FAQs

In a general sense, most commercial projects include a strategic, business decision or mechanism to generate a sound return on investment where as a residential property involves a long-term, personal and emotional investment based on how the house “feels” and “fits”. The principal difference, at a more granular level, however, is the degree and duration of due diligence. Residential purchases have general inspections (typically, a few days inspection), are comparatively cheaper, and can close within 30-45 days. Commercial projects, however, involve business locales with increased liability. The inspection process can be quite extensive, depending on prior usage. As a result, both the evaluation period and the overall closing for a commercial real estate property can be a rather long process.

The goal of every seller is to maximize profits, while the goal of every buyer is to minimize costs. Therefore, paying a commission or fees may seem contrary to your objectives. You should, nevertheless, rely on professional advice and professional fees should be factored in as a cost for any commercial real estate project, as the potential pitfalls can be significant. Even if you’re just leasing property, a real estate broker may be invaluable. A good agent will have the exact commercial real estate expertise necessary for your specific project. An agent will identify, assess, and provide properties. He/she will also serve as a partner to negotiate on your behalf to maximize value. It is important to remember that real estate agents work on similar deals all the time. Their experience and network can be well worth the cost of a commission. Many also assist with contracts and paperwork, to mitigate risk. An experienced real estate partner adds far more value to a project than the minimal associated costs.

Simply put, the property owner pays the brokers. A common misunderstanding is that the broker’s commission adds to the overall cost of the project. Actually, a professional broker can achieve a much higher purchase price than the typical owner because of market knowledge and experience. From the occupant perspective, a broker can negotiate a better lease rate and concession package based on their knowledge of comparable sites, availability, motivation, and expertise. The net result is an increased value for all involved.

Below are several questions you can ask to ensure you not only find a qualified agent, but one you will feel comfortable partnering with. You can ask these questions directly to the brokerage as well as others in your industry that have worked with the firm. The following perspective will help ensure you get the most from your future commercial real estate agent.

• What is the agent’s reputation, regarding experience, integrity, and attention to detail?
• Does the agent have the specific commercial real estate experience to meet my personal company’s needs?
• What is the size of the agent’s brokerage?
• How accessible is the agent?
• How communicative is the agent?
• What are the associated fees and commission rates of the agent and brokerage?
• Does the real estate agent personally own and manage their own real estate?
• Does the agent specialize in commercial real estate or residential real estate?
• How well connected is the broker in community with local contractors, real estate attorneys, brokers, surveyors, lenders, architects, potential buyers and landlords?

When buying, selling, or leasing a commercial real estate property, as with any business proposition, there are always risks. You should aim to mitigate and minimize those risks. Below are several potential issues to keep in mind that could lead to major consequences:

• Zoning and land use restrictions: As outlandish as it may sound; many individuals have purchased a property they cannot use due to zoning. It goes without stating that zoning is a substantial component of commercial real estate and overall business success. It is imperative that a business ensures that the property is not only properly zoned, but also that proximate zoning will not create barriers or conflicts. Even with rigorous due diligence, future issues may arise if governmental agencies or adjacent properties attempt to modify the zoning on your property to alter or even limit its use.
• Market fluctuations: Changing property values and market fluctuations can directly impact commercial real estate operations. Rents and tenant rates can increase and decrease but even businesses that own property are not immune. For example, a firm that owns a retail site may desire to relocate to maintain proximity to its principal customers only to find that property value has decreased to a point where the sale of the property cannot financially justify the relocation. A lease may have provided more flexibility, allowing the business to relocate at the end of the term without managing the sale of the property and potential associated losses of a market shift.
• Hazardous waste and environmental contamination: Unbeknownst to many, property owners have primary responsibility for fixing waste or environmental contamination issues, even if the current property owner did not cause the situation. These problems can be inconspicuous, ranging from an underground storage tank leak to a previous waste site on the premise. If, at some point, you held an ownership interest in the property, you're potentially financially responsible for the cleanup. Environmental cleanup is not cheap, as operations can cost millions of dollars.
• Debt service and lender requirements: If you’re borrowing money to acquire a piece of commercial real estate, the lender will require collateral for the loan. A lender will typically want a mortgage or deed of trust against the property. This provides the lender the right to foreclose if you fail to comply with the loan’s terms and conditions. Beyond payment, the terms and conditions may pose problems. Various lenders, for example, may exclude borrowers from taking out additional loans on their property, which may impede the necessary financing to ensure success for your business.
• Defects in title: In order to track how property changes hands, every state (even most counties) has a public record system where property deeds are recorded and part of the public record. Deeds, however, are sometimes not recorded, or have defects/omissions regarding the scope of the covered land. On occasion, individuals further complicate the situation by selling or transferring partial interests in a property. In addition, lenders make loans against properties and record mortgages or deeds of trust that become liens in the public record.  Easements given to cross over or use property, however, may or may not be made part of the public record. A judgment against a person can also be recorded and become a lien against any property that a person owns, even without the person's consent. Ultimately, you may not purchase what you had fully intended due to unknown prior claims or liens.
• Mechanics liens: Contractors can use a mechanics lien to ensure receipt of payment on the property where they've performed work or furnished materials for the construction, repair, or improvement to a building. Typically, contractors must provide advance notice that they intend to file the lien, and take action to enforce the lien within a set timeframe if unpaid. This can be a strong tool, as a mechanic's lien could be used to foreclose a property. Accordingly, this can be rather precarious for the property owner.

It really depends and varies on the desired type of change. Changes to the building are subject to ownership and government approval with proper permitting and code construction. This may include additional office space, a power upgrade, sprinklers, paint, carpet, etc. Changes to overall square footage, common areas, fencing, and adding windows are more challenging still, but not impossible. Amendments are typically paid for in one of three ways:

1. The owner pays for all of the cost and concedes the cost (rare)
2. The occupant pays for all of the cost (even more rare)
3. A combination of the two.

Ultimately, financial responsibility determination generally depends upon the owner’s ability to pay, the owner’s motivation, the general or specific nature of the improvements, and the market/competitive landscape.

The first thing is to decide if moving into a new space is the right choice and then devise a business case. Ask the following questions:

• Do we want to find space on our own or hire a tenant representative to assist us?
• What are the possible alternatives?
• Is it a good time to move?
• Is it better to buy or rent?
• Who will sign the lease?
• How important is location or visibility?
• How much space/square feet do we need?
• How much can we afford?
• On what date do we need to move into a new space?
• How will the new space benefit the company and its future?
• Does the company plan to expand or downsize?
• Can we afford to lose business or employees during the transaction?

Once you have the above in order you will be better positioned to find the ideal commercial real estate partner. You can begin your brokerage/agent search by asking firms or your network these questions or contacting Ryan Kinney.