Commercial Real Estate Guide
Your Comprehensive Guide To Commercial Real Estate In Texas
Inna Radford | 20th May 2024 | 10 minute read
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Commercial Real Estate Guide | What Is Commercial Real Estate?
Commercial real estate, otherwise known as ‘CRE’ is a property used for business purposes. The main categories are:
Office: Buildings used for professional workspaces.
Retail: Spaces for selling consumer goods and services.
Industrial: Properties for manufacturing, production, or storage.
Multifamily: Residential buildings with multiple housing units.
Specialty types include land, self-storage, hotels, marinas, car washes, golf courses, assisted living facilities, co-working spaces, condominiums, and more.
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How To Find Commercial Real Estate Listings (CRE)
Unlike residential real estate, CRE doesn’t have a unified listing service. Properties might be “off-market” and only available through brokers or private networks.
Here are some websites we can reccommend:
For Sale Listings:
- Loopnet: A large database of commercial properties.
- CREXi: A marketplace for commercial real estate.
- CityFeet: Listings for sale and lease.
For Lease Listings:
- Commercial Cafe: Office space and commercial property listings.
What Are Real Estate Contract Terms?
What Types Of Commercial Lease Agreement Are There?
What Is A Triple Net Lease (NNN)
In a Triple Net Lease (NNN), tenants not only pay a base rent but also cover additional expenses, including property taxes, insurance for common areas and the building exterior, and maintenance costs for shared spaces.
This means tenants are responsible for reimbursing the landlord for these expenses, in addition to their base rent.
Landlords typically retain responsibility for structural repairs, such as those to the roof, foundation, and exterior walls. However, tenants are accountable for all maintenance, repairs, and insurance pertaining to the interior of their leased spaces.
Working Out A Triple Net Lease
NNNs, also known as Triple Nets, represent additional costs paid on top of the Base Rent.
These cover expenses like Common Area Maintenance (CAM), property insurance, and taxes. Unlike Base Rent, NNNs are estimated and can change over time due to fluctuations in taxes, insurance, and maintenance costs.
These expenses are usually calculated per square foot per year and can be converted to a monthly payment by multiplying by the size of the leased space and dividing by 12 months. For example, a quoted rate of $8 per square foot per year for 1,300 square feet would result in a monthly NNN payment of $866.67.
Here’s a step-by-step guide to calculating triple net (NNN) lease payments, with a clear example:
Steps to Calculate Triple Net (NNN) Payments
1. Identify the Quoted Rate:
– This is the annual cost per square foot for NNNs, which includes Common Area Maintenance (CAM), property and liability insurance, and property taxes.
– Example Rate: $8 per square foot per year.
2. Determine the Size of Your Space:
– Measure the total square footage of the area you are leasing.
– Example Size: 1,300 square feet.
3. Calculate the Annual NNN Payment:
– Multiply the quoted rate by the square footage of your leased space.
– Calculation: $8/sq ft/yr × 1,300 sq ft = $10,400 per year.
4. Divide by 12 Months:
– Since the quoted rate is annual, divide the annual amount by 12 to get the monthly payment.
– Calculation: $10,400 ÷ 12 = $866.67 per month.
Example Calculation:
– Quoted Rate for NNNs: $8 per square foot per year
– Size of Space: 1,300 square feet
1. Annual NNN Payment: $8 × 1,300 = $10,400
2. Monthly NNN Payment: $10,400 ÷ 12 = $866.67
So, the monthly NNN payment for your lease would be $866.67.
What Is An Absolute Net Lease?
An Absolute Net Lease, also known as a “Zero Landlord Responsibility” lease, is a contractual agreement in which the landlord receives the base rent from the tenant. However, unlike other lease types where the landlord may cover certain expenses, in an Absolute Net Lease, the tenant bears the responsibility for all costs associated with the property.
This includes paying property taxes, insurance premiums, and expenses related to maintenance and repairs, including those for the buildings structure.
Esentially the tenant assumes full financial responsibility for the property, leaving the landlord with no obligations beyond collecting rent. These leases are particularly common in single-tenant buildings, where the tenant typically operates the entire property and thus assumes all associated costs and risks.
What Is A Modified Gross Lease?
A Modified Gross Lease is a type of lease agreement commonly used in commercial real estate. In this arrangement, the monthly rental payments initially include building expenses for a specific base year, which is agreed upon by both parties. These building expenses typically include items such as property taxes, insurance premiums, and maintenance costs.
During the base year, the tenant pays a set amount each month, which covers their share of these building expenses. However, in subsequent years of the lease term, if the building expenses increase above the levels set in the base year, the tenant is required to reimburse the landlord for the difference. This ensures that the landlord is not financially burdened by rising expenses beyond what was initially anticipated.
One key feature of a Modified Gross Lease is that utilities may or may not be included in the lease agreement. This depends on the specific terms negotiated between the landlord and tenant.
