Categories
Investment Sales

The Basics of 1031 Exchanges

As an investor in commercial real estate, you may have heard the term 1031 exchange tossed around. But what is it, and what does it mean for you?

The most important thing to remember here is that a sale under Section 1031 allows for capital gains to be deferred, meaning taxes are still owed but not payable until later. It sounds almost too good to be true, and of course there are rules to be followed as discussed in this video.

 

If you’re considering a 1031 exchange, it’s essential to plan in advance of the sale to make sure that all deadlines can be met. With that said, though, this can be an effective way to leverage up your investment portfolio and keep growing your assets.

Categories
Blog Leases

Understanding Net Effective Rent

One of the common issues with negotiating a commercial real estate lease is balancing the perspectives of both the tenant and the landlord. Understanding net effective rent and how it relates to each party in the transaction can help build a foundation for coming to a reasonable compromise on lease terms.

What Does “Net Effective Rent” Mean for a Tenant?

For businesses, rent is often one of the biggest expenses incurred, and it extends beyond just the amount specified for the base rental rate in the lease. Net effective rent for a tenant will also include additional recurring charges specified in the lease as well, most often in the form of estimated NNN charges but may also include marketing fees or other reimbursements due to the landlord. These additional costs are typically identified as “Additional Rent” and are due along with the monthly rental payment. The net effective rent for a tenant will also include rental reductions such as free rent periods at the beginning of a lease. Taken together, these costs represent the tenant’s net effective rent, or the total amount that will be paid to rent the space.

What Does “Net Effective Rent” Mean for a Landlord?

For property owners, net effective rent is the base rent due under the lease agreement minus costs incurred by the landlord as part of leasing the space such as free rent concessions, broker commissions, and construction costs for tenant improvements. The difference between what is owed by the tenant and these upfront costs is the amount that the landlord has available to pay its mortgage, accrue reserves for capital improvements, and generate a return on the real estate investment.

Meeting in the Middle

Understanding what net effective rent means for both sides of the negotiation provides a foundation for coming to mutual consensus on the structure of the lease. Tenants can evaluate the costs of renting and understand how that compares to the overall market, while landlords can make sure that they are able to meet expense obligations and achieve their desired return.

Categories
Leases Sales

To Buy or Not to Buy?

As your business grows, one of the most exciting (and nerve-wracking) situations is when you start to think about purchasing a building for your business. So how do you know whether it’s best to buy or lease?

In addition to considering where your business is in terms of age, growth stage, and cash needs, you will also want to consider your capacity for operating the property. Owning a building means that you are also solely responsible for repairs and maintenance, which may take attention away from your core business activities. You can mitigate this some, however, through your due diligence prior to making a purchase and planning for these needs.

Lastly, if you decide that you are ready to make the leap into building ownership, be sure to talk to your lender about SBA loans and other financing options that may be appropriate for your situation.

Categories
Leases Property Management

Are you ready for your NNN reconciliation?

If your business has a triple net (NNN) lease, you will receive a reconciliation letter from your landlord usually by the end of the first quarter after the calendar year ends. The purpose of this letter is to reconcile the estimated monthly payments made during the prior year with the actual expenses incurred for common area maintenance (CAM), building insurance, and real estate taxes. Here are some things to look for in your letter.

  • Proper receipt of payments. The letter should clearly state the amount you paid toward NNN expenses, and you should be able to verify this with your own payment records.
  • Sufficient explanation of expenses. The letter should itemize the NNN costs in sufficient detail that you can get a sense of whether the costs are consistent with the items allowed per your lease. If the reconciliation letter only includes a lumpsum total or very limited detail (such as only having line items for CAM, insurance, and taxes), you should contact your landlord or property manager to get more information.
  • Proper allocation of expenses. The basis for allocating NNN expenses across tenants will generally be based on the ratio of the square footage leased compared to the overall square footage of the building. These values should be identified in your lease, so you can compare to make sure the basis of allocation is correct.
  • Calculation of overpayment/underpayment. Confirm that the calculation of the difference between your estimated payments and the actual prorated expenses is correct. If you have overpaid, you should expect a credit toward your upcoming payments. If you have underpaid, you will owe this additional amount to your landlord.
  • Adjustment of estimated payment. Your estimated monthly payment for NNN expenses may be adjusted, particularly if the prior estimate was significantly different than the actual costs incurred. Carefully review the adjustment to ensure it makes sense and is consistent with any limits on increases that may be specified in your lease.

