Ten Commercial Real Estate Terms You Should Know
Whether you own or rent your commercial space, property costs are one of the largest business over- head expenses. That’s why it’s important to comprehend the full ramifications of taking over the title to a property or entering into a lease agreement. Before you sign a lease, work with a commercial real estate broker with a proven track record, and consult with an attorney skilled in real estate law. You should also familiarize yourself with some common real estate terms:
1. Accord and Satisfaction.
The settlement of an obligation. An accord is an agreement by a creditor to accept something different from or less than what the creditor feels he or she is entitled to.
2. Broker.
An agent who brings together a buyer and a seller, or a landlord and a tenant, in a real estate transaction. All brokers must be licensed by the state in which they work. Most work on commission, and the landlord or seller usually pays the fee.
3. Concessions.
Benefits or discounts given by the seller or landlord of a property to help close a sale or lease. Common concessions include absorption of moving expenses, space remodeling or upgrades (also called “build-outs”), and reduced rent for the initial term of the lease.
4.Default.
The non performance of a duty or obligation that is part of a contract. The most common occurrence of default on the part of a buyer or lessee is nonpayment of money when due.
5. Escalation clause.
A clause in a lease that allows the landlord to increase rent in the future. Rent increases dictated under an escalation clause may be charged in various ways, including:
- A fixed increase over a definite period
- A cost-of-living increase tied to a government index, such as the tax rate
- An increase directly related to increases in operating the property
6. Lease.
An agreement by which the owner of a property (the “lessor”) grants the right of possession to a tenant (the “lessee”) for a specific period of time (the “term”) for a predetermined amount of money (the “rent”). A “lease-hold estate” is the space occupied by the tenant. Common types of leases include:
- A straight, or flat, lease, which stipulates that the same periodic payment (usually monthly) be made for the entire term of the lease.
- A percentage lease, which uses a percentage of the net or gross sales to determine the monthly rent. This is most often used in retail properties and with a minimum base rent.
- A net lease, which requires the tenant to pay maintenance, taxes, insurance and so on, along with a fixed rent. This is also called “net-net-net” or “triple net.”
7. Lien.
A legal claim filed against a property for payment of a debt or obligation. If a property owner fails to pay a creditor, for example, the creditor can place a lien on the property. A lien can halt the sale of a property.
8. Negotiation.
The transaction of business aimed at reaching a meeting of the minds among the parties; the act of bargaining. A real estate transaction illustrates the negotiation process: The first offer received for a property often is considered merely an intention to deal. Thereafter follows a series of counter-offers leading up to the consummation of the deal. Usually, however, negotiation takes place only if the broker’s efforts have proceeded to the point where the prospect is considered a likely buyer or tenant.
9. Sandwich lease.
A leasehold estate in which the sandwich party leases the property from the fee owner or another lessee and then sublets to the tenant in possession, thereby maintaining a middle, or “sandwich” position. The sandwich party is the lessee of one party and the lessor of another; thus he or she is neither the fee owner nor the end user of the property. It is a lease occupying a position within three or more leasehold interests in a property.
10. Sublease.
A lease given by a tenant for some or all of a rented property. For example, if a tenant rents 20,000 square feet but only ends up needing 10,000 square feet, they may want to sublet the extra space for some or all of the remaining term of the lease, providing they continue to occupy and pay rent for the property.
Boulder Multi Family Market is Still Healthy
By Miles King and Paul Kreske
Many investors feel the downturn in the economy started in the 4th quarter of 2008.
However, when you look at the overall markets and the Boulder multi-family market in particular, the numbers reveal that the market downturn started towards the end of 2006 and into 2007. The Boulder multi-family market is a small niche market but remains relatively stable. Investors typically buy and hold their buildings, banking on increased rents and Boulder’s historical appreciation. The demand for quality units, and/or units located close to the University of Colorado has been, and remains steady and solid. Overall vacancy in the market is increasing to approximately 6.5 to 7%. Most of that vacancy occurs in areas beyond the University region.
The stability of the market is driven by several factors:
1) The most obvious is the University of Colorado which brings in an average of 23,000 students annually. These students either buy or rent. Their parents invest in the “college condo” or “college duplex” and then sell that property when the student graduates.
2) Government job and government job growth – Boulder is host to several government research agencies and brings in numerous temporary and permanent employees who need temporary housing.
3) General job growth – Historically, Boulder has seen increased job growth with a main focus on research, telecommunication, biotechnology and other high-tech industries. These employees enjoy living close to the employment center and tend to rent before they venture out to purchase property.
4) Boulder is known as a bit of never-never land surrounded by reality. Let’s face it – in spite of its reputation for eccentricity, Boulder is still a desirable place to live. However, the cost of living is high, so many who choose to live in Boulder are destined to rent if they wish to remain there. Boulder is surrounded by open space that cannot be developed. There is very little land left to re-develop or build new product, the entitlement process is long and expensive. All this combines to keep the demand and prices high.
