Monday, December 09, 2019

Making Sense Of Commercial Leases

Whether you are a real estate investor trying to find a user for your space or a business owner trying to find a new space for your company, you will more than likely find yourself needing to sign a lease. In commercial real estate there are two types of leases: net leases and gross leases, and each can be altered into different variations. For those not familiar with the commercial leasing process and what the different kinds of leases can mean for both owner and user this stuff can make your head spin.

But have no fear, what is that on the horizon? Why, it’s NAI Norwood Group charging in to save the day and explain the difference between gross and net leases!

Please, hold your applause and awards. We’re not heroes, we’re just passionate about educating people about the world of commercial real estate. So, let’s begin.

Gross Lease Vs. Net Lease

The two main categories of leases take varied approaches as to whether and/or how much the tenant or landlord is responsible for paying property operating expenses such as utility bills, taxes, insurance, etc.

In a gross lease, also known as a full service lease, the tenant pays a set sum or amount for rent based on what was negotiated when the lease was signed. It doesn’t matter if the expenses end up being higher or lower than expected, the tenant pays the same rate. You can find these leases in all property types. Sometimes when the cost of utilities is hard to sub meter or if the landlord just wants to keep it simple.  

In a net lease structure the tenant is responsible for rent as well as the expenses, often categorized into nets: property taxes, insurance, utilities and maintenance. Which and how many of these nets they are responsible for depends on the type of net lease they have. Tenants tend to pay less for base rent in a net lease because they are shouldering some of the property operations. So overall they pay the same amount, the difference is that tenant is at risk for the increase in these expenses.  Net leases are most common in industrial and retail facilities.

Simple enough of an explanation, right? But let’s get a little more granular, because both types of lease have variations and subcategories.

A Look At Lease Variations

Some common variations to the above would be an “Increase Over Base Year” gross lease. In these cases there is one lump sum for rent that was agreed to upon lease signing. So the tenant is not responsible for the expenses. However the landlord does have an ability to collect the increase over the base year on certain expenses. In other words the landlord can pass along the increases to the tenant.

Another variation, though slightly less common, is a pure net lease. In these scenarios maintenance of the building and grounds is passed along to the tenant. For example, in most leases if the roof fails or the parking lot splits, the landlord needs to take care of it. However in some leases the tenant assumes all of these costs.

A majority of the leases we deal with tend to fall into the full gross, modified gross or triple net category.

As an investor or tenant, the kind of lease signed can drastically alter the income and risk an investor sees, and the amount of rent and responsibility a tenant has. Have more questions about gross leases versus net leases? Reach out to us! Our expert agents and brokers would be happy to answer any questions you have, whether you’re looking for a space to lease or trying to find a tenant to lease your space.

Tuesday, May 21, 2019

How Experiential Retail Will Revitalize The Shopping Mall And Other Retail Spaces

Last month two of our brokers, Deana Arden and Judy Niles-Simmons, were featured in an article by NHBR for their work in helping to revitalize the Steeplegate Mall in Concord. This got us reflecting on the ways traditional retail has been changing and, as it continues to migrate online, the ways in which retail properties are either evolving to attract consumers or going extinct.

The Steeplegate Mall is a great example of how brick-and-mortar spaces are changing with the times, as Amazon swallows more and more retail sectors. As retailers like Circuit City, Bon-Ton, and Old Navy move out, Altitude Trampoline Park, Capital City Charter School, ViParty Bounce House, and ZOO Fitness Club move in. A pivot away from being a traditional retail space to, as the article states, a consumer engagement space. A pivot that more and more landlords and retailers are taking as the industry continues to be disrupted.

So how are other shopping centers and strip malls across the country filling the vacant anchor spaces traditionally leased by disappearing retailers, and drawing consumers back in?

One option is indoor virtual reality theme parks.

Legend Heroes Parks, a Singapore-based franchise of indoor virtual reality theme parks, is looking to break into the U.S. market by targeting vacant anchor and sub-anchor spaces at regional malls and strip centers. The parks, which use a combination of technologies, including virtual and augmented reality, to help guests experience a wide range of rides, games and other kinds of entertainment, have the potential to bring millennial's back to the malls and strip centers they’ve ignored in recent years, by offering them something more than just hanging in the food court and browsing the same old stores.

