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Commercial Real Estate Lease Types

1. The Gross Lease – Though some sources break out the full service lease type from the gross lease in commercial real estate, they are more often the same. The landlord pays for: Taxes, insurance, and maintenance.

The gross commercial lease is used most often in multi-tenant and single tenant office buildings, industrial and some retail properties. The landlord collects fixed rents and pays the expenses out of them.

As costs increase over time, many gross and full service leases will contain escalation clauses that increase rents over time to offset tax increases and higher insurance and maintenance costs. It is important that a tenant shopping for space understand any escalation clauses in order to project rent expense into the future.

2. The Triple Net Lease – The triple net lease is used extensively in commercial real estate. It is popular for multi-tenant industrial and retail properties. With tenants whose expenses vary greatly, such as an industrial user of electricity, the triple net lease is best for the landlord.Tenants are resistant to triple net leases, as they have no control over increases in expenses and budgeting their costs is more difficult. This is especially true when it comes to repairs and maintenance. In a triple net lease, the tenants would be responsible for sharing the cost of roof replacement. This can be a large and many times unexpected expense.

Of course, fixed rent is lower with the triple net lease. If the building is a newer one, tenants may find triple net to be preferable to other choices. If establishing a new business, the triple net tenant in a new building can enjoy lower rent and expenses in their first few years. Once established, they may have grown to the point that larger space is necessary. The move can be to a different type of lease or another newer facility.

3. The Modified Net Lease – The modified net lease is a compromise between the gross lease and the triple net. The landlord and tenant usually set up a split of maintenance expenses, while the tenant agrees to pay taxes and insurance. Utilities would likely also be negotiated in the modified net lease.This type of lease might be used in industrial, retail or multi-tenant office properties. Tenant resistance to triple net leases, especially in older properties, makes the modified net lease more popular. It allows a compromise situation that shares the costs of building operation and maintenance.

The terms of a modified net lease are as varied as are building and tenant business types. The flexibility of this lease type makes for easier agreement between tenant and landlord. Many a lease has been put together because of creative modified net lease terms.

About The Sundance Company
Established in 1976, The Sundance Company has the experience to help you with your commercial real estate needs in Boise, Meridian, Nampa, and the greater Treasure Valley. If your requirements include property management, leasing, real estate development, project planning, construction or space planning then look to us. The Sundance Company has more than 1.5 million square feet of retail, office, and industrial space available in prime Boise and Meridian locations.

Please check out The Sundance Company website to view property photos, search for office space or learn more about Sundance’s start-to-finish capabilities. If you prefer to talk to someone in person about your commercial real estate needs, then just give us a call at our Boise office, (208) 322-7300

Deal May Bring Aquarium to Times Square

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10 Commercial Real Estate Terms You Need to Know

Whether you own or rent your office space, property costs are one of the largest business overhead expenses. That’s why it’s important to comprehend the full ramifications of taking over the title to a property or entering into a lease agreement. Before you sign a lease, work with a commercial real estate broker with a proven track record, and consult with an attorney skilled in real estate law. You should also familiarize yourself with some common real estate terms:

  • Appraisal: a written report by a state-licensed professional that includes an unbiased analysis of the property’s value and the reasoning that led to that opinion. An appraisal report is required for any property sale.
  • Broker: an agent who brings together a buyer and a seller, or a landlord and a tenant, in a real estate transaction. All brokers must be licensed by the state in which they work. Most work on commission, and the landlord or seller usually pays the fee.
  • Build-to-suit: a method of leasing property in which the landlord makes improvements to a space based on the tenant’s specifications. The cost of construction is generally factored into the lease terms. Most build-to-suit provisions apply to long-term (10-year) leases.
  • Concessions: benefits or discounts given by the seller or landlord of a property to help close a sale or lease. Common concessions include absorption of moving expenses, space remodeling, or upgrades (also called “build-outs”), and reduced rent for the initial term of the lease.
  • Escalation clause: a clause in a lease that allows the landlord to increase rent in the future. Rent increases dictated under an escalation clause may be charged in various ways, including:
    • A fixed increase over a definite period
    • A cost-of-living increase tied to a government index, such as the tax rate
    • An increase directly related to increases in operating the property
  • HVAC: an acronym for “heating-ventilation-air-conditioning” system. In a commercial building, the landlord generally is responsible for maintaining the HVAC.
  • Lease: an agreement by which the owner of a property (the “lessor”) grants the right of possession to a tenant (the “lessee”) for a specific period of time (the “term”) for a predetermined amount of money (the “rent”). A “leasehold estate” is the space occupied by the tenant. Common types of leases include
    • A straight, or flat, lease, which stipulates that the same periodic payment (usually monthly) be made for the entire   term of the lease.
    • A percentage lease, which uses a percentage of the net or gross sales to determine the monthly rent. This is most often used in retail properties and with a minimum base rent.
    • A net lease, which requires the tenant to pay maintenance, taxes, insurance and so on, along with a fixed rent. This is also called “net-net-net” or “triple net.”
  • Lien: a legal claim filed against a property for payment of a debt or obligation. If a property owner fails to pay a creditor, for example, the creditor can place a lien on the property. A lien can halt the sale of a property.
  • Sale-leaseback: a transaction in which an owner sells a property to an investor, who then leases the property back to the original owner under prearranged terms. Sale-leaseback deals offer the original owner freed-up capital and tax breaks and the investor a guaranteed return and appreciation.
  • Sublease: a lease given by a tenant for some or all of a rented property. For example, if a tenant rents 20,000 square feet but only ends up needing 10,000 square feet, they may want to sublet the extra space for some or all of the remaining term of the lease, providing they continue to occupy and pay rent for the property.

