How To Sell Commercial Real Estate

How To Sell Commercial Real Estate

Selling commercial property may sound like a piece of cake but once you go through the process you are bound to realize that there are a lot of details and factors that you need to consider. Entering the arena of commercial real estate unprepared or with a blind eye may cost you a lot of time, money, and could ultimately bring you to a dead end. 

 

Considering that at the beginning of 2021, the volume of office real estate alone sold in the Americas reached nearly $128 billion, it’s safe to say that the commercial real estate space is attractive and lucrative. But regardless of whether you’re an owner of such real estate looking to sell their property alone, you would rather work with a real estate agency, or you are a broker hoping to sell a commercial real estate property for a client, there are a few fine details that you need to be aware of in order to make your sale quickly and get a decent return on your investment or sell for a reasonable price. 

 

In this article, we’ll share with you valuable information that will help you sell commercial real estate like a pro. We’ll look into what it takes to prepare the property for sale, we’ll explore the different stages of a commercial property sale, and we’ll dive into what it’s like to work with real estate brokers vs selling on your own.

Preparing commercial real estate for sale 

Every commercial real estate is different. Your property could be an office, a warehouse, a restaurant or coffee shop, or perhaps a whole office building. As different as each example could be, there are a few ground rules for preparing your commercial real estate for sale, no matter what type of property it is. 

 

A lot of property owners who are about to go into their first commercial property sale neglect the preparation stage and therefore end up with regrets. Preparing your property for sale can help you attract potential buyers quickly, can captivate their attention, and potentially help negotiate and close the sale. 

 

Here are some of the basic things you could do:

  • Repair any minor eyesores – Some parts of your commercial property are bound to make a first impression. This could be a poorly maintained lawn, old and rusty signages, clutter, or damaged exteriors. Putting in the time and effort to make some small repairs to improve the appearance of the property and correct the spots you know are visible will help you sell your commercial real estate faster and for a higher price. 
  • Make sure the lighting is in good condition – Oftentimes, property owners fail to acknowledge the importance of lighting when selling real estate. Install LED bulbs for energy saving purposes and point out how the lighting is durable and just what the property needs. 
  • Get professional cleaning services – Viewing a property that is in horrible hygienic condition could be enough to make buyers want to run away without a second thought. Schedule a professional cleaning company to remove any dirt accumulations, clean the carpets, any curtains or blinds, and enhance the overall appearance and freshness of the space. 
  • Conduct an inspection beforehand – Before listing your commercial property for sale, it’s worth hiring a certified property inspector to check the condition of the property and inform you of any weak spots or areas that need immediate attention. For example, check if the roofing is stable, the pipe system’s condition, and other vital parts of the property. 
  • Declutter – Decluttering is a fundamental part of preparing your property for sale regardless of whether it’s residential or commercial. But when we’re talking about business, it’s even higher up the ladder of priorities. Clutter could prevent the potential buyer from being able to imagine and visualize what the property could turn into once they move their business there. 

 

Of course, there are more tips that you can use and it all comes down to what your property looks like at the moment and what its weak and strong selling points are. Remember, you know your space best so take some time to make a note of all the advantages and disadvantages before welcoming potential buyers to view it or even listing it for sale. Brainstorm ideas on how you could turn the weaknesses into strengths.

Three strategies you could use to sell a commercial property

Next up, you need a selling strategy. And we’re here to help you by sharing with you three of the top commercial real estate sale strategies that inevitably work:

  • Partnering with a professional commercial real estate broker
  • Putting up your commercial property for sale on FSBO listing platforms or commercial websites
  • Directly communicate with buyers using off-market data

 

Let’s dive into each one of these strategies in more detail. 

Working with commercial real estate brokers

It’s not surprising that so many sellers of commercial real estate choose to work with an experienced broker in the field as opposed to tackling the task alone. Selling commercial property does have a level of complexity. There are a lot of legal aspects to consider, paperwork, negotiation skills required, and oftentimes – time restrictions. 

 

Partnering with a certified commercial real estate agent can help you deal with all of the mentioned above and more without any stress. Here are some of the advantages of hiring an accredited real estate broker to help with your commercial real estate sale:

 

  • Higher return on investment – Commercial real estate agents will be aware of any market trends, economic forecasts, and will have data available to help you set the right listing price. 
  • A developed network – Working with a seasoned agent also means that you can gain access to a rich pool of contacts and networks instead of purely depending on standard marketing alternatives that often take more time to prove fruitful. 
  • Superior communication skills – Believe it or not, communication during a potential commercial real estate transaction is key and could make or break the deal. Brokers are experienced and know what to say, when to say it, and most importantly – how to say it. They will also help you understand the demand and how to prepare your property to make it attractive. 
  • Listings – Although there are a lot of free commercial real estate listing websites that you could benefit from, working with a real estate agent means that they will handle the whole process for you. They’ll be able to strategically create the listing to point out the unique selling points of the commercial property. 

 

Marketing the commercial property on your own

On the other hand, there is also an effective strategy that includes you selling your commercial real estate by yourself, without the help of an expert. 

 

You can easily do the work alone, as long as you can dedicate some time to the journey. There is a range of commercial property listing sites available that could present your property to millions of potential buyers. Some of the most popular ones to be on include Commercial Estate, CREXI,Ten-X Commercial, LoopNet, and Showcase

 

When working alone, you can also widely benefit from services like CREOP. The platform gives both sellers and agencies the opportunity to create customized marketing packages, providing memorandums, proposals, and flyers using reliable cloud-based software. All you have to do is upload your company’s color scheme, enter the property data with pictures and the solution will provide you with all the charts, graphs, tables, financial analysis, rent roll, demographics, property websites, email campaigns you could possibly need.

 

There are other listing platforms, specifically dedicated to for sale by owner listings that you can also add to your strategy. For example, FSBO.com or For Sale By Owner could help you get your listing across to even more people. Some of them may require a subscription to actively participate and add listings while others may be completely free. 

Discovering buyers off-market

Lastly, the third strategy is finding buyers off-market. This strategy can be used by both experienced commercial real estate agents and owners who would rather seek potential buyers via research done off-market. It’s perhaps one of the most proactive ways to start conversations and discover buyers.

 

Oftentimes, this strategy is associated with accessing local public property records of off-market research. However, this method involves having a potential buyer in mind and conducting your research on that basis. Alternatively, you can use platforms like Reonomy that offer nationwide off-market information that can fully support you with your research. You can locate new contacts that may be interested in commercial properties like yours. 

 

When it comes to off-market research, you can try to find people you’ve recently bought or sold commercial real estate similar to yours or you could review real estate comps. Regardless of the path you choose for your property sale, off-market research does take time to conduct properly, which means that you ought to be prepared for a slower sale. 

 

Choose the right path for you

As you can see, selling commercial real estate could be a demanding and challenging task. Luckily, the market is so advanced and well-developed that today there are a myriad of options available to help you make the sale quickly and efficiently, getting the return on your investment that you’ve been waiting for. We hope that the information provided in this article will help you craft the right selling strategy for you and will support you in reaching the objectives you’ve set for your commercial real estate. Get in touch to learn more about what CREOP can do for you as a seller or commercial real estate professional.

Top Commercial Real Estate Marketing Software 

Top Commercial Real Estate Marketing Software 

 

Just like in any other industry, real estate success starts with marketing. Making use of all the different techniques and innovative solutions from the digital marketing space will certainly increase your chances of finding more clients and quickly and efficiently selling properties or helping your customers acquire them. 

 

So regardless of whether you’re searching for new properties for investment or new tenants for a client, we’ve prepared a list of top real estate marketing software that can help you boost your performance and achieve better results. In this article, we’ll look at the following commercial real estate marketing tools:

 

  • Commercial Real Estate Online Publishing Tools
  • Marketing Operations Tools
  • Commercial Listings Platforms
  • Content Marketing Software
  • Lead Generation & Prospecting Tools
  • Marketing Analysis Software
  • Paid Advertising Tools

 

Let’s see what some of the most popular and efficient choices from these categories are.

 

Commercial Real Estate Online Publishing Tools

 

CREOP

 

CREOP is a commercial real estate online publishing tool that enables users to create offering memorandums, proposals, and property websites using expert and bespoke designs. It offers an efficient way to attract investors to commercial properties via professional presentations that offer valuable and complete insights.

 

This tool is ideal for making a great first impression and to make any property stand out from the rest. CREOP will help you keep your data organized and easy to access as it stores all numbers and statistics available to use in the property presentation. You can use your brand logo and colors, enter the property features, financials and images and the highly intelligent software will package everything together for you, automatically generating the charts, graphs, tables, designs, financial analysis, and more.  What may take 30 minutes to complete, will look like it took days.

Marketing Operations Tools

MREN

MREN stands for Metis Real Estate Network and is a technology-enhanced collaboration platform that aims to support and help professionals in networking while they work. Some of the top features that the tool offers include interconnected networks, internal communication, collaboration tools, and more.

 

In addition, you can benefit from its marketplace that supports syndication and capital raises. Its exceptional document management feature, on the other hand, ensures safe and flexible document distribution.

 

Apto

Apto is a commercial real estate software company and the number one CRM and deal management platform for brokers in the space. It’s popular as the software with the most paid users when compared to other services in the industry. 

 

With the use of Apto, CRE brokers can manage their contacts, properties, listings, and deals across different locations and devices. It can also calculate commission splits between brokers and can manage workflows. 

 

SharpLaunch

SharpLaunch is a commercial real estate marketing platform that offers all you could ask for. You can use it to streamline marketing activities, maximize speed by reducing time spent on administrative and marketing production activities, improve asset visibility, and more. 

 

You can use the tool to see which leads are viewing specific content provided by you. Additional features include personalized interactive maps, document portals, email marketing, and others. 

 

RealHound

RealHound is a CRM solution that was created to help franchise owners, small business owners, property owners, managers, and business professionals. It’s a common tool used by professionals in the commercial real estate environment.

 

Unlike other, standard apps, RealHound offers the opportunity of connecting people and properties by showing listed properties on a map. You can also take advantage of its email and text templates that are quick and easy to use. 

Commercial Listings Platforms

Without a listings platform, commercial real estate marketing wouldn’t be possible. There are a ton of listings platforms that you could try but we’re about to introduce you to the most popular ones:

 

42Floors

42Floors is one of the popular and easy to use national search engines that offer a diverse range of listings. It offers a range of images, downloadable flyers, floor plans for investors, tenants, and brokers to use in order to make the right decisions. It’s an extremely well-known platform and holds positions on Google’s first page in 200 US cities. 

 

You can easily upload a listing on the platform and make any commercial property easily discoverable. 

 

Commercial Search

You can use Commercial Search for free and add it to your priority commercial real estate marketing tools. It’s a national listing platform that provides leases and sales for all CRE asset class types. Where Commercial Search stands out is that it attracts its own traffic and also receives a lot of traffic directed from Realtor.com, which enjoys a lot of popularity. 

 

People can also take advantage of its broker directory, which is definitely a helpful place for commercial brokers to be active in. 

 

CREXI

 

If you still haven’t heard about CREXI or the Commercial Real Estate Exchange, Inc., we highly recommend that you check it out. It’s one of the fastest-growing marketplaces in the real estate industry and provides access to advanced technology. 

 

The data platform is committed to providing support for the CRE industry and the professionals involved. You can easily and quickly streamline, manage, and expand your business and successfully close deals with clients quicker than ever. More than 500,000 commercial properties have been leased or sold via the platform, totalling in more than $1 trillion in property value. 

 

Brevitas 

If you’re looking for an exclusive place for buying and selling commercial real estate assets, Brevitas is the answer. With an international presence and popularity, Brevitas is a marketplace for the acquisition and disposition of commercial real estate assets.

 

It’s also the perfect place to establish useful and long-term relationships in key markets where your presence is essential. 

 

Catylist

Catalyst is available in more than 50 national markets and offers broker-loaded and thoroughly researched databases of commercial real estate. Its users enjoy access to analytics, personalized reporting, broadcast email opportunities, listing search, broker website display, and more. 

 

It’s a tool that is predominantly used in North America for the exchange of information and research and to prospect and do business.

 

Digsy

Digsy’s main mission is to make the search for commercial space easier and less stressful. It’s a free commercial real estate listing service created for tenants and buyers looking for their next commercial property. 

 

The platform makes the connection between brokers and tenants and buyers so that business can quickly be done and the needs of every client can be satisfied. 

 

Total Commercial

With years of experience, Total Commercial has provided commercial real estate listing information since 1995. It’s a full-featured commercial real estate listing service that is national but very popular in Florida. 

 

Users can take advantage of unlimited listings against an annual fee. However, real estate agents can create customized pages in their professional database free of charge. The listings are carefully inspected and checked before approval. 

