LEASE VS. OWN
Many business owners dream of owning their own industrial or office building rather than lease space and pay rent to a third party landlord.
One should consider both the costs and benefits of commercial property ownership to understand if it’s the right financial and operational move for the individual owner (what ever form of ownership it may be) and the company occupying all or part of the property.
Potential Benefits of Ownership:
Better control of building operating expenses
Potential property value appreciation creating more personal wealth
Principal reduction on the loan via rent payments from the tenant
Tax benefits such as depreciation
An excellent marketing tool (the bldg.) demonstrating the success of an organization
May be less expensive than leasing space in today’s market
Potential Costs and Risks of Ownership:
Generally less flexibility to expand or contract space size
Requires equity up front: 10%-25% down payment
Responsible for ALL building maintenance (roofs, parking lot, HVAC, etc.)
Could lose value during a market downturn
A default on the loan may result in foreclosure by the lender
Q & A
Questions Tenants often Ask Regarding Their Occupancy
Written by Bob Johnston | Vice President Sales & Leasing
QUESTION #1: What if the Landlord isn’t 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 tie 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, the lease might define a specific commencement date. 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, smaller tenants with smaller budgets, the only requirement is a formal letter requesting Landlord reimbursement of the allowance and proof of completion accompanied by all subcontractor lien waivers. Larger jobs can have a title company involved to administer “construction draws” and monitor 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, but each situation is different. The buildings architect can pre-measure individual spaces or bays. From the measurements, floor plans can be drawn. 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 & questions tenants often ask.
REAL ESTATE TIP OF THE WEEK: GLOBAL VIEW OF REAL ESTATE
Sure, it is easy to look only at the total amount of real estate you want to own or lease. It is also easy to only look at the economics associated with your choice. However, before one even looks at real estate options, a strategic review is necessary. You want to ensure that your real estate and business goals can be aligned.
Certainly, economics (costs) are PARAMOUNT, but what other aspects of your occupied real estate significantly impact your business operations? For example; productivity, efficiency, growth, access to labor, and ability to attract and retain top talent are all influenced by real estate decisions. Attracting and retaining top talent, a key concern for most businesses, can be enhanced or diminished by the wrong real estate strategy. Employees and visitors want amenities such as restaurants, walking paths, public transportation, and public spaces.
There can be a delicate balance between the human resource aspects of real estate and the hard economics of the bottom line. A clear and well-articulated strategy makes this balancing act much easier when looking at real estate options.
For more information visit out website: www.paramountre.com