Tuesday, October 25, 2011

Lease Documentation

Here is the next segment in our Leasing Series…Documentation.

Once you’ve surveyed and toured the market for commercial premises, and selected a property for your purposes -- how does the transaction get ‘papered’. There are 2 prinicipal documents involved in most cases - the ‘AGREEMENT TO LEASE’ and the ‘LEASE’ itself.

The Agreement to Lease is more or less the preliminary document needed in order to negotiate and secure the premises, and becomes the basis for both the agreement and as the precursor to the final Lease document. All terms of the deal are outlined - including the lease term, rate, additional rental costs, commencement date, landlord’s work, tenant’s work, rent free periods etc. In addition, tenant information is normally provided at this time, so that the Landlord may complete their due diligence with respect to the Tenant and their proposed use.

The final Lease then typically follows - which in addition to including all the terms of the agreement, also includes a comprehensive point by point summary of all the obligations of both parties, among other details. There is no such thing as a typical lease length, as they come in all shapes & sizes – they can be anywhere from 8-80 pages. Involve your lawyer at this stage of the process, to ensure you understand the document front to back, as this is the overriding document as it relates to your use of the space. In most cases, you will and should have signed the final Lease Document prior to taking possession of the premises.

Seek out experienced commercial realtors with strong leasing backgrounds, to assist you on the transactional side of entering into a lease deal. Their experience is invaluable, in helping you to understand the documentation side of it.

Tuesday, October 18, 2011

Inaugural Blog Post - Intro to Leasing

Welcome to our inaugural blog post! We hope to tackle a wide range of subjects encompassing all aspects of commercial real estate, as our blog title clearly indicates. Although we have lots of posts to follow in the weeks and months ahead concerning real estate investing - we felt it was high time someone tackled the area of leasing.

With that said, here is the first entry of ourleasing series...

Leasing commercial premises, be it office,retail or industrial space, requires a level of market expertise which is essential for any prospective tenant. Unlike data which is much more readily available on property sales (either through MLS or Real Track), determining actual lease rates is a very challenging task. Relying on leases reported through MLS or like sources, can be misleading as they do not include improvement allowances, rent free periods, or any other inducements that may apply. These all serve to reduce the 'net effective rent' and obviously the cost to the tenant.

In analyzing any market, that is existing or second generation space, you need to consider the cost per foot on an 'as is' basis - both the rent and operating costs (which we will touch on in a blog post coming soon). That then gives you a common ground for comparison, and then you consider what are the additional requirements needed to make the space work for your business. Do you need an improvement allowance to finish the space to your specs, or can you negotiate a reasonable rent-free period to do some minor renovating on your own? Either way, you need it to be 'turn-key' for your operation when you take possession.

Commercial realtors with strong leasing backgrounds can not only put together the market surveys your require, but can negotiate the other terms which are necessary to make the economics of the deal work to your advantage.

In our upcoming posts on leasing, some of our topics will include: lease documentation, lease terms/base rates and capping mechanisms for operating costs.