 

CoStar

CoStar stands out as the biggest provider of commercial real estate research and data. It’s the go-to place for real estate professionals as it offers the most comprehensive listings database that includes properties, comps, contacts, analytics, market reports, news, and more. 

 

The company has invested more than $1 billion in the development of a sophisticated research operation to back its platform. Today, more than 80% of commercial real estate transactions happen with a CoStar user and subscriber. 

Content Marketing Software

Content marketing tools offer a lot of advantages in the commercial real estate space. They can help you create and execute a better content marketing strategy and ultimately – enjoy more converted users into clients. 

 

Canva

Even though you may be involved in the commercial real estate industry instead of graphic design, your content marketing efforts are likely to require some level of graphic design. Thankfully, tools like Canva make thighs easier even for the most inexperienced person.

 

You can create your own personalized flyers, E-books, newsletters, social media posts, and more. It’s a platform that offers a range of solutions that only require a click of a button. It will improve your digital branding and will attract more users to learn more about what you have to say.

 

Hemingway

The Hemingway App is designed to turn ordinary content into amazing content. It helps you transform your writing through valuable tips and suggestions for improvement.

 

For example, long and complex sentences can be turned into easy to read, short messages. Grammar and spelling errors will also be detected and suggested for improvement. If you spend a lot of time creating blog post articles, emails, or other types of content, Hemingway can be a true saviour. 

 

Grammarly

Most content writers find it difficult to imagine what life would be without Grammarly. It’s an amazing tool that is designed to check your grammar and spelling on any piece of content that you use it for. However, it offers more than that.

 

Grammarly can analyze your voice, sentence structure, checks for plagiarism, and more. There’s an available extension for Chrome and you can use it for any marketing channel that you create content for.

 

Buildout

Specifically created for the commercial real estate space, Buildout allows you to automatically populate targeted marketing materials by using your company or brand’s blueprints. It offers invaluable support in expanding your existing marketing reach and ongoing content creation efforts.

 

You can also enjoy the process of a streamlined listing as an advantageous feature that the tool provides. 

 

Typeform

By using Typeform, you are basically creating a step-by-step process to engage and quality the visitors that reach your website. The main objective of the tools is to boost the conversion rate of your inbound traffic and lead efforts.

 

The tool is the perfect way to grab real estate leads in a conversational and gentle method. 

 

Medium

Medium is a great tool that can be exploited by experts in the commercial real estate industry. It offers a user-generated content community of content. It can be used entirely instead of a personal blog and can point to your domain. 

 

The platform offers a range of pre-built aesthetics that will reduce the time necessary to format and design your content. You can use it to get your content seen by a wide audience, helping you get your name recognized and potentially connect to prospects. 

 

Quora 

Regardless of your niche, Quora is the place to be. CRE is no exception. The site is created on the basis of question and answer and connects users to providers of services, products or simply knowledgeable experts who can offer insights and answers on specific topics.

 

Some of the relevant channels for CRE include ‘Commercial Real Estate’, ‘Commercial Real Estate Marketing’ and ‘Commercial Real Estate Finance.’ Join the channels and provide answers to the questions potential clients have. 

 

Reddit

Reddit is another community that you absolutely want to be active in. It’s among the strongest online communities where users communicate and exchange information on merely any topic you could possibly imagine. You can contribute with images, text posts, links to sites, and more.

 

Each subreddit on the platform could be regarded as a separate forum where individuals with shared interests are active. You can browse to find CRE-related subreddits and engage with users. 

Lead Generation & Prospecting Tools

 

LinkedIn Sales navigator

LinkedIn Sales Navigator is certainly not limited to the real estate industry but it could dramatically improve your lead generation activities. It allows you to perform specific searches using the lead builder tool to match specific experts or individuals from certain professional backgrounds or locations.

 

When you find the filters that work for you, save them for later and target your audience with personalized marketing campaigns for maximum results. 

 

Ninja Outreach

Ninja Outreach is an influencer marketing and blogger outreach software that automates outreach to influencers and the process of lead generation, saving you time and energy. By using this tool, you can create exceptional, highly customized marketing campaigns. 

 

Discover business profiles and influencers on social media in your chosen niche and geographic location using keywords. This is a great solution for extending your reach to a specific target audience and enjoy more traffic for your commercial real estate business.  

 

Reonomy

Reonomy offers the biggest commercial real estate owner database in America. By using the platform, you can discover LLCs and privately-owned properties that are not being advertised on the market yet. 

 

You can enjoy access to property ownership details like phone numbers, email, mailing address, and more. With this valuable and hard to find information, you’ll always be one step ahead of the competition. The platform is unique with the filters provided that guarantee that you target specific leads only.

 

Google Advanced Search

Wouldn’t it be helpful if you could build a list of listings that are no longer advertised and have recently expired? Google Advanced Search offers exactly that. 

 

Tapping into expired listings is an amazing opportunity for commercial real estate brokers to access information about a seller who hasn’t yet sold their property. All you have to do is choose a listings platform and perform a search for expired listings on it.

Marketing Analysis Software

In order to make your commercial real estate efforts effective and successful, it’s essential to combine them with analysis and make ongoing improvements. To do this, you need data and ways to quickly and efficiently analyze it. 


Here are some of the top tools that can help you do this:

 

Cherre

Cherre is a platform that allows you to connect your real estate data and make it visible for the whole organization in order to support better investment decisions and more efficient underwriting. 

 

You can enjoy a full view of your entire portfolio from one place, take advantage of useful filters by location, asset class, and more. The platform also offers the ability to create reports, monitor benchmarks, and improve performance.

 

Google Analytics

Although not created to suit the purpose of commercial real estate alone, Google Analytics is an incredible tool that can be used by real estate professionals. It’s one of the most reliable tools for tracking your marketing activities.

 

The majority of CRE experts benefit from information on where traffic to their website came from, which allows them to identify which channels are performing best and where most clients are coming from.

 

FullStory

Do you want to know what people do when they’ve landed on your website? FullStory offers the chance to replay user sessions on your site and can provide invaluable information that can show you which areas need improvement and where most visitors are focusing their attention. 

 

It will quickly show what changes you need to make to convert more users into clients and help them find or sell their commercial property. 

 

UTM Generator

By using UTM tracking, you can create a bespoke URL that you can use to determine where your website traffic is coming from. 

 

It’s helpful in monitoring the performance of different campaigns and content. When you’ve created your custom-made URL, visit Google Analytics and go to the Acquisitions Section to see the traffic assigned to this link from certain marketing channels. 

 

Google Search Console 

You don’t have to be a marketing expert to use Google Search Console. It’s a useful Google tool that offers useful information that will help you understand your clients better. It shows what keywords users search for before landing on your website, which can be helpful in creating content that converts better.

 

It’s also a great way to determine whether you are attracting the right audience to your website. You can see the links that lead to your site and other valuable insights that can help you improve your commercial real estate marketing strategy. 

 

Google PageSpeed Insights

PageSpeed Insights is another Google tool that is extremely useful in improving your website’s performance and making the user experience better, which increases your chances of converting them into a client. 

 

The tool enables you to inspect your website’s speed on mobile and desktop. You will also receive suggestions on how you can optimize the performance by making the necessary changes. Optimizing your page load speed can help you rank higher on search engine result pages and become more visible for clients. 

 

Optimizely 

Another useful marketing tool, Optimizely lets you run A/B tests and experiments on your website. You can use a range of dynamic or basic features to inspect your website and test how it performs in certain scenarios 

 

This will help you validate conversion rate optimization and will help you understand whether your existing landing pages are good enough to help convert users into clients. 

Paid Advertising Tools

Paid media is any performance-based medium like pay-per-click, remarketing, paid promotions, keyword campaigns, banner ads, and more. Paid advertising tools offer quick and efficient ways to improve your results and attract more clients as a commercial real estate professional. 

 

Here are some of the main tools you need to be aware of:

 

Google Ads

Google Ads is the most powerful network for digital paid advertising worldwide. Unlike paid ads on social media channels, Google Ads allows you to bid to place your ad as the top result for specific searches based on keywords. It’s an extremely effective way to get your name seen by a vast range of users searching for services like yours. 

 

Considering that more than 60% of core search queries in the United States are generated by Google, showing up on the first page is definitely something you want to invest in. It’s also interesting to note that the average cost-per-click or CPC in the real estate industry is $2.37, while the most expensive real estate industry keyword is $95. 

 

Bing Ads

Similarly to Google Ads, Bing Ads are created to help brands get noticed on Bings’ search results pages. Although Bing does not have the exceptional numbers of Google, it’s still a platform that a lot of people rely on for information. 

 

With one Bing ad buy, you can reach more than 160 million unique searches via Microsoft and Yahoo sites, which are 30% of total search engine share and more than 6 billion monthly searches. 

 

Facebook Ads

If you’re looking for an affordable and reliable way to reach and market to commercial real estate professionals or potential clients, Facebook Ads is another useful tool. You can create different types of campaigns and choose detailed targeting to make sure you’ll reach the perfect audience. 

 

You can target based on interests, hobbies, geographic location, income, and more. The best part is that Facebook Ads also provides amazing ways to analyze the received data and use it for more detailed targeting in the future. With more than 2.5 billion monthly active Facebook users, there’s a lot of potential to explore on the social media platform. 

Improve your CRE marketing efforts 

In order to sell and achieve your goals, you undoubtedly need successful and efficient marketing strategies in the commercial real estate market. The tools that we’ve looked at in this article are some of the most popular and commonly used platforms and software that aim to help you speed less time on marketing yet enjoy better results. 

 

To choose the tools that will work best for you, you may need to test a few options to see which ones are capable of providing all that you need. 

 

Commercial Real Estate Valuation – Sales Comparison Approach

Commercial Real Estate Valuation – Sales Comparison Approach

In this article we’ll discuss the importance of property valuation and specifically one method for appraisal called the sales comparison approach. 

One of the biggest challenges you’ll face in the real estate industry is how to evaluate a property and establish it’s real market value. The market value of a property is a critical component for:

  • Performing investment analysis
  • Securing financing for your project
  • Assessing property insurance and taxes
  • Establishing purchase or asking price
  • Determining lease price and potential income

All these major activities depend on you making the correct valuation according to the real market conditions and individual characteristics of the property. 

Of course, evaluating a commercial property is not as simple and straightforward as evaluating consumer goods, appliances or cars which are produced in mass quantities and have a well known market value and depreciation curve. 

Commercial properties are often substantially different than anything else on the market, which makes their evaluation that much more difficult. 

Furthermore, because of their astronomical cost, as compared to any type of personal property, and even residential properties, commercial property investors have to get incredibly granular and perform detailed analysis and account for every single factor that influences the value.

You can lose 10%, heck, even 50% of the value of a car, but nobody who’s dabbling in commercial real estate would imagine simply dismissing 1% of the value of a huge trade center, which can amount to hundreds of thousands, if not millions of dollars.

Market Value vs Cost vs Price

Before we continue, there are a couple of distinctions we must make. Many people mistake value for cost or price. On many occasions, these three metrics are very similar and nearly identical, but not necessarily so. 

The cost of a property is the expenditures to acquire the land and necessary permits, create a development project, purchase materials, hire manpower and equipment, and construct all buildings, infrastructure and amenities. That’s for the construction phase. Afterwards, the running cost of a property includes all insurance premiums, taxes, maintenance, scheduled improvements and repairs, management, advertising, and other operational activities. 

When the project is executed well, the cost of the property should be less than its value on the open market. However, it’s reasonable to assume that inadequate planning, poor architectural design, subpar construction management can all produce an unjustifiably expensive property.

Then there is the price…sales price that is. Under normal circumstances, the sales price of a property would be very close to its real market value. In fact, the market value is most often reevaluated prior to a sale to correctly determine the sales price. 

However, there are many cases where the owner is under pressure to sell and will accept a much lower price than the property is worth. Likewise, properties that have been repossessed and sold at an auction will go for a lower price, as the bank is trying to recoup their finances. Finally, property sold between relatives, business partners, or other affiliations will often see its price modified to fit the needs of both parties in the deal.

In comparison, the market value of a property is the current worth of the benefits, features and opportunities it provides for its owners. Market value is driven by demand, supply, utility and accessibility. 

Why is the market value so important?

If you want to sell the property and list a price below the market value, you’re likely losing money on the sale. On the other hand, listing too high of a price will hinder the competitiveness of the property on the market and you’ll experience significant dwell times, meanwhile incurring costs to run and maintain the property. 

If you’re an investor, a low market value might not secure funding for your project, while too high of a value might make your funding options uneconomical. 

An elevated market value will make your insurance premium considerably larger, however insufficient value might mean your asset is not completely covered in the event of catastrophic damage. 

When it comes to taxes, you’re looking for a lower market value to minimize your expenses. But be warned about artificially reducing the market value of your property. The IRS are not amused by cheap tricks and it may come back to bite you at some point in the future.

