CIP Blog

Some issues with leases can be solved pretty quickly so let’s clump a few lease issues together, shall we? 

Use:Easy isn’t it?  If you are taking about office space it is very easy.  Just insert language like this…

Class B Office Space

The Leased Premises shall be used by Tenant for general office purposes and for no other purpose whatsoever, without the prior written consent of Landlord.

Problem solved.  I have never gotten into a protracted lease negotiation that involved “Use” in an office lease.

Retail however, is another story.  Insurance companies don’t mind being next to each other in an office building but grocery stores don’t like it when you put there competitor next door.  Many anchors require “exclusivity clauses” that limit the shopping center’s ability to lease to a competitor.  An example is the Shops at Western Plaza.  The Fresh Market is the only grocery store allowed in the center. 

For that reason we have to write the “Use” section of the lease for new tenants carefully.  A tenant like Hard Knox Pizza will have the use listed as something like this:

The Premises will be used for operation of pizza restaurant, and associated food and beverages and for no other purpose whatsoever, without the prior written consent of Landlord. 

Without this language Hard Knox would have the ability, in theory, the change their store to a massage parlor, barber shop or grocery store (or anything else) and the landlord could do nothing about it; even if it did violate another tenant’s exclusivity.

Parking can be a big factor

Parking:

Things to watch for in lease language regarding parking:

• Is the number of parking spaces in the lot listed on the lease?  They don’t have to be but if you are tenant that has a lot of walk-in traffic you need some way to protect your employees and customers parking rights.
• Are their plenty of spots for visitor parking?  If not, ask for them.
• Do you have reserved parking?  What protections do you have from getting those taken away?
• Who has the right to tow cars?  The landlord and managing company must have the right to tow illegally parked cars.

Use of the Common Area:

This is one of those common sense things that are in just about every lease.  The lobby, restrooms, stairwells, etc…are for the use of the tenant, their employees, agents and guests.  Tenants are not supposed to use common areas for conducting business. See…common sense.

As always, if you have questions please feel free to contact me at 865-584-3967 or jcazana@ciprop.com

Next week we delve into….SIGNAGE!

Justin Cazana, CCIM

Surely paying rent is easy, right?  All you do is write a check at the first of every month.  Piece of cake.   Yes it is easy. 

Rent:

In most leases, rent is paid to the landlord on the first of every month.  The language is very specific in the lease document as to how it is paid, when it is paid, to whom it is paid and what happens when you don’t pay it.   To make sure you don’t forget to pay your rent many landlords suggest, or require, automatic draft of all payments from your account. 

A couple of things to watch for…

• When you are starting a new lease make sure the rent commencement date is negotiated.  Rent rarely starts the day you sign the lease.  Do your best to make sure that rent does not start until you open for business or until your construction is complete.  Nothing can put a crimp in a business plan like paying for construction and rent at the same time.
• Negotiate free rent periods.  In this economy many landlords are giving incentives. Free rent is one of them.  Two to three months of free rent is not uncommon.
• Pay attention to late fees.  Rent is due the first but most late fees are not charged until the 5th of the month.  This is not a hard and fast rule but something to watch for.  Also, late fees can be as much as $25 per day. Those can add up quickly. 
• Load factor:  You may notice you pay rent based on “Rentable Square Feet”.  This is based on the amount of “Usable Square Feet” you occupy, multiplied by the load factor.  This is the percentage of the building taken up by the common area (restrooms, hallways, lobby etc…).  This varies from 0% to 20% depending on the building.  Learn your buildings load factor before signing the lease to make sure the rent is properly calculated.

 Operating Expenses:

These costs are defined as the amounts paid to maintain property, such as property taxes, utilities, insurance, repairs, maintenance, legal fees etc…These have more than a dozen names.  They can be referred to as CAM (Common Area Maintenance), NNN charges (known as triple net), operating expenses, pass throughs…you get the idea.  They are handled differently depending on the type of lease but to simplify the process we will look at basic retail and office leases.

Admiral Pointe-Common Areas

Office Operating Expenses:  In typical Class-A office leases the tenant pays a full-service rent.  The tenant writes one check each month to cover rent, utilities, CAM, etc…However, in the lease there will be what is called a “Base Year” or “Expenses Stop”.  This defines the amount of annual payments that goes towards operating expenses.  For example, if you pay $20.00 per square foot in rent in a full service lease your “expense stop/base year” may be $6.00psf.  At the end of the fiscal year the landlord will reconcile all the operating expenses.  If the operating expenses exceed $6.00psf the tenant will be required to cover the difference (Example: if it ends up at $6.05psf, the tenant will have to pay $0.05psf to reimburse the landlord).  But it goes both ways, if costs come in under your expense stop/base year the landlord is sometimes forced to writes the tenant a check for the difference.   