Questions about NNN reconciliations are common and your landlord or property manager should be able to assist in helping you understand the reconciliation letter. However, if you are still unsure about how to interpret the information given or need assistance obtaining information, you may also want to consider hiring a firm that performs NNN reconciliation audits to perform the review on your behalf.

Categories
Leases Sales

Is Time Your Friend or Foe?

Time management is as much an issue in commercial real estate transactions as it is for any other part of business. If you don’t move fast enough, you may miss the boat. Conversely, if you don’t leave enough time, you may not be able to get the right fit. Here are a few tips to help manage the time aspect of your next deal.

  • Be Prepared. Sale and lease offerings may be contingent on financing or other legal requirements. Plan ahead for these contingencies and do as much homework ahead of time as possible so that the deal doesn’t have to wait while these tasks are handled. These holdups may even allow the other party to take another option, putting you back at the beginning of your search process.
  • Account for Other Parties. A commercial real estate transaction involves several parties – brokers, attorneys, lenders, title companies, construction contractors – each with a different role and timing considerations. Not having enough time to coordinate these players puts you at a disadvantage – you may not be able to stay longer at your current space, or there may not be time to find alternatives if the planned deal isn’t completed.
  • Don’t Be Shy. If you have questions about the progress of the transaction or how changes might impact the deal, be sure to ask. No news may not in fact be good news. Open communication will help identify potential problems and expedite resolution.
Categories
Other

It’s Been a Year Already?

The adage “time flies when you’re having fun” is certainly true – this week we celebrate one year of being in business, and the time has sure flown by! Cheers to our incredible clients, colleagues, family, and friends who made it possible for Guiderock Commercial Realty LLC to achieve this milestone. In honor of the occasion, here are some of the highlights and lessons from the past year:

  • Why have cake when really you should have pie? We all start with plans of how things will go, even leaning toward the traditional routes, and have to adapt when the plans and reality don’t align. Most things went well, and the occasional misalignments taught us valuable lessons in flexibility and adaptability. Besides, we like unconventional anyway.
  • The only constant is change. We have continued changes in the industry (different expectations in office use, an omnipresent omnichannel impact on retail and industrial properties, construction and financing pressures) as well as broader economic and political conditions. How these trends will continue or what new environments might come along are difficult to predict, but it’s safe to say that this next year will be different than the past year.
  • Speaking of change, how about some new stuff? This first year saw an emphasis on tenant and buyer representation services, as well as the launch of this blog. More exciting is the groundwork that was laid for new services to be launched in the next few months to further assist our clients. We can’t spill the beans quite yet, but look for more information soon!

We can’t give enough thanks to everyone who has been a part of this journey. It has been an amazing year and we’re looking forward to many more.

Categories
Other

Celebrating Small Businesses

It’s Small Business Week! Over the past several days, we have seen and heard quite a bit of commentary highlighting how small businesses are integral to a sense of community. Sometimes this can be taken for granted, so we are taking a few moments here to (somewhat anecdotally) talk about why small businesses are so important.

Certainly there’s a significant contribution from small businesses to the U.S. economy. The Small Business Administration notes that “more than half of Americans either own or work for a small business, and they create about two out of every three new jobs in the U.S. each year.” That’s good news, but it only scratches the surface of what small businesses do.

When we think about small businesses, we think about our family, friends, and neighbors. The people that own and operate these businesses are embedded in their communities. They know customers by name and may cross paths with them at the grocery store, social events, and church. These small business representatives often hold seats in local government, directly influencing how a community sees and conducts itself. Many of them hold position on non-profit boards, and others may be sponsors for youth sports teams or other groups.

Whether today’s small businesses stay small or become “the next big thing,” we know that they represent creativity, resourcefulness, and a level of community service that goes beyond economic measures.