Sales Comparison Approach to Valuation

The sales comparison approach is one of the most commonly-used methods to find the real world value of a property. It uses data from comparable and recently-sold properties to build a realistic picture about the target property’s worth in the economic conditions at the moment.

The sales comparison approach is used in pretty much every industry from clothes retailers to used car dealers to commercial property investors. Of course, while the former two are mass-produced items, no two commercial properties are 100% alike. And if they were, they likely wouldn’t be constructed right next to each other and would thrive in different market conditions. 

This means you can’t just check what that other shopping mall is selling for and slap the same price on yours. There are multiple adjustments needed, in order to equalize the difference between these properties and establish a realistic market value. 

Criteria for a proper sales comparison approach

The sales comparison approach is a useful tool, but like all tools there’s a right and a wrong way to use it. Before you begin making your analysis, you must check if the following criteria are met to ensure your valuation is correct and realistic:

  1. There is an active market for this type of property – if there are only a couple of properties on the market in the entire country, you don’t have enough statistical data to properly assess and adjust all factors that drive the value. There must be at least 3-4 comparable properties in the appraisal, ideally, located close to the target property, and sold within the last 12 months. 
  2. The local and national economy should be relatively stable – in periods of abrupt violent swings (in either direction), your evaluation can be thrown off by random spikes or dips in sales prices. Likewise, the sale of the comparable properties, used in the evaluation, should be conducted under normal market conditions.

 

When you’ve established the comparable properties, you want to bring all of their key parameters into a table along with your subject property. It should look similar to the example below: 

 

Subject Comp 1 Comp 2 Comp 3
Sales Price TBD $3,377,000 $2,850,000 $5,322,000
Gross building area (sq.ft.) 34,800 29,500 31,000 56,000
Price/sqft TBD $114,47 $91,94 $95,04
Building Age 1 year 2 years 6 years 5 years
Time of Sale TBD 3 months ago 7 months ago 11 months ago
Potential Gross Income (PGI) $469,800 $400,000 $260,500 $580,000
Vacancy 5% 3% 4% 7%
Effective Gross Income (EGI) $446,310 $388,000 $250,080 $539,400
Operating Expenses $113,100 $120,000 $150,000 $214,000
Net Operating Income (NOI) $333,210 $268,000 $100,080 $325,400
Potential Gross Income Multiplier (PGIM) TBD 8.44 10.40 9.18
Effective Gross Income Multiplier (EGIM) TBD 8.70 11.40 9.867
Net Income Multiplier (NIM) aka Cap Rate TBD 0.079 0.035 0.061

 

For this example, our subject property has 34,800 sq.ft of rentable area, going for $13.50 per sq.ft. The operating expenses are $3.25 per sq.ft and the expected vacancy is 5%.

Adjustment Factors Used in the Sales Comparison Approach

The comparable properties are similar but not quite identical. Using their values, or even the average of their values is not good enough. In the next step, we have to account for these differences by using the adjustment factors.

Physical Features

Starting from the most obvious, what are the physical differences between your subject property and the comparables? Ideally, the properties should be similar, but they’re never truly 100% identical.

Think about the age of the building, the quality of the materials and workmanship that went into its construction. Those will dictate the long term cost of renovations, repairs, energy efficiency and other running expenses. 

The design will obviously impact the desirability to tenants, shoppers, visitors and will directly influence the profitability of the building. 

Furthermore, consider all features that are lacking or unique to your subject property. What’s their value and how do they impact the value of the property as a whole. 

 

Let’s assume the following adjustments for the physical features of the comparable properties: +1%, -4%, -2%, respectively.

Other Valuable Property

What else comes bundled with the property? 

If we’re talking about a hotel, then the furniture, carpets and interior decorations will represent a considerable point of value – enough to nudge the price of the entire property. 

If we’re talking about industrial equipment, like manufacturing machines, it can cost many times the price of the building on it’s own. 

Whenever such differences are present, there must be an adjustment to compensate for their value. 

Ownership Interest

It makes a big difference whether you’re purchasing a building outright, or you’re purchasing it with tenants in situ. In the first case, you’re acquiring the fee simple interest, which gives you absolute ownership of the property. 

In the latter, you’re acquiring the lease fee interest which means you become a landlord to the tenant that’s already occupying the property and have to respect their valid contract until it expires or you have a chance to terminate it. On one hand, you might not want these particular tenants, or tenants at all. On the other, you start earning revenue immediately after the sale, which can help out with your cash flow. 

While evaluating, you should take note which property was sold under what conditions and account for that accordingly.

Conditions of Sale

A sale conducted under duress could force the seller to forfeit a significant sum in order to accelerate the process and close the deal. A business in decline or under the threat of bankruptcy will readily provide a discount if the funds from the sale will keep them afloat and pull them through a crisis. 

Similarly, a sale between relatives or closely associated businesses could modify the price as to fit each party’s needs. 

These are not considered normal sale conditions, so if such are present in your comparable properties, they must be adjusted to reflect a natural sales process. 

Let’s assume that property #2 was sold under its market value, because the previous and current owner have closely connected businesses with multiple intersecting revenue streams. We’ll tag a 2% devaluation. 

Market Conditions at the Time of Sale

The economic landscape is ever changing. All the comparable properties were sold in less than a year from the time of our analysis, which is desirable. However, prices can change every month and even every week. 

Depending on the stability of the market which we’re considering, an adjustment must be made to account for the elapsed time from the sale of the comparable property to today. 

For example, the property market has been on the rise in the past year, with average prices creeping at 0.5% per month. 

This means the comparable properties must receive a bump in price with 1.5%, 3.5%, and 5.5% respectively. That’s a substantial difference worth nearly $300,000 in for property #3. 

Location, Location, Location

Location is everything in commercial real estate. Prices vary wildly, between different states, counties, cities, neighbourhoods and even individual streets. Transport links, the quality of the local infrastructure, amount of traffic, competition, quality of life and average income of nearby residents, and many more factors play a crucial role in determining the profitability and therefore the value of a given commercial real estate. 

Therefore, the locational differences must absolutely be accounted for, as that can dramatically change the perspective of your evaluation.

Of course, this task requires its own study, so we’ll keep it out of our example. But you don’t want to skip on this step during your own appraisal. 

Putting it All Together

After analysing each adjustment factor, it’s time to present the corresponding adjustments in a table.

 

Comp 1 Comp 2 Comp 3
Price/sqft $114,47 $91,94 $95,04
Physical features 1% -4% -2%
Conditions of sale 0 2% 0
Market conditions at the time of sale 1.5% 3.5% 5.5%
Total Adjustments 2.5% 1.5% 3.5%
Adjusted Price/sqft $117,33 $93.31 $98.37
Adjusted value $3,461,425 $2,892,750 $5,508,270
Adjusted PGIM 8.65 11.10 9.50
Adjusted EGIM 8.92 11.57 10.21
Adjusted Cap Rate 0.077 0.035 0.059

 

As you can see, we have some significant movement in the values, compared to the original table. 

 

With these values we can average the market multipliers for all comparables and project the estimated value of our subject property. 

Value based on PGIM Value based on PGIM Value based on PGIM
Sales Price $4,580,550 $4,565,750 $5,845,790
Potential Gross Income (PGI) $469,800 $469,800 $469,800
Effective Gross Income (EGI) $446,310 $446,310 $446,310
Net Operating Income (NOI) $333,210 $333,210 $333,210
Potential Gross Income Multiplier (PGIM) 9.75 9.72 12.44
Effective Gross Income Multiplier (EGIM) 10.26 10.23 13.09
Net Income Multiplier (NIM) aka Cap Rate 7.27% 7.29% 5.70%

 

Finally, our subject property value estimate ranges between $4,565,750 and $5,845,790

Conclusion

To summarize: The sales comparison approach uses recent sales data from similar properties, which is adjusted and processed to estimate the realistic market value of your subject property.

That said it is not an exact science. In a real world situation, you’ll have to work with many more factors and variables than we discussed in this article. A great number of them will be adjusted subjectively, based on the data you can collect and a fair amount of assumptions and interpolations.  The comparables analysis used in CREOP’s platform helps illustrate the main financial metrics used when evaluating comparable properties.

Therefore, you will never get a single number that’s the absolute true market value. A range of values provides you with a perspective on how your property might move on the market. 

Finally, remember that even though you’ve calculated a market value for your property, you’re not guaranteed to sell or buy at that price. The market price is set by the highest sum a buyer (who has the means to complete the transaction) is willing to pay for said property.

 

Understanding Commercial Real Estate Leases

Understanding Commercial Real Estate Leases

If we consider all possible commercial real estate leases, the net and gross stand on the two extreme ends of the spectrum. 

Absolute net leases, also known as triple net leases, allocate all operating expenses of the property to the tenant. This includes property taxes, insurance, and maintenance. In addition to these costs, the tenant also pays rent, however, it is usually lower to offset the other responsibilities.

On the other hand, absolute gross leases, also known as full service leases, hold the landlord responsible for all operating expenses. The tenant is only responsible for paying the agreed rent. Of course, the base rent is usually higher with gross leases to compensate for the landlord’s elevated costs.

Between these two extremes, exists an almost infinite amount of leases that split the operating costs and responsibilities of the property. If you’re working in commercial real estate, you’ve inevitably encountered a huge variety of leases like single net, double net and triple net leases, modified gross and full service leases.

In the sections below we’ll offer a brief rundown of each and answer your most immediate questions about the different types of leases in commercial real estate, how they work and why should you choose one over the others. 

Single Net Lease

The difference between all net leases is how much of the landlord’s costs are transferred over to the tenant. 

The single net lease is the simplest form, allocating only the property taxes to the tenant, in addition to the base rent. Building insurance and maintenance remain responsibilities of the landlord.

How commercial real estate property taxes are calculated

Property taxes are charged by the local or state government and are for the most part non-negotiable. 

Residential and commercial real estate are charged very differently. For residential property, the assessment establishes property’s value in context of comparable properties on the market. Taxes are then charged on a percentage basis, decided by the local or state authority. 

For commercial properties, the calculations are more complicated. Property owners are required to submit an “Income and Expense Form” to the respective board of assessors every year. The board’s job is to assess the value of the commercial property from a business standpoint, looking into the rental income, business operations and building expenses like maintenance, repairs, cleaning, utilities, advertising, insurance, legal, management and other costs to run the property. The building will be assigned the appropriate tax according to the local budget requirements which can change every year.

Tips on Single Net Leases

Handling property taxes is usually a responsibility of the landlord. However, in single net leases, the cost of these taxes is reimbursed by the tenant. 

If you’re the tenant, you’re deeply interested in double checking the “Income and Expenses Form” before it’s submitted to the authorities, ensuring all items are properly described in their entirety. Before signing the lease, you want to look at estimations or previous year assessments of the building tax, so you can calculate a more accurate ballpark of your own cost to lease the property. Property taxes are non-negotiable, however your rent is, so you can make adjustments accordingly to offset your costs.

If you’re the landlord, you can balance the property taxes, rent and your other expenses to ensure your building is competitive and desirable to local businesses, but also profitable in the long-term, bringing sufficient cash flow for your own needs. 

Double Net Lease

The double net lease holds the tenant accountable for rent, property taxes, AND, insurance. Building maintenance remains a responsibility of the landlord.

Insurance in Commercial Real Estate

Insurance is always required by the bank or lender who funded the construction cost of the property. Property insurance protects the building and all its contents and equipment against theft, vandalism, fire, natural disaster or other damage. This includes, but is not limited to:

  • The building itself
  • Office furniture, computers, phones
  • Machinery, equipment and tools used for manufacturing, cooking and other services
  • Inventory, parts, supplies and materials kept onsite
  • Accounting records and essential documents
  • Landscaping and other improvements to make the facility more customer friendly
  • Signs, decoration, satellite dishes, etc

 

Commercial real estate insurance is never cheap, but depending on the specific building and business, it can be an excruciating expense. The exact calculation is unique to every single scenario, but the main factors that drive the price are as follows: 

 

  1. The value of the building and its contents form the base price of the policy. Is the tenant a manufacturer with multi-million processing equipment, a car dealership with dozens of vehicles in the lot, or a coffee shop? 
  2. The risk of a natural disaster is linked directly to the location. Leasing a building in one of the wild fire-struck regions in California, a commonly flooded area in Miami or Central Texas will likely bear a significant risk factor.
  3. The risk of a fire depends on multiple factors. What are the construction materials – wood, reinforced concrete, brick and mortar? What’s the occupation – cooking, welding, or selling shoes? Are there combustible materials in the building? Is the electrical wiring up to code? What is the quality of the fire suppression system? What is the proximity to a fire station and a hydrant? Often the insurance company will require an inspection and fire rating analysis before issuing out a policy. In some cases, if the risk is deemed too high, the business may be rejected unless implementing significant improvements.
  4. The risk of theft is associated with both the location, the type of business operated and the quality of the security systems installed. Some urban areas and businesses experience more crime than others. Consumer electronics are reasonably valuable, easy to carry, and trade off in virtually any market. Industrial equipment is worth millions of dollars, but it’s useless and often impossible to steal.

