Category: Investment News

Commercial Real Estate Leases: The Basics

Leases: The Basics

 

Whether you are a property owner with leasable land or space or an individual looking for space to lease, it’s important to know the basics of the types of leases that are most common in the commercial real estate world.

Gross Lease

In a gross lease (also known as a full-service lease) the tenant pays a flat monthly rate while the landlord remains responsible for all operating costs of the property including taxes, insurance, and maintenance, as well as other expected costs, such as janitorial service. Because landlords must cover all of the property’s operating costs, the rental rate for gross leases is generally higher than for a net lease. In exchange for paying a higher rate, the tenant has the security of a fixed monthly rent payment, minimizing the possibility for variations in their operating costs, making budgeting more predictable and less complicated.

Net Leases

Net leases shift some or all the operating costs associated with a property to the tenants, and tenants are responsible for that cost in addition to their regular rent. There are three types of net leases: single, double, and triple. Tenants with a single net lease are responsible for one of the operating costs associated with the property, generally the property taxes. With a double net (net-net) lease, the tenant assumes the cost of two of the operating costs, generally the property taxes and insurance. With a triple net (NNN) lease, the tenant assumes all of the property’s operating costs, which include taxes, insurance, and all maintenance costs. Lastly, there is a variation of the triple net lease called absolute net lease (also known as a bondable lease). This type of lease relieves the property owner/investor from all financial obligations and risks associated with the property, including taxes, insurance, structural maintenance, and debt liability. All those obligations are passed on to the tenant normally in exchange for a lower base rent.

Benefits of Net Leases

From the landlord’s perspective, entering into a net lease can simplify the management and operation of the property, which can be especially beneficial if they own multiple properties. Furthermore, net lease rates are typically made for longer terms, which gives the landlord the benefit of long and stable income from the property.

Because net lease tenants assume more of the unpredictable costs associated with maintaining the property, their base rent is often at a reduced market rate. This can mean considerable savings in rent over the long term of the lease. While annual rent increases may be built into the lease agreement, they usually remain below the rate one would pay with a gross lease.

Ground Lease

Yet another variation of a net lease is a ground lease. An owner with undeveloped land may enter into a ground lease in which the lessee agrees to incur the cost of developing the property (i.e., construct a building or business on the land) and in exchange, pays only a NNN lease on the land. Ground lease terms are long, generally 50 to 99 years, but when the lease term ends, the ownership of the both the building and the land revert to the owner.

Negotiating a Lease

Before entering into a lease agreement as “lessor” or “lessee”, know your options so that you can benefit the most from the deal. Agents at Kelley Commercial Partners have the knowledge and experience to walk you through the process and negotiate with your best interests in mind.

Landlord representation strategically positions property in the market

Landlord representation is just one aspect of the full range of brokerage services provided by our agents at Kelley Commercial Partners. Landlords, property owners, and investors in the know utilize our services to gain a better understanding of the market and, armed with the expertise and knowledge our agents provide, optimize the return on their investments. “We help property owners make informed decisions by strategically positioning their property in the market to achieve the best results,” said Daryl Peeples, president and partner at KCP.

Daryl Peeples, President, Principal Broker, Partner

“We help property owners make informed decisions by strategically positioning their property in the market to achieve the best results,” said Daryl Peeples, president and partner at KCP.

The first step in our process is evaluating your property and understanding your unique goals. After a tour of the property, agents will perform a thorough market analysis, make recommendations for any improvements or repairs, discuss competitive lease rates, current occupancy rates, and identify all possible tenants. This knowledge builds the foundation of our next step: an effective marketing plan.

Marketing your property through Kelley Commercial Partners includes high-quality photography, prominent signage, a property brochure, and exposure on our website and the nation’s leading commercial real estate search engines including Costar and Crexi. For retail property owners, we have a direct connection to a large network of retail partners across the country through our exclusive membership in ChainLinks Retail Advisors. Additional digital marketing includes regularly scheduled email campaigns sent to targeted lists of prospects as well as social media posts to our growing number of followers. Throughout the marketing process, agents keep you informed with open lines of communication and they are available at any time to address questions or concerns.

With a marketing plan in place, the real work for you and your property begins. Agents begin prospecting the most viable leads, conduct showings, screen prospects, negotiate rates, draft lease agreements, and perform all due diligence involved in the leasing process.

Even for the experienced landlord, leasing a property can be a time-consuming process and finding the ideal tenant can be a challenge. With our agents on your side, you can rest assured that we are committed to our fiduciary responsibility to you and we will work to serve your best interests.

Hank Kelley on 2020 and beyond

Hank Kelley, CEO, Executive Broker, Partner

Like so many businesses and individuals, the COVID-19 pandemic has presented Kelley Commercial Partners with unprecedented challenges, but it has also given us a unique opportunity to more clearly focus on the continued improvement of our knowledge of the commercial real estate sector and the values by which we run our business. Our commitment to the safety of our employees, clients, and customers has been and will continue to be paramount. Ensuring the readiness of our team to work remotely is part of that commitment. We’ve garnered much insight by working more closely with banks and the Small Business Administration as many of our clients navigated the tricky waters of PPP loans and other unplanned COVID-related expenses. Maintaining financial stability for our clients and our own company continues to be a top priority and our team grows more confident each day that we have the knowledge and values to keep moving us all moving forward. Many of the companies we interact with — both locally and across the country — have faced challenges that require a higher level of patience and empathy as we all wrestle with the uncertainty a pandemic has delivered.

