March 25, 2015
By: Sue McKitrick
Commercial realtors and residential realtors have different skill sets.
When choosing a realtor, it is important to find one who has the specific expertise to assist you. In residential real estate, for example, if you were looking to purchase a condominium, you would want to choose a realtor who is familiar with the details of a strata corporation, the different kinds of stratas, and the pros and cons of strata life. Rural property requires thorough knowledge of wells, septic systems, and the Agricultural Land Reserve.
By the same token, if you are looking to lease or purchase commercial space, it is important to choose a realtor who has in-depth experience with commercial real estate. Commercial and residential real estate require very different skill sets. Here are 5 examples of ways that a commercial realtor will be able to assist you:
1. Rentable Area and Usable Area
"Usable area" refers to the area within the demising walls of a rental unit that the tenant can use, and on which space planning is based. Rentable area is the usable area plus a proportionate share of the common areas of a building, such as corridors, lobby, etc. The "gross-up" between usable and rentable area can typically be 10-20% in multi-tenanted commercial buildings, so it is important to be aware of. If you require 1,000 sf of space for your business you would need to keep in mind that your search should include units with rentable areas of +/-1,110 to 1,200 sf. Something else to keep in mind is that the quoted rent per square foot is based on rentable area.
2. Additional Costs
"NNN" or "triple net" or "additional rent" refers to building expenses, such as property taxes, common area hydro, HVAC repairs and maintenance, exterior and common area cleaning and maintenance, landscaping, snow removal, etc. A lease that is "fully net to the landlord" requires the tenant to pay or reimburse the landlord for a proportionate share of these expenses, usually calculated based on the proportionate share of the tenant's rentable area. This can be confusing in general unless spelled out very clearly in a lease, and a commercial realtor will be able to explain the nature of these expenses. It is important to obtain budgeted and previous NNN costs psf as they can be significant and they vary widely. As such, NNN costs can make a great difference in the total rent paid by a tenant. They can be as low as or lower than $3.00/sf for light industrial zoned buildings, or upwards of $11/sf for commercial units in strip plazas or malls.
3. Tenant Improvement Allowances
A landlord commonly will offer a tenant improvement allowance in order to assist a new tenant with initial alterations to the leased premises. There are significant up-front costs involved in starting a new business or relocating a business, and having some or all of these improvements funded by the landlord is very helpful. However, the TI is generally expected to be recouped over the term of the lease, and therefore its cost is usually amortized over the term of the lease by way of higher net rental rates, and the interest rate used in determining the higher net rent is likely to be higher than what a tenant might obtain for a bank loan. Something else to keep in mind is that all tenant improvements typically become the property of the landlord at the end of a lease term.
4. Understanding the Terms of a Commercial Lease
Commercial leases can be very complicated and lengthy. Even with a simple lease, there are some important clauses in a lease which you would want your commercial realtor to understand and negotiate for you in your best interests. For example, having options to renew the lease is very valuable to a tenant, as it provides the right to remain in the premises for an additional term or terms. An option to renew will normally be at market rents at the time of renewal. There will be a clear mechanism for providing proper notice to renew and for calculating what the new market rate would be.
Another important term for a tenant is an exclusivity clause if as a tenant you did not want competing businesses on the property.
These are just a couple of examples of many possible terms of a lease. In summary, it is important to have a realtor who understands these terms, can explain them to you, knows how they could best be worded to best protect your interests, and can identify the ways to negotiate on your behalf from a position of strength.
5. Determining an Appropriate List/Purchase Price
This is a complex process that requires the ability to perform a detailed analysis of comparable sales, analyze lease terms and rent rolls in tenanted buildings, and produce cash flow projections. It also requires an understanding of finance, interest rates, market risk, and competing investment returns, in order to apply appropriate discount rates, cap rates and assumptions such as vacancy rates and capital expenditures.
It requires an understanding of the impact that the physical condition of a building can have on the value, as well as how potential future tenant improvements and capital budgeting will impact prices. It requires an understanding of how zoning bylaws, official community plans and municipal regulations affect value.
A solid understanding of appraisals is also necessary, as is having a sense of what investors are looking for what types of properties in order to properly market a property or in the case of a purchaser, to identify properties that suit the purchaser's criteria.
These are just a few of many examples of the expertise required in offering commercial real estate services. Please feel free to call or email me and I would be more than happy to discuss your commercial real estate requirements or answer any questions you may have.