A Commercial Real Estate Buyer Doesn't Care!

Akin to an automobile with a DVD player - a commercial building with certain features may NOT appeal to a buyer.

In fact they don't care, won't pay for the renovation - and maybe worse - will exclude your building from consideration if the betterment exists.

Hmmm, weird you say. I spent a lot of money installing those solar panels in my parking lot. Who cares if the equipment consumes ten spaces - my employees carpool or uber to work. Congratulations! You invested in an upgrade that made your building less desirable - even though you believed the value was enhanced.

So, with that preamble - what other improvements do buyers shun and to which sellers cling - with the expectation of a higher price?

Freeway frontage. Not an improvement per se, but an attribute with which many owners ascribe value. Unless your buyer wants looks from 225,000 cars per day, he will be unwilling to pay. In some cases, freeway visibility is a negative because of noise, debris, and transients that loiter. An exception to this rule is the retailer whose business can benefit from the exposure. Most others don't care.

Signalized corner. Similar to freeway visibility, a signalized corner causes traffic to pause in front of your location - which means your building is on a busy street. Great! but if your business isn't dependent upon destination customers, you just as soon they whisk by. An exception - which could bolster worth - is a property with a higher and better use - i.e. a residential conversion in the future. Now, the signalized intersection creates some benefit and can generate more dollars.

Amount of office space within an industrial building. The amount of office space within a building - especially an industrial building where companies make and ship things - is the biggest merit disconnect between a seller and a buyer. Adding office space to an industrial building is a costly adventure - permitting, construction, timing, new office furniture, etc. - in some cases $75-$100 per square foot. When a seller shells out that amount of money, he expects a return. Unfortunately, rarely does the next guy see any benefit. The layout is wrong, the finishes are outdated, too much shop space is consumed, a second story was created with no elevator, and so on. If a buyer doesn't need the excess office space, he must pay to have it removed or move on to the next building without the problem. Certainly the exception is the black swan that can walk in and use everything without any changes - he will see the benefits and gladly pay.

Assumable financing. Money is cheap and plentiful these days. Lenders are begging qualified folks to borrow. In many cases, a buyer can finance 90% of the purchase at interest rates in the fours. Enter assumable debt. Chances are the assumable debt was written at interest rates higher than present and for less than 90% of the sale price. Thus, a buyer is better served getting a new loan. An exception would be an owner carried loan - especially if the buyer can avoid the costs of an appraisal and loan origination.

5 Considerations When Leasing Commercial Real Estate

I recently authored a post entitled Gotcha Clauses in a Commercial Lease. Wherein, I discussed those nasty sentences in that twelve page tome you were asked to sign - watch out! Today, I'll take a step back and discuss the factors you should consider BEFORE you are ready to ink that commercial real estate lease.

The location. Raise your hand if you have never heard the three most important factors in real estate - location, location, location! Right? But why? Here is why - in no particular order. Your customers may need to find you. May, because some business have zero walk-in or destination customers - others rely upon foot traffic. Access to qualified employees is important for the health of your business. Trucks must deliver your raw materials and transport your finished goods. Employee retention is critical - if you locate out of state, how many will follow? Proximity to your suppliers can save you money. Where do you live? After all, you are the boss. So, location does matter!

The term of the lease. Two common errors I see occupants make are committing to a long term lease when times are frothy or a short term lease when the market is crippled. Business activity fuels a business owner's sense of well being - business is great so I will commit to a ten year lease. Little thought is given to where we are in the cycle, that lease rates are at their all time high, and you would be better served with a five year lease with a five year option. The opposite is true when business bosses are uncertain. Even though landlords are handing out goodies - many opt for a shorter term commitment - three years or fewer.

The leasing entity. Any owner of commercial real estate will require tax returns and financial statements from the corporation, individuals, LLC, or partnership signing the lease. Great! Got those. However, I suggest being preemptive by having your formation documents, information on your previous landlord, bank statements, and history of your company at the ready. Also, give some thought to the reason for the move and why you chose this location. I've witnessed this "story" as the determinant for a tenancy.

The type of owner. A pension fund advisor from New York will view your tenancy differently than a private investor who owns two buildings in Anaheim - and not always more discerning. Speaking "owner" will cause the lease negotiation to proceed swimmingly.

The vibe. How quickly did you receive a response to your lease offer? What additional information were you required to provide from your initial offering package? What do other tenants in the building have to say about the owner - yes! you should talk to a few of them. The answers to these questions will provide a glimpse of your future as a tenant.