The Business Owner’s Upside to a Down Economy: Commercial Real Estate

I just read in the Business Ledger that business owners who lease or buy commercial property can leverage the economy to improve their #1 expense line item after payroll. The bottom line is that the tenant or buyer has an advantage given the turmoil the landlord/seller is experiencing. Landlords are not receiving rent and losing tenants to bankruptcy. Sellers are seeing their property values drop considerably and are looking to short-sale prior to foreclosure.

Seemingly, there is hope for the tenant and buyer. I have always been a proponent of having the business owner’s rights represented. And in today’s economy, appropriate commercial real estate representation is crucial. From the tenant’s vantage point, the lease agreement can make or break a business. There are clauses within every lease, such as termination options (the ability to terminate a lease prior to the lease end date), holdover clauses (lease ends, rent increases at the option of the landlord until a renewal lease is set in place), that the typical business owner may only glance over or overlook. It is the responsibility of the tenant rep to make sure the interests of the business owner are represented and those items negotiated in order to protect the interest of the tenant.

Commercial real estate buyers are looking for a sound analysis of the market. It is the responsibility of the commercial real estate broker to bring to the buyer’s attention the vacancy rates and more importantly the net absorption rate of space. In other words, how much space is available and how quickly can it get filled; this is typically a direct relationship to the asking rent of the project.

In today’s economy, the savvy business owner understands that knowledge is crucial in surviving this recession; and the knowledgeable commercial real estate broker is an invaluable asset as part of the business owner’s team.

Collective Bargaining

As a small business owner, I believe its very important to focus in on the economies of scale, especially when it comes to office space. Let's say you are a company of 3 people that requires two offices, large work area, small reception and a coffee bar (would be a nice perk). At the same time, you know of one to three more people that would like to become your office mates.

In this situation collective bargaining may be a great way to go. You are sharing space without paying a premium to the executive suite centers. By going to larger space you have an opportunity to share come area expenses, copy machine, phones, fax, etc.

Nevertheless, one has to pay attention to the structure of the lease. Is one company going to sign and have separate agreements with the other office mates; or do all sign the lease? The situation can become tricky and should be worked through with someone that has knowledge in this area of lease negotiation.

Tenant / Buyer Advisor takes care your real estate needs…..

In real estate today, many sellers have brokers that represent their interests. It’s important for the business owner searching for real estate to realize that when calling to find out about property, the real estate broker providing the information is aligned with the seller, not the business owner.

Commercial real estate as a general rule has many facets to it. If you are looking to open up a restaurant, studio or office are you going to find the perfect place where all you have to do is “plug and play”. Probably not. The reality is that if you are leasing the space there are items to consider such as tenant improvements, option to renew “at market price”, lease language like “trade fixtures”. Do you have all the aspects of this type of transaction down pat?

It doesn’t matter what kind of business you operate, the real estate decisions you make should align with your business goals. Do yourself a favor and work with a real estate broker that will look out for your interests.

Steps in Commercial Real Estate Transaction

Commercial Real Estate Transactions can be quite intense. There are a set of steps that have to take place, no matter how large or small the transaction (see chart). Furthermore, with a qualified and dedicated commercial real estate broker on your side, the time frame is a minimum of six months from begining the search to move-in date.

Seller's not willing to pay the commission?????

OK. So you've been working with a good commercial real estate broker. You trust them. You seem to have a good handle on real estate and find an investment where the seller is not willing to pay your broker's commission. What to do?

Remember, everything is negotiable, including who pays your broker's commission. It's not something to run from. It's just the sellers first negotiating tactic. So negotiate. Whatever the local commission rate is for your area, the seller's broker should split it with the buyer's broker.

Nevertheless, there may be an absolute refusal on part of the seller. Well, what does that mean to you? If you have become real estate savy, you may do well on your own. Yet, the average business owner is focused on their business, not the business of real estate.

As such, you might consider paying for your broker's real estate expertise by paying their commission rate. It's important to realize your broker has the ability to analyze not only your particular investment, but the local market as well. Analyzing available options, understanding the market and economic outlook will support negotiating the best possible transaction that brings value to you, the business owner.

How to marry office image and functionality?

I find that many business owners I meet are challenged in finding the "perfect" space. Typically location trumps all other considerations. Nevertheless understanding how your clients view your business is critical in the decision making process. If you are a consulting company with the majority of work done at the client site, then the image of your office may not be as important as the amenities such as hotels and restaurants. Yet, office image can be the deciding factor for clients when comparing two different companies of similar caliber. So, what's the secret? Frankly, it's having a conversation with someone who is trained to listen to your real estate concerns. This person's focus is to tease out how your business works and to match it with the appropriate real estate. So don't be scared to pick up the phone and talk to your local commercial real estate broker. They will definately guide you in the right direction.