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5 Things to Avoid When Entering Into a Lease – Office Space Edition

Congratulations –  You have, or are working within a successful business that demands office space. Now’s the time to either obtain your first office, or expand into an exciting new space to more adequately accommodate your growing workforce. Not so fast, though. As with anything, there are a few pertinent components to selecting your company’s ideal office space. Eliminate potential stress triggers when deciding to enter into a lease agreement to better focus on what matters most; your business.

5 Things to Avoid When Entering Into a Lease – Office Space 

Failure to Align with Corporate Ideals

It’s easy to get excited about a big move and disregard details that could potentially effect crucial goals of a business. Failure to clearly identify current and long-term priorities is a significant mistake any company can make when looking for office space. It is critical to take a step back and view the bigger picture in terms of what is important to you and the company. Similarly, it is important to identify how corporate image will be impacted based on the commercial space selected. Corporate image is important to convey to your customers, prospects and employees. You don’t necessarily see luxury brand retail stores situated next to a fast food restaurant or with similar aesthetics for that matter. Same ideals stand for office space, in the look, layout and feel of that particular office.

Not Properly Evaluating Layout of the Space & Location

You just signed the lease to your new office space and are over the moon with excitement. It’s move in day and the stress hits immediately by lack of storage, desk space or room for specialty equipment. Not adequately estimating the amount of space needed for equipment and employees is huge! For instance, on average, for every employee you should account for at least 151 square feet of workable space. Having too much space could pose as a short-term issue if massive growth is anticipated in the near future, otherwise those are just more budget-straining dollars that could have been allocated more effectively. Contrarily, if there is not enough space as-is with your new lease, this can hinder employee productivity and effective forms of collaboration.

Additionally, the question needs to be addressed in what type of environment does your business require? Are you going for a more traditional office space with some cubicles and closed offices? Or perhaps a modern open floor plan to maximize collaboration efforts on massive projects.

Location, location, locations – a seemingly obvious factor that is too often overlooked. When considering locations for your next office space, take into account traffic patterns, visibility from the road, what’s in the immediate surrounding area and notice if there is ample parking and public transit nearby.

Throwing Away the Budget

Easily one of the most important questions of them all – what can I afford? Do your operating expenses, payroll, HVAC, furniture, insurance, maintenance, and moving costs align with your budget? It’s also important to educate yourself on what the current market is and trends presenting themselves. Does it make sense to hold off for another year due to the stability of the economy, or will the space you desire already be occupied by then? Lastly, ask yourself if your budget matches up with your corporate image? If you’re a rising leader in the technology industry, an attractive, modernized office space in heavily populated Silicon Valley sounds like an ideal move for you. On the contrary, if you’re a smaller startup with not much funding, this would not mirror the same office space options that would better suit the technology company with more prestige and capital. To play devil’s advocate for a moment, it’s also necessary to think futuristically. Is there a lot of buzz about a specific area you’re interested in about massive development happening in the near future? Perhaps budget isn’t everything in a decision when considering the future benefits of occupying that specific location – but critical nevertheless.

Not Considering Corporate Growth & Technology 

To nod back to a the previous point of “Not Properly Evaluating Layout of the Space & Location” ask yourself what’s the future growth of the company? Are there additional options to grow my business in this location in the future, or will it require another move? Technology is also a factor in every business now which impacts the day to day functionality of operations and the execution of best industry practices. Is there a certain technology that the business needs that is only available in certain locations? Perhaps your business needs access to data centers, requires a larger electrical capacity,  or may need backup power and servers.

Choosing The Wrong Broker – Or Not Having One At All 

This can inevitably be a costly error, but does happen often. Not only on a monetary value of cost deficit – but time as well. Considering commercial real estate contracts from beginning to end average between 60 days to a couple of  years, should be enough information to call your favorite local broker right away. In addition, the fact that a company’s second or third largest cost is typically office space lease, should inject concern into the budget-conscious business mind of the decision maker. There’s infinite reasons why about 90% of all office space leases signed in the U.S. are executed with a knowledgeable broker.