From January 1, 2009, through June 30, 2009, Boulder had a total of 13 multi-family sales. There were a total of 26 closed sales in 2008, so this is on track for the 2009 year. However, current inventory stands at 37 properties, which is similar to the number of listings in 2008, but double the number of listings for sale in 2007. This gives us a 17-month supply. GRM and CAP rate averages for the first 6 month’s sales activity indicates a GRM of 14.1 and an estimated CAP rate of 5.1%. This is slightly higher than previous years in which GRM was averaging 16.1 and CAP rates were between 3.5% and 4%. The 2009 sales transactions ranged from 2 units to 161 units. The 161-unit sale is an unusual transaction for the market. The typical sale in Boulder is usually between 3-15 units. When a big project sells in town it turns heads. The property was not listed. It was reported as 149,000 SF and sold for $147 per square foot, a cost per unit of $136,025, and a cost per bedroom of $72,214. It may well be the largest commercial transaction in the area for the entire year. A more typical multi-family sale in Boulder is for projects between 3 and 12 units, with a price per square foot of $273, a price per unit of $258, 972 and a price per bedroom of $101,375.
CAP rates in the market are rising, although there seems to be an even greater disparity between the desired yield of investors and a seller’s price expectations. This trend is even more characteristic in today’s market due to the severe lending constraints. Cash or seller financing seem to be the key ingredients to successful transactions now. The traditional relationship between a buyer and seller being on opposite sides of a transaction has given way to the buyer and seller forming an alliance to work together to get the lender to fund the transaction with a minimal amount of conditions, delays and last minute changes.
It is no secret that the market has slowed as compared to previous years. However, it is one segment of commercial real estate where there is still some financing available. When you match the available financing with the amount of available inventory, investors are still able to purchase projects and obtain a respectable return.
Experience and Expertise Proves CCIMs are Invaluable Investment Real Estate Business Partners
There are a multitude of details to be properly handled in any complex commercial real estate transaction. Thus, considering an investment in real estate, the investor would be well advised to engage the services of a Certified Commercial Investment Member (CCIM), a recognized commercial real estate professional.
A team of professionals from various disciplines should be assembled to concentrate on specific aspects of a transaction. A CCIM, as a member of this team, is best able to understand the components of the transaction and to shepard the activities of everyone in concert toward a successful conclusion for the investor.
A CCIM has the professional training, education and experience to serve the members of the investment-decision team, which should include the investor’s lawyers, accountants and bankers. A CCIM is able to see the transaction as more than merely the buying, selling or leasing of a particular piece of real estate. He or she will view the situation as finding a solution to a problem expressed by the buyer or seller.
Before discussing the specifics of the parcel of real estate the investor is interested in, a CCIM will first focus on the motivations, goals, experience, needs and fears of the client regarding real estate investment. These early discussions will include the investor’s long-range plans, including retirement plans. From these discussions, an idea of the return on investment the client desires will be determined. Also of primary importance, a CCIM can determine the appropriate time for the eventual disposition of the property and the alternative methods available: sale, exchange or refinance.
The expert analysis of the investor’s situation by a CCIM will also reveal the investor’s comfort level with the risks/rewards of each of the disposition alternatives. This will determine what form of ownership should be considered and what type of real estate should be acquired. It may be decided, as a result of the analysis, that a REIT or a limited partnership, as opposed to sole ownership, would be most appropriate.
Following the decision on what property or properties will be targeted by the investment team, the data gathering begins. Among the data that is assembled is information on tax law changes, financing alternatives and other pertinent facts. While a CCIM is not expected to be a tax accountant or attorney, he is expected to be familiar with these areas and to use the knowledge to negotiate the best terms with the client’s banking resources.
When all the various professional disciplines work in concert for the client’s benefit, the result of their coordinated efforts, orchestrated by a CCIM, should be a real estate transaction that will serve the investor well in the present and in the future.
The CCIM Institute, Chicago, confers the Certified Commercial Investment Member designation through an extensive curriculum of 200 classroom hours in addition to professional experiential requirements. CCIMs are recognized experts in commercial real estate brokerage, leasing, asset management, valuation, and investment analysis, and form a business network encompassing 1,000 markets throughout North America, Europe, Asia and the Caribbean. Of the approximately 125,000 commercial real estate practitioners nationwide, more than 9,000 currently hold the CCIM designation, with nearly 10,000 additional professionals pursuing the designation.
Flex Space
Commercial property that is flexible enough in its design to allow for a variety of office, retail, and/or industrial uses, “flex space,” has come a long way since its low-budget beginnings. Originally it was built as a way to hedge speculative commercial real estate developer’s bets on landing a wider range of possible tenants. In the past ten years, however, it has become its own distinct category that can command its own market lease rates.
So what is the official definition of flex space? CoStar, a national database and information exchange for the commercial real estate industry, says it is “a building designed to be versatile and may be used in combination with office, research and development, quasi-retail sales, industrial processing or high tech.” Flex buildings are usually one or two stories high with at least half the space designed for office layout, ceiling heights that can go up to 16 feet, and has some sort of overhead door delivery options (either grade level or dock high delivery doors).
