Podcast 03 - Tip Tuesday - Commercial Real Estate 101
You may be thinking about starting a business, but completely exhausted, just thinking about how to start planning and looking for real estate. I interviewed my friend Saadia Sheikh of Weinert's Real Estate, here in Dallas, TX. We're breaking down the ins and outs of what you'll need when looking for a property, and how and why you should look for help from a Commercial Real Estate Agent.
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When should you pull in a realtor – Should it be before you even start putting together your business plan (because that plan will require numbers), or once you’re ready to either lease or purchase that commercial real estate? It’s important to contact a commercial real estate agent vs. a residential. It’s two completely different specialties, and your commercial realtor will have the most update to date market information when it comes to putting the numbers together for your business plan.
Second, you definitely want to bring them in as soon as possible, even the early stages of business planning. One of the most important factors is your space. You’ll also need to consider thinking about construction or contract closing periods of the property you’re considering. So your realtor will be able to help you plan and prepare for getting your business up and running. You’ll need to make sure that they understand your time line, and they will help you get there.
Commercial Realtors will also actual help you fill in the numbers for your business plan when it comes to operating costs. Leasing is a bit different and will require a bit more planning, where purchasing a building will only require you contacting your lender to get the costs. Purchasing a property will be similar to buying a house, where you need to have your lending (should you need it) lined up. When it comes to leasing, the landlords will require certain information, and it’s important that you are as thorough as possible when preparing this information. The real estate agent can help you prepare all of those documents before applying for a lease.
So if you can find a deal yourself, why is it important to pull in a realtor? The first bonus of having a realtor in the leasing or buying side is that you don’t have to pay their fees. It’s always the landlord or the seller who are responsible for the realtor fees on both sides. So basically, it becomes your realtor’s primary responsibility to look out for you and consider all options, not just the ones they might be selling or listing. So be sure the broker that you find focuses on working with tenant or buyer representation.
When it comes to finding what you might be able to on Google, vs. what they have available, commercial realtors will be able to provide you many more options. Not only can they list current properties available, but they will also be in the know of current construction projects and what might be coming available within your timeline. They will also be able to provide you with what’s currently been leased in a building so you can make sure you’re getting the best option in terms of cost and rental rates.
Their expertise will also become crucial when it comes to negotiating the lease for you. They can bring expertise to the table because more than likely you’ll be dealing with representation on the landlord or seller’s side. They can help get the best deal for you, so you’re not just paying only what the landlord or seller is offering you. They’ll also help you with your lease language and contract.
How do you determine if you should lease or buy a commercial property? Another great thing is that most commercial agents are able to show you a buy vs. lease analysis. Capital is a big driving factor in this decision. However, in a start-up, minimizing your capital is crucial in the success of your business, so leasing may be a better option. Depending on your business plan, it’s most likely better for you to lease. Your goal is always to grow. There are benefits and costs to both.
What financial documents should you have prepared and ready to present to a landlord? It will vary from property type on what’s important for them to look-up. In general, they want to see how much money you have at the beginning, along with what your plan is to do once you lease the space, and what your projected income is as you start your business during that lease term. All of these will help you get a better deal as these numbers will determine the bonuses they give to you in terms of build out costs, leasing terms, etc.
Basically, it’s important to show them that you’re professional, confident, and you truly believe you can do this vs. someone who isn’t really sure about the business they’re about to launch. Have a solid business plan in order to get better negotiating power. Get all of your bank and financial statements together.
You most likely will have to sign a personal guarantee. Most landlords want this should your business fall through.
What is a personal guarantee? The personal guarantee is stating you’ll pay any money lost should you back out of the lease before the terms have been reached. However, you might be able to negotiate an early termination clause. A commercial realtor will try to protect you as much as possible, and typically your social is assigned so it can be tied to your credit.
What are some of the ways I can negotiate the lease, like looking at options a landlord would be willing to give me? – One factor will be a tenants market or a landlords market. Typically you can look at rental rates, yearly increases, the amount of free rent, the finish out allowance, and the way the landlord will deliver the space. Typically, the negotiation will depend on the property type. For example, retail will be different than office because the landlord will consider how they can repurpose the space.
What should I be asking when it comes to terms of finding a realtor? What should I be asking and what should I look for? – Find someone who works your market. That could be someone who works specific cities, counties, areas, etc. You want them to know your area. They can also help you hone in on certain areas that are better for your business. They can help you determine what area you should be in. Also ask about experience, and that they have availability for all of the resources. Make sure it’s also tailored to your business.
What about office vs. retail vs. warehouse expertise? Most commercial realtors know about specific property spaces. However, if you’re going the retail route, it’s best to find someone who has experience with retail. Find out if they specialize in landlord representation vs. tenant representation. It’s usually better to find someone who specializes on one vs. both.
Describe some of the lease options – Triple net vs. the others – can you break down the bigger ones? Most of the time lease rental rate will be on the product type. Retail will always be a base rental rates, that will always be the same, and then a triple net rate. Triple rate is the common area, taxes and insurance, and is pro-rated, and those get adjusted every year. It’s added to the price/ square foot. However, you can negotiate how much it’s increased every year.
Industrial it’s typically quoted in gross, which is a rate of everything included. Most of the time industrial will have modified expenses, which is a rate with increased expenses. It’s typically low, but does adjust every year, but it’s not a true triple net.
Office space will be your base rate plus electricity. And what they mean about that, but it’s a dollar/square foot amount, usually $1.50/2, and it’s adjusted every year.
There is also a difference between rentable square footage and usable square footage. Rentable could be common areas like shared hallways or bathrooms, so you need to be aware of that when leasing spaces in an office building. You don’t want to have to be paying hire rates for something like an amazing atrium.
Are there any other things that a person who is starting a business and needs to prep for a lease should know? The most important thing is people need to remember, the number one operating cost can be your rent, and a start-up (to be successful) really needs to be conscious of minimizing their operating expenses. It’s best to have a really good idea of knowing you need and what kind of environment you need to make your business successful.