Frequently Asked Questions
Disclaimer: The information contained here is intended to provide information and insight to industry practitioners and does not constitute advice or recommendations. Royal Commercial Corp. disclaims any liability for action taken as a result of this publication.
Q1. How does the commercial real estate (CRE) industry work?
Most owners/landlords of commercial real estate hire real estate agents to lease their property on their behalf. The real estate agent’s responsibility is to represent the owner in leasing the property; not to represent the tenant. Washington state law requires real estate brokers to disclose in writing exactly who they will be representing during the CRE transaction. RCW 18.86.120. This works the same when buying or selling commercial real estate.
Q2. How are CRE professionals paid for their services?
CRE agents receive a commission upon the signing of the lease between the owner and a tenant. The amount of the commission is most often calculated as a percentage of the lease value, which is negotiated between building owner and the CRE agents involved. There is no set industry standard. The owner of the leased building pays the agents commission; typically, one-half on the signing of the lease and the remaining one-half when the tenant begins occupying the building. When selling commercial real estate the brokerage firm is paid commission at closing.
Q3. What is the difference between a leasing agent and a tenant representative?
The leasing agent has the listing of the property and represents the interest of the owner of the building. A tenant representative (rep) represents the interest of the tenant in the lease. Some agents work exclusively on listing while others take on tenant representation only. Other agents will work with both. This is the same when buying and selling commercial real estate.
Q4. Why should I use a broker (agent) if I have an attorney?
A knowledgeable broker, who is a vital part of your team of professionals, uses comprehensive marketing expertise and valuable resources to ensure maximum results in every lease and sale transaction. Using an experienced brokerage firm will compliment the rest of the team allowing others to do what they do best in their profession.
Q5. Do I need a broker to help me find space?
No. Whether buying, selling or leasing, anyone can search for space if they have the time to spend away from their business. A broker however, does so much more than just find office space. A broker uses expertise in the leasing negotiation process and the same would apply to the buying and selling process. A broker starts with a good understanding of your business and gives you advice as to the best space suited for your business. A broker then uses inside resources to locate the best space available that offers a good deal. A broker seeks out the best terms and rental rates during the negotiable process. A broker stands beside you from the time the search begins until the lease is signed and the same applies in buying or selling commercial real estate.
Q6. I’m thinking about moving my office or leasing a new office. Where do I start?
The first thing is to decide if moving into a new space is the right choice. Whether you are looking to buy or lease, ask the following questions:
Do we want to find space on our own or hire a tenant representative to assist us?
Is it a good time to move?
How important is location?
How much space do we need?
How much can we afford?
On what date do we need to move into a new space?
How will the new space benefit the company and its future?
What does it cost to move?
What else is involved in moving (furniture, phones, computers, copy/fax/postage machines, internet access, etc.)?
Can we afford to lose business or employees during the transaction?
Q7. Whom does a broker work for?
Brokers generally work in two capacities: as a listing agent or as a tenant representative. In the sale of a property a broker will represent the seller or the buyer. Some, if not most, do both. This means that they have property listings and they can also work as a tenant/buyer/seller representative. If you work directly with the property listing agent, keep in mind that the listing agent is representing the property owner. If you hire a tenant representative, they will be representing you. If you are selling a commercial building, and you hire a broker they represent you and your interests. The buyers broker would represent the buyer’s interests.
Q8. What is a representation letter or exclusive agreement, and should I sign one?
A tenant representative will present you with a representation letter to sign for your own protection. The letter protects you by stating that you are working with only one tenant representative. It also protects the tenant representative by ensuring that they will get paid if a lease is signed. If a tenant representative does not have a signed letter from you, they will most likely only perform a simple property search. If you want to get the most out of the brokerage community, it is recommended that you sign an exclusive agreement instead of working with several agents on a nonexclusive basis. When selling commercial real estate a specific type of listing agreement will be agreed to between the seller and the brokerage firm she hires.
Q9. Is finding a space (whether leasing or buying) without hiring a broker a good idea?
Generally speaking, the answer is no. You, as a tenant, enter into a lease every so often. A broker, however, deals with leasing negotiations daily. Think of it this way: Would you go into an IRS office without having your CPA as a representative? Again, the answer is no.
Q10. Now that I’ve hired a tenant representative, what should I expect from them?
You should expect your tenant representative to think only of your interest and to give you guidance on any potential lease. The tenant representative helps you locate space, understands your most important selection criteria, and then finds and negotiates the space that best fits your needs. When it comes to the negotiation, make sure your tenant representative knows what is important to you. The same applies when buying or selling commercial real estate.
