Your Doorway to Commercial Property. FREE to List!

Fin­ding the right property in residential real estate is a little easier than in commercial real estate. For one thing, many commercial properties are not listed in the multiple listing service. This makes it difficult to actually see everything out there without talking with a lot of realtors. It makes sense for most to enlist the services of a buyer’s agent to help you find everything that is available. Agent commissions in commercial real estate are much more negotiable than in residential real estate. They’ll also be able to help you determine the properties that are zoned for the type of business you’re in, parking space requirements, advertising regulations, etc.

Classes of Office Space
Office space is divided into three classes — Class A, Class B, and Class C. The classes are just what they imply, that is higher quality at the A end and lower quality at the C end. The classes are based on the age of the building, the type of construction, the location, the amount of renovation, and the amenities that the building provides. You may also run across what is now being referred to as Class E Office Space in some cities. These are old buildings class B buildings that are being considerably renovated to become spaces with a totally different look. They usually have very high ceilings, lots of large windows, and lots of wood. They seem to appeal to the high tech and dot-com groups. (Hence the “E” designation.)

The dollars per square foot will vary quite a bit from one class to the next, so consider the amenities, location, as well as the “look” you need before starting your search.

See as many spaces as you can, and pull out the list you created earlier in the planning process. Make sure you have prioritized the features that are most important to you and your business, and give them the most consideration when looking over the properties. Don’t let yourself be blinded by one spectacular feature in a property when some of the other equally important features are less spectacular than what you need. You can even create a scoring system to help you compare each property equally. Regardless, of the system you use, take notes about the plusses and minuses of each site, and take photos to help keep them straight in your head. Visit the sites on your short list often and at different times of the day to observe the changes in traffic, noise, and other potential problems. Don’t let your emotions rule your decision!

Don’t forget to also investigate “build-to-lease” options also called “build-to-suit leases”. If you find the right developer you can tailor the space to your needs and then lease it. This option will require a lot of work on your part to make sure you’re getting the quality and structure that will suit your needs. Keep in mind too, that the developer you work with will probably not own the building for the length of your lease.

Inspect the Property

So you’ve found a good spot — you think. You like the location. It’s passed all of the tests so far. So what else do you have to look at before you sign on the dotted line? Here are some things to make sure are on your list of questions.

• First of all, how old is the building? With age can come problems and difficulties in incorporating new technologies.
• Are there structural problems? Talk with other tenants and see if they’ve had any problems either with the building itself, or even with the landlord.
• Does the roof leak?
• How old are the HVAC systems? Will you be dealing with periods of no air in the summer and no heat in the winter?
• Is it wired for computer networks, Internet access, or other electronic items? If not, will you have difficulty wiring it because of the types of wall materials or ceiling?

Is there adequate security? Security features can include:

• steel security doors
• security gates that fold out of the way during office hours
• alarm systems that can be monitored by a security firm or the local police department
• video cameras to watch entrances and exits
• bullet-proof glass
• fenced parking
• external lighting all around the building
• security guards

If you’re buying the property you need to dig even deeper. Sometimes literally! For instance, you may need to do a Phase 1, 2, or 3 site assessment to make sure there is no environmental contamination that you will be dealing with. Sometimes the lending institute you are getting your loan from will require it.

So what do these assessments entail? A Phase 1 assessment involves reviewing the past uses of the land, and government environment records concerning the property, and a simple observation of the property. If this first assessment shows up any potential contamination or problems then a Phase 2 assessment is needed. Phase 2 involves air, water, and soil samples. The third type of assessment, sometimes referred to as a Transaction Assessment, only takes into account the use you are proposing for the site. It does not take into account any past uses or problems. This is the assessment you would need if the site has previously passed a Phase 1 assessment and had no problems.

It is also recommended by most in the real estate profession that any property, whether it is being leased or purchased, be inspected by a professional inspection firm.

Source: http://money.howstuffworks.com/office-space8.htm

Deciding where you lay your brief case is a tough decision to make. Where can your business find the best opportunities? If you’re foot loose and fancy free you may be able to pick up and go wherever you expect to find that pot of gold. If so, do your homework. Check out the market data available on many commercial real estate web sites. Go to the U.S. Census Bureau and see which areas have the most growth and the highest numbers of your target audience.

