Category: Services

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.

Franks Dermatology adds SKN at Franks Dermatology

 

Rachel Sims Hayden Franks

Rachel Sims, RN and Hayden Franks, MD partner to add SKN at Franks Dermatology

Franks Dermatology opened in Suite 320 of the Simmons Plaza Building at 4220 N. Rodney Parham Rd. in 2017. Dr. Hayden Franks and his wife, Lynne renovated the 2,064 s.f. suite and created a beautiful space for his patients from the moment they enter the reception area and into each examination room. They thought of every detail with the patients’ care and comfort foremost in their design. After practicing for more than 20 years, Franks has built a reputation for providing exceptional care. His staff shares the same commitment to the patients. Franks specializes in medical dermatology, surgical dermatology, and skin cancer.

In March, Franks partnered with Rachel Sims Miller to open SKN at Franks Dermatology located in Suite 102 of Simmons Plaza. This 1,977 s.f. space was also renovated to create a welcoming and relaxing space for clients. SKN offers high-end skin care and a wide range of aesthetic products. Miller is a registered nurse and an aesthetic nurse injector with more than seven years of experience. Her training and continuing education keep her informed of the latest, safest, and most effective products and procedures available. She has also developed her own skin care line, Miller Marsh Cosmetics. Like Franks, Miller is passionate about her work and dedicated to providing superior care to each client.

Senior property manager, Cheryl White, says Franks and Miller have been a pleasure to have as tenants. “I wish them great success with their newest endeavor. SKN is a wonderful addition the to the building and community,” said White.

Kelley Commercial Partners leases and manages properties to suit a variety of medical practices. If you would like more information about what we have available, please call 501.375.3200.

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.

Kelley Commercial: Creativity, repurposing rules CRE market in 2021

As seen in The Daily Record

March 15 – 21, 2021

by Dwain Hebda

 

Of all the industries shaped by the events of last year, the impact of COVID-19 on commercial real estate is arguably the most profound. Beyond just impacting a tenant’s ability to pay, 2020 represented a seismic shift in how companies think about leased space and the role of such spaces in the still-dawning era of mass work from home arrangements and the ubiquity of residential retail delivery.

As a result, commercial real estate companies find themselves with the daunting task of reimagining their inventory right along with tenant and public usage patterns, even as the battered economy begins to plod along toward recovery.

The Daily Record sat down with several partners of Kelley Commercial Partners in Little Rock to catch a glimpse of where the market currently stands and what successful commercial real estate (CRE) firms must do to ride the change current brought on by the pandemic.

Change is the only constant

In almost every conceivable way, CRE has transformed market thinking in ways large and small, from the size of space footprints to the way those spaces are configured.

“Heading into the pandemic, I don’t believe that I really saw a lot of people trying to downsize their footprint. Everything was pretty much going on as normal, depending on the type of business that they’re in,” said Cheryl White, senior property manager.

“What we’re seeing on renewables is that a lot of the tenants are either wanting to downsize because so many people are at home and wanting to remain at home,” said White. “Or (they are) trying to work with them while they transition to see what they’re going to let their employees do, whether they’re going to let them remain at home or if they’re going to try to bring them back into the office setting.”

White said CRE companies that demonstrate sensitivity to tenants’ needs as they bring their people back or look for a new space will be critical. This means being flexible on office modifications that promote social distancing or making other investments that speak to health issues within a building.

“We’ve really tried to assure our tenants that we’re doing what we can with our building to promote health and safety,” she said. “From our cleaning and janitorial to having hand sanitizers in the building, we want to make it to where they feel safe enough to come to the office. We ask that they wear their mask and going through all of that protocol as well.”

Even so, most CRE firms are still in a reactive posture when it comes to such measures, given the large amount of uncertainty that still surrounds COVID-19. This puts pressure on management companies and building owners alike to remain light on their feet to adapt and adopt, quickly.

“As it relates to the near future, I’m not sure anybody can really guess or estimate what’s going to happen because we don’t know what’s going to happen with policy making or how the government’s going to address a lot of tenants’ needs,” said Nick Kelley, executive vice president. “People who have been getting [stimulus] help from the government, may no longer get it. It’s hard to know what’s going to happen in a lot of the spaces that we manage.”

“I do see encouraging outlooks, as it relates to commercial real estate. There’s been an increase in activity with the announcement of the vaccines. But the truth is, the immediate future is going to be hard to know because we don’t know what’s going to happen with the pandemic.”

