During my 30 years in the commercial real estate business, I’ve seen numerous roadblocks and obstacles business owners face when leasing or buying
commercial real estate.
Major real estate decisions are typically made every three to five years, which is the length of most commercial leases, so most tenants are not familiar with current market conditions. Databases with up-to-date and reliable information detailing commercial vacancies are not readily available to the public. So where do you start the process? Here are some practical guidelines for business owners to consider when leasing or buying commercial real estate.
1. Commercial real estate is an adversarial process:
Real estate agents who list properties work for landlords or developers, whose goals, wants and needs are the opposite of yours. As de facto employees of property owners, listing agents have a fiduciary duty to protect the interests of their clients. This applies equally to property managers, who are the day-to-day eyes and ears of the landlord. Be aware of the motivations of friends and friendly agents.
2. Never pay the asking price: “Asking price” is to commercial real estate what “sticker price” is to automobiles – merely the negotiation’s starting point. The real questions are: “How low can the price go?” and “What incentives and concessions can the tenant or buyer reasonably negotiate?”
3. Cast a wide net: Making fully informed decisions begins with knowledge about every suitable space available, regardless of who lists them, and which property owners have the most urgent needs to sell or lease. Don’t be influenced by agents who limit your choices to just their listings and use soft words such as “remarkable,” “exciting,” “awesome” and “amazing” to describe commercial property. Make your decisions based on the five C’s: condition, concessions, comparables, convenience and (overall) cost.
4. Mum’s the word: Refrain from discussing your real estate needs and the properties being considered with anyone not directly involved in your decision-making group. The less the landlord, its agents and property managers know about your circumstances and feelings the better off you will be. Generally, it’s the seemingly innocent, innocuous disclosures that adversely affect your negotiating leverage the most.
5. Play hard-to-get: Property owners routinely negotiate with multiple tenants or buyers on the same space or property. Therefore, you should identify several suitable properties and simultaneously conduct good-faith negotiations on each. Let each listing agent know you have several viable choices. Nothing whets their appetite more than the prospect of losing your revenue. Remember, when negotiating for anything, perception is reality.
6. Don’t overpay for “free” advice: Real estate transactions typically generate commissions that are split between the agents representing each party. Even though the property owner writes the commission check, it’s the tenant or buyer who ultimately pays the tab. Be certain you get value from your side of the commission by selecting an experienced, independent and unbiased representative – someone who works exclusively for you. After all, you’re paying for it.
7. Beware of undisclosed conflicts of interest: Many agents do their best to persuade tenants and buyers that one agent, or multiple agents from the same company, can effectively represent the interests of both parties in the same transaction. This practice is known as a “dual agency” and always favors the property owner … and the agent who collects both sides of the commission.
8. Reduce it to writing: By “it” I mean every discussion, agreement, verbal promise, representation and warranty. Listing agents and property owners have been known to have selective amnesia after a contract is signed. Make certain everything of importance is included in the lease or purchase document.
9. Use caution when outsourcing: When interviewing potential advisors, discuss possible conflicts of interest and ask for the qualifications of the people who will do the actual work. Allowing your search and negotiations to be delegated to a junior member of a team or used as on-the-job training for a freshly minted associate could cost you thousands of dollars in additional rent and operating costs over the lease term.
10. Choose your advisor carefully: Your choice of advisors determines which properties you are shown and how much you will pay. Agents for property owners focus on getting the highest prices. But your goal is to pay the lowest amount possible.
Seek out an expert with significant experience in solving your problems. Select an advisor with the CCIM designation, the gold standard of certifications in the commercial real estate industry. While there are numerous other “alphabet soup” designations, none require the level of competency, experience, education and ethical standards of a CCIM (Certified Commercial Investment Member).
Closing Observations: Leasing or buying commercial real estate can be hazardous to your wealth – so plan ahead, stay within your budget, make objective decisions, ask questions until you have a thorough understanding of all ramifications and hire an advisor who will protect your interests and those of your business.
Stephen a. Cross is the owner of Cross Commercial realty advisors in Scottsdale, Arizona. Mr. Cross represents business owners, healthcare professionals, corporate executives, organizations and municipalities in the lease and purchase of commercial real estate. Please contact him at 480-998-7998 or [email protected].
