Drafting a commercial lease is complicated. There are a number of factors to consider and an array of options with respect to structuring the deal. The old “location location location” adage is very much in play when negotiating these leases. This article discusses a few of those factors, foot traffic and breakpoint.
When a tenant negotiates a lease with a landlord because the location has significant foot traffic, like a mall, then the amount of foot traffic bears significantly upon the negotiation. In high foot traffic areas like Cherry Creek Mall or the 16th Street Mall, tenants want to place responsibilities on the landlord in the event that foot traffic decreases. Operators of such malls are able to woo tenants and charge high rents because of foot traffic volume. Tenants want to keep it that way. When negotiating a lease in such areas, a tenant should demand a clause that targets foot traffic. That is to say, a tenant can demand that the mall have an overall vacancy threshold. If the mall’s vacancy falls below the threshold, the tenant will have remedies. Depending on the circumstances and the negotiation, the tenant can demand the ability to break the lease. Another prophylactic remedy is to tie rent payments to vacancy rates. For instance, a tenant can create a 75% threshold wherein any vacancies below 75% allows the tenant to reduce rent payments by 25%. This is justified because the tenant wants to be in the mall because of the high foot traffic. Similarly, a tenant can negotiate a clause with respect to anchor store vacancies. Anchor stores drive significant foot traffic from which other stores in the mall benefit. If the anchor stores go, then the mall takes a hit. For example, a tenant might be able to break the lease or reduce the rent if two or more of the anchor stores vacate the premises.
Another negotiating option is tying rent payments to the performance of the tenant’s business. The parties can negotiate a base rental price that is relatively low and then create a formula wherein the tenant pays the landlord a percentage of earnings that are above a certain point. That point is known as the breakpoint. If the tenant’s sales do not reach the breakpoint, then there is no payment above the base rent.
A breakpoint can be either artificial or natural. An artificial breakpoint is when both parties agree on a number to be the breakpoint, whereas a natural breakpoint is based on a formula wherein the breakpoint is calculated based on how the parties agreed to the base rent payments.
When negotiating a breakpoint, a landlord will insist on the ability to audit the tenant’s sales to determine whether the tenant is being honest about its sales above the breakpoint. In such an instance, the tenant should insist on a defined timeframe as to when the landlord is allowed to audit the tenant’s books.
For questions about landlord/tenant law or other real estate legal needs in Colorado, contact the Law Offices of Eric L. Nesbitt, P.C. at 303-741-2354 or Info@NesbittLawOffices.com.
Colorado is clearly a leader in the pot market. With the legalization of Marijuana came new real estate opportunities for those in Colorado. It created a market for recreational drugs that is unique, bringing in a surge of new customers into the state. It has also created questions about how marijuana affects the rental market.
Currently, the price of pot is declining. At the same time, the market for industrial space is also declining in the Denver area because those leasing space for pot have found cheaper alternatives in other locales. Therefore, if you leased space in the Denver area for a pot warehouse and would like to move the warehouse somewhere else, the terms of your lease may make it difficult to do so.
The opening of the marijuana market created a demand for industrial space to house the supply of marijuana. This led to a significant increase in rent for industrial space in an already crowded real estate market. Initially, the Denver area saw the largest increase of industrial space used for pot because of Denver’s large size, its reputation as a pot haven, and that it hosts a large airport. People were getting off the plane and heading straight to the marijuana dispensaries.
Recently, however, the industrial space market in the Denver area has cooled off. People from neighboring states like New Mexico and Kansas started pouring into Colorado for the pot experience. As a result, more dispensaries opened outside Denver. With that, more pot sellers sought industrial space outside of Denver, especially where that space is significantly cheaper. Industrial space in Pueblo can run $10 per square foot whereas industrial space in Denver can run at close to $100 per square foot. This trend caused the demand for industrial space in Denver to lag.