There are some leases that do not have operating expense stops; these are typically called Gross Leases.  There is no year end charge to the tenant; however, these leases typically include annual rent increases to cover the increase costs of services.

The Gallery on Kingston Pike

Retail Operating Expenses: In most retail leases these are called NNN pass through or Triple Net Charges.  It is the same scenario as offices lease only the rent and NNN charges are broken down into separate categories.  The tenant usually rights only one check per month for rent/NNN but the NNN charges are more volatile and fluctuate more year to year than an office lease.  Remember the retail leases often don’t include things like janitorial service, HVAC repair or light bulb replacement that you might find in office lease.

Protect yourself:  There are ways both the tenant and landlord can protect themselves from outrageous increases in operating expenses in both office and retail leases.  

• Put a cap on controllable expenses:  Landlords have the ability to bid out many of these services, landscaping, janitorial, insurance etc…this allows them to keep operating expenses lower.  In your lease try to negotiate a cap on year to year increases.  Most landlords can agree to around 7% per year.  Note:  Landlords can not control some expenses like taxes and utilities so these are excluded from this type of cap.
• Carefully read the section of your lease regarding operating expenses (it may be called Additional Rent, Operating Expenses, Rental Adjustments or Excess Operating Costs).  Some landlords reserve the right to charge administrative fees on top of the operating costs.  Try and negotiate these out of the deal if you can (its tough).
• Make sure the landlord provides you with a reconciled record of the operating expenses for each year and review it.  If expenses went up 10% make sure there is a reason for it.  
• Negotiate the ability to audit the landlord’s records, but be reasonable about it.  The tenant is paying the rent and the operating expenses so they deserve the right to review the costs.  This is done at the landlord’s or managing group’s office during normal business hours.  Depending on the way the audit rights are negotiated, if the operating expenses are incorrect the tenant can be reimbursed for the excess cost as well as the cost of the audit.

You might have noticed I used the words “typically” and “usually” often in this blog, this is because every lease is different.  Just about everything in a real estate lease is negotiable, these factors are no different.

Be diligent when reviewing these sections of the lease.  A property negotiated lease can save your business thousands of dollars per year.

As always, if you have questions please feel free to contact me at 865-584-3967 or jcazana@ciprop.com

Justin Cazana, CCIM

First a word of warning…commercial real estate leases can be MASSIVE!  I have negotiated leases that are ten pages and I’ve negotiated leases that are 110 pages.   Don’t let the size of the lease intimidate you.  You should have a commercial brokers and an attorney that will get through the finicky details that you may have never heard of; subordination, estoppel, force majeure and the like. 

Over the next few weeks we will delve into the world of commercial leases, everything from Assignment to Warranties.

First stop:  Term

Definition:  The period of time which something is in effect. Typically a condition specified in an agreement. 

Every real estate lease must have defined beginning and ending date to be legally binding.  It sounds quite simple.  A lease starts January 1, 2010 and ends December 31, 2010. 

The term can last any period of time from one week to 100 years (this is usually reserved for ground leases).  Typically they are for set periods but these times can be flexible depending on a number of factors. 

Some of these factors can be:

• Construction timing
• Governmental approvals
• Tenant delays, etc…

This is where things can get complicated.  Both the tenant and landlord will negotiate the lease with an eye to protecting their interest in the lease.  

Office space leases

For example, if a lease term, and rent, are set to being June 1^st and the landlord is doing construction for an office tenant in preparation for their occupancy, the tenant will often put in language stating that the term (and rent) will not being until construction is complete.  That way the tenant is not stuck paying rent if the landlord has not completed construction. 

In retail leases, where the tenant might be performing their own construction, the term may consist of language stating that the term commences on June 1^st or the first day the tenant opens for business, whichever comes first.  This protects the landlord from the tenant opening early without paying rent or the tenant never completing construction and hence not being forced into ever beginning the lease term.  

A properly determined construction schedule for both the tenant and landlord can alleviate many of these concerns.

