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.

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.

Quick note on Lease Review....

I must emphasize that it is very important an attorney review your existing or upcoming lease. Attorney's have a knack for catching the legal wrinkles in a lease and making sure that it is fair and equitable. They are also very clear on the fact that the lease follows the accepted and agreed to Letter of Intent between the Landlord and prospective Tenant.

So, you may be asking why am I bringing this up? A friend shared a story of how she chose to have her lease reviewed by a friend of a friend's friend. This friend reviewed the lease and addressed only the business terms that were already accepted and agreed to. Obviously that did not work well for the landlord and the landlord required the prospective tenant abide to the agreed and accepted business terms. This friend of a friend's friend also was not an attorney and did not address some major legal issues in the lease.

In my experience as a commercial real estate broker, I can read, review and discuss the business terms of the lease. I can also discuss the definitions of the lease and determine if there are red flags that should be legally addressed by the attorney. But I, as a commercial real estate broker, am legally required to refer all legal matters to your attorney. Specifically, in Illinois, Commercial Real Estate Brokers CANNOT advise you legally.

A good commercial real estate broker will guide you in acquiring the real estate that meets your needs. They will refer you to the appropriate real estate attorney. They will work with your attorney to make sure the business terms are reflected appropriately in the forthcoming lease and that there are no surprises.