital cost. You’ll recover those costs through the rent that the tenant pays over the next 5 to 10 years.
The tenant might even pay a percentage of what the cost is to build the turnkey, but you will also pay a percentage of it. You will see build-to-suit many times in rental property where the building is a shell. A tenant will not take it as a shell, but will want it built out to a certain degree.
Build-To-Suit
A build-to-suit situation is a deal in which you can negotiate who pays how much of the build-out fees. When your tenant pays a specific amount per foot in tenant improvements, that’s a built-to-suit type of situation.
Sale/Leaseback
Albertson’s grocery chain does a lot of sale/leaseback. They find suitable property for a grocery site, build a store to fit their own specifications, sell it (usually to a group of investors who like to buy their properties), and then lease it back.
They know that they can make 12 to 13% return on the money they invest in the grocery business. In the real estate business, owning real estate might give them an 8 or 9% “Cap Rate” with an AAA tenant like that. So, rather than have their money tied up in real estate at a lower rate of return, they sell the property to somebody else and lease it back. Then they can invest their money in their grocery business, where they can obtain much higher profits. This is just another financing method.
This type of operation basically means that you construct a building the way a prospective tenant dictates, and then you rent it to them. You pay the initial cost of setting it up as turnkey, in that you put up the capital cost. You’ll recover those costs through the rent that the tenant pays over the next 5 to 10 years.
The tenant might even pay a percentage of what the cost is to build the turnkey, but you will also pay a percentage of it. You will see build-to-suit many times in rental property where the building is a shell. A tenant will not take it as a shell, but will want it built out to a certain degree.
Build-To-Suit
A build-to-suit situation is a deal in which you can negotiate who pays how much of the build-out fees. When your tenant pays a specific amount per foot in tenant improvements, that’s a built-to-suit type of situation.
Sale/Leaseback
Albertson’s grocery chain does a lot of sale/leaseback. They find suitable property for a grocery site, build a store to fit their own specifications, sell it (usually to a group of investors who like to buy their properties), and then lease it back.
They know that they can make 12 to 13% return on the money they invest in the grocery business. In the real estate business, owning real estate might give them an 8 or 9% “Cap Rate” with an AAA tenant like that. So, rather than have their money tied up in real estate at a lower rate of return, they sell the property to somebody else and lease it back. Then they can invest their money in their grocery business, where they can obtain much higher profits. This is just another financing method.
Jun
1st
Commercial Lease Terms You MUST Know
By Gary Tharp
Common Area Maintenance (CAM)
Most of the time when you have a multi-tenant building, you factor in charges for CAM. Usually tenants pay $12 a square foot for annual rent, plus a certain percentage for CAM. So CAM for a building is passed on to tenants.
Many of the issues considered in the commercial arena are not even available in residential leasing. For instance, if your commercial real estate investment target is small office warehouses, strip malls, or strip retail centers, CAM is one of the items you need to research.
Before you start renting or buying those types of facilities, you should know what the standard CAM is for your type of property. Sometimes in some smaller properties, there is no CAM, since the landlord pays it.
That’s all part of your costs as a landlord in this type of property. It’s not a pass-through, because you can’t legitimately pass through CAM expenses to your tenants, if no one in the area who owns a similar property is having their tenants pay it.
Percentage Leases
When you pay a fixed rent plus a percentage of sales over and above the fixed rental, you have a percentage lease arrangement. You will probably not run into percentage rent situations very often as a landlord. Most of the time, percentage rents are used in retail businesses located in large shopping centers and other similar areas.
You might charge percentage rent, if you had a $2,000,000 shopping center with a JC Penny’s, Sears, or Dillard’s, and the attraction of those mega stores brought traffic to your store. Therefore, they want to become your partner, in effect, by charging you a percentage. This is not common in small to moderate businesses.
Ground/Land Leases
This type of arrangement is where the tenant rents the land and builds on the property. Any way in which you improve the grounds, including any buildings, usually belong to the landlord when the lease ends. This is actually a form of financing.
You’ll find many ground tenants in high-cost land areas, like New York City. People don’t want to tie up personal capital in owning a piece of land when they could be putting that money into business operations. The standard land lease is a very long-term lease.
Sublease
A sublease is when you lease the whole property and then sublease a portion of it to someone else. For example, you might rent 10,000 square feet from a landlord. If you don’t need all that room, you have the right to put your own tenant onto the property using a sublease.
Assignment
An assignment is very similar to a sublease, in that you initiate the rental lease. However, you become a landlord by assigning the entire property to one or more tenants whom you manage.
There was a time when real estate investors would lease property and negotiate a very low rental rate. Then they would assign that same property to tenants at a much higher rate. Their real estate business consisted entirely of collecting money from their assignment.
Assignment Not Allowed
In some commercial leases, there’s a sublease clause stating that you are allowed to sublease the entire property, subject to the landlord’s approval. This clause, in effect, means that you cannot assign the lease. Particularly when you get into larger properties, you’ll want to be sure to personally check personally the credit of everybody who expresses interest in leasing your property.
Tip: Assignments can get you into trouble. If you don’t know whether the assignee is credit worthy, don’t assign under any conditions.