Initially, marijuana farms created a greater real estate demand in the Denver area, pushing the prices of real estate higher in an already overheated Colorado real estate market. Using industrial space to grow pot by using heat lamps can get expensive. In response, growers started to spread to other areas of Colorado where the rental space and properties are cheaper.
Breaking the Lease
If you find yourself needing to break your lease so that your pot business can thrive, there are some considerations. In general, signing a lease obligates all parties to fully comply with their respective side of the deal. A bad deal or changed circumstances, by itself, usually does not allow someone to legally break the lease. However, if you are “constructively evicted” then, under Colorado law, you may be entitled to break your lease.
A constructive eviction occurs when there is a major repair problem or the facility does not meet health standards. Therefore, if your warehouse needs repairs or is not up to standards, you may be entitled to break your lease and move operations to a more cost-effective area.
Involved in real estate in Colorado? Rentals? For these or any other questions about real estate law in Colorado, contact Eric L. Nesbitt, P.C. at 303-562-1580.
Eric Nesbitt of the Nesbitt Commercial Group is Changing Perceptions of Minorities in Commercial Real Estate
Greenwood Village, CO – Eric Nesbitt, of the Nesbitt Commercial Group and principal brokers Alec Wynne, Paul Washington, Carmon Hicks were featured in the Colorado Real Estate Journal, Diversity Essential To Industry’s Future discussing the lack of minority representation in commercial real estate.
Although there are many changes in Colorado recently, what hasn’t changed is the lack of minority brokers in Commercial Real Estate. In Colorado, it’s partly a function of population – 21 percent of Coloradans are Latino, and only 4.5 percent are black/African-American. Even so, the percentages of minority brokers are even lower, with some large Denver brokerage firms having only one or fewer minority brokers.
“We’re very underrepresented,” said Eric Nesbitt of The Nesbitt Commercial Group: Keller Williams Realty DTC, a broker, and real estate attorney. “In my day-to-day practice, I rarely interact with minority brokers.”
One the reasons minorities may be underrepresented in commercial real estate is because it’s not a profession people know about in college unless they have family or friends in the industry, which is dominated primarily by white males.
“I think the lack of mentorship is critical,” said Nesbitt. “We all need assistance sometimes in corporate America maneuvering and navigating the right way to do things, and sometimes when you’re in a room and no one looks like you, that can be very intimidating.”
Nesbitt said he’d like to see 10 to 20 percent minority representation in some of the large brokerage firms a decade from now, while Wynne said he’d be happy if there were “at least 20” minorities in the Denver commercial real estate industry by 2027.
“Diversity of people brings diversity of thought, experiences. That just makes for a richer experience altogether,” he said. To read more about this article, click here https://crej.com/news/diversity-essential-industrys-future-insiders-say/.
About Nesbitt Group.: The Nesbitt Commercial Group is a full-service Keller Williams commercial real estate brokerage and advisory firm led by a seasoned real estate attorney, Eric L. Nesbitt, Esq. The Nesbitt Group specializes in providing creative solutions to tenants, buyers, and investors in metropolitan Denver and throughout Colorado.
Much like the residential market, the commercial lease and sale arena is on fire with no signs of slowing in the upcoming quarters. The stats for the sub catagories of the commercial office market are as follows:
The office vacancy rate in the Denver market area decreased to 10.0% at the end of the second quarter 2015. The vacancy rate was 10.3% at the end of the first quarter 2015, 10.5% at the end of the fourth quarter 2014, and 10.6% at the end of the third quarter 2014.
The average quoted asking rental rate for available office space, all classes, was $23.81 per square foot per year at the end of the second quarter 2015 in the Denver market area. This represented a 1.4% increase in quoted rental rates from the end of the first quarter 2015, when rents were reported at $23.49 per square foot.
Total office inventory in the Denver market area amounted to 190,482,183 square feet in 7,408 buildings as of the end of the second quarter 2015.
