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

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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.

Use what you have at home #cre. TUESDAY Traffic Tips

Use what you have at home #cre. TUESDAY Traffic Tips. One of my wife's favorite sayings is to "use what we have at home". There is a practical connection with commercial real estate as well. I discuss this and so much more in this week's TUESDAY video tip for #cre.

How Commercial Real Estate Leasing Fees Are Computed and Paid

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One of the biggest differences between commercial real estate agents and our residential brethren is that leasing commercial real estate is a big part of a commercial real estate broker's practice.

 

Generally, residential real estate agents sell houses. Certainly, they can lease houses as well but typically they specialize in selling them.

 

This post will provide an easy guide to how commercial real estate leasing fees are computed and who is responsible for paying them.

 

The fees (leasing commissions) work this way:

• Fees are paid by the owner of the building after the lease is signed.
• The tenant has no obligation to pay the fees. A misconception occurs, frequently, that somehow the rent that the tenant pays is inflated by the amount of the fee. The fee is included in the rent and the rent is determined by the market conditions. I suppose if no commercial real estate brokers existed then the rents would theoretically be cheaper but owners build fees into their rents as a cost of doing business.
• Generally, one half of the fee is paid at the lease signing and the other half is paid once the tenant moves in and starts paying rent.
• The fees are computed based upon the tem of the lease, the rent paid over the term, and the percentage that the owner has agreed to pay. As an example, 20,000 square foot building x $.60 per square foot in rent per month x 60 months =  $720,000 x 6% = $43,200.
• The percentage of the lease consideration - total rent paid over the term of the lease - that the owner pays in fees varies by the product type - office, industrial, retail - and the market conditions that exist - tenant's or owner's market. In other words, if there are more buildings in the market than tenants to fill them, the owner may offer bonus fees to attract a tenant. We have seen this occur in the office space leasing realm in Southern California, recently.
• Generally, the owner’s representative takes half of the fee and the tenant’s representative takes the other half.

Ok, that is it. Simple, right! The hard part is finding a tenant. Oh, well, leave that up to the professionals - your commercial real estate broker.

Five Things to EXPECT from your Commercial Real Estate Tour Guide

Your business is expanding like a prairie fire. Relocation to a larger building is in your immediate future.

You have carefully scoured the on line world and realized that commercial properties are not as readily searchable as their residential counterparts.

Viewing a survey of commercial real estate, that meets your specific needs, requires another approach - reliance upon a commercial real estate professional - a tour guide.

Just what should expect of this commercial real estate tour guide.

In my experience, these five things:

He should meet with you, tour your location, and get an understanding of your needs. Beware of a tour guide that skips this step. Would a doctor prescribe surgery without an examination? Of course not! Viewing buildings without first meeting with you and understanding your move motivation is not life threatening but can waste an awful lot of time. Additionally, in Southern California, vacant buildings are rare. There might not be many for you to look at. Your best option might be to remain in your present building. A commercial real estate professional can counsel you on this.

A list of buildings, meeting your needs, should be provided soon after your meeting. Generally, this list will be tailored around your specific needs and will be a list of ALL available buildings - not simply buildings listed by your tour guide.

A request for you to pare the list to 6-10 buildings that you wish to see. You can best pare the list based upon the criteria, location, size range, exterior appearance, etc. There are so many variables in commercial real estate locations - amount of office space, warehouse clear height, loading doors, electrical service, outside storage, etc. Don't be discouraged if the PERFECT building isn't on the list.

A tour date will be scheduled. Now your tour guide must go to work and figure out which of the 6-10 are actually available and which ones have been leased or sold. This is the time when your tour guide will de-brief with his owner rep counterpart and determine if the availability is a match for you. The first time your tour guide sees the building should not be with you. In other words, he should preview the building and make sure all is as represented and that there are no lingering questions to answer such as - what is all of that inventory in the warehouse? or, the lockbox is not where it is supposed to be. The information should be bound into a tour book for you with brochures and a map.

The tour is conducted. From the list of 6-10, generally 3-6 will be viewed - because some will no longer be available, others are occupied and not vacant until after you need to move, still others may have the wrong deal structure. You should employ a rating system for all of the buildings that you tour and take careful notes on the plusses and minuses of each one. If you look at more than six buildings, you lose track of what you have seen and the tour becomes a blur. Frequently, the tour will raise some follow up questions. Your tour guide should busy himself and get your questions answered quickly so that you can make a decision.

INSIST upon THIS when MARKETING your Commercial Real Estate

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The commercial building that you own has sprung a leak - AKA the faithful occupant has decided to vacate and leave you with an empty building.

Frankly, this is not occurring much these days as ninety eight of every one hundred industrial buildings are occupied in Southern California.

However, certain circumstances cause a vacancy - the business outgrows the building, is acquired, goes broke, or realizes that the building is now too big for their operation.

If you are fortunate enough to receive some notice from the occupant that a vacancy is imminent, good for you! Now, let's use that time wisely in securing a tenant or buyer for your fallow commercial real estate.