The real strength of flex space is its versatility. If a company has an office use, it can build out the space with a drop ceiling. If there is a need for some retail sales, the company can create a showroom. With the current fashion favoring urban, industrial looks, this can be readily achieved in flex buildings. On the other hand, if the company needs a production, processing, or warehousing, it can use the higher ceilings to rack inventory. Some other advantages flex space has over more traditional office spaces are:
- Uses can be mixed in a single location thereby eliminating the need for multiple sites and redundancy in support staff.
- Often the tenant will have more control over their space’s utilities.
- There is not usually a common area to pass through, so the access is more direct.
- The tenant controls the security of the space which is an advantage for personal and business security since limited access points make it easier to record all ingress and egress to the building and parking is closer.
- Flex space’s lease rates are usually quite a bit less than typical office space.
With these lower lease rates, flex spaces had traditionally been considered budget space for budget-conscious companies, but that has changed. Today it is neither simply considered a less expensive office space option, nor a more expensive warehouse space. The business community has proven that the benefit of flex space goes well beyond cheap and kinda’ pretty. The strength of its versatility and the value that brings to its owners is a better definition of this category.
American Recovery and Reinvestment Act of 2009 and Commercial Real Estate
On February 13, 2009 the 111th Congress passed the American Recovery and Reinvestment Act (ARRA) in order to address the greatest economic crisis we find ourselves in since the Great Depression. It is, by far, the largest stimulus bill of its kind, and will impact virtually all sectors the U.S. economy. Here is a diagram showing how $787 Billion is being spent:
You will note, there are no bubbles labeled “Commercial Real Estate.” However, the commercial real estate sector will feel the bill’s direct effect through provisions in the bill pertaining to energy efficiency, renewable energy and SBA lending. Indirectly, commercial real estate will benefit from infrastructure spending roads, highways and bridges, and on money invested to build power transmission lines and update the nation’s aging electrical grid.
The $43 Billion of Energy spending includes money to encourage energy efficiency and renewable energy in commercial buildings. The bill provides investment tax credits and grants, in addition to accelerated depreciation programs to encourage energy efficiency and on-site renewable energy. Combining the benefits of ARRA with the existing Xcel Solar Rebate program make now the time to evaluate your commercial building for solar electric, solar thermal and/or on-site wind generation.
Renewable Energy Tax Incentives. The ARRA includes $20 billion in energy tax incentives. An investment tax credit is available for the tax year in which energy property is placed in service. The tax credit is based on 30 percent of the cost of the solar and/or small wind property.
Grants in Lieu of Energy Credits. The ARRA allows taxpayers to apply for a grant when they place specified energy property in service in lieu of claiming investment tax credits. The grant will reimburse the taxpayer for part of the expense of the facility. The ARRA authorizes the Treasury Secretary to provide a grant to any taxpayer that either: (1) places the property in service during 2009 or 2010, or (2) places the property in service after 2010, but only if the construction of the property began during 2009 or 2010 and is completed before the credit termination date with respect to that property.
If you are considering adding renewable energy to your building, your first step is an energy audit. An energy audit will establish your baseline and help you to create an energy plan for your building. Generally, a good plan call for the implementation of energy efficiency measures before moving to renewables.
SBA Loans. Both the SBA 7(a) and 504 Programs can be used for purchasing commercial real estate which will be at least 51% owner-occupied. These programs allow for financing up to 90% of the appraised value of the commercial property. In the past, the primary reason business owners have shied away from purchasing real estate with these loan programs is up-front fees. The ARRA authorizes temporary fee reductions (until September 30, 2010) under the 7(a) loan guarantee program and temporary fee eliminations under the 504 loan program.
Putting the Stimulus Bill to Work for You. If you are a building owner this is the time to make your energy efficiency and consider investing renewable energy. Be sure to consult with your CPA to make sure you qualify for the renewable energy tax credits or grants, and the accelerated depreciation. It is also a time to talk with you tenants, find out how they are doing, and to do everything you can, as landlord, to help them succeed. If you are a tenant, who has always wanted to own your space, now may be the time. With SBA fees reduced, historically low interest rates and depressed prices, opportunities abound for you to become an owner of commercial real estate.
Learning More. We are blessed here in Boulder and along the Front Range, in being a technology center for sustainability, green building and renewable energy. If you have a question about how energy efficiency, renewable energy, or tax incentives/rebates can be applied to your commercial real estate situation, drop us a line at info@caseypartners.com, and we will get your question answered or place you in touch with someone who can.
* Tax Relief – includes $15 B for Infrastructure and Science, $61 B for Protecting the Vulnerable, $25 B for Education and Training and $22 B for Energy, so total funds are $126 B for Infrastructure and Science, $142 B for Protecting the Vulnerable, $78 B for Education and Training, and $65 B for Energy. State and Local Fiscal Relief – Prevents state and local cuts to health and education programs and state and local tax increases. More details are available on the www.recovery.org website.