Tallying office building sales of 15,000 square feet or larger, Denver office sales figures fell during the first quarter 2015 in terms of dollar volume compared to the fourth quarter of 2014. In the first quarter, 30 office transactions closed with a total volume of $562,287,698. The 30 buildings totaled 3,023,124 square feet and the average price per square foot equated to $186.00 per square foot. That compares to 44 transactions totaling $601,590,443 in the fourth quarter 2014. The total square footage in the fourth quarter was 4,314,955 square feet for an average price per square foot of $139.42. Total office building sales activity in 2015 was up compared to 2014. In the first three months of 2015, the market saw 30 office sales transactions with a total volume of $562,287,698. The price per square foot averaged $186.00. In the same first three months of 2014, the market posted 21 transactions with a total volume of $333,215,887. The price per square foot averaged $163.32.
Cap rates have been lower in 2015, averaging 7.13% compared to the same period in 2014 when they averaged 7.19%
In summary, the commercial office real estate market is in line with the residential market holding on the steady upward trend. Values are high, vacancy is low and there are no signs of slowing. If you have questions about a specific market area please contact a member of our team for a detailed analysis.
The office vacancy rate in Denver continued on the steady decline track with vacancy rate in the Denver market area dropping to 11.4% at the end of the fourth quarter 2013. The vacancy rate was 11.6% at the end of the third quarter 2013, 11.8% at the end of the second quarter 2013, and 11.9% at the end of the first quarter 2013.
The average asking lease rate for office space was $22.03 per square foot per year at the end of the fourth quarter. Representing a 1.7% increase in rates compared to Q3 of 2013.quarter 2013, and 11.9% at the end of the first quarter 2013.
Total office inventory in the Denver market area amounted to 186,987,415 square feet in 7,311 buildings as of the end of the fourth quarter 2013. The Class-A office sector consisted of 60,023,810 square feet in 315 projects. There were 3,808 Class-B buildings totaling 102,480,903 square feet, and the Class-C sector consisted of 24,482,702 square feet in 3,188 buildings. Within the Office market there were 532 owner-occupied buildings accounting for 19,556,503 square feet of office space.
Sales of buildings totaling 15,000 square feet or larger rose during the third quarter of 2013. Closing 33 office transactions with a total sales volume of $658,618,750. Those 33 buildings totaled 2,720,945 square feet with an average price of $242.06 per square foot.
Cap rates also increased in 2013, rising from 7.35% in 2012 to 7.88% in 2013.
With vacancy on the decline and rental and cap rates steadily rising, 2014 is an ideal time to invest in commercial office buildings and condos. The market is on an upward climb and this trend is only predicted to hold steady in the upcoming quarter and throughout the year.
The real estate market in Colorado is proving to be one of the most resilient in the nation. This holds true for both the residential and commercial sectors. “The office vacancy rate in the Denver market area decreased to 11.5% at the end of the third quarter 2013. The vacancy rate was 11.8% at the end of the second quarter 2013, 11.9% at the end of the first quarter 2013, and 12.1% at the end of the fourth quarter 2012.” according to Costar.com, a commercial real estate listing service.
“The average quoted asking rental rate for available office space, was $21.66 per square foot per year at the end of the third quarter 2013 in the Denver market area. This represented a 2.0% increase in quoted rental rates from the end of the second quarter 2013, when rents were reported at $21.23 per square foot.” Costar.com reports.
Finally, Costar.com has calculated “In the second quarter, 28 office transactions closed with a total volume of $497,093,739.00. The 28 buildings totaled 3,102,898 square feet and the average price per square foot equated to $160.20 per square foot. That compares to 25 transactions totaling $277,866,000.00 in the first quarter 2013. The total square footage in the first quarter was 1,887,145 square feet for an average price per square foot of $147.24.”
Overall, the Denver metro market is demonstrating a strong recovery pattern and as vacancy rates drop, lease rates climb, making the office market a favorable trading exchange for investors. Commercial brokers and investors alike are hopeful that the upward trends will hold steady, keeping commercial property a stable investment for consumers.