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Advice for businesses on leasing or buying commercial real estate

Lynn Drake President Compass Commercial, LLC ITRA Global
Advice for businesses on leasing or buying commercial real estate

A good rule of thumb in business is that a deal isn’t always a deal. This is especially true with commercial real estate, an area where business owners may only have limited knowledge or experience.

Remember, that rent is only part of the financial commitment you make when leasing a property. There are a multitude of other variables, as well as standard market practices and items that are specific to a geographic area, that will affect your bottom line cost when leasing.

If you are looking for a new commercial space on your own, here are some dos and don’ts.


Do

Do figure out how much space you need

Determine how many square feet and the number of offices you will need before you start looking for space.

Every business has a different culture. Some businesses want everyone in an open work environment while others want management in private offices. To determine how much space is needed figure out what positions should be in cube and which should be in offices. Offices and cubes come in different sizes so that should also be determined. Then one needs to consider size and necessity of the following rooms: conference rooms, kitchen, storage, computer rooms etc. Add up the size of all the items then multiply by a factor 1.4 to account for hallways etc. This will give you an idea of how much space will be needed.

Real estate is expensive to rent. You don’t want to have too much space. Conversely if you lease a space that is too small it will limit your businesses ability to grow.

A lot of thought and attention should go into thinking through these questions prior to starting a site search for space.

Do check the building’s zoning restrictions

Make sure the building you want to lease is zoned correctly for your use. For instance, medical tenants need spaces with a higher density of parking. Don’t try and put a retail business in a home unless it has already gotten zoning approval.

A cool trend is to place retail tenants in industrial space. However, cities dictate how many parking spaces are required for retail. Most industrial spaces won’t have enough space. So you may have to get permission from the city to locate the business there. Think twice about this as you may have issues with customers coming to your space if you don’t have enough parking. You can either check with the city on the zoning or ask the building owner.

Making an error in zoning can be costly. A few years ago in Troy, MI a landlord built out space for a medical tenant. Neither the tenant nor the landlord checked with the city on zoning. The building where the Doctor was trying to lease wasn’t zoned for medical. The city didn’t allow the Doctor to move into the space. I don’t know who paid for this mistake, but it had to be a several hundred thousand dollar mistake.

Do check around for prices

Find true comparable sales pricing by checking with the city what other buildings with similar specifications sold for. Do not use comparable sales that are over a year old.

If you are buying a building go to the local city hall assessor’s department where they keep information on sold buildings. Records of all sales are recorded there. Identify all sales of similar buildings. You should gather the address, square footage and price sold. Don’t bother with any sales data over a year old. Drive by the buildings to make sure they are really comparable. For instance, if you are buying an older building, a new building of similar size probably shouldn’t be a used as a comparable.
With the recession behind us now, offers significantly below market value will be ignored. If you make an offer on a building and it is above market value for the building you won’t get a loan. You will have wasted a lot of time and money with inspections etc. for nothing. Make sure you do your homework before making any offers.

Do check for comparable incentives

If you are going to lease a building find out what comparable buildings lease for and how much money the landlord gave for incentives.

If you want to lease space you can hire a commercial real estate agent to help you. If you are a do it yourself person you will need to use LoopNet or online programs that provide rental information in your area. Many brokerage firms offer market studies as well. When looking for space always look at several buildings. Ask the landlords to quote you a rate for the space identifying all the costs in addition to rent along with any improvements. Office space users can expect a landlord to do some build out of the space, paint and carpet with a 5 year lease. Retail comes simply with 4 walls and the tenant is left to complete the improvements. For industrial space the landlord will usually do a minimal build out. Every market in the USA is a bit different. In some cities, the landlords will give you a move allowance; in other cities they might provide free rent. Ask other business owners about the types of incentives they negotiated so you understand what is standard in your city. Before signing any lease use a real estate attorney. They could save you a substantial amount of money by protecting your rights.

Do get quotes in writing

Make sure your prospective landlord gives you quotes in writing detailing all costs and improvements.

Commercial real estate is complex. An office lease charges base rent plus utilities and increases in the cost to manage the building. Some landlords provide janitorial and some don’t. Just asking how much the rent is per square foot is not enough. You need to know what other fees you are responsible for. In California they quote a rental rate by the month. So they might tell you the rent is $2.50/s.f. when it is really $30/s.f. To calculate the cost of base rent take the cost per square foot times the rentable square footage. This will give you the annual cost, then divide by 12 to get monthly fee.

Let’s say you are leasing 5,000 square feet and the rent is $20/sqft plus electric at $1.25/sqft with no additional charges. 20 + 1.25= 21.25 x 5,000=$106,250 in year one.

I have had people who didn’t understand what the costs were and were being evicted within 90 days because they leased a retail space not understanding the costs. In retail the tenant pays for everything.

Here is an example: Rent $14.00/sqft Utilities and Janitorial $3.50 Charges for building management and maintenance $6.00/sqft which means the entire cost is $23.50/sqft


Don't

Do not forget to be aware of who you are working with

Don’t expect the person whose name is on the for sale or lease sign to represent you. Their job is to get you to pay the most rent possible.

The person who is listed on the for sale or lease sign works strictly for the landlord. Their job is to get you to pay the most rent possible with few if any concessions from the landlord. If you hire a company that does strictly tenant representation, then their job is to get you the best possible deal. In most states commercial agents do not have to identify who they work for so be aware of who you are working with.

Do not think that posted rates reflect what your deal should be

If you have access to a commercial MLS do not make the assumption the posted rates reflect what your deal should be. There are many variables in every transaction.
As discussed above there can be many additional costs to a lease. It is unusual to find a lease that includes everything.

One has to confirm the true costs for each building. Even in a single market the landlords can charge differently. If the MLS or LoopNet states the asking rate is $20 per square foot you need to call and find out what additional fees are being charged.

In many markets landlords will give strong tenants incentives by offering free rent. None of this information is available in the MLS or LoopNet. If you want to save time hire a tenant representative to help you figure out the true costs. You don’t want to be the one who didn’t ask the right questions and then have a huge bill to pay.

Do not forget about other associated costs

Make sure you understand what other costs you as a tenant in a transaction are responsible for. Who pays for janitorial, taxes, insurance, ground maintenance, etc? There can be many hidden costs most people don’t understand. For instance, did you know a n/n/n building means the tenant pays for everything?

Do not forget to ensure the lease is correct

Don’t assume that what you negotiated as part of your agreement is in the lease or purchase agreement. Things get missed and verbal agreements won’t matter once the lease is signed. As stated before, get everything in writing and understand every part of the lease before signing anything.

Do not forget to read every line in a lease or purchase agreement

Don’t forget that unlike residential real estate, there are no laws to protect your rights. Make sure you read every line in the lease or purchase agreement and understand what it means. If you have to have the lease reviewed by a third party, then don’t hesitate to do so.


Summary
Jumping cartoon

Remember to look before you leap. If you want to get the very best deal in town, go out and get bids for similar space in the same city or similar areas. Base your bid on square footage, multi-year contract, incentives and build-out. If you’d rather concentrate on your core business and get a professional who understands the jargon, hire a broker whose firm only represents tenants/buyers. Most people don’t realize that a typical representative will spend 40 to 60 hours on the research and financial analysis.


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Lynn DrakePresident

Lynn Drake's status is well known in the industry: She's the commercial realtor focused on maintaining "true north" for her corporate clients. It's a reputation built on 20-plus years of commercial real estate experience and expertise in corpora...

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