Tips on Double Net Leases

In other lease types, the landlord will  pay for the building insurance, and the tenant will have to pay for a separate commercial insurance to cover their furniture, equipment, stock and materials. 

In this regard, the double net lease can be cost effective, as it allows to group both insurances under the same policy, which can offer some savings. Furthermore, the commercial insurance premium is a business expense, so it will be deducted from the taxable income and reduce the building tax also paid for by the tenant. 

Before signing a double net lease, it’s important to get an insurance estimate to ensure the costs are balanced and competitive to other properties on the market. The building might hide construction flaws that bring the fire rating down and inflate your insurance premium more than anticipated.

In either case, the rent payment should reflect on the increased expenses of the tenant.

Double Net leases can be used in a single tenant and multi tenant buildings. In the later case, the cost of building tax and insurance is divided according to each tenant’s share of the building, similar to a core factor.

Triple Net Lease

Triple net leases transfer practically all costs and expenses of the building to the tenant. The tenant pays for building taxes, insurance and maintenance. 

Maintenance is a collective name for all: 

  • Repairs and maintenance – plumbing, electrical, HVAC, elevators and escalators, roofing, interior and exterior walls, structure, etc.
  • Utilities – electricity, water, gas, sewage, trash collection
  • Cleaning and janitorial services
  • Gardening and landscaping
  • Maintenance of parking lots, sidewalks and other outdoor areas
  • Maintenance of loading docs, delivery areas and other commercial facilities
  • Management fees
  • Security services
  • Advertising and marketing of the property

The cost of these varies depending on the condition, size and purpose of the building. Different services can be outsourced to an array of contractors, grouped under a management company, or even conducted internally by the tenant’s own workforce, which is usually the most cost-effective option.

Triple net leases are used when a single tenant occupies the entire building – commonly seen with national food chains or department stores – and are most often structured for extended periods of time – usually 20+ years. 

In this scenario, the tenant absolves the landlord from practically all responsibilities, allowing them to operate a so-called turnkey investment. That said, even with an absolute net lease, the landlord still sees some expenses, like legal and accounting fees related to drafting and processing the lease documentation.

The tenant gains unique benefits in that they can access premier locations and secure long-term exposure to high foot traffic. Landlords can rely on long-term predictable income from their properties. 

Tips on Triple Net Leases

With triple net leases, tenants perform all repairs and maintenance, cover all insurance premiums and submit their own building taxes to the authorities. This comes with a considerably reduced rent, compared to other lease types and can secure some savings by grouping all expenses associated with the location.

On the other hand, tenants must be very careful in assessing and predicting the maintenance costs of the building before signing the lease. Some buildings can prove too much of a burden to maintain in addition to the agreed rent. If the contract is structured as a bondable triple net lease, which landlords prefer, the tenant will not be able to break free before the termination date and will have to face these increased expenses without any rent deduction or other financial aid.

Triple net leases are considered good conservative investments for landlords who need do nothing but enjoy their passive income stream. The rent earned from a triple net lease is lower, however, it’s compensated by the lack of other running costs, reliable cash flow and the security of leasing to well established businesses.

Absolute Triple Net Leases are even more advantageous for the Landlord.  With Absolute NNN, the Tenant is responsible for the roof, structure, foundation, and parking lot.  Consequently, providing zero responsibilities for the Landlord.

That said, acknowledge that the security of tenure is only guaranteed if the business is profitable. If a tenant defaults, the landlord will be left with an empty building, whose costs they have to carry until they find another tenant. This can result in considerable losses. Investors, who plan to use a triple net contract, should spend extra time, effort and money in credit checking and background checking their prospective tenants.

Modified Gross Lease

A modified gross lease is a lease that allocates some operating expenses to the tenant and others to the landlord. The term is really vague as it simply means that both parties have responsibilities towards the operating costs of the building. 

Modified gross leases can be structured the same way as a single, double or even triple net leases. Or they can feature a unique structure, depending on how both parties negotiate. 

These leases can be used in single and multi-tenant buildings and often feature some pretty complicated reimbursement strategy. Modified gross leases must always be read in full, and if needed, taken to a legal professional to review. 

Let’s look at a couple of different scenarios all using a modified gross lease.

Tenants could simply be charged their prorated share of all operating expenses. For example, if they lease 25,000 sq.ft out of a 150,000 sq.ft building, they will pay for 1/6th of the building’s running costs – taxes, insurance and maintenance. Simple enough. 

Alternatively, tenants can be responsible for some expenses, share others and leave third to the landlord entirely. For example, tenants may have to facilitate their own maintenance and repairs in their rented space. Then, the landlord can charge them for building taxes and common area maintenance on a pro-rata basis. Finally, the landlord could cover building insurance and structural repairs. It gets tricky as the tenant has to factor multiple expenses to establish their total costs of renting space in that building. 

But it can get even more complicated. The tenant may have to pay some costs as a percentage of the total amount, but contribute flat sums towards other areas. For example, pay a pro-rata share of all property taxes, but pay $1.50 per square foot for maintenance and repairs of the building. 

Finally, if that’s not complicated enough, the landlord can implement various expense stops.

What are Expense Stops?

An expense stop defines the maximum amount of money that the landlord will contribute to the operating expenses of the building. 

For example, an expense stop of $5 per square foot means that for a 10,000 square foot building, the landlord will pay a maximum of $50,000 annually towards the running costs of the building. Anything above that sum must be covered by the tenant. 

Expense stops can be applied to individual expenses or a group of expenses. In the first case, and using the example above, the landlord will have to contribute $50,000 per year for taxes, then $50,000 for insurance, and finally $50,000 for maintenance separately. If either of these runs above the $50,000, the tenant will have to cover the difference. 

If the expense stop is applied to all operating expenses as a group, the landlord will only contribute a total of $50,000 to all running costs of the building. The expense stop will kick in much sooner and hold the tenant accountable for a way bigger sum. It makes all the difference in the world and it’s extremely important to discuss any expense stops featured in the lease to ensure you avoid unexpected costs.

There is also a thing called a base year stop. In this case, the landlord will assume all expenses in the first year of the lease, then calculate an expense stop using that sum. For example, if the base year operating costs were $50,000 for a 150,000 sq.ft property. The expense stop for any consecutive year comes out to $0.33/sq.ft. Anything over that sum will be compensated by the tenant.

Full Service Lease

A full service lease is just another name for an absolute gross lease. In this structure, the tenant is only responsible to pay a flat monthly rent and all operating costs are handled by the landlord. 

Usually, this means that the rent charge will be higher compared to all other lease types, but the tenant can predict their expenses perfectly and choose a property that suits their needs. Furthermore, these leases typically feature more flexibility and smaller terms, allowing the tenant to break free relatively easily if they wish.

Always Read the Lease

You can never take a lease for granted just based on a description. Commercial real estate leases are often too complex and nuanced to fit into any given type. 

Different lease types could mean different things, depending on the industry and location. In fact, neither of these definitions have any legal backing. There is no law or even universal agreement to how each lease type works. 

More often than not you’ll see full service leases that incorporate expense stops for the landlord, so tenants become liable for parts of the running costs of the building. Or single net leases which force the tenant to contribute some amount towards maintenance, even though the majority is paid for by the landlord.

So, the only way to completely understand what a specific lease entails is to read it in its entirety and where needed take it to a legal professional to decipher and break down.

Another thing to keep in mind is how your rent is being charged and how is your rented area measured. 

How Rent is Charged in Commercial Real Estate Leases

Rent in commercial properties is always calculated as dollars per square foot. For example, an office building may go for $7 per square foot per month. If you lease 10,000 sq.ft, you’ll owe $840,000 rent at the end of the year. 

The critical thing to remember here is what is included in those 10,000 square feet. Business owners could easily assume this is the space available to position office desks with, arrange dining tables, or locate manufacturing equipment like lathes and presses. This is referred to as the usable area or net leasable area. 

However, the building owner paid to construct the entire building, which includes walls, lobbies, staircases, escalators, elevators, toilet areas, maintenance rooms, risers, ducts, electrical and machinery rooms, janitors’ closets, and other features which make the building…well…functional. These add up to a considerable amount of the total area and the landlord has a right to charge rent for them, since they are really inseparable from the building itself.

Depending on your lease, your landlord is going to charge rent on the:

  1. Gross area of the building, which is basically the footprint as measured from the outside surface of the external walls. 
  2. Usable area and incorporate a core factor, which accounts for all areas mentioned above, except for the external walls, based on your portion of the building, if it’s shared by multiple tenants. 

You can read more about types of floor areas and core factors in our articles below:

But just keep in mind that as a tenant, you’ll always pay for more square footage that is actually usable to conduct your business operations.

 

Understanding Hospitality Metrics

Understanding Hospitality Metrics ADR, RevPAR and More

The hospitality industry got a lot more complicated recently. The borders are closed, travel is suspended, there’s mass quarantine and scarcity of tourists. The law of the jungle rules in the travel and hospitality industry. Only the most prepared and adaptive businesses will survive. 

 

Your gut feeling won’t get you out of the woods and it won’t help your business pull through in a tough market. You need information in order to make the right calls. 

 

Obviously, you want higher revenues, reduced operating costs and great profit margins. However, realizing these goals requires diving deep into the data and optimizing several key performance indicators that put your business in the context of the surrounding market.

 

In this article, we’ll go through the most commonly used metrics and KPIs of the hospitality industry and explain how they work and why they matter for your business. 

ADR – Average Daily Rate

Average Daily Rate (ADR) is the most commonly used performance metric in the hotel industry. 

 

Different rooms go for different rates, depending on their size, features and furnishings. ADR gives you a single metric to compare your hotel’s prices against similarly sized and equipped competitors. 

 

You can calculate ADR by dividing the total room revenue to the number of rooms sold for the given period. For example, if you sold 56 rooms yesterday and realized $6,500 total revenue, the ADR is calculated as follows:

 

  • ADR = Total Revenue / Rooms Sold

  • ADR = $6,500 / 56 = $116 per room

 

You can calculate this metric for a week, month, quarter and year by multiplying the rooms to the number of days in the given tracked period and using the total room revenue for the same time frame. If the hotel scores $7 higher ADR than your main competitors, it means you’re getting better value from your property. 

ARI – Average Rate Index

This metric measures how your hotel’s ADR measures against your segment / competitors. You calculate the ARI as follows:

 

  • ARI = Hotel ADR / Market ADR * 100% = some percentage

 

If you’re in tune with the market, your ARI should equal 100%. If you score higher, then you’re earning more than your direct competitors. However, ADR does not account the occupancy rate of your hotel.  You could only fill 30% of your rooms and still get a higher ADR than your competitors who’re taking in twice as many guests and have much bigger revenue and profit. In order to get a more complete picture, you need to consider how much of your rooms are occupied and how many remain empty. 

Occupancy Rate

The occupancy rate is pretty straightforward – the percentage of rooms you have full for any given period. 

 

  • Occupancy Rate = Rooms Booked / Total Rooms * 100% = some percentage 

 

Obviously, a higher occupancy rate is desirable, since it adds direct revenue and has a potential of increased spending on other vicinities, such as restaurants, bars, gyms, etc. 

 

Higher occupancy also adds operating costs. 100% occupancy at dramatically reduced prices can end up losing you profit. That’s the exact opposite of your goal, so a fine balance must be achieved.

 

Of course, 100% occupancy is unimaginable for any significant period. There will be natural peaks and dips in occupancy depending on the seasonality, location and type of accommodations you offer.

MPI – Market Penetration Index

Additionally, you can observe the occupancy rate in relation to the average occupancy for your segment or local market. 

 

  • MPI = Hotel Occupancy Rate / Market Occupancy Rate * 100% = some percentage

 

If your hotel hits the average market occupancy rate, the measurement should be exactly 100%. Any more and you have the edge over the competition, unless you’re unreasonably reducing your prices. 

RevPAR – Revenue Per Available Rooms

Revenue Per Available Rooms (RevPAR) is a measurement of the ability to fill all rooms in a hotel property, given the average room price. 

 

You can calculate RevPAR by multiplying the average daily rate to the occupancy rate in a given period. For example, if your ADR is $120 per room, and you have 85% of your rooms booked up, the RevPAR for your property is calculated as follows:

 

  • RevPAR = ADR * Occupancy Rate

  • RevPAR = $116 * 85% =  $98.6 per room

 

Only revenue from sold rooms should be considered for this calculation. Revenue from restaurants, lobby bars, tourist shops or other services should not be included.

