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Today, I decided it would be fun to regurgitate a few random thoughts as they pertain to LEASING commercial real estate.
As we have discussed before, leasing is a big part of our daily activity – unlike our residential counterparts. We, as commercial real estate professionals help occupants find space to lease or buy.
Typically, leases account for 70-75% of our deal volume – sales the balance.
We differ from our residential counterparts. Our fees are based on a percentage of the deal’s total consideration – purchase price or the amount of rent paid over the term of the lease. Generally, commercial leases run 3-10 years – so the amount of rent payments negotiated is a significant sum. Whereas, residential leases are month-to-month or a year maximum. Consequently, the potential fees on a residential lease – because the term is much shorter – make it unprofitable for residential agents to pursue.
Subleases are a pain. A sublease is necessary when an occupant no longer needs the building – for myriad reasons – yet has a term of lease remaining. The owner of the building still wants his rent. So, the occupant resorts to finding a substitute – a subtenant – to move in and assume the rent payments. Differences in uses, credit, number of players, and changing market conditions all create the pain in a sublease transaction.
Credit requirements of a property owner. At a minimum, the owner will look at the total amount of the lease – let’s assume $10,000 per month for sixty months or $600,000. The owner is leasing an occupant the building in return for $600,000 in rent payments. Therefore, the owner is extending the occupant $600,000 of credit – so to speak. Carefully scrutinized is the occupant’s ability to repay the $600,000 – through an analysis of the business’s sales and credit history.
Process. Searching for a space to lease is similar to searching for a building to buy. The similarities: Facility requirements are discussed – loading, power, amount of office space, warehouse ceiling height, etc., geographical areas are considered, a list of alternatives is toured and a candidate is chosen. Now, the differences occur. A sale deal will proceed to a negotiation, an agreement, an escrow, due diligence and closing – approximately 60-90 days. But, a lease will involve a negotiation and a lease – much quicker – fewer than 30 days, in most cases.
If ever we can assist you in leasing or buying a building, please call us at 714.564.7104 or email us at [email protected]