Bringing in businesses, like Legend Heroes Park, aimed at the tech-savvy and fickle millennial generation, can potentially bring those dollars back into the shopping centers they’ve deserted. But what can retail spaces do to attract families?

Fair Oaks Mall in Northern Virginia has found a way to get families through their doors and keep them in their stores longer, and it starts with the holiday season. The mall’s annual Santa’s Flight Academy gives kids an interactive experience set at the North Pole, which culminates in meeting Santa and getting to see their name and photo pop up on a screen showing Santa’s “nice” list. This all takes holiday shopping from a chore done by the parents, to an experience and an event for the whole family.

Avalon, located in Alpharetta, Georgia, expands on this by attracting consumers to its mixed-use shopping center by offering programmed experiences, such as comedy nights, yoga classes, fireworks shows and more. Avalon has built itself around being more than a shopping center. Instead, being a community gathering space focused on not just extending dwell time, but making sure it is time well spent.

It isn’t just the owners of brick-and-mortar retail spaces trying to draw the crowds back to their properties, though. Retail brands are investing in experiences for their shoppers to streamline and enhance the shopping experience from the moment they step through the door.

Lululemon, the yoga-inspired apparel chain, offers yoga classes in its stores as well as relaxation pods where customers can listen to self-guided meditations, presumably as a comedown from that yoga-high. At Whole Foods, customers can take a cooking class and hit the aisles right after to pick-up the ingredients needed to make the dish for their family that night. And, at the House of Vans in London, shoppers can purchase a new pair of hi-tops and immediately try them out at the skate park located below the sales floor.

But experiential retail can be as simple as making the shopping experience more convenient. Like how Nike installed digital lockers at its new store in Los Angeles for customers who wanted to buy their shoes online and pick them up in-store. Or The Home Depot, whose app allows customers to find the exact aisle and bay the product they’re looking for is located in. So they can spend less time wandering and more time working on their projects.

As it becomes easier to buy goods at the push of a button, brick-and-mortar retail needs to invest in new ways to get customers through the door. Experiential retail and consumer engagement spaces are slowly becoming the future of retail, and the best tool to get shoppers away from their screens and back into the stores.

