Frequently Asked Questions (FAQ)

A: Broadly defined, the term "commercial real estate" can be used to refer to any dealing with real property in a business context. It could involve leasing out office space, owning an apartment complex, or selling real property along with and as part of the sale of a business. It might be industrial or agricultural property. It could even involve residential properties like apartment complexes or rental houses being held for business or income-producing purposes, or involve working with the government. Unless the property is a residence where the homeowner is living, you are probably dealing with commercial real estate.
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A: If your business is strongly dependent on location, a high-traffic area with high visibility with convenient walking or driving traffic is important. These types of locations are typically more costly. It is also important to be familiar with the demographics of the customers you are trying to reach; characteristics like age, education level, family size, and income should help you choose your location more wisely. For example, if you are trying to open an upscale restaurant, try to open up your business in a middle or upper-scale area. Knowing where your competitors are located is also important. Other aspects to look for when choosing a location are: zoning, accessibility of public transportation to your business, availability of qualified employees in the area, availability of utilities needed for business, wage scale in the area, availability of parking, transportation rates of goods to your location, and tax rates on the facility you are looking at.
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A: While each business has unique needs specific to its industry, clientele and personal preferences, there are several factors that must be considered when selecting a commercial location.

Space Needs: Before you start looking for space, take some time to think about your office configuration and how much space you need. Also, know what your monthly budget is so that you can look at appropriate buildings in affordable markets.

Location: Your office location is a major consideration, for a variety of business and personal reasons. If your clientele comes to you, how far are they willing to drive? Are you accessible? How far is your commute? You'll want to consider which restaurants and services are nearby, how noisy the area is, what the view is like, and what other businesses are in the area. Your location is a direct reflection of the image of your business, and will have a real impact on the direction of your business as well as your lifestyle.

Parking: Is the parking adequate to your requirements, and is there a cost involved? Depending on your business location, finding adequate parking can be challenging. Consider your employees and visitors, and their access to close, adequate parking.

Architecture & Style: Choose a building that reflects the image you wish to portray. An appealing building appeals to the best talent, helping recruit quality employees. Your office building needs to give your clientele a positive first impression. Plus, an inviting building contributes to employee morale and spirit.

Technical Infrastructure: Inquiring about a building's technical infrastructure minimizes ongoing challenges. How modern is the electrical system? Is there broadband access? Is the HVAC system reliable and effective? Is after hour HVAC available and at what cost? Are the elevators modern, fast and adequate? Be sure that the office can efficiently handle your communications, information technology and physical requirements without delay or interruption.

Management Services: Get to know who's managing the building. What services can they provide? Understand the scope of their capacities in construction, maintenance, engineering and management to see if they can handle your initial and continued future needs. Look around, is the place clean? Attentive management teams routinely take care of the details that keep the building running smoothly. Having an onsite management team could be indispensable.
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A: Even sophisticated business people will still rely on professional advice when it comes down to actually closing a deal, as the potential for pitfalls can be so significant and costly. Before entering into a lease or purchase agreement, you should seriously consider hiring real estate professionals, and professional fees should be factored in as a cost to doing any commercial real estate deal.

There are many reasons why you should hire your own real estate broker (or an agent who may work for a broker). Look for a broker or agent who has specific expertise in commercial real estate, and particularly in the area where you need it (for example, office space, retail space, industrial warehouse space, apartment complexes, agricultural land). If you're leasing property, a real estate broker may be invaluable. If he or she is good, an agent will go out and find property for you. The agent will also serve as an arm's-length intermediary to negotiate on your behalf, which can be much more effective than your trying to negotiate the deal yourself. Keep in mind, too, that real estate agents work on similar deals all the time, so presumably know what they are doing. Their knowledge and contacts can well be worth the cost of a commission. They can also help you with the paperwork to make sure you don't make a mistake when submitting an offer.
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A: While every business is different, there are a few common factors that should be taken into consideration when evaluating whether to buy or lease office space. Comparing the benefits of leasing versus buying from a cash standpoint is an important step while looking at the business’s future growth and needs. The long term space requirements are also an important part of deciding whether to lease or buy.

