After some 20 years of leasing commercial real estate, I have realized that most tenants seeking new space have very limited experience with the commercial leasing process. Navigating this process can be a daunting and arduous task particularly if you are unfamiliar with industry terminology and market norms. In an attempt to demystify the process, the following article may serve as a “beginners guide to commercial leasing”. 

The space that your business occupies, whether its retail, office, industrial or medical is one of the most important assets of the company. The cost of leasing can often account for as much as 25% of your overall operating costs and choosing the wrong space can often cost your business much more. The location, look and layout of your space can affect customer’s/client’s perception of your business as well as the efficiency and productivity levels of your employees. Given that most people spend more time at work than they do at home, choosing the space your business occupies is clearly an extremely important decision.

Whether you are seeking new lease space, downsizing, upsizing or simply relocating, the first step is to determine the amount of space necessary to efficiently run your business and what the general configuration of the space should be. This is one of the most crucial steps in the leasing process. For instance, I once worked with an office user who insisted they needed no less than 15,000 SF of space even though a brief walk-thru of their current space revealed glaring space inefficiencies. When all was said and done (and with the help of a good space planner) they miraculously fit into 8,000 SF thereby saving them over $115,000 per year. The use of a space planner during this phase is crucial and some landlords will even provide a free “test fit” as part of the negotiation process. If not, the cost of the service is money well spent as it could potentially save you thousands of dollars down the road and can help you design a space that facilitates your work flow and the morale of your employees.

The next step is to determine the ideal location for your business. Location considerations include, customer and employee convenience, distance to services utilized by your company, visibility, ease of access and parking availability. For example, a medical practice may need to be within a certain distance of a local hospital but must also determine where most of its patient base is located in order to chose the optimal location.

The next and last step before actually looking at space is to determine your leasing budget. Where you finally decide to locate the business will depend greatly on your budget. When determining budget it is important to include all of the components of leasing a space, not just the base rental rate. Other expenses can include: utilities, building expenses, parking and janitorial fees. Lease structures can vary greatly from building to building depending on how they are managed and how they are physically configured. For this reason, it is important to fully understand what is included in the advertised lease rates and what additional costs will be incurred. Landlords may use terms such as “NNN”, “modified gross” or “gross” to describe a lease structure. In short, a NNN lease requires the tenant to pay its pro rata share of building expenses over and above the base lease rate plus all of the utilities associated with the space. Generally speaking a modified gross lease includes the building expenses but requires a tenant to pay its own utilities. Which utilities tenant is required to pay under a modified gross lease can vary from building to building depending on several factors including whether the utilities have been separately metered for each tenant. A gross lease includes all building expenses and utilities and in some cases can include other additional amenities such as parking.

Armed with your optimal space requirement, your preferred location, a budget and a general understanding of the possible lease structures, you are now ready to start kicking some tires. The easiest and best way to begin your search is to hire a local commercial broker. The commercial broker will have access to most of the available properties in the area you have chosen and can provide you with an inventory of options that fit the criteria identified in the first three steps of the process. As your agent, a commercial broker will help you navigate through the research and negotiation phases of the process and will work specifically with your best interests in mind.

Leasing commercial real estate can seem over whelming and confusing at first, but once you have completed these simple steps and hired the right commercial broker, the process can actually be a smooth one. The result will be a well planned and well thought out lease arrangement that will help your business reach its full potential.

-Frank O’Connor and Katie Allen

Recently, Howe & Howe Technologies Inc., an extreme vehicle engineering company, outgrew their shop space in Eliot, Maine. The company has since moved into much larger space at 661 Main Street in Waterboro. They leased their new 48,000± SF facility from ATA Realty Group. Tripp Corson and Greg Hastings from NAI The Dunham Group brokered the lease. 

Howe & Howe Technologies, owned and operated by identical twin brothers Mike and Geoff Howe, is best known for the development of the world’s fastest dual tracked vehicle, the ‘Ripsaw’. The ‘Ripsaw’ is an unmanned armored tank that reaches speeds up to 60 mph. The U.S. Military, in particular, has ordered this vehicle from the Howe brothers for its incredible potential to save soldiers lives. Furthering their popularity and exposure, Howe & Howe Tech recently premiered a new television series on the Discovery Channel. (Tuesday nights at 10pm) The show follows the family business as they design and build high-speed military tanks, all terrain rovers and other ingenious machines. With the help of their wives, who also happen to be sisters, the twins work intensely with their talented shop crew to meet stressful production deadlines.

Howe & Howe Technologies leased the Waterboro manufacturing space in order to immediately begin large production orders as well as with the intention to purchase the property within the next few months.

The biggest challenge to the Portland office market is unemployment. Maine’s unemployment rate is running about 8.6 %. Couple that with a national rate of 9.6 % and it is no surprise that the vacancy rate in Portland is increasing at a steady rate. Most of the activity in this sector has been limited to tenants seeking to reduce their space requirements. This is due in part to the consolidation that has taken place in the financial and insurance industries and the overall reduction in personnel across the service sector. We are estimating the current vacancy rate in the greater Portland area at 12%. On the investment side we have seen office properties trading at 10.5% cap rates up from their lows in 2007 of 7.5%. This due to the concerns over current occupancy trends and the lack of financing for these transactions. We are starting to see distressed properties coming to market. For those with cash there could be some real opportunities.

On September 25, 2009, the property at 362-382 Riverside Street, Portland was sold by the United States Postal Service to A. Hausmann Associates, Inc. (Art Girard). Greg Hastings, SIOR and Tom Dunham, SIOR from NAI The Dunham Group brokered the deal on behalf of the Seller and Buyer.

