Wright Realty and Consultants

Real Estate Loss Migration Kit

Do I Lease or do I purchase office space for my business? What are my options? How do I prepare?

 

This Real Estate Loss Mitigation Kit can assist our communities to increase awareness and promote small business growth during these uncertain times.

WHAT TO LOOK FOR BEFORE SIGNING A COMMERCIAL LEASE

A commercial Lease should include the lease term and type, rental amount, security deposit details, permitted use clauses, exclusive uses, exterior appearance/façade, Insurance, American with Disabilities Act compliance, personal guarantee, amendments with modification and termination, subleasing and details about maintenance and renovations. The most important thing you should do before you sign a commercial lease is learn the language that is used by owners and leasing management companies.

WHAT YOU NEED TO KNOW WHEN SIGNING A COMMERCIAL LEASE

  • Evaluate your business needs - Do a little homework before negotiating a lease. List  your company’s current and expected future space needs and determine your budget and preferred  location.

  • Under you cost - Carefully review  the incidentals you are being asked to pay for to make sure the total cost fits in your budget. Any future increases in base rent and incidentals should also be clearly specified. Do not be shy about asking for changes.

  • Understand your lease options - In a net lease, you usually  pay  for  the base  rent  plus  one of the following: property taxes (most common), insurance or utilities. Your landlord pays all other expenses.

  • In a double net lease, you pay base rent plus property taxes and insurance.

  • In a triple  net  lease, you usually pay base rent, plus property taxes, building insurance and utilities, as well as other operating and maintenance costs.

 

  • Check market rents - Get an idea of market  rents  in the neighborhood you are  considering  and compare   them  with the landlord’s asking rent. Talk to a commercial realtor to get up-to-date market   lease   rates. This information can help you negotiate a lower rent if the asking figure is  high.

 

  • Research the property - Gather information about  the  property that  might  come  in  handy for your lease negotiations.

  • Look at the building’s tenant mix and neighbors to make sure they are  compatible  with your business. Are there any competitors? Find out what the building’s traffic is like. You may be able to negotiate lower common area payments if other tenants have much more traffic than you do and use the building more.

  • Seek tenant inducements - Ask the landlord for inducements to rent the space. The landlord may be especially eager to entice you to rent— for example, if the space has been vacant for a while. It is common for landlords to offer two or three months’ rent  free.

  • Some may even pay for part of your renovations or finance them over the lease duration.

  • Review termination condition - Check the circumstances under which either party  may  terminate the lease. For example,  can  you  be kicked out for missing a rent payment? What happens if the building is sold?

 

  • Negotiate leasehold improvements - Businesses often need  to  renovate  a new space to suit their needs. Make sure  the  lease and zoning allow your planned  leasehold improvements.

  • You can seek a clause requiring the landlord to reimburse  some  or all your leasehold improvement costs if the landlord breaks the  lease.

  • Check for a competitor clause - Always ask for a competitor clause  in the lease that requires the landlord to get your consent to rent space in the building to a competitor. This may be particularly important to retailers.

  • Look at renewal conditions – The duration  of  your commercial property lease can range from month-to- month to several years. Be sure to understand when and how the lease will be renewed. Also, ensure that you have the option to renew the lease at the end of the term if that is important to you. You may be able to negotiate other options,  such  as the right of first refusal to lease an  adjoining unit  for expansion.

COMMERCIAL LEASING DURING COVID-19

California faces the very real prospect of a mass extinction event for small  businesses and nonprofits. A result that will undermine our economic recovery and results in countless unoccupied storefronts in our neighborhoods.

COMMERCIAL LEASING DEFAULTS AND ISSUES DUE TO COVID-19 PANDEMIC

Commercial landlords and tenants are facing several critical, immediate issues in the short-term and possibly foreseeable future. How should parties address a tenant’s business closure or workforce reduction and revenue losses affecting its ability to operate, pay rent and repair its leased space? How should a landlord respond to a tenant’s default or request for rent or other relief, considering the landlord’s own responsibilities to pay maintenance costs, real estate taxes and debt service on the property? These questions must be resolved whether the lease is a triple net lease, gross lease, or hybrid one, and whether the CRE is a stand-alone single-tenant property, multi-tenant office building, shopping center or multi-use facility. 

 

For many commercial tenants who have gone out of business permanently, discussions will focus on typical end of lease topics: turnover of the space to the landlord; damage to and, if applicable, restoration of, the leased premises by the tenant; and potential settlement of unpaid present and future rent obligations.

 

Tools for landlords and tenants impacted by COVID-19

 

Nationally landlords have been or are still under a wide variety of federal, state, and local moratoriums on   evictions, late fees, and penalties related to nonpayment of rent, and even as certain federal moratoriums are lifted, state and local moratoriums may remain in place. The process of evicting residents can be costly to landlords, from court and legal fees. With many tenants unable to pay rent, landlords have been offering tenants flexibility in repaying missed rent. These options can be used in combination:

 

  • Deferring or reducing payment of past due rent.

  • Deferring or reducing future rent payments until tenant’s income increases.

  • Applying a security deposit or last month’s rent to unpaid rent (if allowed by law).

  • Check with local agencies who assist in COVID-19 leasing deficiencies.

Confident Businesswoman

A TENANT GUIDE TO SURVIVING THE COVID-19 PANDEMIC’S EFFECTS ON YOUR BUSINESS

Step #1 – LEASE REVIEW

To arm yourself for talks with the landlord; with a pen and notepad handy, pull out your lease agreement and review the following sections.

 

Rent – What is the rent comprised of (just base rent or are there pass-through expenses), what are the amounts, and how much is the next scheduled increase?

 

Lease expiration and options – When does the term end, what renewal options remain,

and what are the business terms of the option etc.)?

