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Commercial Real Estate

RELATIONSHIPS BUILT TO LAST

Relationships Built to Last

RELATIONSHIPS BUILT TO LAST

Paramount recently represented the Owner of 1000 West 94th Street in Bloomington.  The building is approximately 5,000 square feet, with about one-third of an acre of fenced and paved outdoor storage. The client has worked with the Paramount Team for 20+ years.  The relationship began with one transaction in the late 1980s, and has grown substantially since that first transaction.  A mutual trust was developed during the first lease negotiation through open communication, honesty, and truly working in the client’s best interests.  Over the last 20+ years, many more transactions have reinforced the trust that is the foundation of the relationship.
Too often commercial real estate services are commoditized.  Excellent customer service is a lost art that few providers genuinely offer.  Business owners generally have multiple projects underway at once.  The ability to retain a trusted advisor to handle all real estate related tasks can free up an immense amount of time for busy decision makers.  This allows them to focus on running the business.  That is not to say that the business owner is uninvolved, on the contrary; constant communication between the client and the advisor is the most efficient way to build trust and create a successful conclusion to a project.
Paramount prides itself on its customer service.  The team of Paramount professionals  have built a brand with a reputation that Paramount has the knowledge, integrity, expertise, and communication skills to not only satisfy their clients, but go beyond to deliver extraordinary results.  Paramount works hard for our clients, large and small, and seeks to obtain relationships built to last.
Written by: Joseph Schultz, East Team Associate

SUBLEASING IN TODAY’S MARKETPLACE

Subleasing in Today's Marketplace

SUBLEASING IN TODAY’S MARKETPLACE
Subleasing in today’s market is commonplace.  There are a variety of reasons why firms sublease their excess space.  However, for those who intend to sublease, some caution is appropriate.

Make sure to check on the credit and payment history of the firm subleasing the space, particularly if they will pay any part of the gross rent due and payable to the Prime Landlord.
Carefully read and understand the tenant obligations under the Prime Lease.  This is often an attached exhibit to the sublease document.  The Subtenant’s obligation is to comply with the terms of the Prime Lease.
Make sure to receive the Prime Landlord’s formal approval, in writing.  Sometimes this is as simple as a signed consent note on the signature page of the sublease document.  On the other hand, the consent form can be several pages.  If the Prime Landlord’s consent in the Prime Lease is something other than “reasonable,” make sure to understand what the “other” stipulations are.
If modifications are made to the space, understand the obligations in respect to the lease.  Removing modifications may be a requirement upon termination of the sublease.
Make sure the life safety and exiting requirements meet local codes.  Often times, a space carved from a larger space does not meet the proper exiting requirements, which may mean extra costs.https://paramountre.com/agent/phil-simonet/

For more information on subleasing space, reach out to our experts:
Phil Simonet, Principal | John Young, CCIM, Vice President | Nancy Powell, Vice President | Jeffrey Swanson, Associate | Joseph Schultz, Associate | Jack Buttenhoff, Associate

TWIN CITIES MARKET SNAPSHOT

The Minneapolis-St. Paul Real Commercial Estate Market continues to perform admirably with office and industrial sectors demonstrating excellent performance throughout 2019.  The Markets characteristics remain upbeat and include positive net absorption of vacant space, moderate to low vacancy rates and measured new speculative development.  Economic conditions remain favorable however, recent statics raise concern for the continued overall economic growth in Minnesota and the USA.   While inflation continues to remain low at about 2% (annualized), unemployment has increased from 2.5% to 2.9% and median income for Minnesota households as stagnated year over year at $70,300-both still much better numbers than the national averages of 3.4% unemployment and median household income of $63,179 respectively. The 15 month trade war with China combined with all of the uncertainty in Washington DC (impeachment and gridlock) and slowing business investment-down 1% on an annualized rate last quarter create potential headwinds to sustained future economic growth.

Industrial Market


 
Industrial has been the best performing asset class of real estate since the Great Recession in 2009.  Vacancy rates are at an all-time low (4.9%) in a Twin City universe of 248 million square feet and have decreases by 1% since the beginning of 2019.

Net Absorption of available space stands at 2.73 million square feet through the third quarter of this year with bulk (high-bay) warehouse experiencing 1.74 million square feet of net absorption. Driving the net absorption has been e-commerce related companies localizing the distribution of almost everything now available on the internet.
To date there are 27 industrial projects under construction totaling 3.6 million square feet.   1.9 million square feet has already been delivered to the market.

