Los Angeles Commercial Real Estate News

GETTING TO THE DETAILS:

Finding the ideal commercial real estate property to meet all of your specific needs and preferences can be a real challenge, especially in hot markets where the prime spaces go quickly. Once you find that perfect space for your commercial needs, it can be tempting to sign the contract without going through all of the details. Here are a few key details to look for when examining the leasing contract:

UTILITIES RESPONSIBILITIES:

Like residential leases, commercial properties vary in the utility payment agreement. Take care to ensure that you understand what your responsibilities will be in paying for specific utility bills. Commercial leases often use a different set of legal terms to describe the responsibilities, so be sure that you understand the exact meanings of any unfamiliar terms in the agreement.

INSURANCE: In most commercial leases, the landlord does not cover the business equipment of the tenant. For this reason, it is imperative that you understand the coverage provided and take the necessary steps to ensure that you have adequate protection for all of your business equipment and office supplies.

In most commercial leases, the landlord does not cover the business equipment of the tenant. For this reason, it is imperative that you understand the coverage provided and take the necessary steps to ensure that you have adequate protection for all of your business equipment and office supplies.

UNDERSTANDING FEES: When going through the contract, you may find that there are a variety of fees that are not expected and are potential deal breakers. Talking to your future landlord may prove invaluable in negotiating these fees down so that you can put yourself in position to get the best deal.

When going through the contract, you may find that there are a variety of fees that are not expected and are potential deal breakers. Talking to your future landlord may prove invaluable in negotiating these fees down so that you can put yourself in position to get the best deal.

SUBLEASE OPTIONS: Although it is never ideal to have to break a lease, you should know your options if you need to get out of the contract. Every commercial lease contract should have a section clearly detailing your options.

Although it is never ideal to have to break a lease, you should know your options if you need to get out of the contract. Every commercial lease contract should have a section clearly detailing your options.

INSIGHT:

Just a few topics mentioned above that come up in our discussions with you regarding leasing. We can teach you how to have a keen eye to detail and help ensure that you understand all of the parameters of your contract before signing.

Class A buildings vs. B buildings is hard to define, and harder to price. General rule, Class A is new or just renovated, master planned covering all systems and buildout meets codes that are up to date. You will be the first tenant in this new space.

Class B buildings are more difficult to uncover the deficiencies. Generally, structures are one generation older, slightly inferior, passed through several tenants, with systems that need attention with warranties set to expire, and there may be a need to check the latest building codes if there is a plan to add tenant improvements or additional office space. Otherwise, the building is functional for the intended use.

For Class B, look for a price drop off from Class A of ~15%. If you find the drop less than ~15% then Class B is priced too high in the market and negotiating is the way to adjust. Or better yet, simply get that Class A alternative because after all maintaining the building is a cost that tenants cover in most leases.

Ask landlord to provide a warranty in the lease for electrical, mechanical systems and HVAC units for at least for an initial time period. Know that after that time, most costs fall on the tenant. Try all systems upon move-in and document the status, then provide to the landlord for fixes, repairs or replacements. Repeat this process at renewal time as part of your renewal agreenent. Note, systems fail and maintaining these cost intensive items are a part of the negtiating process of leasing and preparing a document to sign. All landlords are different, all buildings are in a different stage and age, which makes warranties ever more important. Don’t miss this opportunity to cost you down the road.

Tenant Tip: In leasing a brand new warehouse, good news is that building warranties exist by the builder for the infrastructure; bad news, you must pull teleconmunication cable thought the office, distribution power in the warehouse, and check internet availability as it may not exist yet for a brand new business park. Which means finding a more expensive alternative that you must pay for in order to get telephones and internet access.

Tenant Advice on Twitter

Yes, over 400 tweets in 10 years available for you, all about getting educated on leasing space. Find real life strategies for small companies leasing space at the Encon Commercial Twitter account. Sign up on this website, see active strategies, read back tweets, save and download all the practical, cost saving advice we have compiled throughout the years. In 140 characters or less, a true valuable resource that is free and always available at our website. Don’t miss the next real news and practical takeaways at Encon Commercial Twitter, where we speak to you the tenant and the nation on gaining an advantage while saving costs and protecting your interests in leasing space.

Even if we are not in your market, we are on your side. We know that your next lease is a new beginning of your company’s future and we can help you obtain the best leasing scenario possible.
Thanks for following us and getting ahead of the game with Encon Commercial. We appreciate your desire to learn and drive to win.