Overall, a Modified Gross Lease provides a structured approach to managing building expenses, with tenants sharing in any increases beyond the base year while still maintaining some predictability and control over their monthly costs.
What Is A Ground Lease?
A ground lease is a contractual arrangement where a tenant leases land from a landlord for a specified period. The tenant is then responsible for constructing a building on the leased land at their expense. In addition to paying rent for the land, the tenant is also obligated to cover all building-related expenses, including insurance premiums and property taxes.
Unlike other lease types where the tenant leases both land and building, in a ground lease, the tenant only leases the land. The ownership of the building typically remains with the tenant throughout the lease term.
However, upon the expiration or early termination of the ground lease, ownership of the building reverts to the landlord. This means that at the end of the lease term, the landlord becomes the owner of the building, regardless of the tenant’s investment in its construction.
In summary, a ground lease allows a tenant to lease land, build a structure on it, and operate their business, while ultimately surrendering ownership of the building to the landlord once the lease term concludes.
What Is A Percentage Lease?
A percentage lease is a type of commercial lease agreement where the tenant pays a percentage of their sales revenue to the landlord, in addition to or instead of the scheduled base rental payments.
In this arrangement, the amount of rent paid by the tenant is directly tied to the tenant’s business performance. The landlord typically benefits from higher rental income when the tenant’s sales increase, reflecting the success of the tenant’s business.
Additionally, the tenant may also be responsible for paying certain expenses such as property taxes, insurance, and building maintenance or repair costs, depending on the terms negotiated in the lease agreement.
Overall, a percentage lease provides both the landlord and the tenant with a vested interest in the success of the tenant’s business, as the rental payments are directly linked to the tenant’s sales performance.
What Is A Commercial Address?
What Is Industrial Real Estate?
What Is A Feasibility Period?
What Is A Texas Commercial Lease Agreement?
Landlord Insurance In Texas
Stay Updated with Commercial Real Estate News
Commercial real estate news is often local. Check local newspapers and business journals for updates. National sources include:
FAQ
What is the difference between a net lease and a gross lease?
- A net lease requires the tenant to pay a portion or all of the property taxes, insurance, and maintenance costs in addition to rent. A gross lease includes these expenses in the rent, with the landlord covering the additional costs.
What are common lease terms and their durations?
- Commercial lease terms can vary widely, but common durations are 3, 5, or 10 years. The specific term often depends on the type of business and the landlord’s policies.
What is a CAM charge, and how is it calculated?
- Common Area Maintenance (CAM) charges cover the cost of maintaining shared spaces within a commercial property. These charges are typically calculated based on the tenant’s pro-rata share of the total rentable square footage.
What is a triple net (NNN) lease?
- In a triple net lease, the tenant pays for property taxes, insurance, and maintenance, in addition to base rent. This type of lease shifts many financial responsibilities from the landlord to the tenant.
What is a lease escalation clause?
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- A lease escalation clause allows for periodic increases in rent, which can be fixed amounts, percentages, or tied to an index like the Consumer Price Index (CPI).
What is a personal guarantee in a commercial lease?
- A personal guarantee is a commitment by the business owner(s) to personally cover lease obligations if the business is unable to pay. This adds a level of security for the landlord.
How are disputes typically resolved in commercial leases?
- Disputes are often resolved through mediation or arbitration, as specified in the lease agreement, before resorting to litigation.
Can lease terms be negotiated, and which terms are usually negotiable?
- Yes, lease terms are often negotiable. Commonly negotiable terms include rent amount, lease duration, rent escalation clauses, improvement allowances, and options for renewal or expansion.
What are tenant improvements (TIs), and how are they handled?
- Tenant improvements refer to modifications or build-outs a tenant makes to the leased space to suit their business needs. These can be paid for by the tenant, the landlord, or through a combination of both, depending on the lease agreement.
What happens if I need to break my lease early?
- Breaking a lease early typically involves penalties, such as paying remaining rent or a portion of it. Some leases may include a buyout clause specifying the cost of early termination.
How is rent typically structured in commercial leases?
- Rent can be structured as a flat rate, percentage of sales (common in retail), or include scheduled increases (escalation clauses) over the term of the lease.
What are the responsibilities of the landlord and tenant in terms of maintenance and repairs?
- Responsibilities are usually outlined in the lease. In a gross lease, the landlord typically handles most maintenance and repairs. In a net lease, these responsibilities often fall to the tenant.
What is an exclusivity clause in a commercial lease?
- An exclusivity clause prevents the landlord from leasing space to direct competitors of the tenant within the same property or complex, protecting the tenant’s business interests.
Can I sublease my commercial space?
- Subleasing is generally allowed if specified in the lease agreement, but it usually requires landlord approval and can involve additional conditions or fees.