Collectively, what all this most likely indicates is a continuation, at least through 2020, of relatively good conditions and performance for the industrial market.  The two current deterring factors, other than an economic slowdown, are the cost of tenant improvements and finding and hiring employees.

Office Market

The office market continues its long standing recovery albeit some sub markets are stronger than others.   The overall office vacancy rate for all Twin Cities office properties is 11.8%, which is down .8% from January 2019, however within multi-tenant properties the vacancy rate is 15.4%.  The northeast office market has the lowest vacancy rate at 8.6% and St. Paul CBD has the highest vacancy rate approaching 20%. Class A multi-tenant office space has the lowest vacancy rate at 12.5%, Class B Office space is at 17.7% and Class C is 13.8%.
Net absorption Year to Date is 363,871 square feet.  Actual absorption Year to Date is 504,247 square feet, however sublease space create 128,052 square feet of negative absorption.

The office market performance has instilled enough confidence in a local developer to spec a 361,104 square foot office building in the West End mixed use development named 10 West End. Net rental rates are projected to start at $25.50/sf.

One new office market characteristic that has been gaining momentum is the demand for building amenities.  Many office buildings have completed or are planning to complete updates to building common areas, add amenities such as work out areas, coffee bars, common area meeting spaces, food service, and concierge services among other things.  Many of today’s sophisticated tenants want space that is fun, functional and will retain and attract top talent in the current tight labor market.

Commercial Real Estate Tip | September 2019

Q & A
Commercial Real Estate Questions Tenants often Ask Regarding Their Occupancy
Written by Bob Johnston | Vice President Sales & Leasing

QUESTION #1:  What if the Landlord is not finished building out my space by the time I want to move in?
ANSWER: If the Landlord is actually responsible for the completed work, much depends on how the lease is written and the commencement date defined. For example, a commencement date can be tied to the substantial completion of the space, so the lease will not commence until the Landlord completes the work. Sometimes, the date is even contingent upon occupancy and the commencement of business in the space. On the other hand, there might be a specific commencement date defined.  If the Landlord is late, the lease language will generally state that there is no culpability on the Landlord’s part, but the commencement date becomes the date on which the space is completed and the initial term extended from that date. In short, these issues are negotiable and dependent on each tenant’s situation.

QUESTION #2:  Toward the end of each calendar year, the Landlord sends us a note informing us of the new Common Area Maintenance (CAM) & Real Estate Tax estimate for the following year. However, we never get a breakdown of the actual expenses. Is that available?
ANSWER:  Most landlords will provide that information if requested. It always helps to have language in the lease that allows for a tenant’s review of the costs; and with larger tenants, audit rights are always helpful.

QUESTION #3:  What do I need to do to get the tenant improvement allowance provided by the Landlord?
ANSWER: Typically, for smaller tenants with smaller budgets, all that is required is a formal letter requesting Landlord reimbursement of the allowance and proof of completion accompanied by all subcontractor lien waivers. For larger jobs, sometimes a title company gets involved and administers “construction draws” and monitors the construction progress.

QUESTION #4:  Do I need to hire a disinterested third party architect to confirm the size of my space?
ANSWER: Typically not.  This can be warranted in certain circumstances. Individual spaces/bays are already pre-measured by the building’s architect and floor plans are drawn based on those measurements. Therefore, the space computation is generally accurate. RU factors can vary by building, and are often much higher in smaller buildings.  It helps to check the accuracy of the actual useable space and clarify the respective RU factor to calculate the rentable area (the number that determines the annual rent).

Get answers to all your commercial real estate questions.