About The Sundance Company
Established in 1976, The Sundance Company has the experience to help you with your commercial real estate needs in Boise, Meridian, Nampa, and the greater Treasure Valley. If your requirements include property management, leasing, real estate development, project planning, construction or space planning then look to us. The Sundance Company has more than 1.5 million square feet of office and industrial space available in prime Boise and Meridian locations.

Please check out The Sundance Company website to view property photos, search for office space or learn more about Sundance’s start-to-finish capabilities. If you prefer to talk to someone in person about your commercial real estate needs, then just give us a call at our Boise office, (208) 322-7300

sundancecompany commercial real estate, Commercial real estate news, Economy news, The Sundance Company

NAR: Commercial Real Estate Decline Starts to Moderate

Erika Morphy of GlobeSt.com published this article last week about commercial real estate.
The decline in commercial real estate appears to be slowing, at least according to the latest statistics from the National Association of Realtors (NAR). So suggests its leading economic indicator, which registered only a 1.3 percentage point decline in its Commercial Leading Indicator for Brokerage Activity for Q2. The index reading was 101.5, compared to 102.8 in Q1. The index is at its lowest point since its inception in Q1 1994–as well as a steep drop from Q2 2008, when it was at 117.6.

“The decline is moderating a bit–we can hope that the steep declines may be coming to an end–but we are not nearly back to normal,” Lawrence Yun, NAR chief economist, tells GlobeSt.com.

The slight easing of credit and introduction of liquidity into the sector is largely the reason, he continues. TALF was extended for a few months beyond the December 2009 expiration date, Yun notes. Also, “there has been a nice gain in the REIT stock price index, which implies that credit conditions may be loosening.”

Yun’s best guess for commercial real estate recovery? “We’ll be bouncing along the bottom for some time, but meaningful gains won’t occur until the second half of next year.”

Getting to that point, though, will not be pretty. NAR is forecasting sharp increases in vacancies for the next year. It expects office vacancy rates to increase from 15.5% in the second quarter to 18.8% in the second quarter of 2010.

In the industrial market vacancy rates are likely to rise from 13% now to 15% in Q2 2010. Retail vacancies will edge up from 11.7% in Q2 2009 to 12.9% in the same period of 2010. Multifamily vacancy rates, by contrast, are expected to slip from 7.4% now to 7.1% in the second quarter of next year.

NAR is not the only leading economic indicator to point to an upcoming recovery. The American Institute of Architect’s latest Architecture Billings Index also suggests a rebound may be underway.

About The Sundance Company
Established in 1976, The Sundance Company has the experience to help you with your commercial real estate needs in Boise, Meridian, Nampa, and the greater Treasure Valley. If your requirements include property management, leasing, real estate development, project planning, construction or space planning then look to us. The Sundance Company has more than 1.5 million square feet of office and industrial space available in prime Boise and Meridian locations.

Please check out The Sundance Company website to view property photos, search for office space or learn more about Sundance’s start-to-finish capabilities. If you prefer to talk to someone in person about your commercial real estate needs, then just give us a call at our Boise office, (208) 322-7300.

sundancecompany commercial real estate, Commercial real estate news, Economy news, The Sundance Company

Strategies for success

To succeed in this real estate market, investors and managers need a new kind of toolbox. While financial implements are still critical, more traditional tools of the trade, a hammer, paintbrush and the number of a good plumber, for example, have joined them.

