San Diego Industrial Warehouse Market News

Contrary to popular belief, a “Gross Lease” does not protect the tenant against annual increases in rent, annual increases in taxes after the first year, nor an increase in taxes due to a sale of the property.

Be Aware and Plan Accordingly!

GETTING TO THE DETAILS:

Finding the ideal commercial real estate property to meet all of your specific needs and preferences can be a real challenge, especially in hot markets where the prime spaces go quickly. Once you find that perfect space for your commercial needs, it can be tempting to sign the contract without going through all of the details. Here are a few key details to look for when examining the leasing contract:

UTILITIES RESPONSIBILITIES:

Like residential leases, commercial properties vary in the utility payment agreement. Take care to ensure that you understand what your responsibilities will be in paying for specific utility bills. Commercial leases often use a different set of legal terms to describe the responsibilities, so be sure that you understand the exact meanings of any unfamiliar terms in the agreement.

INSURANCE: In most commercial leases, the landlord does not cover the business equipment of the tenant. For this reason, it is imperative that you understand the coverage provided and take the necessary steps to ensure that you have adequate protection for all of your business equipment and office supplies.

In most commercial leases, the landlord does not cover the business equipment of the tenant. For this reason, it is imperative that you understand the coverage provided and take the necessary steps to ensure that you have adequate protection for all of your business equipment and office supplies.

UNDERSTANDING FEES: When going through the contract, you may find that there are a variety of fees that are not expected and are potential deal breakers. Talking to your future landlord may prove invaluable in negotiating these fees down so that you can put yourself in position to get the best deal.

When going through the contract, you may find that there are a variety of fees that are not expected and are potential deal breakers. Talking to your future landlord may prove invaluable in negotiating these fees down so that you can put yourself in position to get the best deal.

SUBLEASE OPTIONS: Although it is never ideal to have to break a lease, you should know your options if you need to get out of the contract. Every commercial lease contract should have a section clearly detailing your options.

Although it is never ideal to have to break a lease, you should know your options if you need to get out of the contract. Every commercial lease contract should have a section clearly detailing your options.

INSIGHT:

Just a few topics mentioned above that come up in our discussions with you regarding leasing. We can teach you how to have a keen eye to detail and help ensure that you understand all of the parameters of your contract before signing.

Class A buildings vs. B buildings is hard to define, and harder to price. General rule, Class A is new or just renovated, master planned covering all systems and buildout meets codes that are up to date. You will be the first tenant in this new space.

Class B buildings are more difficult to uncover the deficiencies. Generally, structures are one generation older, slightly inferior, passed through several tenants, with systems that need attention with warranties set to expire, and there may be a need to check the latest building codes if there is a plan to add tenant improvements or additional office space. Otherwise, the building is functional for the intended use.

For Class B, look for a price drop off from Class A of ~15%. If you find the drop less than ~15% then Class B is priced too high in the market and negotiating is the way to adjust. Or better yet, simply get that Class A alternative because after all maintaining the building is a cost that tenants cover in most leases.

Ask landlord to provide a warranty in the lease for electrical, mechanical systems and HVAC units for at least for an initial time period. Know that after that time, most costs fall on the tenant. Try all systems upon move-in and document the status, then provide to the landlord for fixes, repairs or replacements. Repeat this process at renewal time as part of your renewal agreenent. Note, systems fail and maintaining these cost intensive items are a part of the negtiating process of leasing and preparing a document to sign. All landlords are different, all buildings are in a different stage and age, which makes warranties ever more important. Don’t miss this opportunity to cost you down the road.

Tenant Tip: In leasing a brand new warehouse, good news is that building warranties exist by the builder for the infrastructure; bad news, you must pull teleconmunication cable thought the office, distribution power in the warehouse, and check internet availability as it may not exist yet for a brand new business park. Which means finding a more expensive alternative that you must pay for in order to get telephones and internet access.

Tenant Advice on Twitter

Yes, over 400 tweets in 10 years available for you, all about getting educated on leasing space. Find real life strategies for small companies leasing space at the Encon Commercial Twitter account. Sign up on this website, see active strategies, read back tweets, save and download all the practical, cost saving advice we have compiled throughout the years. In 140 characters or less, a true valuable resource that is free and always available at our website. Don’t miss the next real news and practical takeaways at Encon Commercial Twitter, where we speak to you the tenant and the nation on gaining an advantage while saving costs and protecting your interests in leasing space.

Even if we are not in your market, we are on your side. We know that your next lease is a new beginning of your company’s future and we can help you obtain the best leasing scenario possible.
Thanks for following us and getting ahead of the game with Encon Commercial. We appreciate your desire to learn and drive to win.

When it comes to commercial space, we find ourselves trying to understand the language of leasing and our responsibilities under our lease. Although it is not a daily ritual to review our lease, it is worth setting aside some time to understand the basic definitions of the agreement. The landlords and the brokers refer to leasing in three basic terms: Full Service Gross (FSG), Modified Gross (MG), and Triple Net (NNN). The more you familiarize yourself with these three basic terms, the more you will understand your future obligations under your lease and you will be better informed to negotiate in the future.

In the commercial real estate market, the landlords draft the leasing contract with terms and conditions that are to their advantage. Therefore, the tenant should make sure to know the terms and conditions since they will be bound to the lease after they sign. In addition, it is paramount to have your attorney and tax accountant review your lease prior to signing. With this being said, you have a choice to the type of lease you would like to enter into: Full Service Gross, Modified Gross, or Triple Net.

Full Service Gross (FSG): Tenants pay the rent and landlord pays the taxes, maintenance, and the insurance on the building, as well as the electricity. However, tenants may be responsible for any yearly increases in these costs over the first year (or base year) of the lease.

Modified Gross (MG): Tenants pay the rent and the landlord pays some of the expenses for the building. Tenants are also responsible for some, if not all, of the utilities. We recommend the tenant confirm which utilities they will be responsible for prior to signing the lease.

Triple Net (NNN): Tenants pay the rent plus the expenses of the building (property taxes, maintenance and insurance), which is usually calculated as a separate fee paid to the landlord by the tenant.

A Full Service Gross lease is generally the highest rate per square foot, with Modified Gross being the second highest, and Triple Net as the lowest (at least on paper). While the Modified Gross and Triple Net may seem enticing at first, it is important to keep in mind that they have extra fees and costs associated with these types of leases. Therefore, when comparing between the three terms, compare them based on the total cost. One caveat worth mentioning is the ambiguous Common Area Maintenance (CAM) charge, which represents the cost of maintaining the exterior of the property, and it is often an additional charge due to the landlord. With any type of lease, we recommend you to request a breakdown of these additional charges prior to signing.

While these terms may vary slightly for different markets and landlords, the general concept remains true for each type of lease. The devil is in the details, and we highly recommend that you read your lease carefully to understand your economic responsibility throughout lease term.

John Scatoloni is not an attorney or an accountant and this article is not intended to provide any legal or tax related advice.