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Commercial Real Estate Tip | May 2019

Successful Commercial Leasing=Understanding Your Rent
by Bob Johnston | Vice President Sales & Leasing

THE TERMINOLOGY OF RENT

Most commercial leases today are “net leases”, meaning that the tenant pays a “base rent” which is “net rent”, or separate from, the operating costs and real estate taxes for the property. The operating costs are then passed on to the tenant as a separate cost, equaling a total rent cost and what many then refer to as “gross rent.”
Even this varies, however, from property to property. For example, often times in retail and industrial properties, tenants pay for their use of electricity and gas as well as janitorial services. In addition, sometimes the tenant, at its expense, must contract for local trash pick-up. These separately contracted costs are not part of the ordinary operating expenses. On the other hand, office leases typically are “full service” leases. In other words, there are generally no extra charges, other than perhaps charges for extraordinary use of services such as air conditioning or cleaning, etc.
It is critical that a tenant understand the complete picture and know what the total rent will be. In addition, it is also critical that the tenant understand what expenses make up operating costs and what costs are reasonable and legitimate. It is obviously to the landlord’s advantage to get the tenant to pay as much of the total operating budget as possible. This is even more critical in mixed-use projects where landlords tend to shift maintenance costs for the residences to the office component. Thus, the office tenant contribution is actually more than what it should be. I once audited the landlord of a very large mixed-use project in Chicago and found over $100,000 wrongfully allocated to the tenant even though the lease prohibited their doing so.

WHAT SHOULD NOT BE INCLUDED IN RENT?
Here are some suggestions as to what to eliminate from the landlord’s menu. The list is obviously not exhaustive, but rather illustrative of some of the costs landlords attempt to pass on to tenants:

Leasing commissions, space planning expenses with architects/interior designers, or even attorney costs associated with a lease negotiation or existing tenant dispute
Costs associated with the construction of tenant improvements, either with new tenant relocations or existing tenant renovations and remodeling
Costs associated with the entity of landlord, particularly as it relates to partnership/ownership issues or the selling or refinancing the property
Many large landlords have affiliates or interests in affiliate companies, so it is important to ensure that the contracted vendor costs are no more than what an unrelated third party vendor might charge
Be careful about the expenses for salaries, benefits, etc. that go into “management fees.” Executive salaries, or any allocation of those salaries, should not be part of the operating costs for the building
Capital improvements are not, by accounting standards, expense items, although landlords can routinely pass on the amortized cost of the improvement as an operating expense
Make certain that in a retail environment, the tenant’s pro-rata share of operating expenses is calculated over the entire leasable area of the property rather than only on the space currently leased and occupied.

Proper due diligence and understanding of the components of a building’s operating budget are critical to a tenant’s successful occupancy, financial stability and long-term enjoyment of the space.

For the best in commercial real estate
service and solutions.

Call (952) 854-8290

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Ownership Cycle of a Commercial Property

WEST BLOOMINGTON BUSINESS CENTER
6300 W Old Shakopee Rd, Bloomington, MN
Written by: Fred Hedberg

In 1997, Fred Hedberg, Principal of Paramount Real Estate Corporation was asked by a past client to determine the value and marketability of some excess land that was remaining after building a mini-storage facility on a site in Bloomington, Minnesota.  Fred provided a valuation and marketing plan for the land.  He also suggested that his client might want to consider developing an office-showroom or industrial building on the site.  The market for that type of product was very strong at that time. Fred suggested to his client that if this was of interest, he would like to co-develop and own the building with his client.

Forming a Partnership-The prospect of continuing to own the land and to not pay capital gains tax on a sale was appealing to Fred’s client.  It was beneficial having the opportunity to partner with a seasoned real estate professional who had a good understanding of the market and what kinds of buildings and spaces tenants were looking for at that time.  They agreed to move forward on a new development together.  They  began to work with an architect and contractor to lay out a building on the site that would meet current market demands for space and to meet the test of time.
Developing the Property-After a review of financial projections prepared by Fred, a partnership was formed to move forward with the project.  Construction drawings were completed, city approvals and financing was secured.  Krause Anderson was selected to act as the general contractor for the new 80,714 SF project called West Bloomington Business Center.
Completing the Project-Paramount Real Estate Corporation was hired to lease and manage the building for the partnership.  The shell building was completed in 1998 and it was fully leased and built out by the end of 1999. The building attracted well-known local and national tenants that leased the majority of the building as office space.In 1999 the building was recognized by NAIOP as a recipient of their Awards of Excellence for the Light Industrial-High Finish category. The building has performed well though the various real estate cycles that followed and has stood the test of time as different tenants with uses other than office have found it to be a desirable building and location for their businesses.
Selling the Building-After 20 years of ownership, Fred and his partner decided that it would be in their best interests to sell the building during the current business cycle for estate planning purposes and to maximize their return on the investment.  Fred found a local investor that was in need of a 1031 exchange property. West Bloomington Business Center fulfilled his exchange requirement and his desire to own a well performing, high quality asset.  The property was sold in August 2018 and the new owner hired Paramount Real Estate Corporation to continue to lease and manage the building.
Paramount Continues to Lease and Manage Property-Fred and his leasing and property management team are excited to be able to continue to work on this project in the future.   See detailed information about the space currently available at West Bloomington Business Center.

