When you are looking to engage a commercial real estate agent, I recommend you only use a commercial real estate firm that uses commercial lock boxes on their listings.  First, commercial lock boxes in the Boise Valley of Idaho are different than residential lock boxes.

1.     As a rule, commercial real estate agents in this area do not utilize residential lock boxes so agents using residential lock boxes or button lock boxes are doing a disservice to their owner clients as the commercial agents will not be able to get in the space to show it to their tenant clients.

2.     As we commercial real estate agents get to know our client’s needs by showing them properties, we begin to understand that other properties may be more suitable for them than what they originally outlined as their target size, location, or use.  It may sound like that kind of information would be established at our initial meeting with the client, but from experience, I can tell you that information comes out when you are actually looking at places with the tenant client that was not discussed in the initial tasking.  That’s a very typical scenario.

3.     As our understanding of a client’s needs develop, we are able to guide them to properties better meeting their needs.  So we’re out in the field with our tenant clients in tow when it becomes apparent another property may better fit their needs.

4.     As we discuss alternative properties with them and if the other property is near by, we will very often go directly to that property.  If there is no lock box on it we will not be able to show they your property.  To complicate things, if we doing this during off-hours (after normal work hours, during weekends), we will typically keep going with other properties and your property will not get shown at that time – if ever to that client.

That may sound like a small percentage of the potential deals out there, but it is real, it does happen, and some tenants – under their own deadlines or set of conditions -  will not be able to see your property because they’re from out of town and only have a limited amount of time within which to view properties.

As an owner, in a soft market, with a number of other available properties, it is in your best interest to only use commercial real estate agents who use lock boxes so we can come & go at will, rather than finding the right agent with the key to gain access to the property.

On the flip side, I’ve had commercial real estate agents tell me that they want to be present when the property is shown.  That’s fine, you are more than welcome to come open the door, but remember, it’s nothing personal, but we may not want you to be physically present so that we can talk freely on whether the property will work or under what circumstances we can make it work.

If you have equipment in the space, it is understandable that you may not want a lock box on the property.  True enough.  But, for the other facilities (very few properties have equipment on-site when the leasing process is active), you will be much better served to allow agents to bring their clients to your property in an unimpeded fashion.

Leasing A Stand Alone Building.  If you were to lease an entire building, the leasable / rentable square footage would be equivalent to the gross square footage of the building.  This is the same as when measuring the size of a residence – “corner to corner.”

Leasing Space In A Multi-Tenant Building.  In a multi-tenant building, the space calculation is different, but not that difficult to understand.  In a multi-tenant building, essentially, space measurement is the same with little exception.  Since you will share walls with your neighbor, half of the demising wall thickness is allocated to each tenant’s space.  In addition, all tenants are allocated a pro-rata share of the common areas (halls, restrooms, lobbies) and this is what commercial real estate agents will call the building load factor.

WHEN USABLE AREA ISN’T USABLE AREA

There are differences in what most tenants consider to be usable area than what the owners consider to be usable area.  You will find most owners use the industry standard (Building Owner’s and Manager’s Association or BOMA) in defining this term.

Usable Area – Tenant Usage:  To a tenant, the most common usage is to measure from the interior wall surface to the opposing interior wall surface, less major vertical penetrations (such as HVAC shafts & support columns going from floor to ceiling).

Usable Area – Industry Usage:  To owners & commercial real estate agents, a space also includes half of the wall thickness between tenants & to hallways.

CONVERTING USABLE AREA TO RENTABLE AREA

Using the “Usable Area as defined by BOMA, the next step is to allocate the building’s common area (for example: hallways, restrooms, and lobbies) to the usable area.  Each tenant is allocated a pro-rata share of the common areas since each tenant has access to those common areas.  For example, if a 115,000 sf building has 100,000 sf of usable area and 15,000 sf of common area, the allocation would be 15% (15,000 sf of common area / 100,000 sf of usable area).  The industry common definition of this factor is called Building Load Factor.  In this case the Building Load Factor is 15%.

PRACTICAL USAGE.

A typical application of Usable Area and Building Load Factor is as follows.  For a 1,000 sf (actual square feet) office suite the Building Load Factor is used to add and additional 150 sf of common area (1,000 x 15%) for a total of 1,150 square feet of rentable area (rentable square feet or rsf).

