Commercial Real Estate Terms Inspectors Should Know
by Nick Gromicko and Kate Tarasenko
If your inspection business has outgrown your home office, consider leasing or purchasing commercial property. In addition to determining your new office’s size and location, and the budget you’ll need for monthly costs, you should familiarize yourself with some basic terms of the transaction. Always consult with a trusted commercial property broker and attorney familiar with such deals before signing on the dotted line.
- A broker is the go-between for a purchaser and seller (or landlord and prospective tenant). The property owner generally pays the commission or fee for the broker, who must be licensed by the state.
- An appraisal is the financial equivalent of an inspection. An appraisal is conducted by a state-licensed professional that includes an analysis of the property's value based on market trends and sales in the immediate surrounding area. An appraiser’s written report is required for all property sales. Appraisals are essential for determining fair market values of properties, as well as property tax assessments.
- The rental agreement for a commercial property is commonly referred to as a lease. The owner is considered the lessor, and the tenant is known as the lessee. The lease generally stipulates the length (or term) of the lease, the rent and due date each month, and other general terms of occupancy, as well as specific prohibitions or responsibilities of the tenant. It’s important that the tenant understands what his duties and financial responsibilities are for the property, and which ones are his landlord’s (such as property and component maintenance, etc.) before signing the document.
Additionally, there are a few different types of lease agreements that use alternate formulas for arriving at the amount of monthly rent:
- A flat lease (or straight lease) stipulates the flat amount of rent for the entire length of the lease, along with any renewal date, in which case the terms of the lease (including the rent) may change.
- A percentage lease uses a percentage of the tenant business’ net or gross sales to help determine the monthly rent. This is a popular type of lease used for commercial retail properties, and the percentage of sales is charged in addition to a minimum base rent.
- A net lease -– also referred to as a “triple net” or “net-net-net” lease -- requires the tenant to pay additional fees on top of the basic rent. These fees may be for property taxes, maintenance, insurance, etc.
Prospective tenants should especially note if there is an escalation clause in the lease. This allows the landlord to raise the rent based on any number of factors, including cost-of-living increases (based on a percentage as determined by the state in which the property is located), or planned or unexpected expenses during the term of the lease.
- Some commercial property owners allow a tenant to sublease a portion of the property, especially if it is larger than the tenant needs. The tenant is still responsible for the terms of the lease agreement. It’s the equivalent of the tenant taking on a roommate, or becoming a landlord himself. It’s always advisable for the primary tenant to make sure that his sublessee’s business or occupancy is complementary to his own, including hours of operation, number of employees, whether there is adequate parking, noise barriers, shared kitchen and/or restroom accommodations, etc.
- Owners will sometimes modify properties based on a prospective tenant’s specs. These tailored improvements, called “build-outs,” are used in advertising for the property as built-to-suit. The owner makes his/her money back based on a long-term lease agreement, possibly one with an escalation clause.
- Turn-key properties are move-in ready, with little or no modifications or build-outs required in order for the tenant to commence business almost immediately upon occupancy.
- Concessions are benefits offered by the seller or landlord to help close the sale or finalize the lease. Common concessions include paying a tenant’s moving expenses, build-outs, and discounted rent for a period of the lease.
In summary, there are aspects to leasing and purchasing with which you should become familiar before moving your business out of your home.