Q11. What is a letter of intent (LOI)?
A letter of intent is an agreement(s) (not an offer) between two or more parties before an actual agreement, such as a lease, is finalized. It is similar to a term sheet or memorandum of understanding (MOU). While LOIs may not be binding, provisions of them can be, e.g., non-disclosure and exclusivity. The intent is to protect both parties in the transaction until the transaction is executed.
Q12. What is a transit score and why is it important?
Transit score is a number between 0 and 100 that measures the relative usefulness of nearby routes. “Usefulness” is typically measured by a weighted algorithm of characteristics such as distance to the nearest stop; mode of the route such as bus, ferry or rail; and frequency of service.
90–100 Rider’s Paradise World-class public transportation
70–89 Excellent Transit convenient for most trips
50–69 Good Transit Many nearby public transportation options
25–49 Some Transit A few nearby public transportation options
0–24 Minimal Transit Possible to get on a bus
Q13. What is a walk score and why is it important?
Walk score is a number between 0 and 100 that measures the number of amenities such as retail, businesses, parks, theaters and schools that can be accessed by foot inside a 1-mile radius from a particular address.
90–100 Walker’s Paradise Daily errands do not require a car
70–89 Very Walkable Most errands can be accomplished on foot
50–69 Somewhat Walkable Some errands can be accomplished on foot
25–49 Car-dependent Most errands require a car
0–24 Car-dependent Almost all errands require a car
Q14. What is load or core factor?
In an office building, this is the percentage of common space (lobbies, restrooms, corridors, etc.) as compared to the total rental square footage in the building. The load factor is calculated by dividing the rentable building area (RBA) by the usable area. This factor can then be applied to the usable area to convert it to RBA for comparison. In markets were space is leased on the basis of the usable area, if the load factor is 15 percent, then the usable area can be multiplied by 1.15, resulting in the RBA.
Q15. What is LEED?
LEED® (Leadership in Energy and Environmental Design)
LEED is a third-party certificate program under the U.S. Green Building Council (USGBC). It is a nationally accepted benchmark for the design, construction and operation of high-performance sustainable buildings. Certificate levels are as follows: Certified, Silver, Gold or Platinum. The levels are based on points obtained in six areas: sustainable sites, water efficiency, energy and atmosphere, material and resources, indoor environmental quality, and innovation in design.
Q16. What are concessions?
To secure a tenant when vacancy is high in a market or submarket, a landlord may need to grant concessions in the lease. Those concessions most often take the form of free rent but may also include lease buyouts, moving allowances and above-market tenant improvement allowances. In a market where vacancy rates are low, the opposite may hold true.
Q17. What is considered a credit worthy tenant?
A tenant with a business that has been in existence for numerous years, that has strong financial statements, or that has a large market presence that could be rated as investment grade by a rating agency. Financial and business stability implies that the tenant is highly likely to honor its lease commitment; the tenant is, therefore, viewed as a low-risk renter. Buildings with credit tenants as "anchors" are considered less risky investments for lenders. By definition, an anchor tenant is usually a large brand name company which is either national, global, or both.
Q18. What is a Master Lease and why is it important?
The controlling lease identifying the terms and length of the lease. Note that a sublease cannot extend beyond the term of the master lease.
Q19. What is a renewal option and why is it important?
The right of a tenant to extend the lease term for a specified period of time at a predefined rental rate. In many instances, the rate is defined as a percentage of market rent, and in other instances, the rate is a specified dollar amount. An auto-renewal option is a type of renewal option whereby the lease term is extended automatically on the expiration date without any notification requirement. Often, there is a date by which this option must be executed; otherwise, the option expires. It is important that the lessee (tenant) records the option dates for early reminder notices to notify the lessor (landlord) if they plan on renewing.
Q20. What is a work letter and why is it important?
An owner/landlord work letter is a legal document that outlines the obligations of the landlord relative to the improvements necessary to prepare leased premises for a tenant’s occupancy. Items typically found in a work letter include a description of the improvements, the cost thereof, and the portion of the cost to be paid by the landlord, the completion date and the insurance requirements of contractors performing the improvements.
Q21. What is automobile parking ratio and how is it calculated?
A ratio calculated by comparing the number of automobile parking spaces at a project to the gross leasable area (GLA) of a building. This ratio is usually expressed in number of spaces per 1,000 square feet of gross leasable space. It varies by property use, with labor-intensive operations needing higher parking ratios. For example, a building with a GLA of 800,000 sf would have 800 spaces expressed as 8 spaces/1,000 sf.