You need to understand the type of lease you are negotiating when dealing with commercial real estate properties.  You may be incurring legal responsibilities for costs you might not have anticipated if you don’t understand the nature of the lease.

GROSS LEASE

This is a lease where the tenant pays one singe charge to the owner.  All utilities, building maintenance, and operating costs are paid by the owner.

NNN LEASE or TRIPLE NET LEASE

A NNN Lease is a Lease where the tenant pays their pro-rata share of real property taxes, insurance and operating expenses.

CAM LEASE or COMMON AREA MAINTENANCE LEASE

A CAM Lease is very similar but is used in retail environments locally, at least.  Retail properties can often have common areas for general use of all tenants or their guests and the respective tenants pay for the same items in the NNN lease, but since retail environments may have common use areas and typically more parking area, the leases are generally called CAM Leases.

SOME THINGS TO LOOK FOR ASSOCIATED WITH NNN AND CAM LEASES

In both NNN & CAM leases, tenants typically pay their pro-rata share of real property taxes, insurance, and operating expenses.  These expenses are generally estimated annually and paid monthly very similar to insurance and taxes paid on a residence through a mortgage / escrow company.  In theory, this is more efficient since the owner estimates the expenses each year and does not have to include a “risk” factor in case actual expenses are higher since all expenses are paid by the tenants (except those expenses attributable to vacant spaces, which are borne by the owner).  However, efficient as this may sound, there are some issues to look into when renting properties with NNN or CAM fees.

OVERHEAD FEE

Is the owner allowed to add a factor to the annual NNN / CAM fees?  In some leases, the owner may ask for an add-on factor to pay for administrative costs of estimating and collecting the fees.  Locally, the majority of leases do not have an add-on factor, but some range upwards of 10%.  If the owner does not have a property manager, an add-on might be appropriate.  On the other hand, if the owner does have a property manager AND there is an add-on fee, it is worth determining why that is.

LEASING AND MARKETING FEE

Leasing and marketing fees paid to acquire new tenants is generally a cost borne by the owner and should not be a fee paid by existing tenants.

Marketing costs to advertise the property for the benefit of existing tenants in a retail environment are generally specified and incurred with some level of tenant input.  Those costs are typically borne by the tenants on a pro-rata basis.

CAPITAL & MAINTENANCE EXPENSES

When leasing, make sure you understand how this issue is handled in the lease.  Typically, capital expenses are borne by the owner.  Some leases will give the owner the ability to do a cost – benefit analysis to see if a capital expenditure will reduce operating & / or maintenance expenses and, if so, to then include those costs in the NNN / CAM charges.

UTILITY COSTS (Water, electrical, sewage, trash, etc)

In most cases, with a NNN / CAM lease, the tenant pays for their cost of these utilities.  in some instances, one or more of the utilities may be provided by the owner to be billed directly to one or more tenants, or included in the NNN / CAM charges.  For instance, with a small industrial center with several small spaces, it may be more economical and / or efficient to have a single trash bin for common use.  In that case, the trash will be provided by the owner and all tenants pay their pro-rata share of the expense.  However, if one tenant uses an extraordinary amount of a utility, the owner should have that tenant arrange for their own service so other tenants are not unduly burdened by costs more appropriately borne by that tenant.

MAINTENANCE

This is the issue I am most interested in discussing with this blog.  Make sure you understand who is responsible for what costs in your lease.  Typically, the owner is responsible for the exterior and structural elements of the building.  As a tenant, you are typically responsible for HVAC maintenance, plumbing, electrical, etc…  So, if you are moving into a brand new building and the HVAC system needs to be replaced, you should be able to use the existing warranties.  But what if you’re about to move in to an existing space and do not know what the maintenance program has been for the HVAC system?  Or what if the last tenant drained oil into the sump system?  First of all, you need to have an inspection done if those elements are critical or are otherwise of concern to you.  You might even look at capping your exposure in case a major element of the space breaks, like the HVAC.

SUMMARY

Make sure you go over the draft lease with your leasing agent.  You should have already made sure you are working with a qualified commercial real estate agent.  Real estate agents without any or much experience in the technical aspects of leasing a commercial space may not be aware of the different issues important when leasing commercial facilities.

If you need assistance evaluating your commercial real estate needs, please feel free to contact us.

Sincerely,

This is one of those types of articles where I can wonder pretty easily with a number of tangential issues and being an engineer, the problem is exacerbated. But I’m going to be as brief as possible, so just call me if you’d like to discuss these issues further.