Wednesday, April 03, 2019

How Proposed Legislation Could Affect Commercial Real Estate In New Hampshire

Do you hear that? The sound of pencils scrawling new bills, Democrats and Republicans bickering, it must be a new legislative session!
And a new legislative session brings with it, well, new legislation. Some of which, if passed, will impact the commercial real estate sector in both positive and negative ways. Let’s take a look at some of the proposed bills that could affect the world of CRE.
But, before we get into the proposed bills and their effects, a little primer on the New Hampshire State Legislature.
New Hampshire, by far, has the largest legislative body in the United States at 400 State Representatives and 24 State Senators for a whopping total of 424 legislators. The next closest state is Pennsylvania with 253 legislators. New Hampshire’s legislative body is bigger than the legislative bodies of Canada, South Korea, and Australia. Yeah, chew on that for a bit.
Done chewing? Let’s continue, then.
An interesting part of New Hampshire’s legislative process, though not unique to the Granite State, is that all proposed bills get a public hearing. At the federal level the Speaker of the House or the President of the Senate has the power to table proposed bills, denying them from going to committee. While the leadership has authority in New Hampshire, every bill, no matter how odd, must get a public hearing. Though, most will inevitably fail.
Let’s move on from this Civics lesson and take a look at some of the proposed bills that could affect New Hampshire’s commercial real estate sector should they become laws.
The first bill we’re going to take a look at is House Bill 667(HB 667) which proposes that any property that has a well with new construction should have that well tested to ensure well water meets quality standards before a certificate of occupancy will be issued.
HB 667 is one of many proposed bills that deal with ground water, but one of the few that are focused on private wells. The bill comes as we continue to learn more about what PFOAs, PFASs and other contaminants mean to us as humans.
Presently, the state of New Hampshire has no authority to regulate a private well. So, for example, if I was selling my office building that had a well, and there were high nitrates in that well, and you were fine with that, we could go through with the sale and not have to worry about any governing body getting involved. Whereas if a public system was found to have high nitrates the city would have the owner shut the system down and cure it.
The way the proposed legislation would be enforced is through new construction upon certificate of occupancy. Meaning, if you were to build a new commercial property and the city came to inspect said property, and found that the well water did not meet state standards, the city would deny you a certificate of occupancy.
The issues with the bill don’t come from what it is trying to do, protect our drinking water, but from how the bill is currently written, as it introduces a whole new standard that didn’t exist before.
The more specific concern for commercial practitioners is that HB 667 is agnostic to property type. For properties zoned for daycares and restaurants it may make sense to have well water regulated. But for properties zoned industrial, which tend to have barely any water consumption, it may be unnecessary.
The next proposed legislation that we are going to look at is House Bill 561(HB 561) which would allow towns to create their own laws and zoning regulations that would prohibit formula businesses in certain zones. For those not familiar with the term, the bill describes a formula business as a food based franchise, like McDonald's or Starbucks.
The concern with HB 561 is that it allows the Planning Board or Zoning Board, whose main goal is the regulation of land use, to regulate a person’s business, branding, vendor chain and so forth.
While the intent behind the bill is to protect local, community-based businesses, what it fails to take into consideration is that a lot of these corporate, formula-based businesses are owned by local business owners who are just franchisees. So, while HB 561 would protect the mom and pop shops that we usually associate with local business, it would hurt non-traditional local business owners as well. For the moment HB 561 has been tabled, but it could be revived in another legislative session.
Access to affordable housing is very important to New Hampshire employers and their employees, and we consider it a commercial real estate issue. There are two bills concerning housing that we’ll look at. One, Senate Bill 15(SB 15), would require that on an annual basis, $5,000,000 in revenue derived from the Real Estate Transfer Tax (RETT) is allocated to the NH affordable housing fund. New Hampshire spends far fewer dollars than our neighboring states on affordable housing programs and has one of the highest costs of living in the country. Anything to bring that cost down and help retain workers is welcome.
The next is Senate Bill 306(SB 306). SB 306 would create a Housing Appeals Board to hear appeals of decisions of municipal land use boards. Currently, if a property owner wanted to appeal a decision made by a land use board they would have to appeal to the Superior Court which can be an expensive and time-consuming process.
SB 306 would create a three-member board made up of a lawyer, an engineer and another member of the public, appointed by the Supreme Court, all of whom would be required to have expertise in land use law or housing development. The board would be required to hear appeals within 90 days of filing and rule within 60 days after hearing the appeal.
This is fantastic for developers and homeowners as what currently can cost thousands of dollars in legal fees and wasted time can, if SB 306 is passed, be reduced to a $250 dollar filing fee and a roughly 180 day turnaround time for appeals. Time, as the old adage goes, is money, and money that could be used to create more housing opportunities for New Hampshire’s workforce. SB 306 is currently tabled in the Senate, so we will have to wait and see when it is brought back-up.
These are just a few of the proposed bills that could affect those in the commercial real estate sector. What are your opinions on the bills we talked about? We’d love to hear your opinions in the comments. And don’t forget to let your State Rep and State Senator know your opinions as well. There is still time to make your voice heard.

Tuesday, January 22, 2019

A Look Into The Government Shutdown's Effects On The Commercial Real Estate Industry

government shutdown effects on commercial real estate

As 2019 begins, events from 2018 are seemingly dragging themselves into the New Year. Namely, the continued government shutdown. The ongoing gridlock in Washington has brought many government agencies to a standstill, with “non-excepted” government employees being placed on furlough, prohibited by law from using their government emails or other federal resources.

The ripple effects are widespread, affecting national parks, federal research agencies and even the panda cam at the Smithsonian National Zoo. But you didn’t come here for the pandas. You came here to find out what effects the government shutdown is having on the commercial real estate industry. So, let’s take a look.

To start, small businesses will have a harder time attaining non-conventional loans, as the Small Business Administration (SBA) announced in a Facebook post on December 22 that, due to a lack of government funding, it will remain inactive until further notice.

For the commercial real estate sector the repercussions of this will be felt in potentially stalled deals and projects. Businesses that had been planning to apply, or already applied for, a 504 loan through the SBA, to use towards the construction, renovation or purchase of a building or land, have had to place their plans on hold until the loans can be processed.