LEASING BENEFITS:

• Credit ratings are less crucial compared to buying
• Don’t need to worry about selling if moving to a new location
• Your monthly rent is a tax deduction as a business expense
• No loss if owning in a bad market
• Property management is provided in most cases

LEASE DISADVANTAGES:

• Rental rates with annual escalations based on market conditions
• Loss of the value of improvements to the property at lease end
• No equity buildup
• Potential of having to move at the end of the lease

BUYING BENEFITS

• Interest on the mortgage loan is tax deductible
• Improvements can be made to the building to accommodate your business
• You can take annual depreciation deductions on taxes
• No rent increases
• You can benefit if you sell when the market is good
• If you end up with excess space, you can lease out the extra
• You can stay at that location as long as you wish

BUYING DISADVANTAGES

• Usually requires more initial capital to secure financing
• Property values may decline
• Owning real estate subjects the owner to various legal and regulatory risks not associated with leasing
• Requires owners to invest much time and energy in matters that are not its business, unless property is part of a unit owners association
• Inexperienced owners operate their real estate inefficiently and increased operating costs

While the decision to buy or lease may seem difficult and overwhelming, it is helpful to receive advice from a commercial real estate professional who knows the business and the market. Getting advice and assistance from a commercial real estate professional who is involved in the business day in and day out can significantly improve your chances that you will end up in the perfect space at the right price. Many of the lease vs. buy factors can only be decided by you, but having a helping hand in the necessary areas where office expertise is important will assure you of making the best possible decision.
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A: Most commercial leases run from 3-10 years, with the actual term of the lease being negotiated with the landlord. It is important to identify the start and end points of the lease. Unless the suite is unoccupied, you will want to be assured that the space is available and renovated to your specifications when you are ready to take occupancy. All kinds of last minute situations can occur, such as a disagreement as to when you can gain early access to make your own improvements or install fixtures.  It is equally important to specify in the lease what will happen if the space is not ready for occupancy by the move-in date and what adjustments to the rent will be made.
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A: Following are some of the common lease terms that refer specifically to rental rates.

Gross Lease: A lease where the tenant pays a flat monthly amount and the landlord pays for all operating costs for the building. In some cases, the tenant pays for its electricity, heat, and air conditioning. This type of lease often contains an escalation clause that allows the landlord to increase the rent annually to offset increased expenses.

Net Lease: A lease type whereby the tenant is responsible for the payment of its proportionate share of all recoverable expenses of the building. This would mean the tenant is required to pay some or all of the taxes for the property in addition to the base rent.

Net-Net Lease: These leases go one step further than the Net Lease. Besides base rent and taxes, the tenant pays for insurance on the space they occupy.

Net-Net-Net Lease: Triple-net leases effectively pass on all the costs of operating the building, including repairs and maintenance to the renter.

Percentage-Lease: Rent paid by a retail tenant and calculated as a percentage of Gross Sales which is paid by the tenant in addition to the Base Rent.

CAM: Common Area Maintenance charges paid by the tenant for the upkeep of areas designated for the use and benefit of all tenants.
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A: A lease clause which provides for an increase in rent at a specified future date(s) is referred to as an escalation clause. The most common types of escalations are (a) fixed increases in Base Rent; and (b) Consumer Price Index Adjustments.

The costs of operating real estate have become so unpredictable that most landlords feel they need protection in the form of escalation clauses. One common type of escalation clause builds in regular increases in rent over the course of the lease; others pass on prorated increases in taxes, heat, maintenance and other direct costs. Another common escalation clause automatically raises rents according to the Consumer Price Index or some comparable index of inflation. (Since the CPI generally overstates the impact of inflation, a tenant should not agree to pay more than a portion of the annual CPI increase, especially if the lease already contains escalators for taxes and direct operating costs.)

Most landlords will negotiate the key elements in the escalation clause, including the base year. If you move in halfway through the local fiscal tax year, for example, your base year for taxes could be any of three years—the previous tax year, the present year, or even the next full year. The same holds true for heating costs and other elements of the owner's overhead. In particular, you should be careful about the base year if you move into a new building that may take a year or two to reach full capacity, since the owner won't have a stable history of operating costs to use as a reasonable base.
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A: In most subleases, the original tenant remains primarily liable to the landlord for the performance of lease obligations, including the payment of Base Rent and Additional Rent, and the Sub-Lessee is liable for payment of sublease rent to the Sub-Lessor. Subleases usually require landlord consent.

