Residential vs Commercial Real Estate Agents...5 Differences



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Unless you own a business that has leased or sold commercial real estate, you have purchased or leased commercial real estate for your own account, or you work for a company that has leased or purchased commercial real estate, chances are you have never dealt with a commercial real estate broker.

Most of us have dealt with a residential real estate agent - especially if we have bought or sold a house. The two professions are similar but dramatically different - all at the same time!

This post was written to highlight the differences between residential and commercial real estate agents.

Agents, brokers, and Realtors. Many times these titles are used interchangeably but each has its own meaning. Generally, all real estate practitioners - commercial or residential - are agents. All with the agent designation have passed the California agent's exam and currently hold a license through the California Bureau of Real Estate. California law requires an agent to operate beneath a broker. A broker has passed the California broker's exam and may or may not have agents beneath her. I, as an example, am a broker but have no agents reporting to me. A realtor is a broker or agent that is a member of the National Association of Realtors. Typically, commercial agents are referred to as brokers - regardless of their licensing - and residential agents are referred to as Realtors. In some cases, commercial agents or brokers are members of the National Association of Realtors, but commercial agents are not commonly referred to as Realtors.

Leasing and selling. Commercial real estate brokers can make their living leasing or selling commercial real estate. Most in the biz complete several lease and sale deals every year. Residential Realtors generally don't lease houses - they sell them.

Disclosures. Believe it or not - many, many more disclosures are required in a residential transaction than in a commercial real estate transaction. I believe the reason may be the sophistication or lack of sophistication of the buyer in a home purchase vs. a commercial lease or purchase.

Licensing. Anyone with a California real estate agent's license may transact commercial or residential deals. In other words, no special license - other than an agent's license - is required to sell commercial real estate.

Specialties. Commercial real estate specialties abound - industrial, office, retail, land, income properties, multi family. Additional specialization occurs in the area of owner or occupant representation - in many cases, commercial real estate brokers ONLY represent occupants - not owners. Finally, specialization can occur for specific industries - such as companies that operate distribution warehouses in the Southwestern United States. Conversely, Realtors sell houses. Realtor's specialization occurs in specific neighborhood expertise, luxury homes, or buyer or seller representation.

Should You AUCTION your Commercial Real Estate?

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Recently, I was approached by a former Lee & Associates broker who now hangs his hat with Auction.com.

When the auction platform first emerged in the early 2000's, most of the commercial real estate auction volume was from banks that had foreclosed on properties and wanted to quickly liquidate the assets in bulk. As the flood of foreclosed properties has become a trickle, auctioneers, such as Auction.com have shifted their sights to sellers who have equity and want to sell vs. having to sell.

My former colleague wanted to assess my interest in the platform. I have now referred two potential transactions to him and have become conversant with the concept. What follows is a review of the mechanics of auctioning your commercial real estate.

Factors determining success. Your success in auctioning your commercial real estate will depend upon the type of commercial real estate you are auctioning and your pricing expectations. If you own a vacant parcel of land in Barstow, chances are slim that the auction process will generate enough buyer interest. Conversely, if you own a partially leased office building in Costa Mesa, the auction platform will focus buyer interest upon your building and in many cases generate a higher price than otherwise would be achieved by conventional marketing means. The auction platform allows you to set a reserve price - a minimum price at which you are willing to sell.

The process. The auction company will assess the market value of the commercial real estate based upon a quick review of comparable sales and comparable availabilities. A value range will be given to the potential seller. If this range meets with the seller's pricing expectations, a reserve will be determined, and the auction company will be engaged to conduct the auction. The auction company fronts the cost of an environmental report and a property condition assessment. Auctions are conducted every two weeks on Wednesdays. The marketing process is 58 days, the auction two days, and the close 30 days thereafter. The entire process, soup to nuts, takes 90 days. The seller pays nothing to the auction company. The auction company seeks its compensation from the buyer - generally 5% of the sale price. Interested parties are directed to a document vault where all of the due diligence is housed - environmental reports, property condition assessment, leases, preliminary title report, etc. Interested parties are required to sign a confidentiality agreement. Interested parties that become bidders are required to post a bidding deposit - generally $10,000 that is applicable to the purchase price if they are the winning bidder. Bidders agree to execute a purchase and sale agreement the day they become the winning bidder and to close in thirty days. At the point the winning bidder signs a purchase and sale agreement, the winning bidder has money at risk and cannot walk away without penalty.

My take, positives. The auction process focuses buyer interest very quickly. Engaging a good auction company will expose your commercial real estate globally - to as many buyers possible. Normally, marketing occurs, a buyer or two is procured, an escrow is created and you wait with crossed fingers while the buyer figures out if he can buy the building or if he wants to buy the building. Auctioning your commercial real estate removes the if and only delivers qualified buyers that can and must perform if they win the bid. In effect the old model of selling commercial real estate is reversed - all of the investigation occurs before an escrow for the purchase is created. The buyer is committed.

My take, negatives. Auctioning is expensive. The buyer pays a 5% fee to the auction company and the seller normally engages representation for showings, tours, and market expertise - and pays another 3-4%. Currently, there is limited allowance for a buyer to secure financing. A seller can sell the property out of auction, but if he does, the buyer fee of 5% is paid by the seller - a fairly harsh cancellation penalty.

Conclusion. Auctioning is something to consider if you are selling a partially or fully leased commercial building. Your commercial real estate will be exposed to the broadest market. If your goal is to sell your commercial real estate to an owner occupant, auctioning is not the best avenue - currently. But, stay tuned. The process will evolve and is worthy of a look in the future.

How to Choose a Commercial Real Estate Broker?