Located less than 1 mile from Exit 48 of the Maine Turnpike, the Riverside Street property consists of high bay warehouse, office, and mezzanine space totaling 80,000± SF on 9.6± acres. The owner is currently fixing up the property and offering it for sale or lease. The building is subdividable down to 9,000 SF with lease rates as low as $2.95/SF NNN. There is paved parking for over 170 vehicles. The property was originally constructed as a corporate headquarters for Nelson & Small in 1986. The USPS purchased the property in 1992 and redeveloped it for district administrative offices and a mail sorting/postal carrier division.

June 2009: Pratt & Whitney renewed their lease for 972,625± SF of manufacturing space at 113 Wells Street in North Berwick from Newkirk Seguine, L.P. Thomas Moulton, CCIM, SIOR from NAI The Dunham Group brokered the lease on behalf of Pratt & Whitney.

Pratt & Whitney, a United Technologies Corp. company, is a world leader in the design, manufacture and service of aircraft engines, industrial gas turbines and space propulsion systems. The company serves as a substantial employer for the area and has renewed their lease on a long term basis. The manufacturing and service building in North Berwick has been occupied by Pratt & Whitney for decades.

 

On July 10, 2009, 390 Congress Street and 385 Congress Street, Portland were sold to Metro Media Properties, LLC, whose principal is John Cacoulidis, by MTM Portland Properties, LLC. Thomas W. Moulton, CCIM, SIOR, a partner at NAI The Dunham Group brokered the deal on behalf of the Purchaser.

Located on the corners of Exchange, Congress and Federal Streets, 390 Congress Street encompasses two buildings (built in 1925 and 1945) totaling over 84,000 SF and .23 acres. Just across the street and connected to 390 Congress by an underground tunnel, 385 Congress Street (built in 1965) encompasses over 76,000 SF and 2.26 acres. 390 Congress Street has served as the center of Portland’s print media industry and was home to the Portland Press Herald and its predecessors for over 85 years.

Metro Media Properties, LLC, a New York based firm with strong ties to the area, has yet to finalize any formal redevelopment plans for the buildings. However, both buildings will undergo substantial renovations and will be part of a high quality, environmentally conscious, mixed use development. Completion time will depend on the extent of the development and necessary approvals but is slated for Fall of 2011.

The Salvation Army recently leased 14,000 SF of space at Clark’s Pond in South Portland for their newest family store.  Thomas Moulton, CCIM, SIOR and Katherine Allen brokered the sale.

The new store will be in close proximity to the Maine mall, situated among several busy storefronts including Bob’s Discount Furniture, Homegoods, Marshalls, Tuesday Morning, and the successful new Cinemagic Grand movie theater. 

The store will be holding a grand opening ceremony on May 28th.

From the Desk of Charlie Craig:

 

I was recently working with a client that had purchased a small shopping center listing of mine nine years ago.  My client financed the acquisition through a conduit and the 10-year term of the loan was expiring in a year.  I ran financing projections for the client prior to closing and these projections included loan payments as well as loan amortization.

 

My client requested that the lender provide a projected loan balance at the expiration of the ten-year note.  The loan amortization period was 25 years. The lender projected a loan balance that was approximately $33,000 higher than my projection based on initial loan of $1,461,000.  My client asked me to help him account for this discrepancy. 

 

I recalculated the mortgage balance with several different mortgage balance software programs available on line and the result was the same.  My projected mortgage balance calculation continued to be approximately $33,000 lower than the lender.

 

The lender eventually provided a breakdown of the monthly loan payments including interest, principal reduction and daily interest charges.  The interest charges seemed high and offsetting principal reduction low, given a fixed 10 year rate of 9.19%.  It turns out that my client was being charged daily interest based on a 360 day year; however, the 360 day daily interest charge was being applied to the actual number of days in the calendar year, typically 365.  This methodology resulted in an effective interest rate of 9.32% and a reduction of principal amortization, given the monthly fixed loan payments.

 

When this methodology was relayed to the lender, her response was “this is consistent with your loan document and a standard practice in the commercial real estate mortgage industry.” I reviewed the loan document, and the note clearly stated an initial loan balance of $1,461,000 and annual interest rate of 9.19% fixed for 10 years, a 10 year term and a 25 year amortization.  The annual monthly loan payments of $12,451.31 stated in the note matched the calculation based on the standard 360 day monthly payment schedule.

 

However, buried in the agreement was the following language “Interest on the principal sum shall be calculated on a 360 day year, and shall be charged on the actual number of days in the month”

 

The issue is the months typically total 365 days a year. Over a compounding period of ten years, this overcharged interest resulted in an additional $33,000 to the mortgage balance.

 

The lender balked at any insinuation that this practice, which resulted in an effective rate of 9.32%, was misleading or unethical. 

 

No one, including the borrower’s lawyer, mortgage broker and me understood or challenged this language.

 

And, apparently, the lender was right about this practice being a wide spread industry standard.  Based on my conversations with commercial banks, a large majority of banks follow this practice, which results in commercial borrowers being overcharged relative to the interest rates they were quoted.  It is very rare that any borrowers challenge this practice.  Residential borrowers, in contrast, are protected from the activity via Truth in Lending Laws.

 

To be fair to the commercial banks I spoke with, they initially did not understand the ramification of a 360 day year per diem interest charge applied to a 365 day calendar year.

 

My advice?  Make sure you are quoted an interest rate based on a 360 day year applied to 360 actual days or 365 day simple interest before committing to any lender.  And review your loan document to make sure your interest calculation is correct before signing. Otherwise, you may be in for a very unpleasant surprise when your loan is due.

Charlie Craig (Charlescraig@dunham-group.com) is a Partner at NAI The Dunham Group. 

http://www.dunham-group.com/office_retail.asp