In the complex world of commercial real estate, even the most astute business owners can encounter challenges that may hinder their path to success. Addressing these hurdles with informed strategies and keen insights is crucial. Jill Ames, a Commercial Real Estate Broker with over two decades of experience, is a veteran in navigating these intricate terrains. Throughout her career, Jill has mastered the art of steering new and seasoned entrepreneurs alike through the multifaceted aspects of commercial property investments and leasing. In this article, Jill demystifies common misconceptions about commercial real estate, offering new business owners essential advice drawn from her extensive background to help them avoid costly missteps and foster sustainable growth.
Embarking on a journey into commercial real estate (CRE) as a new small business owner can feel like navigating a labyrinth filled with myths and misconceptions. These myths can obscure the path to finding the perfect property for your business. Let’s debunk the most prevalent myths, clearing the way for you to make informed, strategic decisions in the CRE landscape. Here are the insights you need to cut through the confusion and discover the real opportunities awaiting.
Misconception #1: Commercial Real Estate and Residential Real Estate Leasing Are Similar
First, many small business owners expect business property sales to be somewhat like residential real estate. It isn’t! There are stark differences between commercial and residential real estate in many key respects, such as timelines and preparations.
In residential real estate, for example, it’s common to sign a lease in less than a month. But receiving, reviewing, and signing a commercial lease commonly takes at least a month — not counting the time spent finding the space and additional months required for construction. For new business owners, the timeline is often a revelation. Overall, the complex process from scouting to opening can span six months to a year, underscoring the need for thorough planning and patience.
There are several reasons for the time period. The first one is that a lot of commercial real estate is owned by large institutional landlords that may have millions or billions of square footage under ownership and that is a lot to manage! Most of these institutional landlords, their asset managers, and leasing brokers work business hours: Monday through Friday, 8 to 5. Residential real estate brokers may work nights and weekends to show and sell properties. In CRE, by contrast, work is done during standard business hours, and with less of the typical hustle seen in residential real estate.
Second, you may need to be patient to find the right property. The right property depends very much on what you’re looking for and your particular space needs. Most leases are 5, 7, or 10 years, which is a long time, so you want to make sure you’ve found a space that will work for your business. In CRE, patience is fine; there is no upside to impatience.
Additionally, before even reaching the lease signing phase for commercial properties, prospective owners should anticipate spending one to two months just searching the market to find the right location. This period involves diligently researching and vetting potential spaces to ensure they fit the specific needs of the business, whether it’s a franchise or a startup.
Usually, a CRE broker can qualify commercial properties in a few weeks. Qualifying a property involves obtaining information and touring the properties to make sure they are the right fit. It also includes ruling out properties that won’t work for the business.
If your business is a franchise, franchisors often have onboarding specialists to help you assess the space and make sure they meet all the requirements for their franchise business model. The space will need corporate approval.
Misconception #2: It’s All About the Property
Because finding the right commercial property is complicated, new business owners may tend to focus only on the property. But in fact, it will benefit both your business and yourself to do research about the area itself and the demographics.
First, think about the intangibles that matter to you. Will the location add to your commute, for example? It’s easy to overlook those kinds of issues and any ramifications they have.
Second, it’s smart to research data about the area and location. Knowing competitors near you is crucial. Demographics are always going to matter, such as customer concentration, traffic counts, and demographics including the average age and average household income in the area. Brokers have access to a mountain of data that’s relevant to your business.
At the same time, don’t overanalyze. One of the chief issues I see with new business owners is a lack of decisiveness. Don’t go into the weeds and be paralyzed by data! Or be unrealistic about deal terms. Rely upon your brokers knowledge and experience to understand when a deal is fair. Time kills all deals, so you don’t want to hesitate if the right property and area come along. There are many instances of clients passing on a great site approved by corporate because they were pushing for unrealistic deal terms, only to later regret losing out on a great site.
Misconception #3: New Construction Is To Your Benefit
Some business owners may consider new construction a positive in retail buildings and other commercial properties. It can be, but new business owners need to understand the complexities with new construction.
First, new construction adds 4 to 6 months to the process. One reason for this is the permitting process. Obtaining permits can take a while; the larger the city, the more backed up the process often is.
Second, new construction adds considerable costs. Most new construction sites don’t have an HVAC system, or restrooms, for example, so those systems need to be added. You may have to put in other major systems such as electrical And these systems tend to cost much more than people expect.It’s often better to look for second-generation properties because they may need only paint, new flooring, and minor reconfiguration of the walls – much less than what new construction sites typically need.
Considering a 2nd generation location might be a practical solution for many small business owners, potentially easing the burden of expensive construction.
