Repair and Maintenance on Commercial Property
Repair and Maintenance on Commercial Property
Calculating repair and maintenance costs on commercial property, how should that be done? Generally an investor is going to look at repairs and deferred maintenance on commercial properties as a percentage of the potential rental income. Potential rental income is not net operating income and should not be confused with NOI. We can also call potential rental income on a commercial property estimated gross income or EGI. Investors will use different figures on how they base the figures they use for these calculations so we must define how expense figured are determined.
Using dollars versus percentage for repair and maintenance
Sometimes it makes sense to use a dollar figure versus a percentage number. An example of this would be if an investor knows the HVAC is old and needs replaced, than an actual dollar figure can be used or perhaps the HVAC is going to need replaced in 2 years , the cost can be averaged out and that figure can be used. What about a percentage number, what should be used? We have to get down to a reality issue to consider costs involved in repair and maintenance of commercial property which would include lease obligations.
Primary Guidelines
- Age and physical condition of the commercial property
- Condition to the other improvements to the property you are considering
- An investor’s responsibilities under the lease being a landlord
General Rule of Thumb for repair and maintenance
As a general rule, repairs and maintenance should be calculated as a default from 5-10% of the effective gross income generated by the property. This number would be included into the expenses of the property (NNN) or OPEX operating expenses. This deduction will have a direct affect on the net operating income of the commercial investment property.
Breaking an Office or Warehouse Lease
Breaking an office or warehouse lease
Long term leases, may have provisions in them for a tenant to leave early. Maybe your landlord is looking to relocate you as a tenant in essence breaking an office lease in place , or maybe you as the tenant is looking to move into a new space that is more suitable?
There are times in Austin commercial real estate when the usefulness of the lease has run its course before the term has ended. As a tenant, there are some actions that can be taken to protect yourself before executing a lease so that during the lease term you will maintain some flexibility.
Before you execute an office lease
We always suggest that you have an attorney review your office or warehouse lease
Here is what is important , make sure you hire a commercial real estate attorney that is familiar with Texas based lease contracts, you wi
ll want to ask an attorney for review if your office lease seems complex or the language in it is hard to comprehend. There can be large office leases or relatively short leases that have easy or tough language within the lease. Potential problems can be avoided with some by having your attorney translate and offer modifications regarding the details of your office or warehouse lease. Simple straight forward leases tend not to need the oversight, but it is always the tenant’s decision as to engage with an attorney or not.
Buyout or termination provisions in breaking an office lease
During the negotiation process, if a tenant feels they are going to expand or need to move , your Broker can help you find a way to work in buyout or an out clause into the lease. When negotiating a lease is making sure there is a termination option if it applies, let’s be straight forward on this , they are not easy to attain unless there is a legitimate reason to have this. Tenants with office or warehouse leases longer than five years may want this clause in their lease. A right to terminate will not be offered voluntarily by your landlord, rather, it is something your broker will need to establish before singing.
During your office lease
Record all the issues you have had
Keep records in an organized manner regarding issues with the space you have been leasing and how long management (landlord) took to repair or fix the issue. Perhaps this can be used as leverage if you need it, however don’t bank on this being the pivot point to allow breaking an office or warehouse lease.
A tenant should be able to sublet their space , this typically happens when the space is no longer suitable due to downsizing requirements or up-sizing requirements. They key is your broker will help you review your sublease language, be careful some leases have heavy fees involved in them and the landlord will get paid extra if you elect to sublease your space to another tenant called the sub-lessee.
Other Options to breaking an office or warehouse lease?
Ask your broker to have a conversation with the landlord
Your broker may have a greater understanding of how leverage your termination.
Rent reduction towards the end of your term?
This option has teeth in a tough market, with good markets it is not a high probability option unless you as a tenant have been very good about paying your rent on time for most of the term of your lease. Of course this is a win-lose option in a good market because it does not benefit the landlord and the tenant, only the tenant benefits in this situation.l
Commercial Real Estate Leases
Commercial Real Estate Leases
– Not so simple
Here is a great real life example of how a tenant can put themselves into a not so favorable position. Recently, we had a call from a tenant who seemed to take on too much warehouse space in the Austin area. Their game plan was to stop bleeding money so they contacted us about subleasing. Before we got involved, we asked them a very simple question. “Did you read the sublease provision in your commercial real estate lease?” The answer was “Well I have glazed over it”.
Moving thru the leases details
As a responsible broker, we asked them to send us a copy of their master lease so we could review the language. Case in point , within the commercial real estate lease there was language saying that their landlord can charge them up to in excess of $3000.00 if they chose to sublease their space. This fee was to cover the landlord’s costs supposedly of checking the sub lessee’s credit. Ok, folks .. here is why it is important to utilize a commercial real estate broker versus doing it yourself. Typically, some people say to themselves “I can just look up properties on the web and cut my own deal”. The question is : Is it really reasonable to ask a tenant to pay a landlord $3000 to check a sub lessee’s credit? What do you think?
