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Financing Owner Occupied Commercial Real Estate

10 Aug

The current economic climate has enabled strong demand for business owners to seek commercial properties to acquire to accommodate their real estate requirements.

Interest rates continue at historic lows, banks have cleaned up their balance sheets since the last recession and there is a lot of capital available.  While finding the right property for our clients is obviously the most important step in the process, after a property is identified, there remains the process of securing financing for the purchase of the property.

There are many different types of commercial loan products to choose from and the current lending environment is competitive. Interest rates can be pegged to different types of benchmarks other than 10 year treasury bills, as is the case with residential loans such as Libor, Prime and other rates. Furthermore, the length of the term of the loan can vary. Typically this is 5, 7 or 10 years with a balloon or refinancing mechanism. In these types of loans the amortization schedule is not coterminous to the length of the loan. The amortization schedule of a commercial loan can also vary, but is typically 20 or 25 years. The various parameters of a loan are affected by many factors that are tied to the risk assessment of the loan. The credit of the buyer, amount of down-payment, the location and characteristics of the property and the risk tolerance of the lender are some of these factors. Some lenders can be more aggressive than others with loan packages offered to the buyer. For this reason, a buyer should shop the loan with a few different banks to get the best loan terms.

A buyer may also want to consider an SBA 504 loan as a financing option. This is a federal government sponsored loan package that many of my clients have taken advantage of and geared toward owner occupied commercial real estate. The appeal of this type of loan is basically two-fold: first, a buyer can obtain a 504 loan with just 10% down payment as opposed to a typical down payment of 25%. Second, the SBA finances 40% of the acquisition cost at a fixed interest rate, and over the full amortization schedule of typically 25 years. This can save a buyer a great deal of money. The lender also finds this type of loan attractive as it minimizes their risk to 50% of the loan amount. Most banks offer 504 loan packages and team up with an SBA conduit to process the loan.

Once selecting a lender, it is important that the buyer be a part of the bank’s loan approval process to make sure the loan navigates through the due diligence process in accordance with the terms and timelines set forth in the Purchase and Sale Agreement. Several of my clients have experienced instances whereby the  lender processed the loan under their own timeline, missed critical dates and put the buyer in a position of jeopardizing its position in a deal and even forfeiting its deposit. Please note that a bank will require a satisfactory appraisal and environmental report as part of the loan approval process. The cost for these reports is the buyer’s responsibility. The buyer should consult with its attorney and their real estate broker to assist them with the loan process. A professional and experienced commercial real estate broker can be a valuable resource to a buyer throughout the financing process.

Please contact me for further advice on these complex lease issues.

Warren Brown, President, Boston Commercial Properties

Modified Gross and Absolute Net Leases, Part II

10 Apr

As described in Part I: “What does Triple Net and Gross Mean?,” a triple net lease means that the tenant is responsible for payment of real estate taxes and operating expenses and the Landlord essentially keeps all of the rent proceeds. However, as is typically the case with industrial leases, the Landlord may take on the responsibility for the roof and structural components of the property. So the Landlord will have some implicit exposure to carrying costs. But in accordance with General Accounting Principles, the actual way a triple net lease is to be handled with regard to repairs, replacements and capital expenditures, the Landlord will bill the tenant for such costs based on the useful life of the item and amortized over the remaining term of the tenant’s lease. So, if an HVAC unit needs to be replaced and this unit costs $10,000, has a useful life of 15 years and there is 3 years remaining on the lease, then the Landlord will bill the Tenant $667 for the remaining 3 years of the term. Capital Repairs and Replacements clauses in leases are often controversial topics and the parties can often benefit by having a professional real estate broker as well as their attorney to advise them.

An absolute lease is one in which the Tenant truly is responsible for all aspects maintaining and operating a property. This will include roof, structural and all mechanical components. An absolute lease is more common in a build to suit deal whereby the Landlord builds and delivers a brand new building for a Tenant. In this scenario, the Tenant starts off with a brand new building and is expected to take on the responsibility to maintain the property appropriately. This is different than an older building whereby the exact condition of the building structure and mechanical systems is unknown. Even if the Tenant completes a pre-occupancy inspection, there is inherent risk in assuming full responsibility.

Leases can also be structured as modified gross arrangements whereby the rent includes some of the operating expenses. So real estate taxes and operating expenses may be included but not the cost for utilities. Sometimes some of operating expenses are included and some are not. For example, all operating expenses may be included but not snow plowing. It is essential for the tenant to fully understand what it is involved before signing the lease and to understand what is and what is not included as well as to obtain a history of operating expenses to understand how efficiently the property is being managed. Also, as stated in Part I, the correct fiscal year for real estate taxes and base year for operating expenses needs to be accurately stated in the lease. Again, your real estate professional should be able to help answer these questions and provide assistance.

Please contact me for further advice on these complex lease issues.

 

Warren Brown
President, Boston Commercial Properties

What Does Triple Net and Gross Mean? Part I

05 Mar

One of the most popular questions I receive pertains to the difference between “triple net” and Gross lease rates. Most retail and industrial spaces are leased on a “triple net basis.”    This basically means that the tenant is responsible for payment of real estate taxes and operating expenses. The Landlord essentially gets all of the rent proceeds. Triple net can essentially be broken down into 3 components:  real estate taxes, operating expenses and utilities.   The real estate tax bill associated with a property can be billed by the municipality directly to the tenant or the Landlord will bill the tenant as the property tax bills are issued on a quarterly basis.   The former arrangement would be more common in a single tenancy building since the cost for taxes are not shared.   Continue Reading