 

Default – What constitutes a default of the lease and what are the landlord’s remedies if that occurs (late penalties, interest, eviction, damages, etc.)?

Step # 2 –  BEFORE YOU RENEGOTIATE:

PRE-NEGOTIATE

  • Part of that good-faith effort between tenant and property owner involves understanding the situation both are in the landlord should figure out why the tenant is not paying rent.

Step # 3 -BUYOUT

  • Another option is a lease buyout, meaning the landlord agrees to terminate the lease in exchange for a (hopefully affordable) payment. This may allow you to continue operations at a new location, perhaps after a short hiatus.

Key in the Lock

COMMERCIAL LEASING VS. COMMERCIAL PROPERTY  OWNERSHIP

10 reasons why leasing your office space could  be  better  than  purchasing  commercial property

  • No maintenance costs or repair bills
  • Access to amenities
  • No real estate taxes
  • No Down Payment
  • More flexibility on location
  • Few concerns About decreasing property value
  • flexibility to downsize
  • Fixed Rent Amount
  • Lower insurance cost
  • Lower utility cost

10 Reasons Why purchasing your commercial property office Space could be better than leasing

  • Protection from market rent increases
  • Appreciation of property
  • Control over your image
  • Rental income from renters for unused space
  • Financial leverage (mortgage loans, equity, etc.)
  • Tax benefits (favorable interest, capital gains and depreciation
  • Stability of location
  • Promotes the image of stability and strength
  • Control over usage and or other tenants in the property
  • Control over maintenance and operating expenses

Property ownership – What to know when purchasing Commercial Property for your business

  • The first step in purchasing commercial real estate is knowing your needs for the business and what you are looking for. Learn some commercial real estate vocabulary. 
 
  •  Loan-To-Value (LTV): - A ratio of how much money you are asking from a lender vs. the total value of what you want to purchase.
 
  • Debt Service Coverage Ratio (DSC): - Operating income over total debt service. Basically, how much of the debt you will be able to cover each year with income.
 
  • Capitalization Rate (Cap Rate): - Income of the property divided by the total value of the property.
 
  • Cash on Cash: - Annual income over how much you invested. The amount invested could be the amount your down payment.
 
  • Why is the owner selling? - What is the property currently used for? What can/Cannot be done at the property? What kinds of taxes are there on the property? What things will need to be replaced or repaired soon? How is the area around the property doing? Any major upcoming changes?
 
  • Figure out you are financing - What type of banks, credit unions, or another mortgage company could you use? What kind of credit do you have and what kind of interest rate could they give you? Would the owner/seller be willing to help with financing? Read up on things like seller carry back, subject-to, second mortgages, and lease options.
 
  • Escrow/Due diligence period - You will be required to complete an Alta survey, hazardous materials test, and a phase I ESA. This will ensure your covered if the property has any environmental issues. These issues can be rectified during the due diligence period by the seller and not be charged to the buyer. This period also includes things to review such as services/utility contracts, rent rolls, covenants, restrictions, and many other aspects of the proper.

REFERENCES AND RESOURCES

[1] Written by Robert I Chapman, Director Dip. Est. Man. (Hons), M Sc (Regen), MRICS, Affiliate RTPI, FRSA. July 7, 2020 Impact facts to know when leases during Covid-19. https://iod.com/news/articles/Coronavirus-and-commercial-leases-10-key-questions-answered.2020.04.03.

 

[2] By Laura Waxman  – Staff Reporter, San Francisco Business Times Mar 17, 2020, 3:12pm PDT Updated Mar 25, 2020, 12:30pm PDT. Coronavirus uncertainty is hampering some CRE activity, but big leases are still be signed. https://www.bizjournals.com/sanfrancisco/news/2020/03/17/coronavirus-uncertainty-is-hampering-some-cre.html

[3] Patterson, J (2020, May 23). 10  things to consider before signing a commercial lease. Keys to Commercial Leases.  Antham Construction things to consider before signing a commercial lease. Group Inc. https://anthamgroup.com/10-important-things-to-consider-before-signing-a-lease/  

[4] Commercial Property & Sell.com.au(2015, January 10). 10 important points to consider before buying a Commercial property. https://www.commercialproperty2sell.com.au/blog/2015/01/10-important-points-to-consider-before-buying.php      

 

[5] Merrill, N. (2020, April 2). Investors guide to buying Commercial property https://www.fortunebuilders.com/buying-commercial-real-estate/

[6] Forbes Real Estate Council (2018, January 29). 10 things to consider before investing in Real Estate https://www.forbes.com/sites/forbesrealestatecouncil/2018/01/29/10-things-to-consider-before-investing-in-commercial-real-estate/?sh=264d495d3b7f

[7] Davidson, C. The Tenant Advisor (2020, September 2).Fed Beige Book: CRE Remained in Contraction  http://www.coydavidson.com/page/14/

[8] Commercial Lease Workouts During the COVID-19 Pandemic (Kim, Jason)  C. Jason Kim (kimcj@whiteandwilliams.com; 212.714-3077), Patrick Haggerty (haggertyp@whiteandwilliams.com; 215-854-6811) https://www.whiteandwilliams.com/resources-alerts-Commercial-Lease-Workouts-During-the-COVID-19-Pandemic.html

 

RELATED RESOURCES 

 

Legacy Construction daily blog          

Lcfresno.com

 

AEC Construction blog

Aec-business.com

ABOUT US

The Fresno Metro Black Chamber of Commerce is a locally-based membership organization with a global reach advancing the interests of the greater African-American business community.

ADDRESS

1444 Fulton Street

Ste. 206

 Fresno, CA 93721

559-441-7929

info@fmbcc.com

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