Challenges related, but not identical

Specific needs within the CRE market, while all stemming from the same challenge of COVID-19, continue to vary widely. Not all segments come under duress at the same time or to the same degree, demanding something more than one-size-fits-all solutions.

“The three segments of the market that we deal with are all different: retail, office and industrial,” said J. Daryl Peeples, president and principal broker. “At the start of COVID, I spent a majority of my time dealing with retail as it was the retail tenants that couldn’t pay rent. So, we were working with our clients and with our landlords on a daily basis, negotiating rent forgiveness or rent deferral or a combination of those two things and trying to negotiate something on the back end of the lease to give them a little bit of relief.”

“The office spaces were dark, but office tenants, by and large, were paying rent. We weren’t dealing with the nonpayment of rent in our office environment,” continued the local real estate executive. “Today, the larger firms haven’t come back yet, but some of the smaller firms have. So, you’ve got the needs of that segment of the office market and then the segment that hasn’t come back to work.”

Peeples said the industrial market, by contrast, is one of great opportunity, particularly as it pertains to distribution and other flex-type spaces. It’s an example of one segment’s loss is another one’s gain.

“National companies, in general, are trying to focus on distribution, rather than having a retail presence,” he said. “It’s delivery to the homes and trying to improve their distribution of their products. I think they’ll be looking for more flex-type space to provide that product directly to their customers, rather than through a retail environment and that’s a very active market that we want to participate in.”

To that end, Central Arkansas has a distinct advantage with amenities such as the Port of Little Rock and other large footprints that have successfully lured the likes of Amazon.

“Little Rock’s been on a consistent growth pattern for 25-plus years,” Kelley said. “We get back to that rate with a slight uptick because of some of the industries that have started to look at Little Rock as a great opportunity thanks to our shipping ability, our intermodal transport. The Little Rock Port provides a service that’s second to none in the country and people are starting to catch wind of it and taking notice of it.”

“As the community adopts these new people moving in, these new companies and new employees, I think there will be an even greater push for Little Rock to continue to grow in that sector, which will benefit all of us.”

Adapt, adapt, adapt

Capitol Center 12th Floor Executive Suites

Kelley Commercial Partners is converting the 12th floor of Simmons Tower to executive suites which offer professional, affordable spaces with flexible terms. The remodel should be completed by April 1, 2021.

All the partners interviewed agreed that some of the changes that have occurred as a result of COVID-19 are likely to be the norm rather than the exception going forward. The CRE companies that thrive in this new environment are those that can nimbly adapt to fundamentally new ground rules, be it in lease terms, office design or repurposing spaces for alternate uses.

“We have managed to increase and put some new tenants in and it’s all been because the landlord was willing to meet the needs of the tenant and give them the flexibility that made them comfortable to move in,” said Maggie Hogan, chief financial officer. “When people get back open, we’re going to see combinations where maybe not everyone has a private office because they don’t work everyday from the office. Or, people will still want to have an office, but maybe those offices are shared offices throughout the month.”

“I think the trend toward having higher density [in offices] is going to be less, even when COVID’s over. People are going to be a lot more aware, should another pandemic come around, of what we have to do to make sure that we’re prepared. I think people are going to be much more aware that it’s a possibility of having to make changes and being able to adapt quickly to changing situations.”

Peeples said repurposing of spaces will be of paramount importance moving forward. For instance, Kelley Commercial has transitioned several floors of Little Rock office space into “flex space,” what company leaders describe as an “office Airbnb” where drop in and short-term clients can utilize office amenities.

Similar repurposing is in demand. In a retail sector pummeled by online shopping and home delivery, yesterday’s retail store or bank branch is increasingly finding new life as something entirely different.

“The market tells you what’s going to work and what’s not going to work,” said Peeples. “Medical’s an excellent example. Health care entities are very active and are looking for 2,000- to 4,000-square-feet and landlords very quickly have to say, ‘Okay, what’s it going to take to accommodate that tenant?’ It might take a significant amount of money to refurbish a property for that type of use, but landlords are quick to adjust to the market.”

4261 Stockton Dr, NLR

Stockton Medical Plaza at 4261 Stockton Drive in North Little Rock offers a great location and space ideal for health care providers.