When it comes to commercial space, we find ourselves trying to understand the language of leasing and our responsibilities under our lease. Although it is not a daily ritual to review our lease, it is worth setting aside some time to understand the basic definitions of the agreement. The landlords and the brokers refer to leasing in three basic terms: Full Service Gross (FSG), Modified Gross (MG), and Triple Net (NNN). The more you familiarize yourself with these three basic terms, the more you will understand your future obligations under your lease and you will be better informed to negotiate in the future.

In the commercial real estate market, the landlords draft the leasing contract with terms and conditions that are to their advantage. Therefore, the tenant should make sure to know the terms and conditions since they will be bound to the lease after they sign. In addition, it is paramount to have your attorney and tax accountant review your lease prior to signing. With this being said, you have a choice to the type of lease you would like to enter into: Full Service Gross, Modified Gross, or Triple Net.

Full Service Gross (FSG): Tenants pay the rent and landlord pays the taxes, maintenance, and the insurance on the building, as well as the electricity. However, tenants may be responsible for any yearly increases in these costs over the first year (or base year) of the lease.

Modified Gross (MG): Tenants pay the rent and the landlord pays some of the expenses for the building. Tenants are also responsible for some, if not all, of the utilities. We recommend the tenant confirm which utilities they will be responsible for prior to signing the lease.

Triple Net (NNN): Tenants pay the rent plus the expenses of the building (property taxes, maintenance and insurance), which is usually calculated as a separate fee paid to the landlord by the tenant.

A Full Service Gross lease is generally the highest rate per square foot, with Modified Gross being the second highest, and Triple Net as the lowest (at least on paper). While the Modified Gross and Triple Net may seem enticing at first, it is important to keep in mind that they have extra fees and costs associated with these types of leases. Therefore, when comparing between the three terms, compare them based on the total cost. One caveat worth mentioning is the ambiguous Common Area Maintenance (CAM) charge, which represents the cost of maintaining the exterior of the property, and it is often an additional charge due to the landlord. With any type of lease, we recommend you to request a breakdown of these additional charges prior to signing.

While these terms may vary slightly for different markets and landlords, the general concept remains true for each type of lease. The devil is in the details, and we highly recommend that you read your lease carefully to understand your economic responsibility throughout lease term.

John Scatoloni is not an attorney or an accountant and this article is not intended to provide any legal or tax related advice.

Published on:
Tuesday, May 31, 2016
Written by: Amy Sim

Prices are continuing to rise on home sales in Southern California like elsewhere through much of the country, with the typical real estate agent seeing fewer buyers. What this means for the average home buyer is less affordability. While that’s not good news for the typical family looking to move from renting to buying, it is a positive turn for investors. At the same time, commercial real estate provides options for investors who want to enter the market or add to their portfolios.

Read any news report and you’ll notice that first-time buyers are struggling to afford housing in Southern California. According to data from Trulia, the median first-time buyer in this area would have to spend 88 percent of their income on a home. Since this is impractical, it demonstrates the lack of options for the demographic.

How does this impact investors? With fewer buyers driving the market up further, expectations are growing that the prices will actually have to come down. As investors watch the housing market, they can capitalize on those properties.

Flipping Houses

While prices aren’t good for first-time buyers, they are still providing a profit for investors who focus on flipping properties. Redfin discovered that three of the neighborhoods in the country offering the best market for flipping houses were located within Los Angeles. Two of the hottest neighborhoods were Mt. Washington and Silver Lake, ranked at second and third for gains. This is the markup percentage between the purchase price and resale price.

Even though LA real estate is hot, much like the rest of the southern region, investors can locate older homes in need of improvement and make enough updates and repairs to warrant a high price at resale. They are grabbing these undesirable properties because of the potential they see in them.

Markups produced an average gain of $31,000 for 2015 in Mt. Washington while Silver Lake saw gains averaging $307,000. The tenth place neighborhood, Los Feliz, had gains that averaged $241,000. Flippers can do extensive remodeling and still walk away with massive profits. With interest rates remaining low for mortgages, investors with the cash for a down payment and the affordability to make the payments and pay for renovations will still see income potential in the increasingly expensive Southern California market.

