Evan Keith Langert

I frequently represent local clients looking for retail spaces for their businesses. Often, they start off with dreams of leasing the most prevalent space in the most popular shopping center in town. There's good reason for that, of course. They want the traffic that such a great site will bring them, and the much greater shot at success that such a location brings.

Too often, when I begin to show them spaces, they start to ask about secondary retail locations, and then they ultimately concentrate on those spaces exclusively. As we continue on, a number of them even begin to focus on the least expensive locations in town. It's easy to see the process that happens in their minds. They start out very excited because they have a dream of opening this great, successful retail operation right in the middle of where everyone is shopping. Then, as time goes by, the "reality" of the costs of doing business sets in, and they get scared of the worst case scenario. They end up asking themselves "what happens if this doesn't work?", and they look to save on every expense including rent.

Unfortunately, that is often a recipe for failure. It is well understood that foot traffic and drive-by traffic are integral to the success of the vast majority of retail businesses. That's why drug store chains like to locate in shopping centers where large grocery store chains are. Other retailers are then attracted to the traffic that those two uses will bring into a center, and on and on it goes.

I've seen retailers ultimately elect to rent spaces that nobody can even see in order to save money. For instance, I saw one business locate in the basement of a regional shopping mall. The only things down there were their location and the mall management office. For some reason, they thought that people would find them because they were in a prevalent regional mall. The problem was that nobody knew they were there, and they did no business. That's an extreme example. However, the point is that every tenant needs to strike a balance between occupancy costs and visibility/traffic. It is an extreme rarity that a retail business does well in a location that people can't see when they drive by, or that they can't figure out how to get to.

Our job as brokers is to get them to balance their fear of failure with their sense of enterpeneurship. The right space gets them exposure to a large number of the right customers for the least cost possible. Once you start looking below that line, you are losing valuable customers and hence are really diminishing the probability of success.

As many of you know, Keller Williams is the third largest brokerage in the U.S. However, we also launched KW Commercial in February. KW Commercial is our commercial real estate co-brand. We've gone from under 200 commercial real estate agents in February to over 850 agents at the present time. We expect to be larger than Marcus & Millichap by the middle of 2010, and as big as Sperry Van Ness by the end of 2010. We are attracting commercial real estate agents from all of the "name brand" commercial real estate brokerages in the United States, including many of the best commercial agents in the U.S. Check us out and see why we are destined to become the best commercial real estate brokerage in the country. In the Fremont, California office, we are up to five commercial real estate agents. We're looking for some additional experienced agents, and will train the right people. I have over 24 years experience as a commercial real estate broker and attorney, and teach commercial real estate leasing and commercial real estate investments to hundreds of agents all over the country.

We hear a lot of doom and gloom these days in commercial real estate leasing. However, behind the scenes, savvy office and retail tenants are opening new locations. Commercial leases are typically five years in length...sometimes even longer. In this economic climate, a tenant can get a very favorable rental rate and a lot of other concessions that it couldn't have achieved in years past. As the economy improves, those rates can remain largely locked in throughout the lease term. As that happens, you'll have low occupancy costs, which can be crucial in maintaining and increasing profitability.

Also, construction costs are down an average of 20 percent in most areas. That means a tremendous savings in the cost of tenant improvements within your space. If you have a strong balance sheet and can achieve profitablility based upon sales volumes that you are achieving today, then a newcommercial real estate lease might make a lot of sense for your company at this time.

Office landlords charge rent and state the square footage of office buildings based upon the "gross leasable area" of the office building and of the tenant's premises. Sometimes, that causes tenants difficulty, as they mistakenly think that their space actually contains those measurements. In reality, the gross leasable area of a building includes common areas, elevators, common bathrooms, stairwells, and other portions of the building that the tenant doesn't occupy. The actual square footage of the tenant's space is called the net rentable area of the space. Almost without exception, the gross leasable area of a tenant's space is larger than the actual physical measurements of the space. Thus, that 5,000 sq. ft. of office space that you are looking to lease isn't really 5,000 sq. ft. It's more like 4,300, or 4,500, or 4,700 (it depends on the particular building and the amount of non-rentable space that is included in the figures).

I've seen tenants do drawings of how their company is going to fit into a space. They are often surprised, and say "I could have sworn that 5,000 sq. ft. would have done the trick. In many cases, that's because your 5,000 sq. ft. space isn't really 5,000 sq. ft.. When you are budgeting for your new office space, be sure to take into account the difference between the gross leasable area of your space and the net rentable area.

The term "base year" refers to the payment of property expenses under a lease. The term "triple net" generally portray a situation where the tenant reimburses the landlord for taxes, insurance, and common area maintenance of the property (in addition to paying base rent for its space). A gross lease is essentially the opposite. It portrays a situation where the landlord takes on most of those expenses without tenant reimbursement. A base year lease is sort of the middle ground between those two lease types. Base year scenarios are predominantly found in office leases. Here's how they work:

In theory, the landlord knows what its investment is in the office building right now, and what the return on that investment is given the present income and expense situation at the property. The landlord is satisfied with that scenario, and is willing to invest in the property and take on the taxes, insurance and common area expenses as they exist now. However, what if those costs skyrocket? Then, the landlord's investment returns can get eaten into substantially. That's where a base year lease comes in.

Under a base year lease, the "base year" is typically the calendar year that a particular tenant first occupies the premises (that's the general rule, anyway). The tenant under the lease only reimburses its share of the property expenses to the extent that they exceed the amount of those same expenses for the base year. That's probably a little confusing, so let's do an example.

The law firm of Smith and Jones moves into a nice office building in June of 2008. Under it's lease, the base year would typically be the calendar year 2008. Smith and Jones would reimburse the landlord for its pro rata share of building expenses in 2009 and beyond (not in 2008), but only to the extent that those expenses exceed the amount of the base year expenses. So, let's say that the 2008 base year total expenses for the building is $1 million dollars. During the base year, the tenant does not reimburse the landlord for any such expenses. However, let's say that those costs increase to $1.1 million dollars in 2009. In that case, Smith and Jones would pay its pro rata share of the $100,000 increase in expenses over the base year (whereas under a triple net lease they would pay their share of all $1.1 million). If expenses in 2009 stay at $1 million, then Smith and Jones wouldn't be responsible for reimbursing the landlord for anything in 2009, either.

This type of lease allows the landlord to count more heavily on getting the return on investment that it has today. It takes on today's costs, but any increases belong to the tenants.