Frequently Asked Questions
Types of Sales Agreements
In a Sale-Leaseback, the owner sells their property to an investor and then the owner leases it back from the investor for an agreed upon period of time.
Under the Build-To-Suit To Own option, the owner agrees to develop or finish the property or space to the specifications of the user/buyer and the user/buyer buys the completed project from the owner.
In a Straight Sale, the property owner usually transfers the deed and title to the property at closing where the buyer pays the agreed upon purchase price in full.
An Exchange (also known as a “1031 Tax-Deferred Exchange”) is a sale in which some part or all of the proceeds received from the sale of real property are used to purchase a replacement property or properties and the capital gains taxes otherwise due on the sale of the relinquished property are deferred for the seller who initiated the exchange. There are very stringent guidelines and timeframes which must be scrupulously followed to successfully complete an Exchange and the seller should retain the counsel of advisors specifically qualified for and experienced in the property exchange process. We refer our clients to such qualified and experienced Exchange advisors.
In an Installment Sale, the buyer usually gives the seller a down payment for a portion of the purchase price and the balance of the purchase price is paid to the seller in interim payments (i.e. installments) over time. An installment sale may help a buyer (and therefore the seller) complete the transaction if commercial financing is otherwise difficult to obtain since the seller is, in essence, financing the purchase for the buyer. An installment sale may help a seller defer a portion of taxes which might otherwise be due in full upon a straight sale. Although an installment sale may not provide the level of capital gains tax deferral achievable through an Exchange, it does not require the seller to locate and close on a replacement property which might otherwise be difficult to find, especially within the short time frame required by an Exchange. The installment sales agreement should define when the deed transfers to the buyer.
With Seller Financing, the seller usually finances a portion or majority of the purchase price for the buyer. If the buyer takes out a loan for part of the purchase price from a commercial lending institution, and if the seller is also providing financing to the buyer, then the seller’s loan is usually subordinate to the commercial loan. In other words, the commercial lender usually has first lien rights on the property, securing the loan.
*This provides an overview description of these types of documents but is not intended to be legal advice. Please consult with your attorney and broker when preparing these documents.
Negotiation Documents
LETTER OF INTENT VS. PURCHASE OR LEASE AGREEMENT
A letter of intent (LOI) can be prepared by either party, summarizes mutually agreed upon deal points and it expresses a party’s willingness to enter into a contract, but typically with no legal obligation for either party to perform. Letters of intent are often more efficient than full contract offers especially when negotiating leases because they focus on the main business points and not legal fine print. The goal of the LOI is to achieve a preliminary “meeting of the minds”. LOIs are also useful when the full contract (i.e. Purchase Agreement or Lease Agreement) will be very complicated and will involve many details of secondary importance to the main issues such as price and terms. A carefully worded disclaimer should be included to the effect that no contract, liability, or obligation is intended until a formal contract is signed.
A purchase contract is usually prepared by the buyer and a lease is usually prepared by the landlord. The purchase contract or lease provides detailed business terms and conditions and legal delineation of the agreement between the parties and their respective rights, obligations and liabilities. It represents the final “meeting of the minds” between the parties. If one party submits a purchase offer or lease to the other party, it is usually not legally binding unless or until it is signed by all parties involved. However, to be safe, a clause should be included in the document stating that it is legally non-binding. If the party receiving the offer changes any of the price, term or conditions of the offer, it constitutes a counter-offer and will typically not be binding until the party who submitted the offer accepts any such changes.
*This provides an overview description of these types of documents but is not intended to be legal advice. Please consult with your attorney and broker when preparing these documents.
Tenant vs. Landlord Objectives
Virtually every aspect of a lease is negotiable. The broker’s job, whether representing the owner or the tenant, is to give advice on the business aspects of the transaction. The broker needs to understand the negotiating points of view of all parties and the significance of each lease clause and/or concession in conjunction with the party’s legal counsel.
