Friday, October 30, 2015

5 Things a Commercial Real Estate Owner Considers - In a Deal

Image Attribution: www.groups.commonfloor.com
We sat in front of a tenant this morning. She is considering leasing a space and asked us how negotiable the lease rate might be. Our response to her was post worthy, so here goes.

An owner of commercial real estate is concerned about several things in considering a tenancy. His concerns - and the way in which the tenant addresses these concerns - will translate into his willingness to negotiate.

Financial capabilities. An owner wants to receive his rent - above all. The stronger a tenant is financially, and the tenant's willingness to share that financial capability early in the negotiations, will result in an owner that will greet the tenant with open arms. I generally recommend submitting financials along with the initial proposal to lease.

Use of the building. A call center that will overload the parking or an automotive use that will clutter the parking lot with broken down vehicles will not be met as favorably as a marketing firm with few employees or a distributor that will install a few racks in the warehouse. Financial solvency is important, but the use to which the building will be put is equally important.

Abated rent. How much time lapses before the income stream commences? If a tenant is willing to sign a five year lease yet asks for six months of abated rent, the income stream is delayed for six months - and - the concession is a ten percent discount.

Tenant improvements. The less you ask an owner to do the better. I discussed this at length in this post. Generally, owners would prefer to keep the investment in their buildings to a minimum because they rarely get any return - more rent - for their investment. The tenant improvements I reference would exceed a normal refurbishment of paint and carpet.

Length of lease. An owner is less willing to cave on the rent if you are unwilling to commit to a term of lease. Depending upon the size of the building, most owners prefer a three to five year lease commitment from a prospective tenant. Think about it this way. Turnover is expensive for an owner - with abated rent, commissions, tenant improvements, downtime. If the term of lease is long term, this turnover can be avoided.