At the very least, you will have to come up with a new tenant who meets the same standards that the owner applies to other tenants. Depending on where your space is located, the new tenant will have to be approved by the landlord.  Moreover, if your subtenant decides to skip town, you are still responsible for paying the rent on the original lease.
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A: Once your present lease expires, a landlord has no legal obligation to offer the same (or other) space to you. If you have agreed on a renewal clause that guarantees you will get first rights to the space when your lease expires, you will be able to continue in your space at an agreed upon rate.  Normally, a tenant has to give a written notice exercising his option to renew his lease, or it lapses automatically. (A year's notice for long-term leases is standard, while only three or four months might be standard for short-term leases.) Some leases, however, are renewed automatically until you take steps to cancel them. This can be a handy arrangement for companies with several branch locations that don't want to risk having their leases run out by accident.
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A: If a landlord goes broke, he or she cannot reject a lease or evict a tenant who wishes to remain in possession of the space leased.  If a tenant chooses, he or she may remain in the premises for the remainder of the term of the lease, with addition to any renewal or extension of the term provided in the lease if applicable in the state law.  The tenant must continue to pay the monthly designated rent, but may deduct from the rent any damages incurred by the landlord’s negligence.  Seeking the proper legal advice is also strongly advised in order to protect the tenant’s rights.
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A: For commercial buildings, rental property insurance is needed. Most leases require the tenant to maintain liability and casualty insurance. Take the time to meet with a commercial insurance agent and discuss their insurance needs, whether or not the lease calls for insurance. Lease obligations concerning liability and casualty insurance should probably not be the subject of significant negotiations. Just make sure via your attorney and insurance agent that the insurance and amounts are customary in such a setting and that any use of your insurance proceeds are contingent on the landlord’s use of his or her insurance proceeds to restore the building.
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A: The answer to this question may be found in your lease. Read it carefully because your ability to get out of the lease depends upon the language of your lease and the willingness of the landlord to allow it. Your lease may specify a provision for terminating prior to lease expiration, and if so you will be required to follow it.  For example, you may be required to give 30 days notice or pay an early termination fee.  Some leases impose additional penalties for early termination and require longer notice periods. If there is no early termination provision in your lease, a tenant can be held responsible for all the rent remaining under the lease.

If the landlord does re-rent the property, any rent collected must be deducted from your liability. If the new tenant’s lease rate is less than that which you were obligated to pay, you may have to make up the difference as well. Some landlords may release you from the lease if you find an acceptable person to assume the lease, or you may be allowed to sublet to another. If your landlord agrees to allow you to terminate early, be sure to get in writing any agreement as to penalties or future rent owed.
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A: Landlords are typically willing to make concessions for longer-term leases because it minimizes the potential costs of contract negotiations and stabilizes the building income. Therefore, changing the lease term to a longer one will decrease risks taken on by the landlord and you may be able to negotiate a lower rental rate. Your company's needs may change, however, so negotiating a shorter-term lease with renewal options may be best if your growth path is unknown. 
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A: Yes.  As a tenant, it is important to have a management team that offers a wide range of services, is responsive, and maintains the property efficiently and professionally. As an owner, you will want an experienced management team that is competitive and affordable, provides total commitment, and exhibits integrity.  Your investment is very important to you, and how it is managed will reflect directly on you and help you to retain tenants.
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A: Tax abatement is a tool for local governments to expand the economy.  By encouraging new investment, tax abatement will increase or maintain the basic employment in the community, encourage redevelopment of deteriorated areas, and/or stimulate investment in specific areas of a community. Tax abatement is one of the primary incentives available to local government to promote economic development.

The two primary tax abatement laws in Michigan are P.A. 198 (1974) and P.A. 328 (1998).  The first applies to industrial properties while the latter deals with personal property. Tax abatements are provided mostly by local municipalities, but in Michigan the Michigan Economic Growth Authority (MEGA) can also give out credits and abatements to firms relocating or expanding within Michigan.

To qualify, owners must make improvements to real property, install new manufacturing equipment, or install equipment used in research and development activities devoted directly and exclusively to experimental or laboratory research and development.  Tenants in leased facilities can benefit from tax abatement on real property, too, if the property owner applies for the abatement and all other requirements are met.  Also, tenants can benefit from abatements on manufacturing equipment and/or research and development equipment.

You can also qualify for tax abatements based on the number of new jobs your firm creates, the total capital investment that went into to building the business and the impact of your business on Michigan’s economy. If the difference in cost in investing in Michigan as opposed to another state is much greater you may also be able to receive a tax abatement.
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