 

 

Big Box Bust – A Demise to Tech Craze

The Plunge

The big box bust that’s storming through the nation doesn’t seem to be lightening up any time soon. Unprecedented  retail mega-stores now shutting down at an incomprehensible pace due to evolving consumer trends via internet purchases and accommodating delivery services.  Kmart, Toys ‘R Us, Sears, Carson Pirie Scott, Abercrombie & Fitch, Barnes & Noble, J. Crew (U.S.), GNC, even Subways are shutting the doors in large batches across the country [1]. The iconic brands dissolving across the nation not only pulls at the nostalgic heart strings of many, but sheds light on the shifting ideals of what it is to be a retailer in conjunction with progressive consumer habits or preferences. With the shopping demand surging through the internet, this has left many retailers to discover a massive decrease in sales over the past decade. Some retailers, such as Rue 21, a tween clothing store, even filing for chapter 11 before even experiencing significant financial trouble as a proactive measure that is likely an inevitable hardship tumbling their way.

Tech giant, Amazon, the world’s largest online retailer, has forever changed the way modern shopping behavior is executed. Everything from groceries, digital books, electronics, clothes, school supplies, pet food, and more can be purchased and usually delivered between a few days and even hours, depending on the type of account a user has. The unfathomable convenience bit makes shopping on Amazon extremely attractive in that one can shop for anything, at any time, and have it delivered directly to their desired location. Inevitably, as Amazon popularity skyrockets, big box retailers suffer drastically, causing a wave in the economy and the way in which commercial real estate evaluates retail sectors [2].

With vacancy rates increasing in large shopping malls, the challenge of finding occupiers for big box spaces becomes evident. Throughout the U.S., stores previously occupied by, now-bankrupt,  retailers are being converted into shared office space or restaurants.  More than ever, mall owners are welcoming unconventional tenants to obtain some of the estimated 200 million square feet of retail space that has closed, or expected to do so since early 2017 [3].

“Landlords need to be creative, strategic and quick with their large-sized vacancies — the Silicon Valley has become a hotbed for small- to mid-sized retailers coming from all parts of the country to take advantage of our increased population density and disposable income. These large vacancies can be flipped into very lucrative, higher dollar-per-square-foot units with the right strategy in place.” explains Senior Vice President, CSR Commercial Real Estate Services, Jonathan Hanhan.

Getting Creative

As countless big box stores remain vacant, the leaders in commercial real estate are challenged to think outside of the box (pun intended). Ginormous buildings with a naturally open layout, such as Macy’s department store, have been converted into movie theaters, music entertainment venues, and even sporting arenas [4]. This new wave of occupancy bingo creates massive opportunity to get creative and move fast. In conjunction with the e-commerce craze, more of these spaces are being converted into warehousing units. In other areas, restaurants, fitness centers, and office space is taking over. Iconic Silicon Valley’s tech bubble creating crisis for local retailers with the rest of the nation not far behind.

Big Box Bust - Numbers don't lie

Are you a business owner looking to buy, sell, or lease commercial property? Contact our experts today.

The information furnished has been obtained from sources we deem reliable and is submitted subject to errors, omissions, and changes. Although CSR Commercial Real Estate has no reason to doubt its accuracy, we do not guarantee it. All information should be verified by the recipient prior to lease, purchase, exchange, or execution of legal documents. 2018 CSR Commercial Real Estate Services. All rights reserved.
Sources:
[1] https://www.kiplinger.com/slideshow/investing/T052-S001-12-retailers-that-may-soon-disappear-forever/index.html
[2] https://www.investopedia.com/news/5-companies-amazon-killing/
[3] https://www.cnbc.com/2018/08/08/coworking-spaces-are-one-way-mall-owners-are-filling-empty-stores.html
[4] CoStar

7 Commercial Real Estate Terms You Should Know

1. Net Operating Income (NOI)

Net Operating Income (NOI) is equal to your gross rental income minus your expenses.
NOI = Rental Income – Expenses

Those expenses do not include mortgage payments or depreciation, but specifically property expenses. NOI is the center of every commercial real estate transaction.  As the NOI increases, the property value will increase as well (and vice versa). If the NOI goes down, the property value goes down.

2. Cash on Cash Return

Cash on cash return is also known as ROI, return on investment. Cash on cash is basically one’s annual cash flow divided by owner down payment.
ROI = Return On Investment

It’s a very important concept because it’s not how much money one will spend on the property, but how fast money is coming out of the property. The time it takes to receive an overall return on investment is critical to financial cash flow as well.