Nine times out of ten the term is a simple starting point and ending point but it is important to have a commercial broker and attorney on your side when negotiating these details.  The reason many of these lease points are so hotly contested in because landlords, tenants and attorneys have been burned in the past by unscrupulous parties who prosper by taking advantage of the ignorant or inexperienced.   

As always, if you have any questions feel free to contact me at 865-584-3967 or jcazana@ciprop.com

Justin Cazana, CCIM

Commercial & Investment Properties

With office vacancy rates climbing and rental rates dropping this is a great time for tenants to take advantage of lowering their office costs and locking in those rates long term. However, it is an even greater opportunity to lock in future expansion needs now and without adding office rent costs to their bottom line.

In most major cities in the United States, the available office spaces today are in larger blocks ranging in sizes from ten thousand square feet and above. Larger institutional tenants previously occupied most of these spaces. While a recovery appears to be underway, institutional office users tend to come in late in a recovery and leave early when times get tough. Independent firms represent the largest users of smaller spaces under six thousand square feet on average. These firms tend to grow first in hard times, particularly as new firms are established from personnel that have decided to start their own businesses rather than find work at other firms in this difficult jobs market.  

According to Hans Hansson of TCN Worldwide (http://blog.starboardnet.com/), today, it is absolutely cheaper to rent space in offices over ten thousand square feet rather than five thousand square feet. In fact, with the great sublease opportunities today many firms could pay the same rent for ten thousand square feet as they could at five thousand. Take for instance, Hasson’s market in San Francisco. There are some attractive subleases today in the twelve thousand square foot range that are offering spaces as low as $12.00 per square foot for Class A office space for a two to four year sublease. If you needed six thousand square feet of Class A office space you would be paying at lease $26.00 to $30.00 per square foot for similar quality space.  A similar deal was done here in Knoxville with Edison Financial subleasing almost an entire floor from ALCOA in the Riverview Tower a few months ago.

There is a drawback though. If you have too much extra space your firm could appear to be “swimming” in it. This could be resolved by offering to sublease space to other firms which could allow you to defer additional rent costs. Or you can take out some of the existing workstation areas and give your current employees more room to work. Either way, the cost savings could be so high that it is worth it.

It takes sometime to put together deals like this but landlords are very flexible in these types of economic environments.

Hey its Spring Break!

Not a lot of time to write the blog this week so let me tell you what we are going to talk about in the coming weeks.

• Purchasing Property:  What you need to look for, due diligence, red flags etc…
• Leasing vs Buying:  Boy, this can be a tough one.  Lots of decisions.  Lots of cost.  You have to look in to your crystal ball and have a very good idea of where your company will be in a 5 years.

Then we will get in to leases.  Not just why you should lease and what to look for; but the actual leases themselves. 

We we delve in to great topics like:

• Rent
• Term
• Operating Expenses
• Tenant Finish Allowances
• Sublease/Assignments
• Subrogation!

Its not sexy but you have to be informed about these topics to make a well placed decision before you sign on the dotted line.

As always if you have questions contact us at Commercial & Investment Properties. 865-584-3967, www.ciprop.com or jcazana@ciprop.com

See you next week.  Have a great spring break.

Knoxville is a bit different when it comes to the industrial/warehouse/distribution market.  Because of the market’s proximity to so many major interstates, I-40, I-75, I-81 and being so close to major cities like Charlotte, Atlanta, Nashville and Cincinnati, you would expect more of a distribution presence.  But that is not the case.  While there is about 32 million square feet of what would be considered industrial space much of it is dated and not the new high-bay space required by top-flight tenants.

DCP Warehouse-Amherst Road

What do you need to look for?  It varies just like retail and office, but functionality often replaces locations on the priority list (as long as the location is not to bad).

Space Attributes

A wide range of storage alternatives, material handling equipment and software exist to meet the operational requirements of a warehouse space type.  Intergration of these features is essential. Warehouse spaces must also be flexible enough to adapt to future operations and storage needs.