If you’re staying right where you are, you still need to do your homework when it comes to locating your business. Where are your customers? That is probably your biggest challenge. If they come to you then you’ve got to be in a convenient location. If you go to them then consider what is convenient to you and your employees. A lot of the decision is made by the type of business you are in. Here are some other location issues to consider:

• Where is your competition? Does it matter? Maybe, maybe not.
• Will you be able to find good employees nearby? Convenience of location is important to them too.
• Is the building you are considering in an area that is growing?
• Are the surrounding buildings in good shape and attractive?
• Is it a safe area?
• Is there sufficient free parking or will you have to pay to rent spaces for your employees?
• Are there zoning restrictions that might have an affect on what you can do with your business?
• Is the building you are considering renting at the going rate?
• Will you have convenient access to the suppliers and other vendors your business will need?
• Is it the area accessible by public transportation?
• Are there restaurants and other services nearby for you and your staff?

Source: http://money.howstuffworks.com/office-space7.htm

Losing the Terminology War
Remember when I mentioned that you need to familiarize yourself with the commercial real estate lingo? Well here’s why. When you ask to see properties of a certain size, what the agent will show you is usable space. But, usable space is just the space you actually occupy physically. It doesn’t include the common areas such as the entrance hallway into the building, rest rooms, etc. The square footage these areas occupy is indicated as a percentage of the usable space, and if you add the amount of square footage for this common area space to the usable space you are asking to see, you’ll get the rentable space (aka leasable space) WHICH IS WHAT YOU WILL PAY FOR. So, don’t stroll around with the real estate agent while figuring the price in your head based on the amount of space you are asking for and assume that’s what you’ll pay, because it’s not. You have to pay for the common area space as well. That’s our first warning.

Creeping Leases
Don’t forget that your lease will probably also have an annual increase built into it right from the start. That’s right. These are called escalation clauses. Your landlord has to account for inflation, increases in the market value, etc. The landlord may offer a fixed increase, or a percentage based on the consumer price index. Don’t hesitate to negotiate those points.

Read the Fine Print!

Make sure you’ve read every word of your lease before you sign it and negotiate with the landlord to reword any sections that are going to be unrealistically hard to abide by. Remember the lease was written with the landlord’s interests in mind. Watch out for things like:

• limits on hours of use for the property
• requirements that state you have to leave the property exactly as you found it without accounting for typical wear and tear
• limitations on alterations to the property
• subletting restrictions (Remember that you may not need all of the space you have leased, or you may be acquired by or merged with another company changing your legal ownership.)
• restrictions on lease renewals. Make sure there is a provision that will allow you to renew the lease if you so choose, so the building is released to someone else out from under you.
• common area maintenance. Negotiate, negotiate, negotiate.
• landlord administrative charges. You may be able to get the landlord to drop this.

Watch your Bills!
According to an article entitled “Commercial Real Estate,” by Ed Eriksen published at the Online Women’s Business Center, your landlord may charge you for after-hours increases in utility costs like heating and air conditioning. If you find this is the case, make sure you review the bill closely and make sure the electric rate you are charged is truly the rate for that period of time. Typically, the after-hours rates are lower. Check with the local utility company to verify the charges before you pay.

If you are entering a building that houses some much larger businesses than yours, also make sure you’re not paying for some of their expenses. Landlords will often have special deals arranged with large tenants that provide them with longer operating hours, which will in turn mean higher utility bills, higher security bills, etc. Make sure you’re not paying for those services. Check the bills you receive from your landlord and make sure all of the expenses are yours.

Source: http://money.howstuffworks.com/office-space6.htm

You should compare the benefits of leasing versus buying your property from ­a cash standpoint, as well as the more obvious needs standpoint, such as long term space requirements and expansion possibilities. While there are benefits to both options, for startups there appear to be more benefits to leasing than buying. Cash flow is, of course, an issue and buying takes a larger portion of your hard earned cash up front.

Here are some other monetary benefits of leasing:

• Your credit rating will not be quite as critical for leasing as it would be for buying. So again, for startups, this might be a sticking point.
• Your monthly lease payment is tax deductible because it’s a business expense.
• You may be free from paying for building maintenance.

Here are some non-monetary benefits of leasing.

• Freedom to sublet and move to another location if you find the need to.
• No hassle of selling before you can move to another location.
• No loss from owning a building in a bad real estate market.
• No assignment of personnel to oversee property issues that the owner should oversee.

Buying also has its benefits. It all depends on your situation and the type of business you’re in. Here are some of the monetary benefits of buying.

• Interest on the mortgage loan is tax deductible.
• You can take annual depreciation deductions on your taxes.
• In the long run, you’ll probably come out ahead because you won’t be facing increases in rent.
• You’ll benefit financially if the real estate market is good when you sell.
• You may be able to lease out a portion of the building if you determine that you have excess space.
• If you need to make substantial changes to the building to accommodate your business, those changes are owned by you and not your landlord.