3. Cap (Capitalization) Rate

A Cap Rate is used to measure a building’s performance without considering the mortgage financing.

Cap Rate = NOI divided by the sales price

A high cap rate which is between 10-12% usually typifies a higher risk investment and a low sales price. A low cap rate, is between 4-6% making for a lower risk investment with a high sales price.
If cap rate is equal to NOI divided by the sales price, one can flip that equation over and say sales price is equal to NOI divided by the cap rate.

4. Debt Coverage Ratio

This is a term used frequently among lenders. All commercial lenders want  the mortgagor (buyer) to be able to pay the mortgage and have something left over. Debt coverage ratio, DCR, determines how much is left over.

DCR = Debt Coverage Ratio

Lenders usually want to see a Debt Coverage Ratio of at least 1.2% or more. DCR can be determined by  NOI divided by annual debt service. Debt service is 12 months of mortgage payments.

5. Price Per Unit

This term is at the heart of determining what a property is worth and also what to offer when considering buying a property.  Knowing how much to pay for the property is essentially the price per unit and price per square foot.  For example, a $500,000 apartment building with 10 units would equate to a $50,000 price per unit. The same calculation can be done for the square footage.

6. Building Classification

Class A

Class A buildings represent the newest and highest quality, the best location and highest rent potential – attracting top quality tenants. Modernized buildings in ideal neighborhoods are common.

Class B

Class B buildings are usually a little older, but they’re still of exceptional quality. Oftentimes value added investors target these types of buildings as investments since well-located Class B buildings can be returned to their Class A level.  An ideal objective to have is to find a Class B building in a Class A neighborhood and renovate that building to achieve Class A rents.

Class C

Class C is the lowest official classification and the buildings are identifiable as older. Sometimes one can find Section 8 tenants inhabiting Class C buildings. They’re built in the ’80s and back.  If you are an apartment investor, these days today class C is the way to go because the ratio between the price per unit and the rents are still good.

7. Types of Leases

Apartments

There are one year leases,  9-month leases, or month-to-month leases. A strong strong legal instrument is advised to lock in any legal agreements.

Office Buildings and Shopping Centers

When it comes to Office Buildings and Shopping Centers, there are three types of leases. A full-service lease where the landlord pays for everything is identified as a “Gross Lease”. Contrarily there is a triple net lease (NNN) where the tenant pays for everything from taxes, improvements and amenities. Lastly, a modified gross lease is somewhat of a hybrid version of the previous two.

Contact a Commercial Real Estate professional today

Source: Commercial Property Advisors

Types of Commercial Leases

One of the most important aspects of managing commercial real estate includes understanding leases.

A lease is like a partnership. It outlines how the business relationship between the lessor and the lessee will proceed. Following are some types of commercial leases that you, as an investor, may encounter.

The Triple Net Lease (which is abbreviated as “NNN” in advertising) is used extensively in commercial real estate. It is popular for multi-tenant and single-tenant industrial and retail properties.

The three elements—the “triple”—are Taxes, Insurance, and Operating Expenses. In a true NNN lease (and many so-called NNN leases are not “true” NNN), the tenant pays a basic rent to the landlord, and in addition pays ALL the operating costs of the property: the real estate taxes, all the insurance premiums, and all the operating expenses—from utilities to maintenance contracts, pest control to security. The tenant is responsible for everything under this form of commercial real estate lease.

In a single-tenant building, many if not all of these costs will be directly paid by the tenant. Even the tax bill will be invoiced to the tenant. In a multi-tenant building, it is more common for the landlord to be invoiced for at least some of the operating expenses (taxes and insurance at least) that will be collected, often monthly, from each tenant according to their prorated share. This separate collection is often called “CAM,” for Common Area Maintenance (although it may include non-maintenance items such as insurance and real estate taxes).

A Gross lease, sometimes identified as a Full Service Lease, in its pure form has the tenant paying a single flat sum each period to the landlord as the total rent, with the landlord responsible for all costs of operation of the property. A one-night stay at a hotel is such a lease, as are some short apartment leases.

More often, Gross leases should be called Modified Gross, because under their terms a tenant will be required to pay some of the operating costs (electricity, water, cleaning, for example), and/or the rent each year may increase by the amount that the operating costs—or the tenant’s share of them—have increased in the previous year.

