Check out our latest feature on PropertyShark…
“Many residential brokers have been intrigued by commercial deals, and the price tags on their commission, yet most are unaware of the vast differences between a residential and commercial deal. This article gives a broad overview of what a real estate broker should know about the commercial field before representing commercial landlords or tenants.”
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For one thing, the timeframe on a commercial deal is a lot longer than a residential closing. Where a residential deal generally takes about 8 to 12 weeks to close, a commercial lease could take 3 to 12 months until it’s fully executed. It may take many months for a tenant to find a space that works for them, with editing and negotiating terms of the lease potentially taking several more months depending on the type of use, term of the lease, and the parties involved.
Additionally, the tenant must submit an application to the landlord that includes their financials and business plans for proof that they could sustain the lease. The approval process for this can also take several weeks. Once the lease has been fully executed, there is also “Initial Work” that goes into the premises, which delays rent payment, the business opening, and the broker’s commission.
Often, the best thing a broker can do to accelerate the deal would be a strong letter of intent (LOI), detailing as many agreed upon terms between the parties as possible. As opposed to a deal sheet, commercial brokers are generally responsible for drafting the LOI. Brokers should always be sure to specify that the LOI is non-binding; otherwise this could be considered an enforceable legal document, which would be problematic if it does not accurately depict the parties’ intent.
Including the following items in the LOI will reduce required negotiations between the attorneys of each party.
- Rent amount
- Additional rent and tenant’s proportionate share
- Specific use of the premises
- Renewal option
- Security deposit
- Signage rules
- Square feet
- Insurance requirements and term
- Assignment or subletting rules
- Personal or good guy guaranty.
Commercial brokers should be familiar with these general terms and the language of the business. For example, tenants are generally responsible for their proportionate share of the additional rent. Proportionate share is usually calculated as the portion of the building rented by the tenant expressed as a percentage.
For example, if a building consists of 10,000 square feet total, and the tenant is renting out 1,000 square feet of that total, the tenant’s proportionate share should be 10%. In this case, the tenant would be responsible to pay as additional rent 10% of the building’s real estate taxes and any common area maintenance charges and insurance. A real estate broker who could discuss the above listed terms with their client would make a great impression on a landlord.