Functional / Operational

• Use of Space: Warehouse space types are often designed with higher bays to take advantage of vertical storage. Utilization of space is maximized while providing adequate circulation paths for personnel and material handling equipment such as forklift trucks.
• Design for Live Loads: Designs should anticipate the loads of stored materials and associated handling equipment, typically 250 LB/SF. Snow, wind, and seismic loads shall be considered where they are applicable. Racking in seismic areas must be built stronger and be better braced.
• Power and Utility Requirements: Differentiate between spaces that require power and utilities, and those that are for storage only. Depending on the goods being stored and handling equipment required, there may be a need for well-distributed power and utility lines throughout the space. Attempt energy-efficient lighting when possible. Warehouse spaces typically include one floor drain for every two bays of storage, as well as sand and oil traps on waste lines.
• Loading Dock: Warehouse space types are typically designed with one electro-hydraulic dock leveler per every five truck bays.
• Fire Protection:  New buildings sometime are built with an ESFR sprinkler system that allows each sprinklerhead to put out almost 100 gallons of water per minute!
• Special HVAC: Provide proper ventilation under all circumstances. Plan for 100% exhaust from storage areas with paint, petroleum, aerosol, or other minor amounts posing moderate hazard storage conditions.

Determine the type of space you’ll need. Have a good grasp on requirements for phone, broadband data service, HVAC, gas, water and electricity. You’ll want enough power to provide adequate lighting and operate necessary equipment. Take all your needs into consideration when looking at space: storage for raw materials and finished product, a production area or assembly line, ceiling height, column spacing, dock-high or drive-in truck access, signage, offices and rest rooms. Think about proximity to freeways for access, as well as public transportation, parking requirements and, possibly, rail access.

Try to develop a preliminary layout that takes into account all aspects of your operations. The layout should include utility connections for each piece of equipment. With this information, you can determine what type and how much space you’ll need.

As far as Knoxville is concerned there are dozens of small/medium warehouses (less than 40,000sft)  available but fewer of the larger size (+40,000sft ).  In fact only 14 can be found on the MLS (and only one exceeds 100,000sft).  Doesn’t seem like much does it.

For comparison, Columbia, South Carolina (with a metro area only 50,000 more that Knoxville) has three million more square feet of industrial space. Birmingham, Alabama has 123 million square feet of industrial space.

There is space out there.  It just depends on what you are looking for.

Resources:  Whole Building Design Guide (WBDG.org), Grubb & Ellis, Graham & Co.

Opening new retail in these economic conditions is a 50/50 proposition.  Most importantly, the unsteadiness of the economy has many people worried but there are opportunities to get great deals on retail space for lease.

Finding the ideal space in the ideal location

I will let individual business owners make thier own decsions about the economy, but there is a plethora of retail space available all over Knoxville.

Almost every center from Strawberry Plains to Turkey Creek has some type of space available.  Some property owners are in more dire situations than others.  A older center may not have the debt service of new construction so the owners may not be as motivated to deal.  But some centers that were once asking $28.00 per square foot in popular location are down below $20.00.  Those are pretty serious concession.

Even if you are getting a “deal” there are many details to consider before choosing a location.

1.   Of course, Location, Location, Location: Walk in traffic is the best way for a new retailer to be discovered. Spend time in the neighborhood, learn the flow of traffic, the demographic, etc.

2.    Type of space: What side of the street is the space on? Do you get afternoon sunlight? Is the space deep and dark? Is there a lot of wasted square footage in the space? Notice as much as you can on the first tour and make sure to come back several times at different times of day.

3.    Neighbors/competitors: What businesses are located in the area?  Will their customers see value in your merchandise or service? Ask other merchants about the pros and cons of the area.

4.    Crime:  Being in a neighborhood that is gentrifying or potentially has some crime issues is fine for a restaurant or office, but potentially disastrous for a retail outlet. Your most valuable asset is your inventory and although insurance will help make up for losses, it is a major distraction from your business. Do a little research and see how many police reports have been filed within a mile of your potential location.

5.    Parking: How far away is the nearest parking lot? Do your customers need parking or will most of them be walking to your location?  The ability to have your customers park close by and affordably is extremely important.

6.    Signage: How big of a sign do you need to attract attention? What are the regulations of the landlord or the city as it relates to signage? Make sure to check out the neighbors and ask them how they got through the system if the regulations limit what you are hoping to do.

7.    Foot traffic: How busy is the street during the daytime? How busy is the street during evening hours? What types of people seem to be walking around? Is their a bus stop or school nearby. Take note of who walks by and what percentage of people seem to be window shopping because the more people looking the higher likelihood you’ll find a new customer.

8.    Brokers: Most shopping centers will have a broker to negotiate the deal…you should too.  They are experts in finding you the proper space, picking out the details and getting you the lease you need.