Thank you to all of the small businesses for doing what you do and making our communities great.

Categories
Leases

The Lease Is Signed… Now What?

Administering a lease can be very stressful to a new tenant. Fortunately, we can share some key items that should be standard practice and that will keep your new lease running smoothly.

Renewal Reminders

Renewal reminders are great for both the tenant and landlord because they remind both parties they’ll need to make a decision on the space soon. These reminders can come in the form of a letter, email, or phone calls. For the tenants, reminders can be a great way to keep track of when to renew the lease or decide to look for another space. For landlords, reminders can be great to get a better idea of what the current tenant in planning on doing before the notice date arrives. It’s a great way for both parties to be knowledgeable of all upcoming dates with no surprises.

NNN Audits

Triple net (NNN) audits are useful for both the tenant and the landlord to keep each other accountable for certain costs. An audit of the NNN lease allows for the tenant to confirm that the maintenance charges the landlord sends to the NNN tenants are accurate. As a landlord, having this clause in your lease can make the tenant feel more comfortable in the space they are renting. The audit clause should cover who performs the audit, who pays for it, and how the findings of the audit will be handled.

Certificates of Insurance

Having proof of insurance is important for both the tenant and the landlord, for obvious reasons. For most commercial leases, the tenant is required to provide certificates of insurance to show the insurance is valid. The landlord needs to confirm the tenants carry the appropriate insurance and that the landlord is provided with certain protections. Ultimately, understanding the benefits and risks in relying upon insurance certificates is important. It is important to know that not all insurance certificates are going to be the same forms, but the forms of certificates created by ACORD have been used as standard practice.

Open Communication

Open communication with your landlord or their designated property manager is extremely important. Your landlord has an interest in seeing your business succeed, since your success adds to the reputation of the property as well as contributing to the financial performance of the property. Having open communication and a solid relationship with your landlord means that if there are bumps in the road during the course of your lease (and there likely will be) then you have a foundation to work with in finding a mutually agreeable solution.

Guiderock Commercial Realty LLC is here to help with any questions you have about administering your lease after signing. Contact our associates at (402) 421-7474 to learn more about our lease administration services.

Categories
Leases

Before Signing Your Lease, Do Your Due Diligence

Leasing a commercial property isn’t as easy as finding a property that fits your square footage needs. Even though that may be step one, you still have to negotiate your lease.

Leasing due diligence is when the prospective tenant evaluates and analyzes the commercial property to ensure the value is worth the cost. This also includes surveying and inspecting the building to make sure you understand the risks and liabilities that could affect you in a multi-year lease.

If a tenant does adequate leasing due diligence, then they’re more likely to have more power going into negotiations. We’ll be talking about some areas of a lease you can negotiate such renewal options, rights for expansion, and early termination.

Renewal Options

Renewal options are a benefit for tenants, and including a renewal option clause helps a tenant decide whether to extend the lease after the initial term. Since renewal options are beneficial to the tenant, some landlords may be unenthusiastic about including it. However, a tenant may be able to negotiate these terms by providing specific details about his or her renewal options. There are four basic elements for a renewal that can be outlined in your lease: notice period, term, rental rate, and fair market value. Defining these terms and negotiating your lease could save you a significant amount of money depending on the future of your business.

Right of First Refusal (ROFR)

Depending on the nature of the business, it may be wise to include a right of first refusal (ROFR) into the lease. ROFR is a legal option for tenants to rent or lease property before another party can. If a business is rapidly growing and is planning for future growth, then the tenant can opt to secure additional space before another entity can express interest.

Early Termination

There are too many “what if” scenarios when starting a business that could cause a business to move out of its commercial space. A business could be acquired or grow too fast for the current space. In a worst-case scenario, the market doesn’t respond to a company’s products or services, and there’s just no way to continue with the business. No matter the situation, having a well-planned exit strategy is another aspect of leasing due diligence that can put your mind at ease.

Early termination is another benefit for the tenant, so negotiation will most likely be tough if terms are specific. In most cases, landlords will require some sort of early termination fee that would be in the form of additional rent or reimbursement charges. If that’s the case, the tenant would still have some assurance that in a “what if” scenario he or she won’t have to pay the full amount of the lease.