 

RevPAR will grow proportionally to the average daily rate and occupancy rate. It’s useful to judge real world performance of the property and how effectively the rooms are priced compared to their take up rate. If everything is going great, you should see this number grow.

 

For this example, decreasing the going rate by $9 (9.3%) in order to get 9% more occupancy, will increase RevPAR to $100.6.

 

RevPAR does not account for the size of the hotel, and it’s not a measurement for the profit. More occupancy means more running costs. 

RGI – Revenue Generation Index

The Revenue Generation Index is a comparative metric measuring your hotel’s RevPAR against your market segment. 

 

RGI = Hotel RevPAR / Market RevPAR * 100% = some percentage

 

Again, just like other comparative metrics, 100% means you’re getting a fair share of your desired market. You’re aiming for a larger figure. 

TrevPAR – Total Revenue Per Available Room

TrevPAR is similar, however, it accounts for all revenue streams attached to the property – restaurants, bars, gyms, spas and other amenities. If you have a total revenue of $26,000 and 240 rooms in the property, your TrevPar is calculated as follows:

 

  • TrevPAR = Total Revenue / Total Rooms

  • TrevPAR = $26,000 / 240 = $108.3 per room

GOPPAR – Gross Operating Profit Per Available Room

GOPPAR gives you the big picture – how much profit you generate per room in your hotel. That accounts for all operational expenses – maids, cleaning, maintenance, rent, utilities, supplies and other costs. 

 

You calculate GOPPAR in the following manner:

  • Calculate Gross Profit for the given period. For example, if you earned $7.3 million for the entire year, but paid $2.6 million in salaries and $1.1 million in supplies and consumables, your Gross Profit (before tax) would be $3.6 million. 

  • Next, multiply the total room amount by the days in your measured period. In this case, let’s say we have 130 rooms and 365 days in the year, so a total of 47,450.

  • Finally, divide the two figures. Your average annual profit per room is $3.6 million / 47,450 = $75.87.

 

Takeaway

Let’s quickly recap what we learned about key performance indicators in the hospitality industry: 

 

  • Average daily rate – the average price of a room across your portfolio in a measured period.

  • Occupancy rate – the percentage of hotel rooms sold.

  • RevPAR – the average revenue generated per room in your hotel. A metric taking into account the previous two.

  • TrevPAR – similar metric taking into account all revenue sources in the hotel’s facilities.

  • GOPPAR – a metric that measures the profit per room in a given time frame.

 

These are not all possible performance metrics about the hospitality industry, but they should give you a great starting point to develop more sophisticated methods to collect and analyze data. 

 

The right decisions are based on reliable information about your performance in relation to the market around you. If your hotel is not collecting data, you’re already trailing behind the competition. 

 

Make that your top priority! 

ADR, RevPAR and More
The hospitality industry got a lot more complicated recently. The borders are closed, travel is suspended, there’s mass quarantine and scarcity of tourists. The law of the jungle rules in the travel and hospitality industry. Only the most prepared and adaptive businesses will survive.

Your gut feeling won’t get you out of the woods and it won’t help your business pull through in a tough market. You need information in order to make the right calls.

Obviously, you want higher revenues, reduced operating costs and great profit margins. However, realizing these goals requires diving deep into the data and optimizing several key performance indicators that put your business in the context of the surrounding market.

In this article, we’ll go through the most commonly used metrics and KPIs of the hospitality industry and explain how they work and why they matter for your business.
ADR – Average Daily Rate
Average Daily Rate (ADR) is the most commonly used performance metric in the hotel industry.

Different rooms go for different rates, depending on their size, features and furnishings. ADR gives you a single metric to compare your hotel’s prices against similarly sized and equipped competitors.

You can calculate ADR by dividing the total room revenue to the number of rooms sold for the given period. For example, if you sold 56 rooms yesterday and realized $6,500 total revenue, the ADR is calculated as follows:

ADR = Total Revenue / Rooms Sold
ADR = $6,500 / 56 = $116 per room

You can calculate this metric for a week, month, quarter and year by multiplying the rooms to the number of days in the given tracked period and using the total room revenue for the same time frame. If the hotel scores $7 higher ADR than your main competitors, it means you’re getting better value from your property.
ARI – Average Rate Index
This metric measures how your hotel’s ADR measures against your segment / competitors. You calculate the ARI as follows:

ARI = Hotel ADR / Market ADR * 100% = some percentage

If you’re in tune with the market, your ARI should equal 100%. If you score higher, then you’re earning more than your direct competitors. However, ADR does not account the occupancy rate of your hotel. You could only fill 30% of your rooms and still get a higher ADR than your competitors who’re taking in twice as many guests and have much bigger revenue and profit. In order to get a more complete picture, you need to consider how much of your rooms are occupied and how many remain empty.
Occupancy Rate
The occupancy rate is pretty straightforward – the percentage of rooms you have full for any given period.

Occupancy Rate = Rooms Booked / Total Rooms * 100% = some percentage

Obviously, a higher occupancy rate is desirable, since it adds direct revenue and has a potential of increased spending on other vicinities, such as restaurants, bars, gyms, etc.

Higher occupancy also adds operating costs. 100% occupancy at dramatically reduced prices can end up losing you profit. That’s the exact opposite of your goal, so a fine balance must be achieved.

Of course, 100% occupancy is unimaginable for any significant period. There will be natural peaks and dips in occupancy depending on the seasonality, location and type of accommodations you offer.
MPI – Market Penetration Index
Additionally, you can observe the occupancy rate in relation to the average occupancy for your segment or local market.

MPI = Hotel Occupancy Rate / Market Occupancy Rate * 100% = some percentage

If your hotel hits the average market occupancy rate, the measurement should be exactly 100%. Any more and you have the edge over the competition, unless you’re unreasonably reducing your prices.
RevPAR – Revenue Per Available Rooms
Revenue Per Available Rooms (RevPAR) is a measurement of the ability to fill all rooms in a hotel property, given the average room price.

You can calculate RevPAR by multiplying the average daily rate to the occupancy rate in a given period. For example, if your ADR is $120 per room, and you have 85% of your rooms booked up, the RevPAR for your property is calculated as follows:

RevPAR = ADR * Occupancy Rate
RevPAR = $116 * 85% = $98.6 per room

Only revenue from sold rooms should be considered for this calculation. Revenue from restaurants, lobby bars, tourist shops or other services should not be included.

RevPAR will grow proportionally to the average daily rate and occupancy rate. It’s useful to judge real world performance of the property and how effectively the rooms are priced compared to their take up rate. If everything is going great, you should see this number grow.

For this example, decreasing the going rate by $9 (9.3%) in order to get 9% more occupancy, will increase RevPAR to $100.6.

RevPAR does not account for the size of the hotel, and it’s not a measurement for the profit. More occupancy means more running costs.
RGI – Revenue Generation Index
The Revenue Generation Index is a comparative metric measuring your hotel’s RevPAR against your market segment.

RGI = Hotel RevPAR / Market RevPAR * 100% = some percentage

Again, just like other comparative metrics, 100% means you’re getting a fair share of your desired market. You’re aiming for a larger figure.
TrevPAR – Total Revenue Per Available Room
TrevPAR is similar, however, it accounts for all revenue streams attached to the property – restaurants, bars, gyms, spas and other amenities. If you have a total revenue of $26,000 and 240 rooms in the property, your TrevPar is calculated as follows:

TrevPAR = Total Revenue / Total Rooms
TrevPAR = $26,000 / 240 = $108.3 per room
GOPPAR – Gross Operating Profit Per Available Room
GOPPAR gives you the big picture – how much profit you generate per room in your hotel. That accounts for all operational expenses – maids, cleaning, maintenance, rent, utilities, supplies and other costs.

You calculate GOPPAR in the following manner:
Calculate Gross Profit for the given period. For example, if you earned $7.3 million for the entire year, but paid $2.6 million in salaries and $1.1 million in supplies and consumables, your Gross Profit (before tax) would be $3.6 million.
Next, multiply the total room amount by the days in your measured period. In this case, let’s say we have 130 rooms and 365 days in the year, so a total of 47,450.
Finally, divide the two figures. Your average annual profit per room is $3.6 million / 47,450 = $75.87.

Takeaway
Let’s quickly recap what we learned about key performance indicators in the hospitality industry:

Average daily rate – the average price of a room across your portfolio in a measured period.
Occupancy rate – the percentage of hotel rooms sold.
RevPAR – the average revenue generated per room in your hotel. A metric taking into account the previous two.
TrevPAR – similar metric taking into account all revenue sources in the hotel’s facilities.
GOPPAR – a metric that measures the profit per room in a given time frame.

These are not all possible performance metrics about the hospitality industry, but they should give you a great starting point to develop more sophisticated methods to collect and analyze data.

The right decisions are based on reliable information about your performance in relation to the market around you. If your hotel is not collecting data, you’re already trailing behind the competition.

Make that your top priority!

Understanding Estate Types in Commercial Property

The concept of ownership is fairly simple. However, when dabbling in commercial real estate, the question of “Who owns what?” becomes significantly more complex.

For instance, multiple individuals or legal entities can have interest in the same parcel of land. Adding to that, their rights will vary depending on the type of estate (interest) each party holds.

Finding it difficult to follow already? Let’s start at the beginning.

An estate in land describes the interest or rights of a person in a defined parcel of land. There are three main types of estates in commercial property:

  • Freehold estates
  • Leasehold estates
  • Concurrent estates

In the article below, we’ll describe each estate type, how they differ, and reasons to choose one type of commercial property estate type over another.

What is a Freehold Estate?

A freehold estate is the absolute ownership of an area of land. The owner of the freehold estate owns the land in its entirety for all time. This is the highest form of ownership an individual or a company can achieve.

The freehold estate owner is free to do as they please with their property including develop buildings and industrial facilities, erect and demolish structures, improve the land, and perform other activities.

The freehold owner can sell, lease, gift, or donate the land as they see fit, bound only by the established laws, building codes, and regulations in their area.

There are, of course, several types of freehold estates, each with various rights and responsibilities of the owner.

Fee Simple

When you buy a parcel of land for a new development project, what you’re really doing is acquiring the “fee simple absolute” interest. This type of interest in an estate provides you unrestricted rights to the property, within the extent of the law. It’s also inheritable, meaning if at the end of your life you have not distributed the land to anyone specific, it will automatically be inherited by your heirs.

The fee simple ownership is inheritable, transferable, sellable, and subject todonation, gifts, and leases. The fee simple owner is free to construct or develop the land without any permission, except for the government.

Life Estate

A life estate is a type of ownership which only extends to the end of your life. In other words, after you pass away, your interest in the property reverts back to the fee simple owner. Life estates are commonly used for estate planning and residential property with practically no application in commercial real estate.

Other types of freehold estates exist, however, they have phased out of modern practices.

Why Should You Buy a Freehold Ownership?

Freehold ownership guarantees you the freedom to develop your commercial project in any way you want. All buildings and structures you erect on your property also belong to you and you’re free to use and modify them without limitations or conditions.

Here are some other benefits to buying a freehold estate:

  • You won’t have to deal with anybody (except the authorities and building inspectors)
  • You’ll amass equity that can be used as collateral to secure bank loans or other financial services
  • You can build appreciation and possibly profit from a future sale

Keep in mind, though, that all of this freedom comes with a steep price tag. Buying a freehold estate is the single most expensive way to purchase a property. As the freehold owner, you’re also responsible for taxes, maintenance, repairs, insurance, and all other costs associated with the land.

Notice, ownership and possession are two different things. You don’t always need to purchase the land in order to be able to use it for your commercial project.

In fact, some states like Hawaii will not allow you to obtain a freehold interest in the land, no matter how much money you’ve got.

What is a Leasehold Estate?

A leasehold estate is a type of land tenure where one party (the lessee or tenant) pays the owner (the lessor or landlord) for the right to use the land for a specified amount of time.

A leasehold is obtained by a type of ground lease, which can be configured differently, depending on the needs and wishes of both parties. In doing so, the freehold owner transfers some of their rights to the leasehold owner, such as the right to occupy, the right to exclude others, the right to operate a business, and so on.

The lease term is typically for a long duration – anywhere from 30 years all the way up to 999 years. However, these leases are usually set for above 50 years. Because of this, a leasehold can last practically forever, giving the lessee possession of the land to develop commercial buildings and operate businesses on the premises.

With a leasehold estate, the lessee does not own the land, however, and their rights are limited. Every project is pre-approved by the landowner. Modifications to the structures, improvements of the land, and significant changes to the type of business operations at the facilities must also be approved by the landowner.

This limits the flexibility of the leasehold owner to adapt to changing conditions. Depending on the specific lease structure and cooperation of the freehold owner, this may or may not be a significant concern. However, if there is any disagreement between both parties, they are bound to the wording of the lease contract.

