Commercial Real Estate - Brokerage - Investments - