THE BASICS OF COMMERCIAL REAL ESTATE LEASING

Today’s topic is about commercial real estate leasing. This will be a breakdown of what you should think about, and the things to avoid.
 
The first thing that most people misunderstand is the difference between a commercial lease and a purchase agreement. In a purchase agreement, you are interested in the price and maybe some conditions that the closing is subject to. However, in a lease, you might have 30 significant business points that you’re addressing that are above and beyond price. They are all critical, however, they all vary in the material to the transaction and take quite a bit of time to work through.
 
In addition to that, most people think that when you are leasing a property, it’s almost make-believe. Why? Because you are talking about a range from somewhere around $10 – $25 per square foot. However, your average space in a B-market is around 3,000 square feet at $22 square foot for retail, all-in. When you do the math, and you sign a 5-year term, which is pretty common, with 3% increases annually, you are looking at somewhere in the neighborhood of $330,000 over that 5-year term.
 
So if you are not paying attention, what you are really doing is signing a contract for a sum of money that you would probably never pay cash for today. You need to understand the risk that you are taking on because you are dead to paying this until the end of the contract. Most tenants are religious about their space, so they are very in-tune to the renewal terms because they don’t want to be there for 5 years.
If their business is successful, they are going to be there for 10 years. So now we’re not talking about 330,000, we are talking about 660,000. Let’s round up and call it 700,000, plus whatever improvements you’re going to spend in that space. You’re looking at close to a million dollars for a 3000-square-foot space. So, taking a little bit of time upfront to do some planning, to do it right, makes all the sense in the world.
 
Principal, Midwest Realty Group
Brokerage – Property Management – Construction – Development