As the industry experiences one of the worst downturns in decades, real estate investors and managers are reconsidering strategies for success. Many of them have embraced a back-to-basics approach that provides a path for staying strong in a difficult economy. A key part of that approach: actively maintaining their properties.

Gone are the days when making a profit in real estate involved a financial transaction and little else. Now, in an effort to remain viable, real estate professionals are focusing on 1) protecting and enhancing the value
of their assets; 2) adapting to a changed investment climate; and 3) reallocating precious resources.

And despite the rough sledding, there is a good likelihood that these strategies, taken together, will yield success. To be
sure, a meaningful recovery is not imminent. But there is a growing list of companies lining up to take advantage of the recovery when it occurs, giving perhaps the first indication that a slow turnaround may be beginning, at least in some sectors.

About The Sundance Company
Established in 1976, The Sundance Company has the experience to help you with your commercial real estate needs in Boise, Meridian, Nampa, and the greater Treasure Valley. If your requirements include property management, leasing, real estate development, project planning, construction or space planning then look to us. The Sundance Company has more than 1.5 million square feet of office and industrial space available in prime Boise and Meridian locations.

Please check out The Sundance Company website to view property photos, search for office space or learn more about Sundance’s start-to-finish capabilities. If you prefer to talk to someone in person about your commercial real estate needs, then just give us a call at our Boise office, (208) 322-7300.

sundancecompany Boise Commercial Real Estate, commercial real estate, The Sundance Company

A Few Basics About Commercial Real Estate

So just what is commercial real estate? The next question you might have is what is investment real estate? Sometimes they are the same and sometimes they are not.

Commercial real estate is generally defined as any property that is used for the purpose of commerce. For example, an office building, a warehouse, retail store, shopping center or an apartment building with five or more units. Investment real estate is generally defined as property that is purchased for the income it produces. This can range from the purchase of a single-family home that is used as a rental, to a major shopping mall or office tower. It does not include the home you own and occupy.

While the valuation of a single family home is most often established by the sales of comparable homes in the same area, larger commercial property is usually valued by the income it produces. The more money it makes, the more it is worth. Simple, right? Well, sort of. Let’s start with an explanation of the general process of real estate valuation.
Keep in mind that what an appraiser says is defined as “an opinion of value based on supportable evidence and approved methods.” It is important to understand that the appraiser does not establish a property’s worth but rather verifies what the market indicates.

There are three processes of valuation an appraiser will use to determine the value of any piece of real estate. These three processes are:

Cost – The cost to build a similar piece of real estate.

Market – Based on the closed sales of similar properties in similar condition and areas. This is called the comparable or market value.

Income – The property value based on the net operating income the property produces. An appraiser will use all three processes, but select only the one (or, at most two) that most accurately reflects the market value. They are never averaged.

As an investor in real estate, you will be particularly interested in the Net Operating Income (NOI) in order to determine a property’s worth to you.

Here is an easy way to compute the Net Operating Income:

Start with the total income that would be generated if the property is fully occupied. Then subtract any money lost due to vacancies, uncollected rents or other credit losses. The remainder constitutes the money available to operate the property. From this figure, subtract all operating expenses, such as routine maintenance and property taxes, and then what is left is called the net operating income (NOI).

About The Sundance Company
The Sundance Company has become a development powerhouse with more than 30 years of successful history in Idaho’s Treasure Valley and the Boise metropolitan area. The Sundance Company is one of the few local companies that self-manages and maintains its own properties—enjoying higher occupancy levels and superior quality control for its projects.

Savvy tenants and buyers look to The Sundance Company for development; office, warehouse, and retail leasing; property management; build-to-suit/construction; and land and building sales. With more than 1.5 million square feet of prime office and industrial space in the greater Treasure Valley, The Sundance Company has the size and diversity to avoid the need for a “one-size-fits-all” approach—thereby assuring customized solutions that are genuinely tailored to each client’s needs.

Every project by The Sundance Company is conceived and executed with integrity, innovation, accountability, and dedication by a team of seasoned experts who always remains mindful not only of tangible aspects of a property transaction but also the intangible. The in-house management team values its personal connections and the relationship of trust it has created with its tenants and property owners, which include national and regional companies, some of whom have been in Sundance buildings for more than 15 years.