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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.

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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 buying commercial real estate 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.

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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.

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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.
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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 commercial 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.

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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.

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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.

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Leases

Commercial Property Lease Types

You’ve found your dream space for your business, and you’re ready to sign on the dotted line. But before you do that, take a second to make sure you know what you’re getting into.

There’s several types of leases, all with varying degrees of risk for the tenant. Here’s the basics of each option to help ensure you don’t get stuck with unexpected costs.

Let’s start at the riskier end of the spectrum.

Absolute Net Lease

This type of lease has the most risk for a tenant because the tenant is responsible for all expenses and repairs related to the building. So, you’ll pay all maintenance, repairs, utilities, real estate taxes, and insurance costs in addition to base rent.

Triple Net Lease

In this lease, you’ll pay most maintenance, repairs, utilities, real estate taxes, and insurance in addition to base rent. However, the landlord usually pays for structural repairs and capital improvements to the property, making it a slightly less riskier lease to enter into.

Modified Gross Lease

Here, you’ll pay some — but not all — of one or more operating expense items (maintenance, repairs, utilities, real estate taxes, and insurance). For example, under this lease, the building’s heating expense might be included in the base rent rather than being charged separately on a prorated basis. The specific expenses paid separately can vary extensively, so it’s important to know exactly what’s included in the base rent with this type of lease. This type of agreement is sometimes called a modified net or base plus lease.

Gross/Full-Service Lease

In a gross or full-service lease the rent is all-inclusive. Maintenance, repairs, janitorial services, utilities, real estate taxes, and insurance are included in the base rent. This type of lease is easy for the tenant, allowing you to forecast expenses without worrying about unexpected charges. You can concentrate on growing your business while the landlord assumes all responsibility for the building.

In Conclusion

That’s the basics of each lease. But, of course, it doesn’t hurt to have an expert to help you negotiate the details, and that’s where Guiderock Commercial Realty LLC comes in. Speak to an expert at (402) 421-7474.

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Leases Sales

A Quick Guide to Beginning Your Property Search

Renting commercial space can be a huge liability. Whether your business is large or small, the terms of your lease can hinder your success. As exciting as it can be to grow your business and search for commercial space, it’s important to take your time and understand each step of the process before you move forward.

Step 1: Determine Commercial Space Needs

Two common mistakes we see are businesses either paying too much for rent or having a space that’s the wrong size. That’s why we start by analyzing your business needs and budget. Each business has a different set of requirements for its commercial space, depending on the number of employees, production needs, and a wide variety of other needs. A restaurant, for example, wouldn’t need multiple private offices, just like a law firm wouldn’t need a large kitchen.

CREATE A LIST OF SPACE NEEDS FOR YOUR BUSINESS

First, write down your space needs. It’s a great way to start figuring out what square footage you’ll need. Make sure you take into account the space needed for storage, private offices, production, and future growth. If you’re forecasting growth in production and employees, it makes sense to calculate that in as well so you don’t grow out of your new location within the first 6 months. Think about how you use space as well; do you need a conference room in your space for daily meetings, or would it work to have a shared space elsewhere in the building?

CALCULATE YOUR COMMERCIAL SPACE SIZE

Once your list of commercial space needs is completed, you can find an office space calculator to give you an estimate of what size of space is needed. Add up your square footage and use it to start your search for your new commercial space. Other types of spaces may require different methods to determine how much space is needed; your tenant representative will be able to help you through this process.

SET A BUDGET

Researching your budget will narrow down the listings for your business and give you realistic expectations on what you’ll pay. You probably already have a rent budget in mind, but how realistic is that price based on your list of needs? You can search for commercial properties that fit your square footage needs to see if that price matches your budget. Make sure you check different locations around town as some prices will fluctuate based on traffic flow, location, and demographics. Researching a budget also allows you to reevaluate your list of space needs where you may find some room to cut down on square footage.

Step 2: View Property Listings

Once you’ve researched your commercial space needs and set a budget for rent, it’s time to start looking for properties that match your needs. Searching online for commercial space can be frustrating and eats away at your time. This is where it makes sense to talk to a commercial real estate agent or tenant representative who is connected within the local market. They’re typically connected to private networks that have commercial listings not open to the public. Tenant representatives also bring a lot of experience and resources to the search so they can lead you in a better direction after looking at business needs and budget. Even if you’ve found a commercial property, there’s still the possibility that the lease terms may not fit your business needs.

Step 3: Understanding Terms & Negotiating

Since finding the right commercial space can be frustrating, it can seem like a relief to start talking to the landlord about leasing. Make sure you take your time to read over and understand the terms of the commercial lease before signing anything. Even if it’s the only commercial space that fits your budget and size, you’ll still want to go over all the terms. Your tenant representative and your attorney will review all of the terms with you and make sure you understand your responsibilities.

LEASE AGREEMENTS & CONTRACTS

Chances are the lease will be more appealing if you lock it in for multiple years, which makes it extremely important to know the lease agreements and contract details. There could be future scenarios that cause you to break the lease, which can be very costly. Having a commercial real estate agent and an attorney on your team adds another resource to explain parts of the lease you don’t understand. They can also point out which parts of the lease could potentially affect your business in the future. Leasing commercial space is a significant commitment, and if you don’t understand the terms then you may have negative consequences later.

NEGOTIATING POWER

It can be tough to negotiate commercial space terms and price, but an experienced tenant representative can help find a way to leverage your business to strike a deal. There are different negotiating techniquesthat can give the landlord an upper hand, and utilizing a tenant representative to do your negotiating evens the playing field.

Step 4: Start Moving & Feeling Confident

Even after you’ve signed a lease, it’s nice having a resource in case something comes up in the future. That’s why building a strong relationship with your tenant representative makes sense, and as a bonus, you can feel confident moving forward.

READY TO TALK WITH A TENANT REPRESENTATIVE?

We listen to our clients to evaluate and analyze what type of commercial space would fit their specific needs. Contact one of our tenant representatives at (402) 421-7474 to see how we can help you with your next lease.