But, it’s not just the end of the government shutdown businesses have to wait for. Once the government opens back up, and government agencies open their doors, there will be a massive influx of loan applications from certified development companies (CDC) across the country trying to get their loans approved by the SBA.

“There’s going to be an enormous backlog. So the SBA is going to have to buy some time to get through all of these loans that are going to be submitted to them simultaneously,” said Laura Brown, Vice President of BDC Capital and CDC New England. In years past BDC Capital and other CDCs have seen the SBA come out of shutdowns with a more scrutinizing eye. Screening out deals they would normally approve. “There’s going to be some delay, it’s going to take a little bit longer to catch up for everybody, the CDCs and [the SBA].”

This waiting game can complicate things for the borrowing business. The longer the wait for the loan is, the higher the chance for any potential purchases of buildings or land to fall apart. Especially if the seller gets cold feet, or is highly motivated to sell.

Some local CDCs are trying to bridge the gap left by the SBA’s closure by providing direct financing options that can be approved completely within the CDC. Allowing some stalled deals to get moving again, without having to wait for the government to open back up and the SBA to wade through the flood of loan applications that continue to build up each passing day.

The multifamily sector which, after a great 2018, enters 2019 with some uncertainty, will not be helped by the shutdown. Both the Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA), while not completely closed, have seen a significant portion of their staff furloughed. The effects of this being that HUD will take more time to process loans for housing projects and enforcing federal housing regulations, while the FHA has made no commitments that it will endorse new loans for its multifamily program.

Locally, most multifamily financing takes place conventionally. However, HUD does provide loans for many larger projects that may not otherwise work without that financing. In the same fashion, the FHA provides a good amount of financing to smaller owner occupied buildings of four units or under.

While buyers haven’t been left completely in the cold, as both agencies are still operating, the staffers are spread so thin that any movement will be slow. Meaning anyone who relies on these loans for new mortgages or refinancing are going to have to live with delays.

Commercial owners could be impacted in a number of different ways. Due to the SBA’s closure, any tenants that rely on SBA loans to help them pay rent could have a hard time getting by, especially if the shutdown drags out for an extended period of time. While there is relatively little chance that any of these tenants would default on their rent, they could be forced to explore cost-cutting measures to ensure they are able to pay it on time. And any entrepreneurs who were looking to fund a start-up with an SBA loan will have to put those plans on hold, or find other means of funding. Potentially making it more difficult to afford space, and harder for landlords to fill space.

It’s not just those that rely on SBA loans that could see an impact. Retail and hospitality businesses whose clientele is made up of a majority of government workers have seen foot traffic dip in recent weeks as offices have been closed and workers, not sure when their next check will come, have curbed their spending. The effects of this being felt most heavily in economies where government workers make up a large portion of the local workforce.

And what about landlords who lease office space to the government through the General Services Administration (GSA)? At the moment, they don’t have too much to worry about, as there is no risk of rent payments not being made. The question, though, is will payments be made on time?

As the GSA receives funding that can be carried over from one year to the next, it has been able to keep its doors open and staffers working, while making sure lease payments are being made on their due dates. But, as the balance of carryover funding has declined in past weeks, the GSA has begun to furlough their employees, as of Monday, January 7. The question then becomes, if the shutdown continues on, how long can the GSA go before it is unable to make rent payments on time?

The effects of the government shutdown are far reaching within the commercial real estate sector. Too far to properly cover in one blog post. While, so far, it has mainly brought only discomfort, the big question is what happens if it extends to 30 days and beyond? And at what point do doomsday scenarios need to be taken seriously? It’s enough to make you want to grab a beer. Just hope that your beer of choice was approved by the Alcohol and Tobacco Tax and Trade Bureau before the government shutdown.

Tuesday, December 11, 2018

The Rising Cost Of Construction And Its Effects On Commercial Construction in New Hampshire

Since 2014 construction costs have steadily risen across the United States due to the continued increase in the cost of materials and a labor shortage that has gripped the construction industry. And New Hampshire contractors and construction companies haven’t been spared. But how are these factors affecting the commercial construction industry here? And in what ways are they affecting building projects across the Granite State?

