The ABC's of Commercial Leasing

By: Julie Hovorak, Broker

Finding a commercial location is one of the single most important steps toward the success of your business. Finding the perfect space does not have to be difficult, and with the assistance of an experienced commercial real estate broker, the process can be relatively quick and painless. Once we have identified the desired location, we begin the proposal process. Most lease negotiations are in the form of a Letter of Intent (LOI), at the very least the negotiation should always be in writing. The negotiation process does not imply commitment and the LOI is not usually binding, it merely establishes the basic terms for which the final lease agreement can be drawn from. This is an opportunity for the owner and future tenant to begin a dialogue and negotiate a successful lease.

If the owner's broker is present during the initial tour they may provide you with written or verbal information about the property, approximate terms and lease type the owner is expecting.
There are several types of commercial leases, the most common being a triple net or modified gross. It is important to be aware of any additional increases in monthly charges which may occur over the lease period and how those increases might effect the lease.

Once we are ready to prepare a proposal we will need to include the following information:
1. Tenant/Trade Name
2. Address or description of premises, including approximate size, if available
3. Length of lease desired
4. Date of possession and rent commencement (these may differ depending on concessions)
5. Rental rate including increases
6. Security deposit amount ( a new business start-up will usually require a larger deposit)
7. Your intended use of the premises (be specific)
8. Any improvements you are proposing for the space, related contractor proposals & who will be responsible for the improvements
9. Contingencies to the lease (city licensing, zoning restrictions, etc)

I recommend that an experienced broker assist you with this process and give you some insight into the owners perspective. When you are ready to submit your proposal we will also submit a commercial application usually supplied by the broker. This is a standard application requesting personal and business information including bank and trade references, the owner will use this to determine your credit worthiness. In addition, many owners will ask to see a financial statement. In the instance of a new business start-up, they will ask to review your business plan if available.

Once the owner has received the proposal they will consider the terms you have requested, this may result in a counter offer from the owner. Essentially this is a process of negotiating parameters for a happy and successful business relationship.

Short Sale vs Foreclosure Pros and Cons

We recently found this excellent article regarding short sales and foreclosures.

Should You Choose a Short Sale Over a Foreclosure?

Answer: Whether you should do a short sale or let the home go to foreclosure depends on several factors. While for some homeowners, it is easier to throw up your hands and let the bank take your home, that might not be the wisest thing to do.

Short Sale Benefits

Here are a few benefits for doing a short sale that may not have occurred to you:

• You are in control of the sale, not the bank.
• You may sleep better at night knowing who is buying your home.
• You will spare yourself the social stigma of the "F" word, foreclosure.
• Contrary to popular belief, you can be current on your payments and still effect a short sale.
• Your home sale will be handled like any other home sale.

Buying Again After a Short Sale

If your payments have never fallen behind 30 days late and the lender does not require that you pay back the loan, Fannie Mae guidelines may allow you to buy another home immediately. The wait for an FHA loan is 3 years.

If your payments are in arrears yet a short sale is granted by your lender, you may qualify to buy another home with a Fannie-Mae backed mortgage within two years, regardless of whether the home is your primary residence.

Buying Again After a Foreclosure

With certain restrictions, you may be eligible to buy another home in 5 years if the home was your primary residence. Without restrictions, the wait is 7 years. If you are an investor and do not occupy the home, the wait to buy with a Fannie Mae insured loan is 7 years.

Affects on Credit After a Short Sale

A short sale is not a derogatory mark on your credit because credit bureaus do not show the word "short sale" on your credit report. It may say "pay as agreed" or "paid as less than agreed," among other categories. Some clients have reported negative FICO scoredrops from 50 points to 130 points. The point drop is typically due to being in default, that is behind on your payments.

Affects on Credit After a Foreclosure

A number of sources have reported FICO score drops from 200 to 400 points after a foreclosure. Generally this credit score will remain on your credit report as a public record for 10 years.

Credit Reports After a Short Sale

All lenders report short sales differently and some do not report them to the credit bureaus at all.

Credit Reports After a Foreclosure

If a prospective employer runs a credit check on you, your job application may be denied if you
have a foreclosure on your record.

Deficiency Judgments After a Short Sale

Judgments are often negotiated between the seller and the short sale bank. In some cases, such as California, if the home is your personal residence and was financed through purchase money, there is no deficiency judgment.

Deficiency Judgments After a Foreclosure

Banks are unwilling to negotiate deficiency judgments with the homeowner after a foreclosure. In California, for example, according to the California Association of REALTORS, a deficiency judgment may be filed regarding a hard-money loan if the lender forecloses under a judicial foreclosure versus a trustee sale or if the second loan is a hard money loan and the sale takes place as a trustee's sale.

Loan Application Questions After a Short Sale

Loan applications do not ask questions about a short sale. You may report that you sold your home.

Loan Application Questions After a Foreclosure

You are required to answer the question: "Have you ever had a property foreclosed upon or given a deed-in-lieu thereof in the past 7 years." If the bank sees you have had a foreclosure, your loan most likely will be denied. If you lie, you may be subject to investigation by the FBI for mortgage fraud.

Length of Time to Move After a Short Sale

If you've had a foreclosure notice filed, you may be able to postpone that action while the bank considers your short sale. The wait for short sale approval can be from 2 to 3 months, or longer.

Length of Time to Move After a Foreclosure

Unless prior arrangements have been made, the bank may want you to immediately vacate the property and can commence eviction proceedings.

Taxation After a Short Sale

A personal residence is exempt from mortgage debt relief until the end of 2012 on a federal level. Some states will still tax you unless you qualify for an exemption. An investor is not exempt from mortgage debt relief, subject to certain conditions.

Taxation After a Foreclosure

Same as with a short sale. Except some lenders immediately send out 1099s, even if the owner is exempt.

Click here to view the original article at Homebuying.About.com