Most of the time when you have a multi-tenant building, you factor in charges for CAM. Usually tenants pay $12 a square foot for annual rent, plus a certain percentage for CAM. So CAM for a building is passed on to tenants.
Many of the issues considered in the commercial arena are not even available in residential leasing. For instance, if your commercial real estate investment target is small office warehouses, strip malls, or strip retail centers, CAM is one of the items you need to research.
Before you start renting or buying those types of facilities, you should know what the standard CAM is for your type of property. Sometimes in some smaller properties, there is no CAM, since the landlord pays it.
That’s all part of your costs as a landlord in this type of property. It’s not a pass-through, because you can’t legitimately pass through CAM expenses to your tenants, if no one in the area who owns a similar property is having their tenants pay it.
Percentage Leases
When you pay a fixed rent plus a percentage of sales over and above the fixed rental, you have a percentage lease arrangement. You will probably not run into percentage rent situations very often as a landlord. Most of the time, percentage rents are used in retail businesses located in large shopping centers and other similar areas.
You might charge percentage rent, if you had a $2,000,000 shopping center with a JC Penny’s, Sears, or Dillard’s, and the attraction of those mega stores brought traffic to your store. Therefore, they want to become your partner, in effect, by charging you a percentage. This is not common in small to moderate businesses.
Ground/Land Leases
This type of arrangement is where the tenant rents the land and builds on the property. Any way in which you improve the grounds, including any buildings, usually belong to the landlord when the lease ends. This is actually a form of financing.
You’ll find many ground tenants in high-cost land areas, like New York City. People don’t want to tie up personal capital in owning a piece of land when they could be putting that money into business operations. The standard land lease is a very long-term lease.
Sublease
A sublease is when you lease the whole property and then sublease a portion of it to someone else. For example, you might rent 10,000 square feet from a landlord. If you don’t need all that room, you have the right to put your own tenant onto the property using a sublease.
Assignment
An assignment is very similar to a sublease, in that you initiate the rental lease. However, you become a landlord by assigning the entire property to one or more tenants whom you manage.
There was a time when real estate investors would lease property and negotiate a very low rental rate. Then they would assign that same property to tenants at a much higher rate. Their real estate business consisted entirely of collecting money from their assignment.
Assignment Not Allowed
In some commercial leases, there’s a sublease clause stating that you are allowed to sublease the entire property, subject to the landlord’s approval. This clause, in effect, means that you cannot assign the lease. Particularly when you get into larger properties, you’ll want to be sure to personally check personally the credit of everybody who expresses interest in leasing your property.
Tip: Assignments can get you into trouble. If you don’t know whether the assignee is credit worthy, don’t assign under any conditions.
May
24th
Types of Commercial Leases
By Gary Tharp
Types of Leases
Leases are written contracts between a property owner and a tenant. These documents include references to items such as the specified amount of rent and when payment is due. Usually, the rental period is stipulated, such as a three- year lease.
Leases differ, relative to their target area. For instance, an office building lease in a city like San Francisco and a retail lease for a strip center mall in a smaller city like Sarasota, Florida, would be quite different.
Types of leases include
•Gross
•Net
•Percentage
•Ground
•Sublease
•Assignment
•Turnkey
• Build-to-suit
• Sale/Lease-back
Gross vs. Net Leases
A gross lease is one in which the owner/landlord is responsible for paying taxes, insurance and any other costs of property ownership. Most apartment leases are gross leases since you just pay rent and that’s all. Some apartments may require you to pay your electric bill, but everything else is paid by the landlord in a gross lease.
A net lease is just the opposite - basically, you pay a rental fee to the landlord and then you pay your taxes, insurance, maintenance, and all other fees and expenses associated with the property. Therefore, when you as a landlord agree upon a net lease, the rent you receive is net income. You don’t have to pay any other costs out of it.
Triple Net Lease
In the commercial arena most leases are net, to a certain degree. You could even have a double or a triple net lease.
A triple net lease used to mean that you would pay the rent, taxes, insurance, and common area maintenance (CAM). Nowadays, there’s no such thing as a completely net or gross lease.
Typically, if you were renting space in a freestanding facility, you would pay all fees and operating expenses associated with that area.
The great thing about a commercial lease is that the vast majority of them are net leases. A lease may be largely net, with the tenant paying rent and all of the other expenses of the property, like taxes and insurance.
However, even in a case like this, the landlord would pay something, like the insurance on the building structure itself. Therefore, the lease isn’t completely net.
Tenants insure the contents of a structure. Before the lease begins, if you have a lot of equipment, you should inspect it to make sure it’s in working order. Then, meet with your tenants and agree on procedure, should anything happen to the equipment or property.
Tip: Never allow someone else to insure your assets. The policy could lapse and you might not find out that there was no coverage until after you filed a claim.
Leases are written contracts between a property owner and a tenant. These documents include references to items such as the specified amount of rent and when payment is due. Usually, the rental period is stipulated, such as a three- year lease.
Leases differ, relative to their target area. For instance, an office building lease in a city like San Francisco and a retail lease for a strip center mall in a smaller city like Sarasota, Florida, would be quite different.
