4 random commercial real estate leasing thoughts – Orange County Register

Today, I decided it would be fun to recall a few random thoughts as they pertain to leasing commercial real estate.

Unlike our residential counterparts, leasing is a big part of our daily activity. We, as commercial real estate professionals, help occupants find space to lease or buy.

Typically, leases account for 70-75 percent of our deal volume, with sales taking the balance.

We differ from our residential counterparts. Our fees are based on a percentage of the deal’s total consideration: purchase price or the amount of rent paid over the term of the lease. Generally, commercial leases run 3-10 years, so the amount of rent negotiated is a significant sum. Whereas, residential leases are month-to-month or a year maximum. Consequently, the potential fees on a residential lease — because the term is much shorter — make it unprofitable for residential agents to pursue with vigor.

Subleases are a pain. A sublease is necessary when an occupant no longer needs the building — for myriad reasons — yet has time remaining on the lease. The owner of the building still wants his rent. So, the occupant resorts to finding a substitute — or a subtenant — to move in and assume the rent. Differences in uses, credit, the number of players and changing market conditions all create the pain in a sublease transaction.

Credit requirements of a property owner. At a minimum, the owner will look at the total amount of the lease — let’s assume $10,000 per month for 60 months or $600,000. Therefore, the owner is extending the occupant $600,000 of credit, essentially. Through an analysis of the business’s sales and credit history, the occupant is carefully scrutinized on their ability to repay the $600,000.

Process. Searching for a space to lease resembles searching for a building to buy. The similarities: Facility requirements are discussed — loading, power, office space, warehouse ceiling height, geographical areas. A list of alternatives is toured and a…

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