Therefore, it’s absolutely necessary to have the contract analyzed by a legal professional to ascertain whether enough provisions are in place to protect the leaseholder’s interest in the property.

Despite not owning the land, the leasehold owner can own the buildings, structures, and improvements they develop on the property. After the lease expires, this immovable property usually reverts back to the freehold owner, together with the land. Depending on the terms, the leasehold owner can be responsible for demolishing the buildings and returning the land to its original state.

The leasehold owner usually has a right to sell and transfer the leasehold to a different person or legal entity during their term.

Throughout the lease, rent is paid periodically – typically monthly or annually, with the rental period specifically defined in the contract. The rent structure can vary. It usually starts as a flat fee which can increase over time to adjust for inflation or can follow a more complicated percentage-based system.

Another problem leaseholders face is obtaining bank loans and other financial services. Since they do not own the land, banks can be reluctant to provide funds, especially if the term of the leasehold is below 50 years.

Why Should You Buy a Leasehold Ownership?

At first glance, it seems that obtaining a leasehold interest is sticking your hand into a hornet’s nest since many of your rights are dependent on provisions in the lease contract.

This is correct, however, there is one significant reason why you should consider a leasehold interest – cost.

Buying the freehold interest in a piece of land is very expensive and requires a huge capital investment before first sod. This often necessitates a hefty mortgage loan, which banks may or may not be willing to extend to you.

In comparison, leasing the land is relatively cheap and most importantly, you pay as you go. Any upfront payment required is usually negligible and the investor can funnel their money directly into the development phase.

Depending on your project, a leasehold estate can be the perfect method of acquiring the land to build on.

Freehold vs Leasehold

Now that we have explained exactly what a freehold estate and leasehold estate is, let’s do a more direct comparison.

Freehold Estate Leasehold Estate
Ownership Rights Owns the land outright and may do anything without restriction with it Leases, or rents the land to use, develop buildings, and operate a business
Lease Term Retains rights to the land forever or until it is transferred to another party Is bound by the lease term length (usually 30-999 years) specified in the lease agreement
Authority Maintains absolute authority over the land, needing no approval or permission to construct, develop, modify, renovate, or demolish existing structures (save for building inspectors and related authorities) Must abide by the conditions outlined in the lease agreement and must receive permission from the freehold owner to make any changes
Right to Transfer Maintains complete rights to transfer, sell, give away, or exchange the land as they see fit Will need explicit permission before transferring interest in the property or land
Cost Requires a large capital investment and can be extremely costly Typically requires no upfront costs and is paid in monthly installments, making it affordable
Financing Readily financed by banks since the freehold estate can act as collateral and guarantee the investment Financing based on a number of factors and is dependent on individual circumstances

What is a Concurrent Estate?

The final form of ownership is the concurrent estate.

A concurrent estate is created when multiple individuals or legal entities own the same property at the same time. Co-owners are also referred to as joint tenants to the property.

There are several types of concurrent estates, the most common being:

Joint Tenancy

The joint tenancy ensures complete equality of rights between all owners of the property. Each tenant has a complete interest and possession of the property as a whole. The ownership is held under the same title and extends in time equally for all tenants. This means that ownership and tenure of the property ends for all tenants at the same time with neither party being able to sell or transfer their share.

Joint tenants have a right to survive each other, with the last survivor receiving complete ownership of the property.

Tenancy By the Entirety

This tenancy is formed between married spouses for their jointly acquired property. It’s practically identical in nature to a joint tenancy.

Tenancy in Common

This form of ownership allows different parties to own different shares of the same property under different titles.

Each co-tenant can freely operate with their share of the property and sell, trade, or mortgage it at will, without input of the other tenants.

Wrapping Up

Whether you’re a landowner or an investor looking to kickstart your next commercial project, it’s imperative to know the difference between all these forms of ownership and how your rights change from freehold, to leasehold, to concurrent estate owner.

Do you have a piece of land or property you’d like to offer as a freehold, leasehold, or concurrent estate? Then check out CREOP, the advanced online software designed to make marketing your land and property, negotiating deals, and finalizing sales a cinch. Get in touch with us today and see how we can help you advertise your parcel and get it sold right away.

Commercial Real Estate Flyers: Design Best Practices

So, you’ve developed a commercial property and you’re ready to capitalize on all your hard work?

Before investors or tenants hand over their hard earned cash, you’ve still got to do a little marketing if you want to convince them you’ve got the right property for their business.

In order to do that, you’ll need to gather your marketing assets, which include property listings, an immersive website, and even professional looking real estate flyers.

Though you may think in this digital world that real estate flyers are unnecessary, think again. Though you may not want to stand on the corner and hand out pieces of paper to potential investors or tenants, one thing you will want to do is create digital real estate flyers that are easily shared across the web and given out to people in person.

That’s why today we’re going to convince you that real estate flyers are a necessary marketing component for any property owner looking to sell or lease. Plus, we’re going to give you some surefire ways to ensure your commercial real estate flyers attract the right people and convert.

Why You Should Use Commercial Real Estate Flyers in 2020

Advanced web technology has irreversibly changed how we market everything, including commercial real estate. Yet, there is still a spot for more traditional marketing materials, such as flyers, brochures, and offer memorandums. In fact, this type of marketing still exists, just with varied forms so business owners can reach wider audiences than ever before.

In the commercial real estate world, properties exchange hands for millions and sometimes billions of dollars, and yet, interactions are still mostly conducted face to face. We’d even go so far as to say there’s a long time before we learn to entrust life-changing transactions consisting of lots of money to the computer.

Handing somebody a physical flyer promoting your property gives you another touch point to use and influence the buyer’s decision. In fact, a flyer with the property’s core information and benefits can complement a verbal presentation and give your potential investor something to remind them later about the property long after they’ve walked away.

Think about it.

Our fingers remember the distinct feeling of cheap glossy flyers we’re handed from fast food restaurants. Handing somebody a piece of premium paper that feels solid and expensive to the touch is going to leave an impression – just like a firm hand shake does.

This type of marketing, though often pushed aside and replaced with digital means of advertising, gives you an edge over the competition.

Now that you know you’re going to need a commercial real estate flyer for your piece of real estate, let’s take a look at how you can create highly attractive and converting flyers for your properties.

1. Create Integrated Experiences

Any decent marketer will tell you that marketing today is all about offering an integrated experience, no matter what means you take to market your brand. Your marketing efforts must interact seamlessly with what you’re offering and take potential investors on a journey that leads to a transaction. If not, you’ll never generate a sale or have a signed lease agreement in hand.

Because of this, it’s best to think of your real estate marketing materials as extensions of you, and insist that they come in all forms – print, online, and in-person interactions.

This process starts with handing someone a beautifully designed and informative flyer. From there, the conversation moves online, where a detailed website neatly presents all the compelling reasons to pick up the phone and request a meeting.

This then takes us to our next point.

2. Consistently Represent Your Brand

Every flyer, brochure, business card, email, or social media post is a representation of your business.

There are a million and one downloadable templates for any type of commercial real estate property you have. There are also many design apps that allow you to customize and modify premade layouts for just about everything you need.

It’s important to consider how the design of your real estate flyers and other marketing materials correlate with your brand and the message you’re trying to get across. This is true even for property owners that have one piece of real estate they want to sell or lease.

If you’re going to leave a lasting impression on potential investors, you need your marketing materials to be consistent with one another and stay true to the values your brand is known for.

Of course, a commercial real estate flyer is all about the property that’s available. However, even if you can’t land the transaction right now, nailing down the visual presentation will entice potential investors to come back around and take another look. And eventually, you’ll land a sale.

3. Follow the Design Rules for Commercial Real Estate Flyers

In order to push ahead of the competition, you need to follow a handful of design principles when creating your commercial real estate flyers. And the best part is, whether you plan to make these marketing materials available for in-person interactions, or as an immersive experience on your website, the same best practices will come into play.

Layout

If you’re picking a ready-made template, choose a layout that has all the core elements of a commercial real estate flyer:

  • Building name and address
  • Square footage and price
  • Photograph
  • Map
  • Text area / Featured benefits / Highlights section
  • Contact information, company name, and logo

From there on, different types of real estate will be marketed differently.

For example, an office space flyer will inform tenants about nearby transportation options, as well as nearby amenities such as parking spaces, cafes, restaurants, bars, gyms, and anything else people like to do after a hard day’s work.

office space layout

On the other hand, an industrial complex flyer will emphasise property features such as 3-phase power, climate controlled warehouses, railway infrastructure, and proximity to the highway network.

industrial space layout

Lastly, a property owner with a piece of retail space will want to promote to prospective business owners the amount of foot traffic going through the premises, the population of the nearby areas, and the amount of money typical customers spend when they frequent the area.

retail space layout

In the end, just make sure the layout of your commercial real estate flyer speaks to the property you’re advertising.

Images

Nothing turns off potential buyers or tenants like a bad quality photo that takes up half of your real estate flyer.

One of the best marketing investments you can make is having your property professionally photographed.

images example

Premium quality photographs can mean the difference between someone finalizing a purchase and going elsewhere with their business. You want to make sure to highlight your property’s best angles and entice people to come check it out in person.

Typography and Colors

Ideally, you want to match the fonts and colors of your flyers, brochures, and website.

In doing so, vsitors will have an easier time recognizing your consistent branding and style and recalling previous information they read or emotions they felt about your brand.

If you can’t match the style exactly, focus on making the flyer easy to scan and effortless to read. Use colors to outline or contrast other design elements, keeping the reader’s eye pinned to the flyer.

Content

All the fancy presentation of a real estate flyer is pointless if you fail to create solid content for it. Sure, a commercial real estate flyer is mostly a visual piece of marketing material. However, this means the written text you do include on the flyer is even that more important.

The key to winning a potential buyer or tenant over is being able to tell them in 5 lines or less why they should buy or lease from you.

Remember, it’s all about selling or leasing out the property you have available. It’s not there to advertise your business, so don’t emphasize your brand too much. Instead, use demographic data, market statistics, and projections to present a compelling business case about the property and make people feel that if they don’t jump in and buy or lease now, they’ll regret this missed opportunity later.

Of course, don’t forget to put your name, contact information, logo, and website on the flyer, so those interested can look you up later.

If you want to take it a step further, you can always add a QR code that leads people from your flyer directly to your website, where all the compelling benefits you listed will be matched with even more detailed information about the property and your business.

Again, if you match the design of your flyer and website, you can offer a seamless transition between both mediums, thus giving the reader reassurance they’re looking at the same property and company.

4. Strive to Hire a Qualified Marketer

Of course, any advice provided in this article cannot compensate for the years of experience and practical knowledge of a professional marketer.

The person designing your marketing material should not only have vast understanding of the property and your industry, but also the ability to convey the values of your project to the target buyers or tenants you want to attract.

Not able to hire a professional marketer quite yet? Don’t worry. At CREOP, we understand the importance of marketing properties to interested buyers and tenants. At the same time, we know that property owners don’t necessarily have the time, money, or skills needed to create “professional” real estate flyers.

That’s why we strive to provide a user-friendly online platform that helps any property owner, regardless of marketing or design skills, to create stand out real estate flyers, offer memorandums, and other advertisement materials.

5. Study Your Competition

If the right person is already responsible for marketing your properties, they’ll understand the need to research the competition and study their designs in detail.

After all, your potential investors will likely meet some of these other developers (who are your competition) and will be handed their real estate flyers in addition to yours.

Of course, the goal is to copy (or worse, plagiarize) your competition’s marketing materials. Rather, the goal is to study what they’re doing that’s working, tweak what isn’t working, and make your materials even better than theirs.

Doing this will leave lasting impressions on all interested buyers or tenants, no matter how many other property owners they consult.

Wrapping Up

Your commercial real estate flyer does not live in isolation; and it never should.

Just like every other marketing tool, a real estate flyer will represent your business, attract the right target audience, and drive sales. If you take the time to create informative, original, and highly attractive real estate flyers representing the properties you have available, you’re sure to get more business in no time.

This is especially true if you use a cloud-based software like CREOP. Providing property owners the tools to design and manage a property marketing campaign in no time, CREOP is as effective as hiring a professional marketing – without the hefty price.

So, get in touch with us today and see how we can help you create real estate flyers, offer memorandums, proposals, and full-fledged marketing packages to advertise your available property for the highest sales prices or rent rates possible.

Understanding Percentage Rent in Commercial Leases

When it comes to negotiating a commercial retail lease, there are plenty of lease provisions you should be aware of before signing on the dotted line. After all, it’s your responsibility as a tenant to understand what your landlord expects from you. And sometimes, that’s more money than you might expect to pay each month.

