Commercial Real Estate Advice with Jay Nelson, Archer Real Estate Services

A: Property users, for both lease space and to acquire property, are important and a key source of a commercial realtor’s business. Often overlooked is that commercial real estate can be a good investment, both for a beginner and for a sophisticated buyer. It is the investor buyer who helps define market values, taking into consideration a tenant’s business model, creditworthiness, the location of the property, the size, and condition of the property, and the rent and return on investment. These sophisticated buyers generate transactions that may be used as comparable sales for user properties. Buyers should educate themselves on market conditions, societal trends, local growth patterns, cap rates, and business models that have some longevity to them. A good commercial realtor can be a valued team member.

Q. What legal or regulatory issues should business owners be aware of?

A: A significant factor is zoning. Understand the property’s underlying zoning and whether that allows your anticipated use of the property. For a tenant that utilizes space for large groups of people, understanding building codes, especially “assembly use,” is important.

Q. How can a business assess whether a property aligns with its operational needs?

A: If the business relies on inbound customer traffic, then being near customers is more important than ease of commute for the owner and employees. For some retail uses, simply being on the right side of the street is important. For instance, if you’re selling take-and-bake pizzas, being on the right-hand side of the street when evening traffic flow is dominant (right turn in, right turn out); for a coffee shop, being on the righthand side of the street when morning traffic flow is dominant (right turn in, right turn out). Every business is different and one way I help clients find the ideal location is to find a similar business that is dominating its market, then do a 1/3/5 mile demographic study of that high-performing location… then look for similar demographics in the market the client is interested in.

Q. What negotiation strategies do you recommend for first-time commercial property buyers?

A: For the property type, the client is interested in, we can use the client’s budget and the geographic preference to dig and find similar recent transactions that help us understand market conditions and whether buyers or sellers have leverage on the other. Another important thing is not to fall in love with brick and mortar—be willing to walk if the deal isn’t right. There’s always a new day and a new deal. Be prepared. Line up a team that includes a commercial realtor, insurance agent, lender, attorney, and contractor. Be ready to move quickly and aggressively. Have your ducks in a row in advance.

Q. How can business owners ensure they get the best terms in lease or purchase agreements

A: Business owners are skilled in what they do day to day. A commercial realtor is skilled in understanding what deals are getting done and what terms those deals include.

A business owner who negotiates a lease every five years or so is at a serious disadvantage compared to the landlord, as the landlord is likely a professional and does this type of work daily. Find a skilled commercial realtor to represent you (the tenant) to better understand the market conditions that may give you leverage in a negotiation. Having an attorney review the lease and make certain that the tenant understands obligations is also mandatory.

Q. What are some common cost pitfalls in commercial real estate transactions and how can they be avoided?

A: For first-generation lease space, delivered from landlord to tenant in some condition less than finished, negotiating a tenant improvement allowance and understanding the costs to finish the space is essential. For example, if a landlord offers a $25 per square foot tenant improvement allowance, but the actual expense to finish the space is $50 per square foot, then there is a gap that needs to be closed, either by the landlord paying more, the gap amount being amortized over the lease term, the tenant paying more, or some combination of the three. Commercial leasing is the most complicated assignment for a commercial realtor and even more so for an unrepresented tenant.

Q. Are there lesser-known expenses that business owners frequently overlook when budgeting for real estate?

A: Budgeting for a lease space when the occupancy expense is comprised of a base rent and a CAM (Common Area Maintenance), know that the CAM can increase yearly based on true operating expenses. A CAM is generally estimated at the beginning of the year, collected monthly, and then reconciled at the end of the year. If the estimate at the beginning of the year was low (which allowed a property to be inappropriately marketed with an artificially low CAM rate) then the tenant is getting an invoice at the end of the year to make up the difference. Landlords can control some CAM costs, but not all; if it’s a snowy Winter, CAM may increase due to extra snow removal, and the opposite could also be true. At the beginning of the lease negotiation, certain aspects of the CAM can be negotiated.

Jay Nelson, CCIM