Like anything else in real estate, it is important that you understand the agreements and the terms before entering into a deal. Understanding commercial leases isn’t as difficult as performing brain surgery, but you need to do a little homework all the same.

Source: Commercial Property Advisors 

What rules govern the return of the security deposit to the tenant?

Q. What rules govern the return of the security deposit to the tenant?
A. Residential: Upon termination of a rental agreement on residential property, the landlord must furnish the tenant the unused portion of the security deposit and an itemized statement showing what deductions have been made, no later than 21 days after the tenant vacates the property. (Cal. Civ. Code § 1950.5(g).) The itemized statement must be accompanied by receipts or invoices issued by the person that performed the work that the deductions were used to pay for; or, if the landlord or landlord’s employee performed the work, the itemized statement must list the work that was done, the time spent, and the reasonable hourly rate charged. (Cal. Civ. Code § 1950.5(g).)
C.A.R. Sample Letter “Security Deposit Return” (Form SDR) may be used for this purpose and can be found in ZipForm within the C.A.R. Sample Letters library.
If the landlord retains any of the deposit in bad faith, s/he will be liable for up to twice the amount of the deposit in punitive damages, as well as any actual damages the tenant may suffer. (Cal. Civ. Code § 1950.5(l).)
A. Commercial: For commercial leases, the deadline for returning a deposit is generally 30 days. However, if the landlord only claims deductions from the deposit based on defaults in the payment of rent, and if the deposit exceeds one month plus the last month’s rent, then any amount exceeding one month’s rent must be returned within two weeks. (Cal. Civ. Code § 1950.7(c).) If the landlord retains any of the deposit in bad faith, s/he will be liable for up to $200 in punitive damages, as well as any actual damages the tenant may suffer. (Cal. Civ. Code § 1950.7(f).)
For more information, please see the C.A.R. Legal Q&A, Security Deposits.

Q. May a tenant take the landlord (or vice versa) to small claims court over a security deposit dispute?
A15. Yes, as long as the damages claimed do not exceed the jurisdictional limit for small claims court ($10,000 in most situations where the claim is brought by a natural person.). (Cal. Civ. Code § 1950.5(n); Cal. Code of Civ. Proc. §§ 116.220, 116.221.)

CSR Commercial Real Estate Welcomes Erika Cervantes

The Commercial division at CSR Real Estate Services welcomes Erika Cervantes to the team as Commercial Leasing & Sales Manager. Ms. Cervantes began her Commercial Real Estate career working directly for one of the largest individual commercial property owners in the Bay Area. Ms. Cervantes has dealt with all aspects of commercial leasing and property management for nearly a decade. From tenant management, building maintenance, leasing of retail, office & industrial property types, Erika demonstrates professional excellence throughout her career.

Being bilingual, Erika is able to connect with a larger audience and gain trust from the masses. Ms. Cervantes’ success lies within her philosophy, that if you take care of your clients, they will take care of you.

“Beyond Erika’s experience and skills, her will to go well above and beyond, and her driving force of doing what is in her clients’ best interest is why we knew we had to have her on our team” explains Jonathan Hanhan, CSR Commercial.

Ms. Cervantes is a strategic and key addition to support the growing Commercial team with Tony Odom and Jonathan Hanhan in the expansion and sustainability of quality care and service to their key clients. Her technical skill set, character and congruency with CSR’s culture, of doing what is best for clients, is what makes this career marriage the ideal match.

But wait, that’s not all; Erika also values community outreach and helping others in need which is a perfect parallel to CSR’s Charity, CSR Cares. For over 6 years, Erika has dedicated her time and efforts towards assisting the homeless and is on the Board of Directors for the Youth at Risk Organization.

Welcome to CSR, Erika!

Erika Cervantes

Commercial Leasing and Sales Manager

(c) 408.648.7514

(f) 408.559.5505

(o) 408.558.5000 Ext. 7351

Erika@CSRCommercial.com


 

 

CSR Commercial Capital Closes $17M Construction Loan

CSR Commercial Capital closed on a $17,000,000 construction loan for a 4 story mixed use podium build project located at 955 South First Street just south of downtown San Jose.  The project consists of 50 apartment units ranging from 1 to 3 bedrooms, along with five ground floor retail spaces totaling 5,136 s.f. Parking for the project consists of 74 residential spaces and 28 commercial spaces.  Tenants will also benefit from lush landscaping, a 452 s.f. children’s play area, and over 5,800 s.f. of courtyard space featuring barbecue and picnic areas.

