CIP Blog

As we continue our tour through a basic lease the topic today can be a big subject when it comes to cost savings but it can be covered pretty quickly.

UTILITIES!

Utilities are handled one of two ways (typically).  One, the utility bill is part of the rent.  The landlord pays bill when it comes in every month.  This is part of a full-service lease.  Two, the tenant contracts separately with the utility provider and pays their own bill.  This is typical most retail leases and some office leases.

There is no better or worse way to do it.  Some tenants prefer to control their own utilities; others would rather just right one check every month instead of having to pay a separate utility bill.

Depending on the tenant and the type of HVAC systems, a considerable amount of saving can take place with full service utilities.

Utility systems are often set up because of the style of building.  For example, at the

Admiral Pointe-Medical Office Building in Farragut

Atrium, Admiral Pointe, Century Park I & III tenants are pay their own utility bills.  These buildings are two and three stories, respectively.  Over our 40 years of development we have found that tenants like having the ability to control their own systems and own hours.  It allows them to keep the utility bills down by instituting set-backs for non-work hours.  Most of they time these tenants are served by split-system, roof-top units. If a someone comes in to work on the weekend all they have to do is turn on the system in their section of the office.  This saves money in the long run.  However, it is very difficult to use a split-system on anything over three stories.

New, larger buildings have highly efficient HVAC systems

Larger (or taller) buildings are typically serviced by water source systems, cooling loops, chillers or VAV systems.  These highly efficient systems can cool large buildings at a rate 15-20% cheaper than a split-system.  They do have a draw back however; each system services a large area, therefore if a tenant has multiple shifts or does weekend work they have to cool the entire floor (or more) of the building and that can get expensive.

In many large buildings, with full service leases, tenants are charged an “after hours utility charge” of about $40 per hour if they use the systems after standard building hours.

Regarding water; in most building water is “commonly metered” meaning it is paid for by the landlord.  If there is a tenant that uses more than standard amounts of water (like a restaurant) they can be separately metered or have an increased rate to cover the increased usage.

Next week will be a market update…lots has been going on in Knoxville and commercial real estate in general lately.

As always, you can contact me at 865-584-3967 or jcazana@ciprop.com for questions or for more information.

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

Its been a while since I have been to New Orleans.  It is safe to say I have matured since I was last there.  Bourbon Street used to be a great place to have fun in college.  Now its just disgusting.  Seriously there should be an age limit just to walk down the street!  

New Orleans-2010 CCIM Mid Year Meetings

But if you are going to NOLA to eat…you have plenty of choices.  I had to privilege of eating at Drago’s, Red Fish Grill and the Pelican Club (twice).  All were fantastic, as expected.

The reason for the excursion was the CCIM Mid-Year meetings.  As the president of the Knoxville chapter I had the opportunity to sit down with several hundred CCIM leaders to discuss the direction of the commercial market as well as the how the CCIM Institute is growing.

If you are not familiar with CCIM; a Certified Commercial Investment Member (CCIM) is a recognized expert in the disciplines of commercial and investment real estate. A CCIM is an invaluable resource to anyone in commercial real estate.  If you are on this side of real estate it is imperative that you work with a professional with these four letters behind their name.

As you might imagine this economic cycle has been hard on commercial real estate, and the CCIM Institute is no different.  In his “State of the Union” CCIM President Richard Juge said that the institute has stayed above the projected budget and should break even for the year.

What is exciting is CCIM’s growth in technology and education.  For the past few years CCIM has improved its training and education plans to meet the needs of its candidates and designees.  That will continue over the next few years.   You can get many of the details from the CCIM website www.ccim.com (which is about to get a make over).  Many have considered the CCIM designation to be the equivalent of a graduate degree in commercial real estate; if anything it will be a more difficult and informative degree in the coming years.

The most impressive display of the weekend was the update on CCIMREDEX. This real estate exchange platform is the most comprehensive commercial real estate web site in the world.  The list of features is much to long to list here but the best description came from one of its creators Todd Kuhlmann.  He said REDEX is like the I-Phone; on its own there is not much to it…but when you add in all the apps it can practically run the world.   REDEX allows you to list a property and then send it out to all the other listing services you subscribe to with one touch of a button.  It can run demographic reports, create marketing flyers, create postcards to mail with just a few clicks of a button and even create flash-enabled web sites for your property.  I haven’t even come close to scratching the surface of what the platform can do.

If you are interested, and a CCIM member, REDEX training will be held in Knoxville on July 22nd.  I suggest you attend.

I would be remiss if I did not congratulate the three Knoxville realtors who earned their CCIM designations this week.  Solange Velas (Southland Realtors), Bill Beecher (Wood Properties) and Joyce Anderson (Caldwell Banker/Wallace & Wallace) all passed their final exam and earned the pin.   This is no easy feat; each broker completed more than 160 hours of education, a detailed portfolio (some are over 500 pages long) and passed a 6 hours final exam.  Congrats.

Justin Cazana, CCIM

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

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