• Low rent, fair method of calculation
• Maximum services
• Predictable and fair operating costs
• Expandability of space for future needs
•Maximum improvements, and right to recover value of tenant-paid improvements
• Fitness for use
• Maximum grace periods
• Increasing rent (annually)
• Reimbursement of property operating expenses
• Long-term lease (typically)
• Minimal build-out costs
• Minimal concessions (e.g. free rent, tenant improvements etc.)
• Minimal maintenance
• Credit-quality and track record of tenant
This is a question we are commonly asked. The answer will largely depend on ability to borrow, cost of capital vs. growth rate of the business, and whether or not you choose to invest in real property vs. other areas of your business. Leasing frees up capital for business operations. Buying the property gives the company control of its operating facilities and more control over costs. The company's cash flow, cash requirements, management resources and flexibility for needing the particular facility will determine the answer. Please feel free to contact us for a confidential, no-obligation consultation to discuss this further.
Types of Leases
The broker’s role is to negotiate the business terms of the lease transaction for the party they represent. The type of lease transaction usually depends on the type of property lease involved and is determined long before the negotiating stages begin. Following is a summary of the kinds of lease transactions in which you might be involved. The following definitions are generalized and are for overview purposes only. Your broker and legal counsel should clearly delineate any contemplated transaction in the lease or sale agreement.
In a GROSS LEASE, the tenant usually pays a fixed monthly rent; landlord pays real estate taxes, property insurance, common area expenses and all other operating costs, including, in many cases, utilities. Janitorial services may also be paid by landlord, in which case, the lease is called a “full-service” lease.
“Net” Leases usually indicate that the tenant is responsible for it’s proportionate share of a portion or all of the operating expenses for the property in addition to base rent and the landlord is responsible for the balance of the operating expenses, including any mortgage payments on the property. The tenant’s proportionate share of the operating expenses is usually calculated by determining the square footage of the tenant’s space relative to the total building square footage expressed as a percentage figure (tenant’s “prorata share”). Tenant’s prorata share is then multiplied by the cost of the property’s operating expenses to determine the actual cost of the operating expenses allocable to the tenant.
There are no industry-wide accepted definitions for the various types of “Net” Leases and definitions will vary among landlords and brokers, even within the same market. Therefore, caution is urged when using these terms and they should be carefully defined when negotiating a lease. The operating expenses associated with “Net” leases are typically broken down into three “Net” components:
•Real Estate Taxes
•Property insurance
•Common Area Maintenance (“CAM”)
CAM costs typically include maintenance of the common areas of the property exclusive of costs to maintain the tenant’s space. For example, CAM costs include lawn care, snow removal, pest control, elevator maintenance, roof and parking lot repair, management fees, cleaning of corridors, lobbies and parking lots, maintenance and repair of shared mechanical, electrical and plumbing systems, etc. In most but not all leases, the landlord is responsible for structural repairs to the overall building and site improvements.
Reference is usually made to:
•”Net” (or “single net”) Leases
•”Net Net” (or “double net”) Leases
•”Triple Net Leases”
Net Lease – In a single net Lease, in addition to base rent, the tenant is usually responsible for it’s proportionate share of one of the three “Net” expenses (e.g. taxes, insurance or CAM) referred to above and the landlord is responsible for the other two “Nets”. However, sometimes reference to a Single Net Lease may imply that the tenant only pays for utilities (e.g. gas and electric expenses.) Yes – it is confusing!
Net-Net (“double net”) Lease – In a “Net Net” Lease, in addition to the base rent, the tenant is usually responsible for it’s proportionate share of two of the three “nets”
Triple Net Lease – In a “Triple Net” lease, in addition to the base rent, the tenant is usually responsible for it’s proportionate share of all three “nets” (i.e., all operating expenses) as well as utilities and janitorial costs.
Absolute Net Lease – Same as a “Triple Net” Lease except tenant is still responsible for paying rent and all operating expenses even if the premises are destroyed by casualty (e.g. fire) and Tenant may also be responsible for structural repairs.
