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🙏🏻 Commercial Leasing

🚩 Lease Terms to Pay attention To 🚩

Types of Lease

Full Service

  • Landlord pays for everything
  • Not ideal, common in smaller commercial buildings

Triple Net

  • Tenant pays for everything
  • Ideal scenario

Modified/Gross

  • In between

Lease Due Diligence

  • Who pays pest control? Our family’s restaurant gets billed 2-3k every time we get termite issues
  • Do you have to pay a signage fee? Landlords sometimes charge rent to have you put your sign up
  • Sublease vs Assignment. Can the tenant sublease their unit to another tenant? A sublease means the original tenant is still liable, where an assignment transfers
  • Use clauses. Competition with other tenants in the space. More flexible is better for the tenant
  • Attornment clause. Who is paying who, protection when paying new landlords
  • Estoppel. Legal instruments prevents from saying something contrary
  • Subordination clause. Tenant rights are below that of the lender, future buyer, etc
  • Nondisturbance clause. Business can still operate while building is being foreclosed
  • Utilities cost clause. How is electricity cost split? Direct meter (common for single family), submeter (charged and managed by the landlord), or prorated (common for older buildings)
  • Escalation clause. Ceiling or expense caps are helpful for limiting property operating costs.
  • How much longer is the lease? The value of leases declines as the term gets reduced. A 20 year lease is also worth more than a 5 year lease of course
  • How is the cost of electricity distributed to tenants?

Market vs In Place Rent

1. Run Lease Comparables:

• Market vs. In-Place Rent: Newly constructed Triple Net (NNN) properties often have rents that include construction costs, leading to above-market rates. Always compare the current lease terms with prevailing market rents

2. Strategies for Vacant Properties:

• Entitlement Process: Some investors secure contracts on vacant properties and initiate the entitlement process to make the property suitable for a specific tenant.

• Financing Challenges: Lenders often require a signed lease agreement before approving loans, as a committed tenant reduces the investment’s risk profile.

• Seller Preferences: Sellers may be reluctant to tie up their properties for extended periods (e.g., 6-12 months) during the entitlement and tenant placement process. They typically prefer quicker transactions to minimize holding costs and market exposure.

3. Competitive Bidding Tactics:

• Waiving Contingencies: To expedite deals, some investors waive standard contingencies (e.g., financing, inspection, or zoning approvals), making their offers more attractive to sellers.

• Associated Risks: This approach increases exposure to potential issues, such as unforeseen property defects or financing challenges.

4. Mitigating Risks with Tenant Commitments:

• Letters of Intent (LOIs): Securing LOIs from prospective tenants before finalizing the purchase can demonstrate serious interest and facilitate financing approvals.

• Due Diligence: Thoroughly vet potential tenants to ensure their business stability and suitability for the property.

Save Reading Lease Abstracts

1. Extract Text from PDF: Use a reliable tool to convert the lease PDF into plain text while preserving its structure.

2. Identify Key Lease Elements: Determine essential details such as:

  • Lease commencement and expiration dates
  • Tenant and landlord names
  • Monthly rent and payment terms
  • Renewal options
  • Maintenance responsibilities

3. Craft a Structured Prompt: Develop a clear prompt to guide Claude in extracting the necessary information.

Please extract the following details from the lease agreement text provided:

- Lease Commencement Date

- Lease Expiration Date

- Tenant Name

- Landlord Name

- Monthly Rent Amount

- Payment Terms

- Renewal Options

- Maintenance Responsibilities

Lease Agreement Text:

[Insert extracted text here]

4. Input Prompt into Claude: Use Anthropic’s API or console to submit the prompt along with the lease text.

5. Review and Refine: Assess the generated abstract for accuracy and completeness, and adjust the prompt as needed to improve results.

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