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Your commercial real estate will soon be vacant and you have decided that your best shot at getting your building leased or sold quickly is to list the building with a commercial real estate broker. So, what factors should you consider when making your choice?

Global, national, regional, or local firm. The nature of your commercial real estate will largely determine your need for a global, national, regional,  or local firm. Specifically, if the marketing of your CRE can benefit from exposure in Sri Lanka or Abu Dhabi, a global firm can provide this. Conversely, if your building will appeal to the neighbor, a local firm could be a great choice. A nice compromise would be to choose a national or a regional firm. I have the benefit of working with a national firm. We have 54 offices around the US. However, our knowledge of the local commercial real estate landscape is as good as any local firm - because we started as a local firm and have grown our platform from that basis - strong local knowledge.

Background, tenure, experience. Length of time in the business is not the only factor to consider but it certainly is a key component of choosing the right representative. Certain firms encourage their agents to form teams of several practitioners. Other firms are a collection of sole operators. Generally, the teams are comprised of a senior "rain maker" and one of more junior associates. Two key considerations of hiring a team vs. a sole operator - make sure you know who will be the single point of contact within the team. Often, a firm that interviews with a team will have an impressive array of seasoned brokers. You may be drawn to a specific member of the team. But what if that member pawns you off on a junior associate? If you are considering hiring an sole operator within a firm to market your commercial real estate, make sure the individual has sufficient support to handle property inquiries, marketing, and showings.

Knowledge of your market. Does the team or individual that you are considering hiring understand your specific market. You don't want to engage a firm that specializes in multi family investments if your commercial real estate is a single tenant industrial building. Additionally, if your building is a 50,000 square foot office building in Orange County, California, how conversant are they on activity within that specific submarket? Can they talk about deals that have transacted, competitive spaces that are available, and potential occupants that are looking? If the answer to these questions is yes, chances are you are considering the correct representatives.

Complimentary vs. competitive listings. There is great benefit to you that your representative has control of other complimentary available buildings in the market. Complimentary listings are those larger or smaller than yours. Listings typically have signs (both physically and digitally) advertising their availability. These signs will generate inquiries from potential occupants. It is important that your representative be well represented in the market so that these inquiries will pour in. I would caution against hiring a broker with many competitive listings to yours, however. If an agent is marketing four buildings of similar size, amenities, and price - to whom does his loyalty lie?

Does she play nicely with others. Last on the list, but first in my opinion. Your commercial real estate representative is tasked with marketing a large portion of your net worth - a piece of you! Whomever you choose should wake up everyday determined to find an occupant for your building. Remember, they are your gatekeeper to the commercial real estate market - the occupants that inquire, the active brokers who represent suitable occupants, and occupants that operate in a similar industry or that are located close buy. If you can't imagine the person representing your interests - don't hire them! Ask for the names of their three biggest competitors and call them. See what their competition has to say. This can speak volumes about the person you are hiring.

 

What Tenant Improvements Will an Owner of Commercial Real Estate Consider

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Recently, I have encountered two occasions of owner funded tenant improvements in an existing industrial building - or I should say a request for owner funded tenant improvements. I believe the topic is post worthy as the question arises quite frequently.

Definition: According to the Certified Commercial Investment Membership Institute "CCIM", the real estate definition of leasehold improvements, also known as tenant improvements (TI), is "the customized alterations a building owner makes to rental space as part of a lease agreement, in order to configure the space for the needs of that particular tenant."

I am limiting the discussion in this post to an industrial space that has been previously occupied vs. an office space that is in shell (no walls, ceilings, or flooring) condition.

An owner's decision to fund tenant improvements depends upon the following three factors:

Cost: An owner will generally compute the total consideration of the lease by multiplying the monthly rent (including contractual increases throughout the term) by the term of the lease. This amount is the gross amount of revenue that the owner will receive from the tenant over the term of the lease. Based upon this figure, an owner may be willing to invest a small percentage of the future income to secure a tenant. Items such as painting and carpeting the office areas and possibly painting the warehouse walls are considered necessary refurbishment to make the space lease ready. Tenant improvements generally refer to something over and above normal turnover refurbishment. So, as an example, if a tenant requested that new lighting be installed in the warehouse at a cost of $10,000 and the total consideration of the lease was $1,000,000, chances are great (assuming the factors below are also in line) that the owner would fund this request. However, if the tenant requested that the power service be ungraded at a cost of $100,000 and the lease consideration was $750,000, an arm wrestling match would ensue.

Available Resources: AKA, the amount of cash that an owner has on hand to fund tenant improvements. Generally, an owner will build up a tenant improvement "slush fund" from the rents received to handle future refurbishment costs (paint, carpet, etc.). Most commercial real estate lenders will require a reserve for tenant improvements so that the owner won't spend all of the rents and jeopardize his ability to rent the space if the tenant vacates. If an owner is cash poor and a tenant requests a tenant improvement, an owner may ask the tenant to pay for the improvement and offset the cost of the improvement by an amount of free rent.

Nature of the Improvements: With the definition above, the word "customized" jumped out at me. Customized connotes some special purpose improvement that will not find appeal with the next tenant in the space. This is one of the criteria from which an owner bases his decision to pay for an improvement. The last thing an owner wants to do is to pay for an improvement that must be removed in order to lease the space the next go around. Generally, additional office space falls into this category. Most industrial tenants don't require a great percentage of office space compared to warehouse space. Therefore, if a building is "over improved" with too much office space, the building could be un-marketable. The opposite would be true of an improvement in the truck loading. If a tenant requested that truck hi loading be installed, the value would be universal and the improvement investment a wise one.