Generally, you will engage a commercial real estate professional to market your vacancy. His services will include preparing professional collateral such as brochures website, and postcards. He will install an available sign. Your vacancy will be published in all of the multiple listing services. She will broadcast the availability through conventional means such as newspaper ads, mailers, cold calling, and broker open houses. If your commercial broker is really creative, a virtual video tour of the property will be produced and social media marketed.

Great! Now you just sit back and wait for your broker to call you with a multitude of offers, right? Very rarely, unfortunately. The one thing that will quell an active, well priced, highly sought after size ranged building is the showing protocol. In other words, how will active occupants and their commercial real estate representatives tour your property?

If the property is vacant, you have a couple of options. Option one is that your broker can install a lockbox on your building and allow a free flow of tours. Option two is that your broker is required to be present at all showings. 

But, what if the building is occupied during the marketing process? You also have a couple of ways to accommodate interested parties. You can require your broker to guide the tours or you can allow interested parties to walk through un-escorted.

So vacant or occupied, should you require your broker to be present during showings? I could wax forever on the pros and cons of each approach but I believe you should insist that your broker guide the tours of the property for these three reasons.

Limit the occupant disruption. If your building will be occupied during the marketing, a great deal of  occupant disruption can be avoided by requiring that the tours be guided. Remember, the occupant has paid you rent for a period of time. Parading folks through the space un-bridled without proper notice and consideration is worth avoiding.

Control the flow of information. If the tours are guided, the tour guide (your commercial real estate broker) can insure that all parties have a proper brochure, understand your motivation - whether you want to lease or sell the building, and can make sure that all of the potential occupant's questions are answered and that a course of follow up is established.

Qualifying. If your representative is present during the tours, she gets a first hand feel for the occupant's interest, use, financial capability, competition, and a general "gut feel" for the viability of your space.

Additionally, there is no way to control the access of a lock-boxed vacant building. Your broker may provide the code to a fellow broker, assuming that the fellow broker will guide his client through. In reality, the fellow broker might simply give his client the lockbox code and you have lost control of the access.

Relocating a HOME BASED Business to Commercial Real Estate

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Many, many wonderful companies were started with two things - a great idea and a corner in someone's basement, garage, or living room. Disney, Microsoft, Apple, Hewlett Packard, and others, brain children of their founders, today employ thousands of people. None of these companies existed prior to the middle of the last century and ALL are truly a product of American ingenuity.

You may be reading this post in your home office while taking a break from working in your home based business. Your business now consumes your living room for its information technology department, dining room for sales and accounting, upstairs bedroom for procurement, and the garage for warehouse storage, shipping and receiving. Next door neighbors believe that FedEx is next of kin because their truck is in front of your house daily. You are wondering if moving from home is a wise decision.

The tipping point, for most small businesses that move out of their house, occurs around one of two circumstances - they hire employees or they receive customers. Both are clunky to accomplish from home. I have counseled countless small businesses faced with these situations.  I am consistent in advising them to remain at home as long as you can. Avoid the overhead. Get to the point of practically tripping over yourself, your family and pets before launching into an office suite or industrial building. If you have no employees and don't receive customers, this move can be postponed indefinitely. If you MUST move, this post provides advice on issues to consider as you move your business out of the house and into a commercial real estate location.

Cost considerations. Your business occupies your bedroom. If you own your house with no mortgage, you have little overhead for the business. Once you leave home, you will pay a commercial landlord rent for the location. In addition to rent, your commercial real estate location will require utilities (electrical, phone, internet, gas, water, trash, janitorial, etc.). You pay these costs at home already. Now, you will duplicate your utility costs. Your commercial landlord will require liability and contents insurance and to be named as the additional insured.  This insurance requirement exceeds what your business needs at home. Most commercial landlords will require a lease term of one year or more - thus your business is committed for this amount of rent. Depending upon the age and financial capabilities of your business, you may be asked to personally guarantee the lease obligation.

Permitting. The municipality where the business locates, will require occupancy permits. Chances are you have a business license as a home based business but now you will need a permit to operate your business from a commercial location. If the operation involves a manufacturing process, plan on this taking some time to accomplish.

Location considerations. Folks believe that the three rules in real estate are location, location, location. I would add a fourth - where does the boss live - that is you! If you move your business to an off site location, working until 2 AM is not as easy as staying up past your bedtime at home. You cannot roll out of bed, in your pajamas, and go to work in the spare bedroom anymore. You must rise, dress, drive, and potentially greet employees. Find a location as close to home as possible. You will save on the commute time.

To lease or purchase. I generally would advise that you lease and do so for as short a period as possible. You don't want to commit yourself to a location that you outgrow in three months or discover that moving was a huge mistake and you should retrench to the garage. Buying a location makes a great deal of sense at some point in a businesses tenure, but not first thing. Lease a spot, get the business stable, make some money, hire some employees, make some more money, and look to buy down the road. I discussed this in detail in this post.