What works best for you may not be ideal for others

Potential hidden cost:  NNN Pass thrus.  We have discussed these before.  Shopping centers are not trying to hide these numbers from potential tenants but they are calculated differently than rent.  They are CAM (common area maintenance), taxes and insurance; also know as pass-throughs or NNN charges.  They are different at every center.  Some NNN charges are as low as $2.50psf in older centers or neighborhoods.  NNN charges in lifestyle centers such as Turkey Creek can be between $5 and $8 per square foot!  In many cases these charges are passed through directly from the property owner to the tenant without mark up.  But they can still add a considerable amount to your monthly rent check so pay attention to these.

Basically, if the time isn’t right don’t force the issue.  Find a good broker who is experienced in the field to guide you along and make the decsion when all the pieces fit properly. 

Commercial & Investment Properties manages and leases more than 350,000sft of retail space in the Knoxville market.  If we can be of assistance please let me know so you business has the proper headstart. 

www.ciprop.com   //  865-584-3967   //  jcazana@ciprop.com

Justin Cazana, CCIM

My apologies for the late posting of this blog…I got bit by the stomach bug.

Today’s focus is on types of leases…and let me tell you there are dozens!

Full service, gross, modified gross, NNN, NN, ground lease…there are many variations.  Today we will talk about the most popular current forms of lease.

Leases have developed over time from verbal or handshake agreements to documents that can exceed 100 pages.  Today’s leases are legal documents and should be reviewed by experienced legal counsel prior to being signed (that is my disclaimer. Get used to it, it will probably pop up every week).

Warning:  I will use the words “typically” and “usually” a lot in this blog because every lease is different.

Full Service Lease:  Typically a full service lease would be found in an office building lease.  Its name says it all…Full Service.  The building landlord provides all services to the tenant for the price of the rent.  This includes: utilities, janitorial service, property taxes, trash removal, building insurance etc…There are some building that also provide telephone service and cable TV but they are the exception rather than the rule.  In these leases the landlord is also responsible for repairs to the building or the tenant’s space, like the HVAC system, replacing light bulbs or repairing roof leaks.  

 Important to note: These leases typically have a “Base Year” or “Expense Stop”.  This is meant to protect the landlord from increases in operating expenses (the cost of janitorial, utilities, insurance etc…).  Example, if Joe is leasing space in a new Knoxville building  for $20.00psf per year his Base Year/Expense Stop would be around $6.00psf per year.  The $6.00 is the amount the landlord had budgeting for operating expenses the year the lease is signed.  At the end of the year the landlord reconciles all their operating expenses.  If the operating expenses exceed $6.00psf Joe has to pay the landlord the difference. If it ends up at $6.04psf Joe has to write a check for $0.04psf.   This is a standard practice in Knoxville real estate.

 Gross Lease:   Probably the most common of commercial leases, although less common in new, Class-A buildings.   A gross lease is very similar to a full service lease because the landlord still provides all the services needed for the tenant, only without a Base Year/Expense Stop.   Instead of a Base Year/Expense Stop typically there is a larger than standard annual increase in lease rent rates.

 These leases are popular for a variety of reasons:

1. It makes accounting for the landlord much easier
2. The tenant doesn’t have to worry about writing an unexpected check at the end of the year.

 Some would say both the landlord and tenant are taking chances with this type of lease.  For the landlord the risk is greater, if operating expenses go up significantly (such as the building being reassessed for tax purposes) the increase in lease rent rate may not cover the difference.  For the tenant, there is a chance that they will pay slightly more for rent than is needed, but in this age of rising costs it’s probably a safe play.

Both Gross and Full Service leases typically require high levels of property management to make sure the properties and tenants are serviced correctly and that the end or year accounting is properly calculated.

 Modified Gross Lease:  Just like it says, it’s a gross lease with slight modifications.  The rent the tenant pays will cover most operating expenses but the tenant will be responsible for one or more of the cost, usually janitorial service or utilities. In most cases the landlord is still responsible for repairs in the office space.

 NNN or NN Lease:  These are known as “triple-net” leases and are usually found in retail or industrial leases.  The N’s stand for common area maintenance (or CAM), property taxes and building insurance.  For reasons of simplicity these are referred to as CAM.

The precise items that are to be paid by the tenant are specified in the lease. For properties that are leased by more than one tenant, such as a shopping center, the expenses that are “passed through” to the tenants are usually prorated among the tenants based on the size (square footage) of the area occupied by each tenant.

