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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.

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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