Thursday, September 22, 2016

Are You Focused on the Tip of the Iceberg?

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We've all heard the expression, "that is only the tip of the iceberg". Made common when the Titanic met its untimely demise in the frigid North Atlantic, the expression has a commercial real estate application as well.

As occupants of commercial real estate, you focus upon a couple of things - the space and possibly the lease payment or monthly debt service. The space - does the physical space lay out well for your operation? Are there enough private offices for a collaborative work environment? Does the power into the building adequately support all of your machinery and equipment? Can  you afford the monthly payments? If these boxes are darkened, boom! You're golden, right? Maybe not so rapido.

If you focus upon the space and the payments, you only are seeing the "tip" of the iceberg. Akin to the iceberg, more than eighty percent of the transaction's issues are lurking beneath the surface and can destroy your occupancy if not properly anticipated. So what unforeseens are you navigating? Indulge me while I discuss a few.

The ownership of the building. Let's assume your operation requires a substantial capital investment by the owner of the building - you need offices built, a loading door added, or the power upgraded - does the owner have the money to accomplish this for you? If your heart is set on owning the building you're considering and the owner wants only to lease it, how will you overcome this obstacle? Finally, is the owner someone with whom you want to do business? A quick survey of the owner's tenants will tell you much about how the owner operates his properties.

Lease agreement. Generally, commercial real estate leases have "gotcha clauses". Who pays for the roof if it needs replacing? What happens if the operating expenses on the building increase? If your building owner's lender forecloses, is your lease terminated? Does the rent schedule have annual escalators? All of these issues should be fully investigated and understood before you sign on the dotted line.

Market conditions. You've heard owners are motivated these days and the market is dying to give you several months of abated rent. Or, you drive down any industrial street only to be greeted by multiple marketing signs advertising availability - there must be tons of space available, right? How many other occupants are competing to buy or lease your dream space? It's best to know where you stand before opening negotiations with a building owner.

Occupancy requirements. Your plans of opening for operation can be splintered like a ship's hull if you don't consider the city's requirements for your use of the building. A quick on-line search for zoning and allowable uses should give you an idea of any potential hurdles.

Your credit worthiness. All building owners look at tenancy and credit worthiness differently. A private owner may only care timely rent payments. A real estate investment trust may concern itself with your audited financial statement. Regardless, arm yourself with the knowledge of your space's owner and view of credit.

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