Though this doesn’t always happen, there are times when a percentage rent clause becomes part of a commercial lease agreement. As a way to ensure they receive great value from the business you run, landlords often charge a percentage rent in addition to the base rent you agreed to pay to lease the property.

If you’ve never heard of percentage rent in commercial lease, keep reading. Today we’re going to explain to you what percentage rent is, how breakpoints work, and ways to negotiate with your landlord so you get the best deal possible.

Let’s get started!

What is Percentage Rent?

Percentage rent is extra rent you pay your landlord that is ties to the sales you generate from your business. By charging a percentage rent, landlords are able to share in your growing success.

Though this seems unfair to tenants trying to run a business, it’s important to note that owning a commercial building comes with plenty of expenses that go beyond the square footage that’s being leased to you. For example, things like maintenance, marketing, and continuous improvement of not only the building but common areas surrounding it are things your landlord typically handles. For a landlord leasing a shopping mall, this ends up being quite costly.

By charging tenants a percentage rent, landlords are able to tap into the success business owners are reaping as a result of their hard work. And honestly, a tenant is always going to do more business in a busy commercial building as opposed to a deserted unit in a remote part of town.

So, in an effort to generate more revenue for themselves, and provide you the best commercial space possible, it’s possible your landlord might include a percentage rent clause in your lease agreement.

Commercial Lease Rent: A Breakdown

Rent as part of a commercial lease can be broken down into two parts: base rent and percentage rent.

Base Rent

The base rent  of a commercial lease is a flat amount the tenant owes each month, regardless of whether their business is generating a profit or operating on a loss.

The base rent is usually calculated based on the floor area of the property. However, the base rent can also be a flat rate based on your business’ gross sales.

Base rent is helpful for business’ like fast food chains or coffee shops, both of which have fairly consistent and predictable revenue. In fact, their base rent would be loosely associated with their projected annual revenue.

On the other hand, businesses who have peak seasons (e.g. Thanksgiving or Christmas) may not be able to afford a consistently high base rent every month of the year. As a solution, a low base rent is charged, allowing the business to sustain a healthy cash flow during its slow months. However, you can bet business’ with a low base rent and seasonal sales will also have a percentage rent clause in their commercial lease agreement.

Percentage Rent

If a lease has a percentage rent clause, the percentage part of the rent is charged only after a business exceeds a specific amount of revenue that exceeds its gross sales. This is called the breakpoint.

The average percentage rent in the retail industry is 7%. That said, this value is not set

in stone and can be negotiated. In fact, different industries also find applications for percentage rent, where the value can differ significantly.

Breakpoints

When your business’ gross sales surpass a specified amount agreed to by both you and your landlord, your rent hits what’s called a breakpoint. From there, any sales you generate are subject to the percentage rent amount in your lease agreement.

Breakpoints ensure that businesses are not overburdened with high rent rates at low periods

of the year. At the same time, they allow landlords to profit when a business is doing well and turning a high profit.

A Practical Example of Percentage Rent

If this all seems like a lot to you, don’t worry, you’re not the only one. Let’s take a look at a real-life example to make things clearer:

You operate a consumer electronics store and you’re offered a retail space in a new strip mall. The contract includes a base rent of $5,000 per month and a percentage component of 7% of the gross sales, which is applied for every dollar above $150,000 – measured in gross income.

  • In July, when shopping is typically down, the store generates $80,000 in revenue. This means only the base revenue of $5,000 is charged.
  • In November, there’s Black Friday, and as a whole, shopping activity in your store peaks. The electronics store generates $250,000 in gross sales. The breakpoint is $150,000, so on top of the base rent (which is 5,000), the store also owes 7% of the $100,000 excess, equal to $7,000. Therefore, the total rent you owe for November is $12,000.

As you can see, when you have a percentage rent, the monthly rent you owe largely depends on your sales and can vary greatly from month to month. That’s why it’s important to understand your commercial lease in order to negotiate the best deal for your business.

What Is Included and Excluded When Calculating Percentage Rent?

Percentage rent is calculated from the gross sales of your business each rental period. This includes both cash and credit card sales at the time of merchandise delivery or performance of services. With credit sales, the risk of collecting (or specifically, not collecting) the revenue falls onto the tenant. In other words, if you process a transaction, but fail to invoice and collect for that transaction until next month, you might still owe your landlord a percentage rent.

Any discounts, refunds, credits, allowances, or price adjustments extended to individual customers are not accounted for when calculating percentage rent. If a sales tax is attached to the price of the product or service, it is also usually excluded.

How to Calculate the Natural Breakpoint of Your Percentage Rent?

A natural breakpoint in a percentage rent commercial lease is the amount of gross revenue at which the base rent becomes equal to the percentage rent.

For our consumer electronics store example, we have a base rent of $5,000 and a percentage of 7%. The natural breakpoint is $71,428.57, because 7% of $71,428.57 is $5,000.

You can calculate the natural breakpoint by dividing your base rent by your percentage rent. If we express the percentage as a fraction, the calculation is really easy.

$5,000 /(7/100) = $5,000 * 100 / 7 = $71,428.57

In a lot of commercial leases, the percentage rent breakpoint is simply the natural breakpoint. This ensures the landlord always receives a fixed percent of gross revenue or more in rent.

When the tenant suffers a lack of sales for the month, the base rent is still charged and it represents a larger percentage of the tenants’ gross income. In other words, the business faces a greater relative charge when they have the least amount of business.

For our example, if the electronics store only yields $45,000 in revenue, the base rent of $5,000 represents 11.11% of their gross income.

If the agreed breakpoint in the lease is higher than the natural breakpoint, the business benefits from a reduced rent compared to their gross income.

For our example, if the electronics store yields $75,000 in revenue, but the breakpoint is set at $80,000, then the base rent of $5,000 is only 6.67%.

Rent Periods and Sales Auditing

Since percentage rent is directly calculated from the gross income of the business, the landlord will expect the tenant to provide sales reports either monthly, quarterly, or annually.

If reported monthly or quarterly, usually a final annual report is required to nullify any previous errors and adjust the percentage rent accordingly.

The tenant’s sales records must be made available for audits by the landlord. Usually the landlord will request an annual audit by a certified external accounting company.

Tips for Negotiating Percentage Rent

Oftentimes your prospective landlord will provide a ready-made lease contract configured with their preferred base rent, percentage rent, and breakpoint. However, that does not mean these figures are set in stone.

You can and should negotiate.

Tenants should strive for the lowest possible base rent and percentage rent, while also seeking the highest possible breakpoint. There’s no magical leverage to help you achieve that, but you can balance the terms to better suit your business.

New or Slow Businesses

Businesses that have just opened their doors, or project a slow revenue growth can benefit from a higher base rent and a higher breakpoint.

For example, consider a base rate of $5,500, percentage of 7%, and breakpoint at $90,000 (naturally at $78,571.42). Right up to that breakpoint, the business can benefit from a rent equal to just over 6.11% of their gross sales.

Highly Seasonal Businesses

Alternatively, highly seasonal businesses with volatile monthly revenue can gain an advantage from a low base rent and a higher percentage rate.

For example, a base rate of $4,500 could secure businesses some extra cash flow when sales are slow. If we increase the percentage rent to 8.5% and set the breakpoint at $60,000 (naturally at $52,941.18), the business would still save a significant amount of money, even during the strong months.

If November and December yield gross sales of $100,000, the tenant would need to pay $3,200 in additional percentage rent, or a total of $7,700 per month. That’s an increase of 71%, but there is enough revenue to absorb the extra cost and return profit for the business.

Wrapping Up

In the end, percentage rent in commercial leases is not a difficult concept to grasp. Though it is more complex than a flat rent arrangement, it shouldn’t be too difficult for any business owner to figure out. That said, the devil is in the details and understanding your commercial lease agreement before you agree and sign is crucial to the overall success of your business. After all, your landlord isn’t the only one looking to generate a profit.

Are you ready to advertise your commercial space as available to tenants and want to make sure they understand all the details, including the percentage rent clause that you intend to add to the agreement? Then take advantage of the beginner friendly online platform CREOP. Designed to make marketing commercial properties a breeze, complete with everything a potential tenant would need to know before agreeing to lease from you, this advanced software makes your job easier, so you can concentrate on more important things, like getting lease agreements signed.

Get in touch today and see how we can help you lease your commercial space with ease.

Understanding Commercial Lease Floor Areas – Gross vs Net Leasable Area

When talking about commercial real estate, everything is calculated based on floor space. For example, development costs, how much area can you lease, and even the potential annual revenue are all dependent on the square footage of the property.

But how do you accurately measure your floor space?

Unfortunately, measuring floor space is not as straightforward as you might think. In fact, there are many different ways to measure a building and its floor space. From the total footprint of a building to the area available for commercial tenants, it’s important you know exactly what someone means when they say a building is X number of square feet.

Whether you’re a developer, investor, tenant, or buyer, it’s crucial you understand commercial lease floor areas and how they relate to your financial goals.

Seems complicated?

Let us clear things up for you.

Types of Floor Area

In architecture, construction, and real estate, floor area (also known as floor space) is the area taken up by a building or part of it, and is measured in square feet or square meters. Of course, as we mentioned above, things are more complicated than that. One must consider whether external or internal walls, corridors, stairwells, lift shafts, and more are calculated into that measurement.

Here’s a look at the different types of floor area.

Gross Floor Area (GFA)

Gross floor area is the total area of the building measured all the way out to the external face of the external walls.

In other words, it’s the total footprint of the building, multiplied by the number of floors.

Features excluded from the gross floor area vary, though they often include the roof, covered walkways, terraces, porches, chimneys, air shafts, roof overhangs, trenches for piping, and other utility connections.

Here’s why gross floor area is important:

  • It’s the public number that brokers use to advertise available space or calculate previous sales numbers
  • The city uses this number to determine planning numbers like the building’s density or floor space index
  • It’s used to calculate applicable levies
  • Construction companies need to know how many walls and floors they need to build and will look to the gross floor area first when creating their plans

Though this area does not always drive development costs or the amount of revenue you stand to gain from leasing the space, it’s an important one to know when starting a new commercial development project or investment endeavor.

Gross Internal Area (GIA)

Gross internal area is the total area of the building measured only to the internal face of the external walls.

Since the external wall area is excluded, this measurement provides the total useful area contained in the building.

Some of this space will be dedicated to common building features and facilities, such as stairs, escalators, lifts, machinery rooms, pumping rooms, plumbing, ducts, vents, public toilet areas, and other service or maintenance rooms.

Net Internal Area (NIA)

Net internal area is the usable area available to occupants of the building. It’s calculated by taking the gross internal area and subtracting floor areas being used by:

  • Lobbies
  • Machinery rooms on the roof
  • Stairs/escalators
  • Lifts
  • Columns
  • Toilet areas
  • Ducts
  • Risers

Tenants leasing a commercial property like a store or office space are only interested in the usable space of the premises, since that’s where they can fit displays, storage units, computer desks, and equipment. Everything else is not important. In other words, when someone is looking to buy or lease a commercial property, they want to know what the net internal area is.

Commercial Leases and Building Measurements

Commercial leases are almost entirely based on the leased area. However, that area can be measured differently and can even include additional areas not contained within the boundaries of the leased property. This makes the lease more expensive, though not necessarily more usable.

Because of this, investors look for properties with the maximum net internal area for the smallest given gross floor area.

In other words, they look for properties with the most usable space within the smallest building possible. Doing this will allow them to charge premium rent rates that tenants are willing to pay because there is plenty of usable space for tenants to use to run their businesses.

Ideally, tenants only want to pay for the net internal area. After all, the net internal area is the space that they get to use and will generate them revenue. However, this rarely happens.

If investors charge tenants just for the net internal area, there are large amounts of building space, though unused by the tenants, sitting idle and not generating the investor any money. Remember, the investor pays for that unusable space. By not charging tenants for that same space, they lose money, making the project unsustainable.

In the end, commercial tenants always pay for more area than they physically get to use.

What is Gross Leasable Area (GLA)?

After learning about the different types of floor area, you might be asking yourself what is gross leasable area then? The gross leasable area is the total area designed for exclusive use by a commercial tenant plus common areas, elevators, common bathrooms, stairwells, and other parts of the building the tenant doesn’t actually occupy.

If the building is leased to a single tenant, then the gross leasable area is equal to the gross floor area. Simple enough.

If there are multiple tenants leasing different parts of the building, the gross leasable area is calculated based on the shared walls between them, plus those extras mentioned above.

To get the gross leasable area for one tenant, you would measure from the center of the common wall (shared with another tenant) to the outside face of the external wall. The external wall can be a shopfront, a window display, or just a flat wall. Regardless, it is included in the gross leasable area. Similarly, though the area occupied by the shared wall is not usable, it is also included in the gross leasable area of both tenants.

Any structural members – columns, arches, or truss structures –  that are enclosed within the boundaries are also included in the gross leasable area.

