Herbert J Strather

Whether you own or rent your office space, commercial property costs are one of the largest business overhead expenses. That's why it's important to know the full ramifications of buying your own commercial property or just leasing a space from someone else. Before you sign a lease, you should be working with a commercial real estate broker. Not a residential broker, there is a difference. You should also consult with a real estate attorney. You should also familiarize yourself with some common commercial real estate terms as well, and they are listed below:

1. Build out: Improvements to leased space to make it usable for a particular tenant's needs. now the key here is who is going to pay for this build out, you or the landlord.

2. Appraisal: a written report by a state-licensed professional that includes an unbiased analysis of the property's value and the reasoning that led to that opinion. An appraisal report is required for any property sale.

3. Build-to-suit: a method of leasing property in which the landlord makes improvements to a space based on the tenant's specifications. The cost of construction is generally factored into the lease terms. Most build-to-suit provisions apply to long-term (10-year) leases.

4. Concessions: Rental Concessions are benefits that are offered by the landlord to his tenants. Concessions are usually offered to draw tenants to vacant properties. Some other landlords may choose to offer a concession if the tenant decides to renew the lease.

5. Escalation clause: a clause in a lease that legally allows the landlord to increase rent in increments at set times throughout the lease term. Some examples are: • An increase directly related to increases in operating expenses of the property, i.e. Taxes, Special Assessments. • A cost-of-living increase tied to a government index, such as the tax rate • A fixed increase over a definite period i.e. 6 months, 1 year.

6. A straight lease, which stipulates that the same periodic payment (usually monthly) be made for the entire term of the lease.

7. A percentage lease, which uses a percentage of the net or gross sales to determine the monthly rent. This is most often used in retail properties and with a minimum base rent.

8. A net lease, which requires the tenant to pay maintenance, taxes, insurance and so on, along with a fixed rent. This is also called "net-net-net" or "triple net." As a tenant make sure you know exactly what part of the expenses you are paying for.

Your Commercial Real Estate Broker will be good source of knowledge here as this is what Commercial Brokers do on a day to day basis. That is why is it very important to have people on your team that can advise you in making the right decisions. As you can see from this short list, there is a lot to think about when looking at leasing a space for your business. We have covered the buy side of this equation, which will be in future issues.

Any commercial real estate (CRE) deal worth doing should be able to withstand a little due
diligence. I want to discuss examples of due diligence you'll want to perform before
you put the final touches on that Purchase Agreement (PA) and they include:

· Property Inspection

· Market Analysis (values, rents, etc.)

· Title Search & Inspection

· Lien Review

· Confirmation of Seller's Mortgage Balance and Payment

· Confirmation of "Currency" of Seller's Mortgage

• Mortgage Terms (e.g. fixed or adjustable, prepayment penalties, etc.)

Let's spend some time on some of the most important due diligence items from the list, which
concern either title or financing, both of which are also critical prior to any commercial
real estate purchase.

Title Search & Inspection

The title to a property shows the chain of ownership and will show any liens that are
attached to it. Both of these factors are important to look into, before you ever close on
any real estate investment. Because of family or business arrangements, the chain of
ownership is not always as clear as you'd like them to be, and your due diligence allows you
to confirm that acquisition of the property can be a smooth transfer of ownership.

Lien Review

Another aspect of title search & inspection process is the review of any liens on the
property. Liens can come in many shapes and sizes but some of the primary types are listed
below:

· Property tax liens

· Income tax liens

· Mechanic's liens (unpaid work done to property)

• Judgment liens

Tax related liens are either due to local property taxes going unpaid or to state or federal
taxes that are similarly delinquent. Tax related liens have high priority, when it comes to
transferring ownership cleanly, and this is a potential issue you need to be clean up before
you close.

Mechanic's or judgment liens are usually easier to address during the due diligence period,
but are also worthy of your review, as they can still affect the closing process. When these
liens appear, it is often a matter of contacting who placed the lien to see what they will
accept to release that lien. More than likely they will take less than what is owed, if you
close right away. Always get the agreement in writing, so that you can show it to the closing
Agent or Title Company.

Confirmation of Mortgage Terms

A final form of due diligence you'll need to consider is a review of any financing terms that
the seller of a property has to adhere to. This review may include such items as confirmation
of payment and payoff terms, confirmation of the currency of an existing mortgage (to make
sure the payoff is what everyone thinks it should be), and review of any relevant mortgage
"fine print" that may affect the final closing numbers for the transaction.

Remember that due diligence is not just there as something to do, just for the sake of doing
it. It is designed to protect you, especially given that commercial real estate represents an
often-substantial investment of resources.