If you would like real estate investment advice,
please contact:
www.paramountre.com
(952) 854-8290

Real Estate Tip of the Week-9.14.2018

Have you purchased a commercial or industrial building lately? If so, then you know the Minnesota Pollution Control Agency is aggressively regulating vapors that may seep into buildings. Cracks in concrete floors, holes in the foundations, and just plain porous concrete can be conduits for harmful chemical vapors that may exist from contamination on your property or even the neighbor’s property.
Environmental consultants are recommending vapor testing for sites that are near known
groundwater and soil contamination.
If the tests are positive, a second round of testing may be completed before designing a treatment system. Typical treatments include creating negative pressure under the floor slab and venting it out the roof. This can be expensive, $1.00-$2.00 per building square foot. As you may know, when the MPCA is concerned, so are the banks. We have worked on four transactions in the last two years that required vapor treatment. It did not stop the transactions, but the process takes time, effort, and attention to detail in order to be successful.
Need real estate advice.  Call Paramount.
TRUSTED.  DEDICATED.  EXPERIENCED.
(952) 854-8290

Real Estate Tip of the Week-9.6.2018

What is LEED?

In order for a building to earn LEED Certification, it must meet certain criteria and goals within the following categories:

Location and Transportation: How close is the project to mass transit?
Materials and Resources: Will the project use locally sourced, sustainable products?
Water Efficiency: To what extent will the project reduce potable water usage?
Energy and Atmosphere: How will the project improve energy performance and indoor air quality?
Sustainable Site: To what extent will the project utilize nearby natural resources and ecosystems that can naturally take part of the design, minimizing environmental pollution?
Regional Priority Credits: This addresses particular concerns based on project location
Innovation: Any idea that is not covered under the main LEED areas

Each of these respective categories contains a series of opportunities to earn credits.  The project earns points when it uses and integrates these opportunities.  The more points the project earns, the more sustainable is the building.  Depending on the number of points gained, the project can then earn certification as a certified building or as a silver, gold or platinum building.
Benefits of a LEED Certified building are many:

Reduced use of energy and water
Reduced operation and maintenance costs
Reduced construction waste during the construction process
Increased indoor air quality
Usage of recycled materials
Increased employee performance, satisfaction and retention

Need advice on LEED.  Call Paramount.
TRUSTED.  DEDICATED.  EXPERIENCED.
(952) 854-8290

Real Estate Tip of the Week-7.26.2018

Qualifying your real estate needs, researching, locating and negotiating a new lease or purchase of a property is by no means the end of the relocation process for most companies. 
One of the most important and costly items within relocating a business operation is the actual move itself.  This activity requires diligent planning, multiple bids for competitive pricing, knowledge related to construction, furniture systems, Tel-com and IT, relocation/moving service providers, and many other move related items.  This is where a seasoned project manager can add tremendous value saving time and money, keeping everything on schedule and handling any problems as they arise.  Why risk exposure to additional costs, disruptions or unforeseen delays and headaches, not to mention the stress the inside person who was tossed the project manager hat will experience.  Interview and select a Project Manager as part of the initial space planning process and the move experience (and costs), will be well worth the cost of a Project Manager.
Call Paramount.
TRUSTED.  DEDICATED.  EXPERIENCED.
(952) 854-8290

Real Estate Tip of the Week-6.28.2018

Sale lease-backs can be a great option for your business. While many business owners feel that building ownership is right for them, a sale lease-back can provide financially-strapped companies with the capital injection they need. The transaction is simple: an owner/user sells the building to a third party investor, then leases the building back, often long-term. Equity in a building will generally see an appreciation equal to that of inflation (1-2%/year). A sale lease-back allows for a much higher return on equity by reinvesting the cash from the building sale back into the business itself; where owners can see a return much higher than 2%.
Want more information on sale lease-backs?
Call Paramount.
(952) 854-8290