There are a lot of moving parts and things to consider when it comes to selling or leasing commercial property. Commercial real estate (property used specifically for business-related purposes) is very different from residential and if the process of leasing or selling commercial real estate isn’t done right, you can actually lose a lot of money in the process. In this post, discover what you need to know as a property owner when selling and leasing commercial property; and why you need to work with a commercial real estate agent.
What to Know When You Sell a Commercial Property
Here is what you should know as a property owner looking to sell a commercial property.
How to Sell Commercial Real Estate
When working with commercial realtors or brokers, you’ll not only be guided through the entire process, but you will be able to rely on their considerable knowledge of the commercial real estate market and know-how of the selling process.
First, you will have an initial consultation where they will discuss the goal you wish to achieve. Your agent will evaluate the property in order to determine the commercial property value estimate. This will include classifying your property, which we will look at more below. You may be asked for a tour as well as copies of your documents and records (such as rent roll and expenses related to the asset).
Next, your broker will list your commercial property for sale and the agent or commercial real estate agency will create a specialized marketing packet. Then your agent will field offers and proactively reach out to potential commercial property buyers. A good real estate professional will also interview potential candidates to assess their ability to buy. Potential commercial property buyers will then be educated about the specifics of your asset.
Your agent will help you with the offers you receive on your commercial property, presenting you with the best offers for you and then manage any negotiations between you and the buying party. Once you have accepted an offer, they will help facilitate the closing process and troubleshoot any issues that arise.
Groups and Classes of Commercial Real Estate
Commercial real estate is categorized into several groups depending on what the space is used for. These groups include: office, industrial, multi-family, rental, retail, mixed-use, hospitality, and land.
These groups are then further broken down into class. The three classes are:
- Class A: buildings suitable for institutional investors in terms of age, infrastructure, location, and aesthetics.
- Class B: buildings that are often older properties that were once considered Class A but are now ripe for repositioning through upgrades and renovation.
- Class C: buildings that are often obsolete properties, are in less desirable locations, and are in need of some major rehabilitation.
What to Know When You Lease a Commercial Property
The biggest thing a commercial property owner thinks about when leasing their property is the terms of the lease and how much to charge for rent. Here is what to know if you wish to lease a commercial building to tenants.
Types of Leases
There are three major types of commercial real estate leases. Let’s take a look at those three different types of leases and what they mean for you.
Gross/Full Service Lease
With this type of commercial real estate lease, the tenant’s rent covers all property operating expenses. These expenses include, but are not limited to, property taxes, utilities, and maintenance. The landlord pays these expenses using tenant rent to offset the costs. As a result, the base rent for this type of lease is relatively high, but is only costly to the tenant. This type of lease is typical for industrial, retail, and office freestanding properties.
Many tenants actually prefer this type of lease because they don’t have to get involved in the daily operations of the building and the rent is fixed, even if the expenses aren’t. However, some landlords may include an “escalation clause” that can account for an increase of insurance or taxes, or language that allows you to temporarily increase rent based on variable costs.
Net Lease
A net lease is a highly adjustable type of commercial real estate lease. While the base rent is lower than a gross lease, the tenant also pays fixed operating expenses (property taxes, insurance, common area maintenance).
Net lease is broken down into four types:
- Single Net Lease: tenant pays a set rent, a piece of the property tax, and utilities and other services directly; landlord pays building expenses.
- Double Net Lease: tenant pays set rent, a piece of the property tax and property insurance, and utilities and garbage services; landlord pays for building expenses and maintenance of common area.
- Triple Net Lease: tenant pays for some or all of the cost of property taxes, insurance, and common area maintenance on top of their base rent; this lease is one of the most common types and favors the landlords though tenants have the right to review the landlord’s operating expenses and all savings go directly back to the tenant.
- Absolute Triple Net Lease: the triple net lease but magnified, and perhaps the most uncommon type of commercial real estate lease; tenant takes on all costs allowing them to have sole responsibility of the building; however, if there is a catastrophe that destroys the property, the landlord is responsible.
Modified Gross/Net Lease
This third type of commercial real estate lease offers a middle ground for the tenant and the landlord. It allows for a broader range of negotiations when it comes to operating expenses while the base rent is subjected to the terms agreed upon by both parties, like in the gross lease. What makes it different is the lease rate remains fixed even if costs increase or decrease.
Why You Should Work with a Commercial Real Estate Agent
To sell or lease a commercial property on your own can be quite difficult and can lead to costly mistakes. As mentioned earlier, partnering with the right commercial real estate agent can give you an advantage. Working with commercial realtors can help drive competition for commercial property buyers and tenants, getting you the best deal. Second, these professionals have large networks they can leverage, getting you a larger pool of qualified buyers or renters. Commercial real estate agents also have the ability to list your asset across multiple platforms, further growing your pool of interested buyers and tenants.
If you are ready to sell or lease a commercial building, JP Powell wants to help you! He is a seasoned commercial realtor and real estate broker with over 20 years of experience in Middle Tennessee’s commercial real estate market. With his local expertise and drive to exceed your expectations, he will help you buy or lease your property in a timely manner for the right price. Contact him today to learn more.