The project was brought in to CSR Commercial Capital by the President of CSR’s commercial sales and leasing division, Tony Odom, who previously acquired the property for the client.

“The most challenging aspect of this transaction,” commented Duane Hood, President of CSR Commercial Capital, “was that we had an out of country borrower who, although he possesses permanent residency and extensive experience overseas, is not a U.S. citizen and has not previously developed in the U.S.  Aside from those regulatory challenges, however, we could not have asked for a better client. His responsiveness and decisiveness were instrumental in his ability to close this loan and move this exciting project toward completion.”

A representative for the buyer and partner in the ownership group commented, “In addition to just obtaining the land, CSR acted as a full service commercial real estate firm throughout this transaction, including interviewing the architects and general contractors and working with the city and title company to resolve issues. Moreover, CSR interviewed many qualified lenders, then brought us the most competitive commitments. We were able to select a lender which best suited our needs. We couldn’t be happier with the work the team at CSR has done.”

Learn more about what CSR Commercial & Commercial Capital can do for your business.

Commercial Real Estate Outlook: 2018.Q1

Analysis from RCA pointed to a growing gap between sellers’ high price expectations and buyers’ willingness to pay those high prices. 
The small cap space closed the chapter on 2017 on an upbeat note. Commercial real estate in SCRE markets continued to experience advances in investment sales, as the momentum picked up in the final quarter of the year. Following on the second quarter’s 4.4 percent increase and the third quarter’s 3.6 percent gain in sales volume, REALTORS® reported that sales volume advanced a solid 9.1 percent in the fourth quarter. 
International transactions remained a fixture in  REALTORS®’ CRE markets in the final quarter of the 2017. The average international sale price was $1.2 million in the fourth quarter of the year. Indicating a likely preference for safety of capital over returns, the average cap rate for SCRE international deals was 6.7 percent.
Office demand softened in the fourth quarter of 2017, even as employment in office-using industries expanded.  Office vacancies increased 1.7 percent in the fourth quarter, to $32.17 per square footIndustrial vacancy declined in the fourth quarter, to 4.5 percent. Industrial asking rents advanced in the fourth quarter by 0.6 percent, to $6.92 per square foot.
With rising wages and employment, consumer optimism was well- reflected in the fourth quarter’s  holiday shopping season figures. Demand for retail spaces advanced, with net absorption totaling 3.1 million square feet during the quarter, according to CBRE. Retail construction activity slowed, with completions totaling 9.1 million square feet. The retail availability rate picked up, moving to 6.6 percent in the fourth quarter, as asking retail rents reached $17.12 per square foot.

Helpful Hints to Successfully Renew Your Lease

It is up to the Tenant to notify the Landlord of his/her intention to exercise the “Option to Renew”  during the lease specified notification window. Tenants need to be vigil about lease termination dates and option exercise timelines, not only to keep their renewal options in-tact, but to have better leverage when negotiating a renewal. Furthermore, if the Tenant does not notify the Landlord, the Landlord is not obligated to allow the Tenant to renew.

Avoid Costly Mistakes

One crucial mistake that a Tenant often makes, is to assume he/she can simply go to a month-to-month term until they find another location. Most leases will have a “Holdover” clause. These clauses in the lease agreement often allow the Landlord to charge a premium of sometimes as high as 200% of the last month’s rent.

How your Commercial Broker can help you

Keep in mind, it is always best to contact your commercial real estate professional at least a year prior to the expiration of your lease term to assist with these matters.  Commercial real estate professionals can:

  • Listen to your needs and provide specific options. Is it best to move or stay?
  • Explain current market conditions and how they affect your potential move
  • Provide a Lease vs. Buy analysis to see if it makes more sense to buy rather than lease
  • Perform a comparable analysis to assist in re-negotiating with the current Landlord
  • Find a new location and negotiate terms
  • Provide a timeline for tenant improvements and assist in coordinating move