Retail leases will commonly use gross leasable area as a basis for rent calculations. The problem is, many tenants think they’re leasing X amount of square feet for their business only to find out that the actual square footage is quite smaller.

What is Net Leasable Area (NLA)?

The net leasable area is the space within the leased unit that’s actually available to the tenant for use.

This area excludes the external walls, as well as common areas and utility rooms, which are not contained within the unit. However, it does include basements, storage areas, mezzanines, upper floors, and other floor areas which can be used by the tenant.

Unlike most retail leases, office leases typically base the rent rate on the net leasable area rather than the gross leasable area. However, there’s a catch – office tenants still need to pay fees for the common areas.

These areas do not fall within the boundaries of any leased units and are not used directly by business owners on a daily basis. However, they are used by the businesses, their employees, and their customers at some point.

Furthermore, these common areas require a fair share of maintenance and building services such as lighting, electrical/elevator maintenance, plumbing, cleaning, gardening, and more. These cost a considerable amount of money each year and are not going to be paid for by investors; that burden is placed on tenants leasing the space.

Core Factor/Pro-Rated Share of Space

The core factor is also referred to as a load factor or a pro-rated share of space.

If the entire building is leased by a single company, the calculation of the core factor is really simple – it’s 100%.

When multiple tenants share the same building, the shared areas are added in proportion to the net area leased by each tenant.

Let’s make this easier to understand by considering the following office lease scenario: 

You rent 10,000 sq.ft (net) in an office building that has 5,000 sq.ft of net leasable area and another 5,000 sq.ft of common areas and service rooms.

You have 20% of the building for your exclusive use. Your core factor is 20%, which means you’ll pay for 1/5th of the common areas.

Therefore, your rent will be calculated based on 10,000 sq.ft of net leasable area and 20% of 5,000 sq.ft of common areas, for a total of 11,000 sq.ft.

This is important when a tenant is looking to lease a commercial space. If a tenant does not understand the differences between the areas, or doesn’t know about the core factor calculation, they could end up overspending on rent without even realizing it.

BOMA Standard for Measurement

When drafting or negotiating a commercial lease agreement, it’s important to include and look for the standard which defines how the floor area will be measured. Remember, though the gross leasable and net leasable areas are widely used calculations in commercial leases, the GFA, GIA, and NIA have the potential to vary.

The Building Owners and Managers Association – BOMA – is the widely accepted authority for building measurements. BOMA has specific standards for different commercial buildings including office spaces, retail stores, industrial facilities.

The information above is derived from the BOMA standards, although the literature includes extensive details on how to calculate building area for a wide variety of conditions. Please visit the BOMA website for more information on building measurement standards.

Wrapping Up

In the end, it’s important to understand common terms related to commercial leases and building sizes, whether you’re an investor or tenant looking to lease a space and run a business. Not knowing the differences, or how rent is being calculated, can cause a lot of financial strain, quickly put you in a hole, and ruin your investment or business dreams.

Are you ready to advertise your commercial property as available to tenants and want to ensure potential business owners know all the different measurements? Then be sure to use our highly advanced and easy to use online platform, CREOP, designed to make marketing commercial retail space visually appealing and informative. Get in touch today and see how we can help you lease your property faster, with highly qualified tenants you can rely on.

What is a Ground Lease (Pros and Cons)

One of the first and most critical steps to realizing a new development project is securing the land to build on.

In this case, there are only two options – buy it or lease it.

Though many developers frown upon the idea of renting a parcel of land to build on, it is an attractive alternative that comes with lots of possibilities. That’s why today we’re going to share with you what a ground lease is and what the pros and cons are to having one.

So, let’s get started!

What Is a Ground Lease?

A ground lease, also known as a land lease, is a lease agreement that allows you to rent a piece of undeveloped or developed land for a long period of time. This land your leasing can be used for development and commercial purposes.

In other words, a ground lease is an agreement that lets you lease the land you want to build your next commercial property on.

With a ground lease, the following happens:

  • A landowner leases the land (rather than selling it) to a developer for anywhere between 35 and 99 years
  • The developer (or tenant) pays rent to the landowner and retains the right to develop buildings and operate business ventures on the premises
  • All responsibilities and associated costs related to the land, such as taxes, insurance, development permits, and maintenance fall onto the developer

When a developer signs a ground lease agreement, they do not own the land; they are only renting it. However, any structure or facility that the developer builds on the land is owned by the developer, not the landowner.

When the ground lease expires and is not renegotiated, the land, as well as any improvements created by the developer, reverts back to the landowner.

Ground leasing enables a developer to obtain a piece of land that’s too expensive to buy or is otherwise inaccessible and make something profitable out of it. For example, government properties are often too expensive for an investor to buy. That said, renting a piece of government property is much more doable.

In addition, a ground lease enables the landowner to benefit from the property they’re leasing to developers without having to sell it or make major investments to develop the site.

In the end, it’s a win-win situation for both the landowner and developer.

A Practical Example A Ground Lease

Large franchise chains like McDonald’s frequently operate using a ground lease. The land is usually purchased by the corporation and leased to the local franchise to develop the building, set up the operation, and run the business.

Every ground lease agreement contains specific terms and provisions for the usage of the land. In this case, the land is only provided for the development of a McDonald’s restaurant. The developer is bound by the lease agreement and cannot switch 10 years down the road and open a KFC joint.

Types of Ground Leases

A development project is rarely paid for in cash. In fact, there are different kinds of loans or mortgages available to finance the construction and/or improvement of the land. In order to grant the exorbitant amounts of money required to develop a commercial project, banks will require some collateral in the event the business defaults.

Should the business fail, there is a hierarchy of who gets to claim the assets to recoup their investment.

Top priority is usually either the bank providing the loan or the landowner. From here stem two basic types of ground leases – subordinated or unsubordinated.

Subordinated Ground Lease

With a subordinated ground lease, the landowner agrees to forfeit the top priority claim to the land should the developer default on the loan.

Banks are much more willing to finance a business venture if they’re guaranteed the right to claim first. As such, the landowner effectively pledges their land as collateral in the event the business goes bankrupt.

This means that a subordinated ground lease creates a significant risk for the landowner, which is usually compensated for by charging the developer a higher rent.

Unsubordinated Ground Lease

An unsubordinated ground lease gives the landowner the ability to claim their land back should a developer default – guaranteed.

This is a preferred option by many landowners who do not wish to incur the risk of losing their land.

However, it makes it difficult for the developer to secure the necessary funds for development, as banks are reluctant to approve a loan if not given top priority to claim should the loan go into default.

To offset this challenge and make it worthwhile for developers, unsubordinated ground leases typically come at a reduced rate and yield less profit for the landowner.

Ground Leasing vs Other Commercial Leases

Though still related to commercial real estate, ground leasing differs dramatically from other forms of commercial leasing.

Gross Leasing

Similar to renting an apartment, in a gross lease the investor (or tenant) pays the landowner an agreed rent amount to use the facilities for conducting their business. There is usually an already erected building such as an office space, grocery store, or workshop that the investor simply leases.

The investor assumes no other responsibility with a gross lease other than the scheduled rent payment. Taxes, permits, insurance, and other costs fall onto the landowner. However, the investor has very little freedom to modify or upgrade the facilities without prior consent.

Net Leasing

Net leases allow investors to assume some of the landowner’s responsibilities to varying degrees. Because of this, the investor has more freedom to improve and modify the facilities.

The exact structure of a net lease is up to the landowner and investor to negotiate and agree on.

A special kind of net lease, called a triple net lease, transfers most of the landowner’s costs and responsibilities to the investor, including construction cost, property taxes, insurance, and more. Since these are costs the investor is now responsible for, this type of lease usually comes with a lower base rent.

Absolute Net Lease

Absolute Net leases are similar to triple net leases but go a step farther by placing 100% of the responsibilities onto the Tenant’s shoulders.  This includes structural items such as the roof, exterior walls, and parking lot.

Advantages of Ground Leasing

Ground leasing is not the perfect solution for every real estate development project. However, it’s becoming increasingly popular in the United States and offers a number of advantages for both developers and landowners.

Pros of Ground Leasing for Investors

The biggest advantage for property investors using a ground lease is that they don’t have to buy the land to operate their business and make a profit. Acquiring the land for a development project can be the biggest hurdle holding an investor back from successfully running a business.

In fact, acquiring land involves massive upfront costs, and many times, the perfect site is just not accessible. For example, oftentimes the landowner doesn’t want to sell or the land may be public property that cannot be obtained or is uneconomical to do so.

Ground leasing helps you avoid upfront costs and frees up resources to be used on improvements instead. And to top it off, rent payments are tax deductible, which is always good news.

Pros of Ground Leasing for Landowners

Arguably, ground leasing is more advantageous to the landowner than the investor leasing the land.

The owner of the land retains ownership, and sometimes, a significant portion of control over how property is utilized. Depending on the case, the ground lease may include extensive documentation for the type of facilities built, the purpose of the business, and details on how business will be conducted.

Once the ground lease agreement is signed, the landowner can enforce the provisions found in the contract. Any changes to the development or use of the land must receive the land owner’s permission.

In addition, ground leasing is a great way to establish a passive income stream for landowners. This is because the owner of the land doesn’t need to invest in developing the real estate themselves. They just collect rent payments.

If a landowner were to sell their land, they would receive capital gains and owe a significant amount of taxes to the government. After all, rent payments are considered regular income and are subject to taxes. However, it can be financially advantageous to pay income taxes rather than capital gains taxes.

Finally, the owner of the land inherits all buildings, structures, and improvements at the end of the ground lease term. If the current ground lease is not extended or renewed, the investor must simply forfeit their immovable assets unless there is a clause in the ground lease that mandates the developer to demolish and remove all structures and return the land to its original stage when the lease is up.

Disadvantages of Ground Leasing

Like most things, there are disadvantages to ground leasing that both investors and landowners need to consider.

Cons of Ground Leasing for Investors

While investors pay for the right to develop and operate businesses on land with a ground lease, the project and design must first be negotiated with the landowner.

Of course, investors always seek the most lenient use provision so they can operate their business as they see fit.

However, sometimes that’s not possible and the ground lease may contain a specific schedule and timeline for the execution and development of the project. Investors who don’t uphold the schedule can face financial repercussions. These limitations are often hard to overcome and investors may face huge burdens to complete the project.

No matter how good your initial design is, in practice it’s often required to make changes and alterations. Depending on the use provisions, every significant change to the project must receive approval by the landowner, which can create points of friction and lead to lost time during the development process.

With a ground lease, the investor pays rent to the landowner. However, they also incur all other financial costs related to the land such as taxes, construction, improvements, permitting, insurance, and more. All of this can become very expensive over time.

Not to mention, in some cases long-term rent can prove to be more expensive than buying the land outright. Sure, sometimes that’s just not possible or economical to do. However, total cost must be taken into account before agreeing to a ground lease.

Cons of Ground Leasing for Land Owners

While not immediately obvious, there are a fair number of disadvantages to ground leasing for landowners.

To start, every development project faces the risk of not succeeding. Businesses fail for a million and one reasons. If the investor defaults, they usually cannot pay the rent they owe, meaning the landowner is out a lot of money.

If the business is bankrupt before even finishing construction, there is usually a long list of unpaid contractors which will begin litigation to recoup their money. This can affect the landowner and compromise their interest in the property.

The worst part is when a leasehold mortgage or another finance structure is involved. The relationships between the finance provider, the land tenant, and landowner become very complex, very fast.  If no protections are in place protecting the landowner, they may end up accountable for their investor’s business failure and lose the land.

In addition, though partially mitigated by the use of proper insurance, there is always some element of risk associated with incurring liability for injured third parties at the site or environmental damage caused by the investor. And while the landowner is not directly responsible for such injuries or damage, they may be held partially accountable.

Finally, landowners must carefully consider the rent structure of the ground lease. Since it encompasses decades, the market can and will change dramatically, rendering a fixed rent structure irrelevant within just a few years.

The rent structure must change just as the market does and account for inflation and the state of the market, so that the landowners always receive a fair rent for their property. There are even some ground leases that tie the rent rate to the performance of the business. So, if the business excels and becomes very profitable, the landowner also gets a proportionate share of that profit.

Wrapping Up

In the end, a ground lease is a complex, though highly advantageous solution for developers looking to start a commercial project without having to invest a ton of money upfront. Plus, the benefits awarded the landowner make leasing land for a long period of time a fairly easy process that allows both parties to win.

Are you a land owner looking to promote your piece of land to developers, or a developer looking to lease the property you just erected thanks to a ground lease? Then be sure to check out our highly advanced and easy to use online platform designed to help you design stunning marketing packages that entice people looking for a business opportunity without a lot of hassle. Get in touch today and see how we can help you with your next commercial property endeavor.