“From my perspective, anything that’s B-retail is eligible to be converted to service office use, medical use, et cetera,” said Hank Kelley, Jr. CEO and executive broker. “This is a fantastic opportunity for the hospitals, the medical practices and the clinics that need retail-like locations to go grab some of those locations at a fraction of what they would spend to go build a building.”

“Look at all the bank branches that are around. They’re being repurposed. Why are they being repurposed? Because, they’re at some of the best locations that exist in the market. Most of them have drive thrus. In the restaurant world, if you have a vacant restaurant building that has a drive thru already built into it, somebody’s looking into that. I don’t care what part of town you’re in, somebody’s looking to do a drive thru business.”

More questions than answers

The pandemic situation still poses far more unknowns than concrete trends, the partners said, both for the company and for present and future tenants. From economic recovery to health aspects and availability of vaccines to as-yet unimagined government and regulatory changes, the CRE market is fluid at best.

“Today, you’re saying, ‘Well, what’s going to happen with the office market?’ I think that’s yet to be determined and I think the challenge will be in the next few years, as we deal with lease renewals on these offices,” Peeples said. “What is that going to look like now that these larger firms have had a year of working remotely? How’s that working for them? Is the savings of rent worth continuing to work in that environment?”

“We don’t know the answer to that yet. I think people are still in a wait and see mode before they make any decisions on where they’re going to lease space. We’re hopeful that in the second half of this year, the leasing activity will pick up.”

Hank Kelley said uncertainty in the market can also work in the company’s favor when talking to prospective clients trying to decide between building a new headquarters and leasing existing space.

“The availability of capital is more important now than it’s ever been,” he said. “On one hand, if I go to the bank and borrow 50% of the cost of the project, I have banks lining up to make that loan to me because there’s no risk to it.”

“But most people want to borrow 75% loan-to-value and the banks and the lenders are very risk-averse right now. Even though they don’t have a lot of loan losses, they can see where the potential for loan losses lies on the horizon and they’re being very cautious about what they’re lending.”

And even if a project can access capital, Hank Kelley said, clients are finding money isn’t going as far given higher construction costs such as materials and labor, only some of which is pandemic–related. Therein, he said, is CRE’s ace in the hole.

“The advantage we have as managers and owners of existing buildings is that the cost of our space is maybe 50 percent of what the cost of a new building is now,” he said. “We deliver extraordinary value to the users of those buildings, as compared to if they decide to move and go build something themselves. The last resort of any client that I’ve got is to come out of the ground with a new building on a piece of ground right now, unless it’s build-to-suit where no other building can be adapted to the client’s needs. We’re developing several of those right now and we’re glad to have that as part of our business.”

“But even then, any client that comes to me and says, ‘I’m thinking about relocating,’ I make them go through buildings that are existing to see if a building can be upgraded or remodeled because the end solution is going to cost them a fraction of what it would cost them to build from the ground up. So, there is hope for these buildings that are may be dormant right now. When the market comes back, existing spaces will have a real advantage.”

 

Advantages of consulting with a tenant broker

When you’re searching for office, retail, warehouse, or any other type of commercial real estate space to lease, finding the right property to match your needs can feel a bit overwhelming, which is why contacting a knowledgeable tenant broker is the best place to start. Tenant brokers understand current market trends and are equipped with the tools and knowledge to successfully guide you through the leasing process from start to finish. 

Kelley Commercial Partners’ tenant brokers have the expertise to make your search for space less daunting. They have the latest information about market conditions and space availability to help narrow your options so you can make a choice with confidence. Working with a tenant broker at Kelley Commercial Partners means you have an expert on your side who can not only save you time and energy but can also save you money.

Tenant broker processThe first step in our process is to schedule an appointment with you to discuss your specific needs. Matt Strom, a KCP agent in our Northwest office says this a crucial step because having a thorough understanding of a client’s needs helps to streamline the process of securing the right space for their business.

Once the ideal space is found, tenant brokers will help you negotiate with landlords to secure the space at the best possible price. And the best part of all? Tenant broker services are done at no cost to you! “Many clients don’t know that a tenant broker’s services are free to them,” said Strom. When a lease has been executed, tenant brokers’ fees are paid by the landlord. 

At Kelley Commercial Partners our brokers have a proven history of satisfied clients. Helping our clients find the right space to meet their unique needs and meet their commercial real estate goals is our top priority. Whether you are looking to lease, buy, sell, or develop commercial real estate, our team is available to guide you through the process.

If you would like us to assist you in your search for your ideal space, please contact us.