Know Your Options

Leasing due diligence comes down to knowing and understanding your options. When leasing due diligence is done right, a tenant can have more negotiation power, which will ultimately save him or her from future changes.

If you’re currently searching for commercial space to lease, contact one of our tenant representatives at (402) 421-7474 to set up an initial consultation for securing a lease that fits your business needs and protects you in any future scenarios.

Categories
Leases Property Management

Common Area Maintenance (CAM) Charges

Aside from the base rent, common area maintenance (CAM) charges are some of the largest additional leasing costs that tenants may see. Here, we give an overview of what CAM charges are and ways to manage them.

What are Common Area Maintenance (CAM) Charges?

In a triple net (NNN) lease, tenants are billed CAM charges for maintenance fees to their property’s common areas. This is an additional fee on top of the base rent you’ve already agreed to pay.

What Can Be Included in CAM?

CAM charges could be overgeneralized by looking at all the features in your building that benefit your rented space. Chances are most of the features you think about can be applied to CAM.

We can break this down into inside and outside features of a commercial property. On the outside of the building, you can assume non-structural repair and maintenance of the roof, landscape, and parking surfaces to be covered by CAM. That includes snow removal, landscape, lighting, and signs. On the inside of the commercial property there’s plumbing, electrical, and cleaning services, which could also include all of the cleaning supplies.

What Are Capital Expenditures and Why Do They Matter?

When you’re leasing a property, you don’t own it so there’s no advantage in increasing the value of the property. However, there’s always a chance that a landlord will try to add these into CAM charges.

This is when understanding what benefits your business is key to negotiations. It’s even more important to have someone you trust that knows your business to help determine what – if any – capital expenditures are covered in CAM charges. The reason why there’s conflict surrounding these improvements is because of the nature of the capital expenditures.

There are typically three categories of capital expenditures: capital improvements, capital replacements, and capital repairs. As you read through these, you’ll start to understand why most of these should stay out of CAM fees.

Capital Improvements, Capital Replacements, and Capital Repairs

These can be defined as additions or improvements that increase the value of the commercial property. Capital improvements can include everything from new structures, equipment, or other improvements which most tenants will find objectionable. Capital replacements are investments that upgrade depreciated assets, and capital repairs are maintenance to keep capital assets in a working condition.

All three of these capital expenditures can be seen as investments into the commercial property, but there are times when they’re included into CAM charges. For example, if there was an upgrade to the HVAC system, or electrical system that would lower the tenant’s utility charges, then there would be some benefit to the tenant. Even with that example, prospective tenants should make sure those terms are specifically outlined in their contract.

Remember, we’re just scratching the surface with these topics and if you’re searching for a new lease, make sure you work with a tenant representative to protect yourself from potential risks and liabilities.

How CAM Charges Add Up

Usually your landlord of the commercial property will give you a prorated fee based on the square footage of your rented space. Accurately estimating yearly CAM charges can get complicated because it’s difficult to predict cash flow. Depending on your commercial property, your landlord may include a cap or floor on CAM charges.

CAM Caps and Floors

Caps and floors are included in some leases to limit CAM charges to a fixed value. This can help both the landlord and the tenant as cash flow varies from month-to-month and year-to-year.

A cap on CAM fees would limit the amount paid by the tenant to a fixed price that can rise each year. CAM caps increases are percentages that can be cumulative or compounded, and calculated year-over-base or year-over-year.

When CAM charges are less than the cap, then a landlord may use a floor CAM. These CAM charges will budget a minimum increase in the fees, which may slow down any major increases in the future.

CAM Audits

Since common area maintenance is under the control of the landlord, it’s important for tenants to ensure they have a right to audit the expenses to ensure they are fair and equitable. In addition to reviewing the annual CAM reconciliation report that the landlord will send, tenants should also ensure that their lease provides for the ability to obtain copies of invoices and review for accuracy.

Still Have Questions?

Making sure that tenants are comfortable with all terms of their lease is one of our highest priorities. Contact one of our agents at (402) 421-7474 with any CAM questions you may have.