Where have all the skilled laborers gone?

The unemployment rate sits at 3.7 percent as of November 2018, with approximately 155,000 jobs created in that time. And employers within the construction industry and the trades are having a harder and harder time finding young, skilled workers to fill their employment needs. Part of this is because of the stigma that has been placed on having a career in construction. A thinking that has pushed young people away from the trades and toward a four year degree.

“We need to make construction sexy again.” said Bill Jean, Director of Business Development for Fulcrum Associates. “There are still those trades that are very physically labor intensive, but a lot of the trades are getting a lot more technical requirements associated with them now… I think you’re finding that you’re needing a little bit more of a technical staff, technical training.” There are a number of initiatives underway that are hoping to change how construction and trades careers are perceived, and employers recognize the need to invest in better training and apprenticeships for the next generation of skilled laborers.

New Hampshire, though, faces a unique challenge with its labor shortage: the exodus of young people. Their ‘exit: stage right’ leaves the Granite State as one of the oldest states in the nation, with a rapidly aging workforce and population. The median age of a construction worker in New Hampshire is 44 years old, 3 years older than the national median of 41. As companies see their workforce get older and retire, they are not seeing nearly enough young talent come into the trades to replace the retirees. This doesn’t tell the whole story though.

The industry is still bothered by the scars of the last economic downturn, which saw many skilled tradespeople leave the area. Historically, many tradespeople in the construction industry have been migrant, going where the work is. The last downturn heavily impacted the New England market, with those that moved out never coming back. Trying to fill the boots of the tradespeople that left the area during the last recession has put that much more stress on companies that are already struggling to find workers for their current projects.

Materials don’t come cheap

On top of the need for workforce, construction companies are getting hit in the wallet by the steadily rising cost of materials. Looking at almost any graph of materials cost from the past few years looks like the hill Sisyphus was forced to roll his boulder up. As of this writing, according to an analysis of U.S. Bureau of Labor Statistics done by Associated Builders and Contractors, construction material prices were 7.4% higher than they were at the same time the year before. Crude oil was up 47% over the past year. Much of that cost being due to mounting trade tensions between the U.S. and China, as well as the shadow of impending sanctions on Iran. Iron and steel were up 12.2% buoyed by the current tariffs, and with iron ore forecasts showing a continued rise in price that won’t subside any time soon. Finally, softwood lumber was up 5.4%, also affected by trade tariffs.

While the price increase for materials like softwood lumber haven’t affected New Hampshire’s industry much, due to resources in the Northeast and Canada, the rising cost of steel initially caused some friction within the market as the volatility during the early days of the tariffs caused prices to fluctuate almost daily. Unable to eat all of those price increases, many companies, like Fulcrum Associates, were forced to pass off the cost to the end user. Affecting planned projects and their budgets.

What does the crystal ball say?

While both of these variables seem to paint a dire picture for commercial construction in New Hampshire and nationwide, how much has the rising costs really affected business? According to the latest Construction Confidence Index released by Associated Builders and Contractors at the end of September, not much. The outlook from most construction firms is that sales will continue to rise over the coming months, with higher profit margins expected. The survey found that the CCI for sales expectations rose from 72.2 to 72.6 during the second quarter, and expectations for profit margins increased from 63.4 to 64.5.

Bill Jean and Fulcrum Associates concur with the report. “Beyond 12 months the crystal ball gets a little fuzzy, but certainly if you’re looking at a 6 to 12 month window we feel very confident about the strength of the market and the industry. We don’t see a great trend upwards in profitability, but we’re still finding that work is being heavily competed for. There’s a lot of it out there, and there’s probably more of a volume available out there [today] than there has been in the last decade.”

The chances for any sort of slowdown in commercial construction in the short-term seems unlikely. The long-term outlook is not as clear. The biggest challenge to the commercial construction industry in the future is finding talented, young tradespeople. Access to labor and the shallow depth of the region’s trade talent pool happens to be the primary factor for the increasing cost of commercial construction in New Hampshire and the rest of the Northeast region. A rising cost that may or may not eventually catch-up with the industry, especially as it plans for a decline to the growth the industry has been enjoying. For the moment though, the cup runneth over.