Types of leases include
•Gross
•Net
•Percentage
•Ground
•Sublease
•Assignment
•Turnkey
• Build-to-suit
• Sale/Lease-back
Gross vs. Net Leases
A gross lease is one in which the owner/landlord is responsible for paying taxes, insurance and any other costs of property ownership. Most apartment leases are gross leases since you just pay rent and that’s all. Some apartments may require you to pay your electric bill, but everything else is paid by the landlord in a gross lease.
A net lease is just the opposite - basically, you pay a rental fee to the landlord and then you pay your taxes, insurance, maintenance, and all other fees and expenses associated with the property. Therefore, when you as a landlord agree upon a net lease, the rent you receive is net income. You don’t have to pay any other costs out of it.
Triple Net Lease
In the commercial arena most leases are net, to a certain degree. You could even have a double or a triple net lease.
A triple net lease used to mean that you would pay the rent, taxes, insurance, and common area maintenance (CAM). Nowadays, there’s no such thing as a completely net or gross lease.
Typically, if you were renting space in a freestanding facility, you would pay all fees and operating expenses associated with that area.
The great thing about a commercial lease is that the vast majority of them are net leases. A lease may be largely net, with the tenant paying rent and all of the other expenses of the property, like taxes and insurance.
However, even in a case like this, the landlord would pay something, like the insurance on the building structure itself. Therefore, the lease isn’t completely net.
Tenants insure the contents of a structure. Before the lease begins, if you have a lot of equipment, you should inspect it to make sure it’s in working order. Then, meet with your tenants and agree on procedure, should anything happen to the equipment or property.
Tip: Never allow someone else to insure your assets. The policy could lapse and you might not find out that there was no coverage until after you filed a claim.
May
17th
Commercial Contracts and Leases: Part 2
By Gary Tharp
Representations and Warranties
In a residential closing, everyone buys homeowner’s insurance because the Seller’s representations and warranties expire at the closing, unless you insist that they don’t. These are the property facts to which the Seller alleges in the sale, such as a solid roof or that no illegal action, including legal cases, are threatening against the property. Always include a representations and warranties clause in your contract that the Seller must live up to even after closing.
Although most commercial sellers won’t warrant the roof, sometimes they’ll warrant the structure. For instance, they might say that although there are cracks in a certain wall, they had testing done. They would give you a copy of that test, and agree to stand behind the safety of the wall. Any warranty that the Seller makes to you should survive the closing.
Commercial Closings
The closing, like the inspection period, is based on a formula. It starts at the end of the inspection period, so it’s like a moving window.
Brokerages
Your contract must contain language regarding any brokerages involved. If this inclusion is not applicable, each of you wants to hold the other side harmless. This protects both Buyer and Seller if a finder’s fee suddenly appears or a broker shows up at the closing, making unexpected claims.
If any brokers are involved in the deal, the contract should list each broker’s name and indicate the manner of payment. Often, they may be paid based on a separate agreement between Seller and Broker.
Key Point
Many people write contracts for themselves with no broker language. Even if the broker clause is not applicable, include the broker language in your contract.
Assigning a Contract
Many contracts will either not have any assigning ability checked or include no assigning ability at all. If there’s a specific paragraph that says the Buyer may assign the contract, the Buyer may freely assign it. However, if the signed contract has no assignment clause, then it is assignable. You don’t have to include an assignment clause.
Tip: To be safe, always include the assignment clause and specify whether it can be assigned.
In a residential closing, everyone buys homeowner’s insurance because the Seller’s representations and warranties expire at the closing, unless you insist that they don’t. These are the property facts to which the Seller alleges in the sale, such as a solid roof or that no illegal action, including legal cases, are threatening against the property. Always include a representations and warranties clause in your contract that the Seller must live up to even after closing.
Although most commercial sellers won’t warrant the roof, sometimes they’ll warrant the structure. For instance, they might say that although there are cracks in a certain wall, they had testing done. They would give you a copy of that test, and agree to stand behind the safety of the wall. Any warranty that the Seller makes to you should survive the closing.
Commercial Closings
The closing, like the inspection period, is based on a formula. It starts at the end of the inspection period, so it’s like a moving window.
Brokerages
Your contract must contain language regarding any brokerages involved. If this inclusion is not applicable, each of you wants to hold the other side harmless. This protects both Buyer and Seller if a finder’s fee suddenly appears or a broker shows up at the closing, making unexpected claims.
If any brokers are involved in the deal, the contract should list each broker’s name and indicate the manner of payment. Often, they may be paid based on a separate agreement between Seller and Broker.
Key Point
Many people write contracts for themselves with no broker language. Even if the broker clause is not applicable, include the broker language in your contract.
Assigning a Contract
Many contracts will either not have any assigning ability checked or include no assigning ability at all. If there’s a specific paragraph that says the Buyer may assign the contract, the Buyer may freely assign it. However, if the signed contract has no assignment clause, then it is assignable. You don’t have to include an assignment clause.
Tip: To be safe, always include the assignment clause and specify whether it can be assigned.
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