commercial leasings insights--part 1

Secrets of LeasingSecrets of Leasing Commercial Real Estate Commercial Real Estate

Part 1 Part 1Presented byPresented by

Dan Oster, Vice PresidentDan Oster, Vice PresidentIndustrial Team Member, NAI AllianceIndustrial Team Member, NAI Alliance

IntroductionIntroductionDan Oster, Vice PresidentIndustrial Team MemberNAI Alliance(775) 336-4665Doster@NaiAlliance.com

Adjunct ProfessorGraduate School of BusinessAdvance Seminar on Supply Chain Management

The Industrial Team has negotiated > 500 Sale and Lease transactions valued in excess of $500,000,000 since 2004.

Today’s TopicsToday’s Topics• Commercial Real Estate Commercial Real Estate

CycleCycle• Vacancy RatesVacancy Rates• Vacancy Rates vs. Lease Vacancy Rates vs. Lease

RatesRates• National Market ReportNational Market Report• NegotiationsNegotiations• NNN vs. Gross LeasesNNN vs. Gross Leases• Fixed Rate OptionsFixed Rate Options• Personal GuaranteesPersonal Guarantees• Beneficial Occupancy vs. Beneficial Occupancy vs.

Free RentFree Rent• You Covet Your You Covet Your

Neighbor’s SpaceNeighbor’s Space

Dan OsterDoster@NaiAlliance.com

(775) 336-4665

CommercialCommercialReal Estate CycleReal Estate Cycle

Dan OsterDoster@NaiAlliance.com

(775) 336-4665

Vacancy RatesVacancy Rates

Dan OsterDoster@NaiAlliance.com

(775) 336-4665

Vacancy Rates vs. Lease Vacancy Rates vs. Lease RatesRates

Lease RatesLease RatesVacancy RatesVacancy Rates

Dan OsterDoster@NaiAlliance.com

(775) 336-4665

National Market National Market ReportReport

Dan OsterDoster@NaiAlliance.com

(775) 336-4665

NegotiationsNegotiations

• Negotiation Video• He (or She) who cares MOST – loses• Time Kills All Deals• A third party can diffuse emotional situations• Leases are like marriages – winning at all costs can really

cost you!• Big NO, little Yes• The cost of moving can really cost you• No two situations are the same (so don’t expect the deal

your neighbor got!)• Civility is always appreciated

Dan OsterDoster@NaiAlliance.com

(775) 336-4665

NNN vs. Gross LeasesNNN vs. Gross Leases

• Every Building Has Operating Expenses• Property taxes• Owner’s Insurance• Common Area Maintenance• Gross Leases – Included in the rent number - you see

nothing• NNN Leases – Added to base rent – Reconciled Annually• Broker Secret: All things being equal, Gross Leases cost

you more because the owner is absorbing the risk of unforeseen expenses like heavy snow removal, property tax increases, etc.

Dan OsterDoster@NaiAlliance.com

(775) 336-4665

Fixed Rate OptionsFixed Rate Options

• Fixed Rate Option is typically an additional time period added to a lease at an agreed upon price at the Tenant’s sole election

• Options in Leases almost always favor Tenants• Landlords know that when a lease rolls and the option

rate is higher than the market, Tenants renegotiate. When the market favors the Landlord, Tenants exercise the option.

• Broker Secret: Landlords reluctantly grant options to win deals. If you want to control your lease exposure farther into the future, consider a longer term. Longer terms typically come with lower occupancy cost from day one.

Dan OsterDoster@NaiAlliance.com

(775) 336-4665

Personal GuaranteesPersonal Guarantees

• Personal Guarantees allow a Landlord to pursue the personal assets of an individual should the business entity on the lease fail.

• Startups (new) businesses, Businesses with negative recent operating history and/or expensive Tenant Improvements often require Personal Guarantees.

• Broker Secret: Businesses build credit worthiness over time. Ask for the guarantee to be removed after a period with good payment performance, the T.I. is paid off or offer a performance bond to limit your individual liability for a lease.

Dan OsterDoster@NaiAlliance.com

(775) 336-4665

Beneficial Occupancy Beneficial Occupancy vs. Free Rentvs. Free Rent

• ‘Beneficial Occupancy’ is the period of time before a lease starts when the Tenant has access to the building to prepare it for operations.

• ‘Free Rent’ periods are less restrictive – you can be in full operation and are usually responsible for just the operating expenses during this time.

• Broker Secret: What’s the Difference? From the Landlord perspective, the Free Rent Period, a concession, is often included in their calculations of the financial return of your lease while Beneficial Occupancy, a necessary step toward operating in the space, is not.

Dan OsterDoster@NaiAlliance.com

(775) 336-4665

You Covet Your You Covet Your Neighbor’s SpaceNeighbor’s Space

• Landlords typically love to have an existing Tenant expand; usually 50% growth (or more) will compel a Landlord to tear up an existing lease for a new one covering more square feet.

• If you’re moving into a space and want to control the adjoining unit for expansion in the future, what are your options:

• Right of First Refusal (ROFR)• Staged Take Down• Right of First Offer (ROFO) • Broker Secret: ROFR and ROFO are typically one time

options – use ‘em or lose ‘em.

Dan OsterDoster@NaiAlliance.com

(775) 336-4665

Q and AQ and A

Questions??

?

Questions??

?

Dan OsterDoster@NaiAlliance.com

(775) 336-4665

Recap and Next TimeRecap and Next Time

Today’s TopicsToday’s Topics

• Commercial Real Commercial Real Estate CycleEstate Cycle

• Vacancy RatesVacancy Rates• Vacancy Rates vs. Vacancy Rates vs.

Lease RatesLease Rates• National Market National Market

ReportReport• NegotiationsNegotiations• NNN vs. Gross LeasesNNN vs. Gross Leases• Fixed Rate OptionsFixed Rate Options• Personal GuaranteesPersonal Guarantees• Beneficial Occupancy Beneficial Occupancy

vs. Free Rentvs. Free Rent• You Covet Your You Covet Your

Neighbor’s SpaceNeighbor’s Space

NextNext TimeTime

•The Secrets of Leasing The Secrets of Leasing Commercial Real Estate Commercial Real Estate Part 2 - March 23, 9-10 am Part 2 - March 23, 9-10 am PSTPST•Trade Fixtures vs. Tenant Trade Fixtures vs. Tenant ImprovementsImprovements•How Much Space Do You How Much Space Do You Need?Need?•Options to PurchaseOptions to Purchase•RepresentationRepresentation•Why Competition Between Why Competition Between Landlords Helps You Get a Landlords Helps You Get a Better DealBetter Deal•For a Copy of 10 Leasing For a Copy of 10 Leasing Insights or the NAI Global Insights or the NAI Global 2011 Report contact me 2011 Report contact me todaytoday