In most NNN, the landlord is responsible for the building and the common areas.  They repair the roof, structural problems, sidewalks and parking lot.  The tenant is responsible for any internal repairs like plumbing, replacing lights or HVAC repairs. 

The difference between a NNN and NN lease is the common area maintenance is not included (usually).  This is common in industrial property and single tenant buildings like a restaurant or other retailer no in a shopping center.  Single tenant buildings can also have an “Absolute Net” lease.  This means they pay the landlord rent and also are responsible for all upkeep of the building, landscaping, property taxes and insurance.       

Ground Lease:  Just like it says, the tenant is leasing the ground.  The most common on these are found with drug stores like CVS and Walgreens.   These companies lease the land for 10 to 50 years, build a building and operate their business.  They write a check to the landlord every month, or every year.  That is all there is to the landlord/tenant relationship.  At the end of the lease the tenant can leave the building or tear it down, depending on what the lease says.  The tenant is responsible for all aspects of the building, the land and any repair that is required.  

As you can see the variations in leases can be immense and some what confusing.  If you are looking around and have questions contact a commercial broker (such as Justin Cazana at Commercial & Investment Properties; jcazaan@ciprop.com .  Brokers can walk you through the details you need to make your lease work for you.

Justin Cazana, CCIM

Director of Leasing/Marketing

Commercial & Investment Properties

www.ciprop.com

Let’s cut to the chase…when should you start looking for a new office?  Most brokers will tell you at least one year before your current lease is set to expire.

While all situations are different and factors regarding location, cost, size and type of space will play a factor, one year out is a good time to start.

It seems like a long time, but it can go by quickly.  Let’s put together a timeline for Joe’s Insurance.  Joe is looking for 6,000 square feet for his business.  He would like to be downtown or west Knoxville, in nice space.  It doesn’t have to be Class-A space, but pretty close.

Step 1-Find a broker, of course.  Depending on how much time Joe has to devote to the process this could take a day or a month.

Step 2-Joe sits down with his broker.  He needs to know what part of town Joe needs to be in? How much can Joe spend per month?  Does Joe need a space with a lot of offices or can an open floor plan work?  Other details include; parking requirements, hours of operation, length of lease etc…

Step 3-Property Search:  The broker performs a search through the commercial MLS , talks to other brokers, and relies on their basic knowledge about what is available.  This will provide an initial list for Joe to review.  Some properties will be deleted, others may be added, all based on cost, location and the type of building.  This will allow Joe to tour the spaces he is interested in without wasting vast amounts of  time.  Hopefully after the tour Joe will have narrowed his list to 2 or 3 spaces.  This entire process can take a week or three months.  It all depends on how quickly of a move is required and what is available.

Step 4-Here is where is gets tricky…determining where Joe really wants to go.  Some times it is easy, there is one place you want to go, everything is perfect.  More often than not there are multiple locations that would work.  In a situation like this an Request for Proposal (RFP) or Letter of Intent (LOI) is effective in determining exactly what you expect from the Landlord and what he expects from the tenant.  Typically an LOI or RFP will spell out the length of the term, the lease rate, and tenant improvements that the landlord will provide.  They can also get VERY detailed.  I’ve had LOI’s that are 1 page long and I’ve had LOI’s that are 35 pages long.  This process can take anywhere from 1 week to 2 months depending on how firm either party wants to stand on a specific issue.  With the LOI/RFP in place you can determine what is best for an office based on actual comparisons of rates, tenant improvements etc…   If you would like more information about LOI’s/RFP’s let me know jcazana@ciprop.com.

Step 5-Lease Review.  Once Joe has made his decision on the space he wants the landlord will (typically) provide a lease for the space.   The lease should include all the information that was negotiated in the LOI/RFP as well as MUCH more.  You will become familiar with words like default, estoppel, force majeure and many others.  While brokers can provide basic insight in the lease it is imperative that an attorney review this document.  Leases are legally binding and if you don’t understand the details it can get you in a lot of trouble if you default on the lease.  How long will lease review take?  One week to a year!  It just depends.  My favorite story about negotiating a lease was just a few months ago.  On my first conference call with the tenant’s attorney she told me she had just found out she was pregnant.  At the time of our last conference call to seal the deal her baby was 4 weeks old!  That is an extreme but it happens (especially with corporations).

There are many other details that are some times worked in to the process. 

