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Know Your Lingo: 6 Key Terms for Leasing Commercial Real Estate Space

Whether you’re just starting your first company, or looking to expand your operation, navigating the commercial leasing process can be complex and confusing. Leasing Commercial Real Estate space can get complicated and have few standard rules.

As you begin your search for the ideal office, retail, or restaurant space for your business, here are a few of the most important commercial real estate terms you’ll need to know.

Common Area Maintenance (CAM) – Also known as operating expenses, CAM expenses are common in commercial properties that include more than one tenant. CAM expenses are added on top of a tenant’s base rent to cover areas or aspects of the property that multiple tenants benefit from. This may include everything from maintenance of parking structures and landscaping, to services like snow removal, to insurance and property taxes.

Gross Lease – Sometimes called a full-service lease, this is a lease agreement in which a commercial landlord pays all expenses associated with owning and operating a property, which includes CAM expenses. The tenant, in turn, pays a flat “base rent” sum. While full gross leases are rare in today’s market, modified gross leases are more common. In this arrangement, the tenant pays a base rent amount for one year. After that, any increase in operating expenses above the first year are passed on from landlord to tenant. Modified gross leases are most common in office buildings and warehouses.

Letter of Intent (LOI) – Also known as a term sheet, a letter of intent indicates your commitment to move forward with Leasing Commercial Real Estate space. A letter of intent may be written by a landlord, a prospective tenant, or their respective attorneys. This letter summarizes any key issues you’ve already discussed, as well as other requests or stipulations related to a potential lease. While letters of intent are often legally non-binding, they provide a roadmap for future negotiations, and often result in a quicker, more amicable deal.

Net Lease – Sometimes called a pass-through lease, this is a lease agreement in which the tenant pays a base rent, along with certain agreed-upon expenses typically associated with owning a property, including utilities, repairs, insurance, and taxes. Net leases come in three varieties: single-net, in which the tenant only pays property tax; double-net, in which the tenant pays property tax and insurance premiums; and triple-net (NNN), in which the tenant pays all of the above plus repairs and maintenance costs.

Tenant Improvement Allowance (TI) – This defines contributions by the landlord toward a tenant’s permanent alterations to their space. These include changes to walls, floors, ceilings, and lighting, among other elements. These improvements and their expenses are usually enumerated and agreed upon up front, with the tenant agreeing to pay any costs that exceed this amount.

Usable Square Footage – This is the amount of space in Leasing Commercial Real Estate that is reserved for exclusive use by the tenant. Usable space is different from “rentable square footage”, which may include common areas like restrooms and lobbies. When looking for a commercial lease that can sustain a growing business, it’s crucial that you investigate your usable square footage to ensure that the space is consistent with your needs and vision.

Beginner’s Guide to Finding a Restaurant Space

Many people dream of opening their own restaurant. But for most restaurateurs, dreams give way to harsh reality. Studies have found that 60 percent of restaurants don’t make it past the first year, with 80 out of business in five years.

While there are several factors that contribute to the success or failure of a restaurant business, many of them can be traced back to the commercial space owners have chosen to open their restaurant. Here are some tips for choosing the right restaurant space.

1. Start With a Good Business Plan: The biggest mistake most first-time restaurateurs make is a lack of preparation. Unlike buying a home, which is often an emotional purchase for all involved, commercial real estate is driven by profits and return on investment. Because of this, you need to enter the leasing process with a very clear picture of your financial assets and liabilities, along with the market opportunity for your restaurant. This isn’t just for your benefit, either: remember, commercial landlords are investors. With a solid business plan and financial documents in hand, you’ll be able to sell yourself and your business more effectively.
2. Know Your Customers: Choosing the right space for your restaurant isn’t just about knowing what you can afford: it’s also about going where your customers are. The clientele you’re targeting has a huge impact on everything from the location of your restaurant, to the facilities and layout you need to be successful. Does your concept cater to families? If so, you’ll want to target commercial spaces in family neighborhoods with a roomy, traditional floorplan. Are you targeting young professionals? A smaller, cafe-style space in the financial district is likely more suitable.
3. Be Patient: Time is a factor for many residential buyers, who may be moving for a new job or closing on their existing home. But there’s no clock on starting a business. No matter how eager you are, it’s important to take your time and find a location that best suits your needs, rather than rushing into a commitment on the wrong space. Expect to spend 6-12 months to find and negotiate a lease on the right location for your business.
4. Know Your Codes: Municipal building codes can be incredibly complicated, and vary widely from location to location. Neglect them, and they’ll come back to haunt you. First, make sure that any areas you’re considering are zoned for restaurant use. Next, be sure to contact your municipality and find out how much parking is required for restaurant use. This may differ depending on the kind of restaurant you’d like to open. For example, a take-out restaurant often requires less parking than a fast casual or fine dining restaurant.
5. Hire a Broker: When it comes to commercial leasing, it’s strongly recommended that you hire a broker to help you, for several reasons. First, virtually every prospective landlord will be represented by a broker or attorney, and many of them prefer to negotiate with other professionals. By hiring a broker, you’ll be taken more seriously and put yourself in a better position to beat out other bidders. Second, working with a broker gives you access to the most up-to-date information on what’s available in the market. Finally, commercial leases can be incredibly complex, and there is no standard agreement. In order to negotiate the most favorable terms, it’s a good idea to hire someone who has plenty of experience navigating the process.

SNOW REMOVAL an issue? Perhaps not the one you think!

In the Triangle snow removal may not always be top of mind but commercial real estate professionals have an obligation unlike any other; we must always be planning for the inevitable.  Risk management and due diligence may represent the less glamorous activities but the Benjamin Franklin axiom that “an ounce of prevention is worth a pound of cure” is as true today as it was when Franklin made the quote. Although many use the quote when referring to health, Franklin actually was addressing fire safety. Franklin wrote this (courtesy of ushistory.org) under an assumed name.  This rings just as true on snow or any peril me must guard against.  As an owner, operator or user of commercial real estate we must dedicate adequate resources to this notion of due diligence.  Many investors or users diligently examine investments at the outset but long term due diligence is far too often secondary.  While often delegated to property managers either internally or externally, owners and operators should not neglect their due diligence to these tasks through regular reviews by the management or senior advisory team many problems can be entirely avoided or effectively managed.  Neglect surely compounds even the most basic of problems.  A minor water leak left unattended can cause excessive damage and expense.  An absence of an effective snow or ice plan can create an equally excessive personal injury claim.

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Site Selection | Finding the right location is everything!

Feasibility Analysis for CRE Investments are critical to any successful venture.  Far too many fail to go beyond the most rudimentary measurements and often get bogged down with an age old question of which comes first “the chicken or the egg”: market analysis vs. financial analysis.  In reality, most rudimentary measurements are just filters or a way to say there is no interest to doing any real analysis.

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