Bond Lease – Same as “Absolute Net” Lease except Tenant is still responsible for paying rent even if the property is taken by municipal condemnation.
In a Percentage Lease, rent is based on a percentage of gross sales generated from the leased premises. The percentage takes various forms: straight percentage of sales with no minimum base rent amount; minimum base rent plus a percentage of sales, minimum base rent plus percentage of sales, with a ceiling on the percentage amount. This type of lease is typical of retail, not office or industrial leases.
A Ground Lease is a lease on the land alone, usually a long-term Absolute Net Lease (except for land condemnation). Land ownership and improvement ownership are kept separate: the tenant usually owns the building improvements until the end of the lease term.
Under a Sublease, the tenant (sublandlord) leases some portion of its leasehold interest to another tenant (subtenant) while keeping some interest in the premises and remaining liable to the landlord for the rent. The subtenant usually pays rent to the sublandlord who, in turn, pays the landlord.
Under Assignment, the tenant (assignor) transfers its leasehold interest in the leased property to another tenant (assignee) but the assignor may still remain liable to the landlord for the rent. The assignee usually pays rent directly to the landlord.
Under the Build-To-Suit option, the landlord agrees to develop or finish the property or space to the specifications of the tenant, with the build-out cost usually amortized over the term of the lease in the form of increased rent.
Under a Lease-Purchase, the lease usually stipulates a purchase price amount and an outside date for completing the purchase but the tenant initially leases the property until the purchase date. Some portion or all of the lease payments may be credited to the purchase price. The tenant pays the balance of the purchase price at a defined point in time stipulated in the lease and the deed then transfers to the tenant, who then owns the property.
Under a Lease With Purchase Option, the tenant enters into a lease with the landlord and the tenant retains the right to purchase the property from the landlord. The purchase date and purchase price amount may or may not be stated in the lease. The purchase price amount, if stated in the lease, will usually be a fixed price or it is determined by a pre-agreed upon formula which is stated in the lease, for determining the purchase price at the time the purchase occurs. A Lease With Purchase Option usually does not require the Tenant to purchase the property whereas usually a Lease-Purchase does.
Services we offer
We do not offer repair and maintenance services for commercial properties but we do offer leasing services. Check our landlord representation services tab here
Our compensation is a commission based model with fees typically paid by sellers or landlords.
Typically not. Our fees get paid at settlement for a sale and at lease execution / initial rent payment for a lease transaction. We typically cover marketing costs for exclusive listings.
This typically varies on a case by case basis and is dependent on current market conditions, location, price range and type of property etc.
Our compensation model is primarily commission based. We value client relationships and offer no-obligation property valuations, lease reviews, real estate audits etc. We also help our buyer and tenant clients, without additional cost, through their entire due diligence process- to help ensure that their transaction closes. Click here to learn more
This is a great first step prior to looking for space. Every square foot of space can add significant costs and an efficient space planning exercise (that we can help coordinate) can be extremely valuable. We often find that clients either underestimate or overestimate the amount of space that they may need for current and any future expansion.
The search and planning process for relocating your business typically takes much longer than most people realize. If you are thinking of leasing or buying an existing facility, if the new facility requires any renovations to accommodate your business, then you should start your search process at least 9-12 months prior to the expiration of your current lease. If you are thinking of leasing or buying a to-be-built facility, then you should start the search process at least 2-3 years prior to the expiration of your current lease. This amount of time is needed to (i) find the new site, (ii) design the new facility, (ii) procure governmental approvals ( and any zoning approvals) for the new facility and finally, ( iv) construct the new facility. Also, sometimes, our clients are in long-term leases which they would like to get out of so that they can relocate to a different location or facility ( for example, they may have outgrown their currently facility, etc.) but they assume that they can’t do anything until their current lease expires. However, there are creative ways where they can potential shorten their expiration date. Please contact us and we will be happy to discuss some of these methods in confidence.