• Space Planning: If a tenant is moving into brand new space (which has never been built out), or a significant amount of construction is required to prepare the space for occupancy, a space plan from an architect should be considered.  This will allow the tenant to determine how much space they really need.  How many offices fit in the space, the most efficient use of cubicle space, where the conference room should go etc…This takes anywhere from a week to a month depending on the size of the space.
• Construction Estimates:  The space plan will allow the tenant or landlord to determine how much construction will cost.  The last thing you want to have happen is to budget construction costs at $10,000 and it ends up being $50,000.  I’ve seen it happen.  This should take less than 10 days.
• Construction:  Again, depending on the size of the of the office and what is involved construction typically takes between 60-90 days.  That includes construction documents, permitting and actual construction.

So there you go, a “looking for space timeline” in a nutshell.   If you need to find space in 2010 its time to start looking.

You can reach Commercial & Investment Properties if you have any questions about property searches.  865-584-3967 or jcazana@ciprop.com

There are literally dozens of variations of commercial leases; full service, gross, modified gross, NNN, NN, absolute NNN…you get the idea.  We will get into leases at a later date; but they are just one of the reasons you need to have a commercial real estate broker on your side when looking for space, negotiating a lease, or purchasing/selling commercial property.

Let me answer the first question most commercial realtors get asked when working with a client for the first time…“How do you (the realtor) get paid?”  While each case can be different, depending on the circumstances, in the Knoxville market it is standard business practice for the landlord to pay the commissions in a lease.  Hence, it doesn’t cost the realtor’s client (the tenant) a dime to look for space. 

Commissions for property sales are similar to residential practices in that they are negotiated in the sale contract.  

In the eyes of the state of Tennessee, and national groups like REALTOR, there is no difference between a commercial realtor and a residential realtor.  We all have the same licenses and took the same classes; it’s what we do with the license after it is earned that makes the difference.   Many commercial realtors earn designations that help educate them on marketing properties, helping clients make decisions on proper investments and the like.  Some you may have seen include CCIM (Certified Commercial Investment Manager, http://chapters.ccim.com/easttennessee); SIOR (Society of Industrial and Office Realtors, www.sior.com) and CPM (Certified Property Manager).  These realtors have spent hundreds of hours in courses, and years in the field, to prepare them to meet their client’s needs.

Two of the biggest reasons to use a commercial realtor are time and experience. 

Time is the one thing everyone has a shortage of.  Instead of spending your day driving around town looking for space that might be available (and hopefully in your price range) commercial realtors have market knowledge and multiple interactive data bases at their finger tips to steer you in the right direction.  Say you want office space in west Knoxville; within minutes a commercial realtor can tell you what is available in that area, what it costs and the type of development in which the office is located.  The same can be said for retail and industrial space.  This way you can spend 15 minutes narrowing the list of potential spaces instead of three hours just trying to find out what is available and tracking down phone numbers.  

Commercial realtor experience is what saves you money!  Any broker worth his salt will know the important details you need to help you make an informed decision.  Is this a new building?  If so, what kind of tenant improvement allowance will be included?  Is the rent abnormally high for the market and the economy (boy, does that really play a part now)?  What other kind of leasing incentives might the landlord provide? Should you lease or buy?

Commercial realtors will also have the experience to walk you though a lease (although most realtors are not lawyers and any lease should be reviewed by legal counsel prior to signing) to explain things like; force majeure, estoppel, operating expenses etc…

On the other side of the ledger, property owners can use the expertise of commercial realtors in much the same way.  Instead of spending your precious time looking for a tenant for your empty building a realtor does it for you.   Commercial realtors are able to market the space via local and national data bases (basically a commercial multiple listing service), they can market the space through signage on the property and most importantly they talk to other brokers every day.  It helps them keep the pulse of the market; who is looking and how much space are they looking for. 

Commercial realtors can also help keep you apprised of market conditions.  If several of the building around yours lease space for well below what you are asking the broker can determine if you are asking too much.  Commercial realtors are paid to know this information.   

Also important to owners is disposition of the property.  Better described as “what are you going to put in your pocket when you sell”.  There is an entire CCIM course related to these transactions.  How should you price your property?  What kind of capitalization rates (cap rate) can the market withstand? What tax implications do you have when you sell it?  Experienced commercial realtors can walk you thru all these steps.

There are many more details that we can get into regarding commercial brokers.  The items above are strong evidence that an experienced broker is imperative to the success of your property search or ownership.

Justin Cazana, CCIM

Commercial & Investment Properties Co.

Director of Leasing/Marketing