The good news is that these lessons are making us a stronger company, one more prepared than ever to face whatever the next decade may bring. Many of our team members quickly adapted to working remotely and some will likely continue working from home after the pandemic is gone. Our cloud-based brokerage management, accounting, and payment systems have been very effective tools to ensure that we are operating as efficiently as possible, whether we are behind our desk at home, in the office, or on a property site.

However effective these applications have proved to be, the true defining characteristic of our company’s success has been our team’s ability to earn and maintain the trust of our clients. If this year has taught us anything, it’s that most clients care far less about exactly what we know and instead place much more importance on how we show that we truly care about them both personally and professionally. Our agents go through rigorous training and development to ensure they have the skills and knowledge that our clients expect and deserve, but as we all know, even the wisest counsel can only be heard after trust is established and skills are proven. This focus on always coming to the table with a positive attitude and willingness to do the hard work of building trust has been in place since day one and will remain a principal aspect of our company culture far into the future.

We work throughout the state in many property categories — unimproved land, build-to-suit, retail, office, industrial, hotels, multifamily. Prior to March, we were spending more time on retail and office requirements. Today we are working with a variety of industrial and distribution needs as well as acquisitions by users and investors. We believe industrial properties will be active over the next several years to answer the needs of online distribution and manufacturing.

We see some retail space making a transition to more service and medical uses. Owners of retail properties that are able and willing to make that conversion will benefit by diversifying their tenant mix. COVID and the growth in online shopping have caused owners of retail properties to convert empty spaces to uses not directly affected beyond online shopping. COVID accelerated the transition, and that will continue.

Office space users are also weighing their future needs. Some are looking for more traditional office plans providing an emphasis on safety; others are planning to make remote work permanent. However, we are confident the value of working together, in person will bring the office market back to a normal condition during the next two years.

The pandemic did force us to pivot some aspects our business plan, but our focus on unwavering client support has not changed. Our standards are still as high as ever and we measure our performance against those standards. We are grateful for the opportunities we have had during this past year and know that 2020 will be thought of as a year that taught us some valuable life lessons. Now the challenge is remembering these lessons as we move through this stage of the pandemic into a future filled with hope.

In the December 21 issue of Arkansas Business, Hank Kelley and six other business leaders in the community were asked to share their expectations for the future.

Kelley Commercial Partners rebrands and looks forward

Kelley Commercial Partners

We recently sat down the Daily Record to talk about Kelley Commercial Partners’ recent rebranding efforts and how excited we are about the future of the firm. CEO and executive broker of KCP, Hank Kelley, emphasized that while our name has changed, the company will continue to operate much in the same way it has for the better part of three decades. Most of the firm’s current partners have been in place for several years, and in order to underscore the value of their knowledge, experience, and hard work, Kelley wanted to include the word “partners” in our new name.

And before the ink could dry on our new business cards, an unexpected global pandemic hit and we knew our clients and tenants needed our support more than ever. Property managers and brokers worked closely with tenants to help them understand the process and red tape involved in obtaining state and federal assistance, while our facilities team helped to ensure the health and safety of the occupants in more than 7.4 million square feet of property managed by our firm. Kelley Commercial Partners has also been involved in negotiations that will bring Costco and Amazon to Little Rock.

All in all, it’s been a challenging year for everyone, but Kelley Commercial Partners still sees a bright future for Arkansas and we will continue to serve our community for decades to come.

 

1031 Exchanges help defer certain tax liabilities

Brokerage, property management, development management, consulting

For all of your commercial real estate questions, ask a professional at Kelley Commercial Partners

A 1031 exchange, also known as a tax-deferred exchange, gets its name from the Internal Revenue Code 1031. Essentially, this rule in the tax code allows investors to defer certain tax liabilities they would otherwise incur after making a profit from a real estate investment. This can be an incredibly effective tool for investors who find themselves in a situation in which they would like to sell a real estate holding, but do not want to incur the tax burdens such a transaction would create.

In order to take advantage of the 1031 exchange rule, you must replace the property you are selling (the relinquished property) by purchasing another property (the replacement property) with one of equal or greater value and similar in kind and use. For example, if you are relinquishing a rental property for $100,000, you must replace it with another rental property with one valued at $100,000 or more. (You may also have the option to buy several rental properties, so long as the sum total of their value is $100,000 or more). So, unfortunately, you cannot relinquish a rental property and replace it with a vacation home because those two properties would not be alike in kind and use.

In addition to these restrictions, there is a set time frame in which all of these transactions must occur. Once the relinquished property has closed, investors have 45 days to identify the replacement property and 180 days to close that transaction.

Finding buyers for the properties you wish to relinquish, while at the same time attempting to identify equitable exchange properties can be challenging, especially considering the time restrictions. Proper attention must be paid to the details of how 1031 exchanges work and how using them might affect your long-term plans. This is why it is so important to find an experienced CRE professional you can trust to help you with the due diligence commercial real estate transactions require.

If you have any questions regarding a tax-deferred exchange or any other commercial real estate issue, Kelley Commercial Partners brokers and associates are here to provide the answers and support you need to make successful decisions.