Misconception #4: The Rental Price Is All When Negotiating A Deal
Obviously, rent is important. Watching your overhead is crucial in business. But you need to look at the whole picture when you negotiate a lease. It’s often easier to get concessions in areas other than rent to make sure you have affordable overhead.
When thinking about negotiating a commercial deal, understanding the logic of what matters to a landlord is key. Some people get fixated on negotiating the rent but that is only one “lever” you can pull when negotiating a deal. It’s important to understand that a landlord’s asset value is established by the rent rolls, so discounting the rent devalues their asset. The lever of “less rent” is typically the deal point that landlords like to discount least in most negotiations.
The better levers to pull are 1) length of term (instead of a typical 5-year term offer a 7- or 10-year term), landlords usually prefer longer terms and may be willing to offer a better deal 2) tenant improvement allowances and 3) rent abatement (free rent). Rent abatement has some tax benefits for landlords but doesn’t devalue assets. Negotiating all three and looking at a deal holistically can allow you to negotiate for the best overall deal.
Misconception #5: If I Am Doing Well Financially, I’ll Be Charged More
Many business owners have a certain mindset or hesitation with sharing their personal or business finances which are usually required as part of negotiating a CRE lease. Simply put, it goes something like this: “If I show strong financials, I’ll be charged more in rent.” It’s true that financial statements are usually required and are often times sent with a Letter Of Intent. But landlords are most interested in understanding how risky you are for them. Your financials are how they assess the risk of a potential tenant defaulting.
As a result, the financial statements are no time to be humble about your personal or business finances and withhold information. Put your best foot forward and put all your assets and equity out there.
If you seem high risk, landlords may pull back or require larger deposits. But if you’re low risk, they’re more likely to sweeten the pot.
Misconception #6: You Don’t Need a Personal Guarantee
Personal guarantees – putting up assets as collateral against the risk of default – are a fact of doing business in CRE. No venture is risk free. Unless you are a corporation that can show a long-standing record of success and profitability, landlords will almost always ask for a personal guarantee, especially for startups.
You and your CRE broker can try to negotiate to limit the terms of the personal guarantee. We succeed in negotiating reasonable limits about 50 percent of the time. Ultimately, only about two percent to five percent of CRE leases involving a start-up have no personal guarantee.
But that’s not to say you can’t negotiate within the guarantee. There are several strategies:
- The first strategy is a ‘burn off clause’ which reduces the amount of guarantee every month by the amount of rent you paid that month, assuming you pay on time.
- The second is a ‘sunset clause’; the guarantee evaporates after a certain period of time, typically three to four years.
- The third is a ’12 month rolling guarantee’, which means that if you default at any point, you’re responsible for 12 months of rent. There are also 18 month and 24 month rolling guarantees.
Offer all three during negotiations, as some landlords are more receptive to one rather than others.
Misconception #7: You Can Go It Alone
In CRE, it’s not wise to go it alone. One of the most common mistakes first-time business owners make is trying to fill all skill sets and play all positions. You have to hire for the skill set you need. In CRE, you can use a team: your broker, attorneys and, if your business is a franchise, the skill sets of the franchisor, consultants and its relevant staff.
Summary
In diving into commercial real estate, it’s clear that the terrain is vastly different from residential property ventures. As a new small business owner, understanding these differences – from leasing complexities to the negotiation nuances – is crucial. By dispelling these common misconceptions, you are better equipped to approach the CRE market with a well-informed strategy, patience, and the right support network. Remember, the right property and location can transform your business prospects, but achieving this fit requires a blend of decisiveness and diligent research. As you move forward, keep these insights in mind to navigate the commercial real estate landscape more effectively, ensuring that your business not only finds its ideal space but thrives in it.
As an entrepreneur, business owner, and investor, Jill Ames offers a valuable prospective to her clients because she understands how critical the right location and lease are to a company’s culture, recruiting efforts, and bottom line. She helps her clients minimize business interruption and maximize ROI through strong lease negotiations, understanding of the market and utilization of space.
Jill has been in the real estate industry since 1999 and has commercial experience that includes not only tenant placement and representation, but also foreclosure auctions, condo-conversions, multi-family and commercial real estate purchase transactions. Her experience includes owning two different franchise concepts, as well as multiple real estate services companies. Jill’s experience makes her an invaluable partner in blending business needs with pragmatic commercial real estate solutions.
She helped her husband, Jeremy, find the initial office spaces that allowed his business, Guidant Financial, to grow to one of the Inc 500 fastest growing companies and which now helps launch more than 2,000 small businesses and franchises each year.