Commercial Properties

Investors not interested in single-family dwellings for flipping can still find lucrative opportunities in commercial properties. If they talk to a real estate agent in Orange County, they will discover that multi-family dwellings have a vacancy rate of just 3.3 percent, which means new developments will be in high demand.

Industrial properties has the second lowest vacancy rate at 3.4 percent and retail has a rate of 4.6 percent. Both of these real estate subcategories offer potential for investors who are looking for a sound investment. These figures are according to the National Association of Realtors. An experienced real estate agent can provide guidance as to where the best possibilities for future developments exist.

According to the same report, the focus for investors today is in rentals rather than flipping. New construction is still low, which is a prime area for investors who want to take advantage of the economy. Since many buyers are looking to move to another rental instead of purchasing a home of their own, they will be looking at new-builds with more amenities and space than their current units. Investors will have no problem filling properties with tenants if they should choose this avenue.

Demand for housing will continue to increase as more people seek rentals. This growth is largely driven by Hispanics as well as other minorities. In fact, the increase is projected to be 77 percent minorities versus 23 percent whites in new rental units.

In addition to the lack of sufficient housing, the improving job market and income growth is helping propel multi-family housing forward. For non-residential real estate, technology companies are driving the demand for new structures. Office space is continually needed, which is the primary focus for many developments in the area.

The story for investors who are looking at Southern California real estate to add to their portfolio is the opportunities are still here. However, they are going to have to do plenty of research to discover the right areas to place their funds, not only in the type of real estate for investing but in the right location with continued potential for profit.

The 80/20 Rule of Tenant Improvements

From the Desk of John Scatoloni

In looking for office space, an often overlooked aspect of lease rate is the allowance for tenant improvements. The more space built-out to accommodate the layout, the higher the start rate will be, and with annual increase based on a higher base rate, the affect is staggering, often a 15-20% higher lease commitment over the term.

Avoid costly build-outs and delays in commencement by implementing the 80/20 rule in the search for office space. That is focus on 20 percent of the properties in the market that meet your general layout (i.e. number of private offices, size of open area and special purposes rooms) and leave the rest behind. In other words, focus where 80 percent of the intended space exists (residual improvements) and only concern yourself with the 20 percent of upgrade required to meet your firm’s ideal layout and negotiate a turnkey premise for the remaining 20 percent. This is not a complicated strategy but one often overlooked when tenants focus on building image, amenities, and lower incentive rates. Expensive build-outs costs time, money and valuable negotiating leverage and ultimately tenant improvements will drive the deal structure higher to satisfy the landlords required return.

What can you do at the beginning of the site selection process? Start by implementing the 80/20 rule, then, gain a clear understanding of what are standard improvements in the market. This is easily accomplished by inquiring with your broker what tenant improvements have been included in past deal and lease comparables. The details you obtain will provide an understanding of where a particular landlord in the market sets the bar for “standard improvements” to the space. Armed with a focus on the right 20 percent of the spaces in the market and a clear understanding what landlords provide as standard improvements, you have a real opportunity to reduce your fixed expense in office rent.

Simply put, avoid the costly tenant improvement trap which landlords utilize to increase the base rent through the proposal process. The tenant improvement allowance trap often leads to economic creep, which is when the negotiated base rate creeps up with every subsequent request for improvements, alternatives and additions. A 5-10% increase in base rate can easily result, and higher cost living adjustments often accompanies this increase. The end result is that your total lease commitment over the term can reach a 15-20 percent increase over office space that meets the 80/20 rule.

Avoid paying for economic creep by applying the 80%/20% rule. Understand that many of these improvements to deliver the space are in fact market standard. The landlord would have improved the space regardless to meet the market Remember that a tenant improvement allowance is a direct investment in the property, an investment that is borrowed by the tenant for the term of the lease, and subsequently not transferable at the end of the lease. Align your intended layout with a space that exists on the market, look for properties that meet the 80/20 rule and understand what standard improvements to insist to be included in the rate.

“-30-“

Tenant Tip: Major shift in leasing rates between LA & West San Bernardino County; nearly the same, no longer a major discount to head East for lower rates alone. The rationale for heading East is still better designed buildings, newer construction and lower rates and a better price to own. However, the price distinction is fading fast as vacancies are at a historic low and demand is strong. Best advice; focus on the buildings with the best features, newer construction to avoid deferred maintenance costs, and buildings that your company can expand within for the next five years.