If we represented this tenant, we would have asked to strike this language. Why? it is a pure profit ploy and does not benefit the tenant whatsoever. Small things like this can cost a business $1000’s of dollars. A professional tenant representation broker knows from experience what to look for. We also know when to tell you to seek the advice of an attorney for complex legal language. Now this tenant is stuck. Can you get stuck doing the same thing? Of course, if it has been done once it can be done again and again. A standard commercial real estate lease can be anywhere from 15-39 pages long , how would a business that does not transact commercial real estate deals day in and day out know what to look for? (Rhetorical question of course) . So why take the chance? Isn’t it time for you to offload this concern to a professional broker than can serve your best interests and not the landlords?
Office lease negotiations
Handling office lease negotiations
What is important when a broker like Shire Commercial represents you as a tenant?
. Working on knowing as much about who you are as a tenant and what your company has to offer to any landlord is important process of handling office lease negotiations.
Lower values? These start with a a startup? Why you may ask- high risk because your company may not have a long track record or no track record at all the exposure to a landlord is much higher than an established company.
So we would ask you and any professional broker will has you how long has your Company and the principal(s) that are run the Company have been in business?, Financials: It is a reasonable question to ask for an opportunity to be able to view your last few years of financial statements so that we know
Who you are and what the tenant will bring to the office lease transaction? Not able or don’t want to provide financials? You can have the broker sign a NDA however, realize when it comes time to draft a lease , your financials will be asked for.
Other work-arounds? Bank Statements would be the next step if there are no financials over the past 2-3 years available.
Landlord and listing agencies for office lease negotiations.
A broker’s knowledge and market experience will have a good idea sometimes about the landlord’s “strength” and “”staying power”.
This may include knowing as much as we can about the landlord’s “basis of the property”, their current mortgage term (if any), any reputation for non-performance to existing tenant(s) or to lender(s), and importantly-performing to pay commissions on time real estate brokers as well as and meeting any future brokerage commissions such as renewals- extensions or expansions.
Market Trends
. The “trend” of Austin’s commercial real estate market is either our friend or not from a tenant’s or your broker’s perspective so knowing how to create leverage to bring in concession strategies into play for more favorable terms and conditions is what Experience and Knowledge brings value from Shire Commercial to you as the tenant. Lease language can be fine tuned off a promulgate form by the broker however interpretation or writing new provisions for tenants is not allowed and you would have to seek legal counsel to do so.
Specialization is key, unlike other brokers, Shire Commercial “does specialize” in office leasing and warehouse leasing as well as purchase acquisitions on both types of property. We may do a few retail deals but that is not where we specialize.
City of Austin Permitting
City of Austin Permitting
The permitting process in Austin is a bottleneck for some and an easy transition for others. How do you navigate thru the ups n downs for commercial real estate with the City of Austin and its permitting process?
Overview
It depends on what you have to do these include :
- Commercial Tenant Finish-out Permits
- Commercial Shell Permits
- Quick Turn Around Permits
- Demolition Permits
- Apartment Building Permits – New Construction
- Apartment Building Permits – Renovations
- Phased Franchise Permits
- Mobile Vendor Permits
- Health / Industrial Waste Permits
- Business Change of Use Permits
- Site plan exemptions / corrections
- Restaurant Permits
- Bar Permits
Zoning and Site Plans
When a property has renovation or finish out, a tenant or buyer has to make sure the property is properly zoned. Zoning is for the usage they intend to have when they occupy the property. Most properties have an existing site plan in place unless it is a to be a construction property. If there is a “change of use” to the existing commercial space , the City of Austin will have to verify the property meets zoning. This includes parking and ADA accessibility as well as ingress and egress. Starting from a development standpoint, the developer will have to provide a site plan to submit to the City of Austin for permitting review.
More on City of Austin Permitting
There are different types of permitting , electrical, HVAC , plumbing etc..
When there is work that requires 2 or more contractors to work on the space permitting from the City of Austin is required. There are also Quick turn permits which are 5,000 SF or less for office and retail sales occupancies where hazardous materials are not being utilized. Quick Turn permits require no exterior remodels that increases the square footage of the commercial property. A phone call can be made to the Development Assistance Center for quick information about the permit process before a tenant signs a lease.
Inspections & Certificate of Occupancy
Once the plans are approved and the contractors commence work, the City will send an inspector out to check compliance with City codes. After the improvements are inspected and verified a certificate of occupancy is issued by the City of Austin. A C of O is given so that a business can start operating. There are stories of inconsistencies and bottlenecks with the City of Austin permitting process. Be prepared, permitting takes time even though the City is trying to re-write the development codes. As of the writing of this blog article, typically it is 60-90 days for major changes to a property.