STREET EXPOSURE / LOCATION. Do you need street exposure or not? If you are a destination (i.e.; people seek out your products or services) it’s not so important, but if you are in a competitive industry or trade, it may be critical. However!!! Retail customers are a finicky group and given almost any impediment to one shop, they will move on to a competitor -> retailers must absolutely make sure their location is conducive to their business. A coffee shop without much parking or on the “going home” side of the street, or tucked away behind other shops might not be a great idea, regardless of lower rents as many buyers make instantaneous decisions to buy or not. A corner with great street exposure but only “right-in / right-out” access is also problematic. Discuss your business plan with your real estate adviser so they thoroughly know how important these items ae to your business and don’t be surprised if your Broker, based on their experience with companies in your focus area, gives you some suggestions on important location issues.

ACCESS TO CLIENTS / CUSTOMERS. We recently showed a regional real estate manager around the Treasure Valley as his company was looking to open a new type of service center for their clients. He was armed with the locations of his clients and told us where to find him a suitable shop. We sent him a list of properties which met his criteria. When he got to town, we queried him further on his location criteria & it became apparent that with him being from a very large population area, his frame of reference was different than ours vis-a-vis travel time. Once he understood our commute times from anywhere in the valley was less than he was used to, we were able to find him a suitable location at 1/2 the rent he would have encountered had he stuck to his original siting criteria. However, in some businesses, access to clients is more important. We recently placed an emergency response company and their highest priority was quick access to the interstate. When we investigated average travel times, we were able to look in areas originally not identified as acceptable and saved 25% of their Base Rent with an alternate, acceptable location.

USE-DRIVEN NEEDS. Okay, doesn’t seem like it needs a lot of discussion, but you’d be surprised. We had a meeting just a couple of weeks ago with a company that got a “great” deal (i.e.; the rent was really very low) on a warehouse a few months earlier , the problem was that it didn’t have 3 phase power and the cost of them either modifying their equipment or bringing in 3 phase power was very high. We’ve also dealt with firms who have service trucks who hadn’t identified the truck clearance needed to get the truck in the shop. There are some very fundamental items we commercial real estate agents generally go over with our clients, but make sure you have thought through any specialized needs your company has. We had one client recently who specified a certain size water main to the property to ensure adequate water was on-site. When we couldn’t find that, given other constraints, we found that a smaller size main would deliver enough water for their given purpose. Another issue is racking / stacking height (especially in a warehouse environment). Fire Marshalls have certain constraints on the height of stacking and the use of racks. We met a client recently at a warehouse they were about to lease & the client was meeting with a vendor to order storage racks. Thankfully, we were present and we engaged the supplier in a discussion of his knowledge about fire suppression restrictions relative to local requirements. When we identified critical issues, the client and the supplier were able to discuss those issues with the local regulatory authority. Keep in mind that some “high stacking” may require a total redesign / replacement of whatever fire suppression system exists – at a significant cost.

HVAC ISSUES. Make sure if you have special equipment or cooling / heating needs they are identified early in the process. Tanning salons require more BTUs for cooling than a normal office or retail environment. Consider whether your application will require more heating / cooling than the space can accommodate. If it does, then your Broker will need to negotiate that item for you.

POWER NEEDS. Most retail shops and small industrial shops will come with 200 amps, depending on the age of the unit and the size. However, don’t assume anything about what is available to the unit you are reviewing. We were performing a review for a client of ours who needs 300 amps and a quick look at the electrical panel indicated the panel was rated at about that. We called an electrician and upon investigation (the electrician removed the panel cover) he found there was a much lower supply actually to the unit. Apparently, the contractor had used a left over panel out of convenience and had we not verified the actual amperage available, the tenant & landlord may have had a significant issue to resolve.

SUMMARY

Okay, so hopefully I didn’t wander too far off the beaten path. The one point we want you to walk away with when searching for a new location, is to identify your business needs & technical needs in your chosen space – to the extent possible. Identify to your Broker, those items which are critical and which ones are desirable. Make sure, if you are in an existing location, your Broker tours your current location with you & discuss those things you like & dislike about that location. Your Commercial Real Estate Broker is your advocate and consultant, make sure you identify those things you know which impact your business and then engage your Broker into their thoughts and ideas on other items / issues you may not have thought about.