Non-monetary benefits of buying include:

• You can make any changes you want to the property.
• The hours of your business can be whatever you want them to be.
• You are free to stay in the same location as long as you wish.

Cash Flow Analysis
If you can’t make a decision based on these pluses and minuses, you can (and probably should) do a cash flow analysis to see which option makes more sense from a cash standpoint. Before you can do this, however, you have to have all of the necessary information for making your comparison. This includes information like the full cost of purchasing, the terms of the lease, the depreciated value of the property at the time you would want to move, an estimate of the property’s value at that time, estimates of maintenance costs, and your tax rates.

To do the cash flow analysis, complete cash flow budgets (sample Cash Flow worksheet in Microsoft Excel format) that include all of the expenses you would incur for either buying or leasing over a set period of time. For the lease analysis, you’ll need to determine your net cash outlay, which is the amount you end up spending on the lease once you’ve subtracted the tax savings you receive from it. (Remember your lease payment is considered a business expense.)

In order to compare apples to apples from a cash flow standpoint, you also have to take into consideration the change in the value of today’s dollar versus a dollar five years from now. This are known as the discount factor and can be calculated using most spreadsheet applications.

You’ll also have to know the amount of your interest deduction that you will get on your business’s taxes. You can arrive at this number by multiplying the interest rate of the loan by each month’s preceding balance.

Now for the tricky part… remember above where I mentioned estimating the value of the property when you would be selling it? This is the number that will ultimately determine who wins in the battle of the benefits of buying versus leasing. Obviously the longer you stay in the building, the better off you will be because you will be gaining more and more equity. However, do you know how long you will actually be there? Do you know what the real estate market is going to do in that time period? Not unless you have a crystal ball.

So, study the current market, as well as trends and predictions for as far into the future as you can get. Keep in mind that the farther out the prediction, the less reliable it will be. Arm yourself with as much knowledge as you can, and then make your best estimate. You know your business and you should have a good idea of where it is headed. If you know you want to be in an area for the foreseen future (say 10 or more years), the market is strong, and you’ve identified a building that will suit your needs for that timeframe then go for it. Ten years of equity can be substantial. If you can get a good deal on the property (at or below market value) then it certainly makes sense to buy if you’ll be there for ten years. If you know the building is priced at or above the fair market value, or if you think five years may be more the length of time you’ll be there then think about offering to lease.

Let’s move on to the leasing process and how you can educate yourself and avoid some pitfalls.

Source: http://money.howstuffworks.com/office-space5.htm

Befo­re you even begin looking for space, make sure you’ve thought about exactly what you need. You’ll save yourself some considerable time pounding the pavement, as well as eliminate a lot of wasted effort. Also, begin the process as early as possible to avoid being rushed into making the wrong decision.

1. Estimate your space needs as accurately as possible, but keep in mind future growth and account for that as well.
2. Know what features you need in the space. (See our sidebar for additional office features that you may not have thought about)
3. Have an “ideal” timeframe in mind, but remember it may not be feasible.
4. Know your budget. If you know the upper limit of what you can spend, you’ll not waste time looking at spaces out of your ballpark.
5. Know the length of lease you need. Don’t let yourself get tied into a long contract for space you know you’ll outgrow too quickly.
6. Get familiar with the lingo. Don’t let a communication breakdown lead to paying too much for your space. Know what they mean when they say “usable square feet” versus “leasable square feet.”
7. Have a list of questions ready to ask about each location that include items like “what utilities are included in the lease?” or “what are your maintenance responsibilities?” Having a list ready will help you more efficiently compare each property and not leave items out.

OK. So, now you are a little more prepared to begin this process. To give you an idea of the length of time this might take, here are some guidelines for spaces up to 50,000 square feet. (More detailed schedules are posted by TenantWise, a company that will help you search for, negotiable and finalize your property deal, and OfficeFinder)

• Determine your needs — estimate anywhere from 2-3 days to two weeks.
• Conduct the search — 1-4 weeks
• Walk the spaces and narrow your choices — 1-4 weeks
• Lease it! — 2-4 weeks (includes negotiation and legal work)
• Modify the space — 4-5 weeks for simple construction modifications, or 6-12 weeks for major construction modifications

So, by pulling out the old calculator, you can see that this endeavor may be over as quickly as one month, or may drag on for almost 7 months. Planning for what you need and can afford along with understanding the terms of leasing and real estate in general will help tremendously.

Source: http://money.howstuffworks.com/office-space4.htm