Scanlon: There’s wisdom in the old clichés

Plus, what’s the difference between triple net and modified gross rents?

The longer I practice my profession as a commercial real estate broker, the more I see the wisdom in some old, if not tired, clichés, and I wanted to share some thoughts on them in this column.

I also want to add a refresher on the topic of triple net vs. modified gross rents.

Location, location, location

We often hear this one with regard to buying homes in safe neighborhoods with great schools, but it applies pretty much across the board in the commercial world.

It seems most important with retail space, whether it’s the demographics of a specific area, the tenant mix in a multi-tenant shopping center, how accessible the property is from highways or main arteries, visibility, or even whether it’s at a signalized intersection.

In some cases, the question is whether it’s on the proper side of the road – the going to or coming home from work side.

For office space, accessibility is a big issue, for both clients and employees. In some cases, the commute time for the owner/CEO is a big factor.

In the last year, I worked with two regional CPA firms to find new space. One of them chose to remain in downtown Manchester and the other relocated to Bedford. In each case, location was a critical factor in providing the “employee experience,” in order to attract and retain professionals.

Industrial and warehouse operators are concerned about highway accessibility for shipping and receiving, as well as commute times for employees.

In almost all of these categories, the presence of a strong labor pool is a key factor.

Although it is not easy to quantify, location will always have an impact on how much rent a landlord can get, or how high the selling price will be.

Everything’s negotiable

Just like with buying cars, the price for real estate is negotiable, whether it’s the rental rate or selling price. But it doesn’t end there. Every item that goes into a deal is negotiable, from the time frame for getting a deal done to how large a deposit to annual rent increases – everything.

What I’ve learned is that every party to a transaction has his or her own business model and that usually includes items that are important to them, and others not so much.

So every deal is different, and has room for give and take before the final terms are set. Usually, the “package” is more important than any one term, and it’s best to try to get all of the terms on the table rather than focusing on just one (usually the dollars).

In fact, I’ve found that it’s often non-financial factors that end up being more important than the numbers, in the final analysis.

Everything’s for sale

This is where the value of a knowledgeable real estate broker shines through, because at any given time, only about half of the properties that are actually available are listed. Brokers who know their market well, and the players in that market, generally have a good handle on who might be willing to sell, and most owners of real estate will tell you that they will sell, for the “right price.”

In my practice, I often represent businesses looking to lease or buy. They can usually find what’s available publicly on their own through the various online databases. But they don’t always know about properties that are not listed, either because the owner prefers not to, or because an existing tenant has not yet vacated the property, but will be doing so in the near future.

As I write this column, I am working with a business that needs a larger facility than their current one, and wants to stay in the same town. There is really nothing on the market that meets its needs, so we are looking at properties that are not listed, and will be reaching out to the owners to see if they would sell.

Triple net vs. modified gross rents

In my experience, tenants always pay the costs of operating a property, but rents in our market are generally structured as triple net or modified gross, and I wanted to review them, as they seem to spawn lots of confusion.

In a triple net lease, tenants pay a “base rent,” plus three other items that are often referred to as the three “N’s”: property taxes, insurance and operating expenses, like snow removal, landscaping, repairs and maintenance, etc. Each year, the base rent generally increases by some percentage or dollar amount, and the landlord notifies the tenant as to any increases (or decreases) in the net items, and the rent is adjusted accordingly.

So, for example, in year one, the base rent is $10 per square foot (annually) and the nets total $5 per square foot. For year two, the base rent may increase 3 percent to $10.30, and the nets might go up 25 cents. So the tenant paid $15 per square foot in year one and will pay $15.55 per square foot in year two.

In a modified gross lease, the net items are wrapped in with the base rent, so the rent is quoted at $15 per square foot. The lease will usually provide that the rent will increase by some percentage or dollar amount, and the tenant will be responsible for any increases in the net items. So if we used the same example as above, with the rent increasing 3 per cent (to $15.45 per square foot) and the nets going up 25 cents per square foot, the rent for year one would be $15 per square foot and for year two would be $15.70 per square foot.

Once again, business models come into play. For a landlord, it’s generally easier to administer a modified gross lease, and a tenant can generally plan on what the rent will be a few years out. (In some cases, the only increase in a modified gross lease is with the rent itself, and not the nets, so that is even more predictable.)

The reality in our market is that landlords all have their own ways of assessing these items, and it’s important to review the lease terms to fully understand, and project, what the rent will be over the term of the lease. Again, a seasoned broker can help with this, along with good legal representation.

Dan Scanlon, a senior associate with Colliers International in Manchester, can be reached at 603-206-9605 or dan.scanlon@colliers.com.

Categories: Real Estate

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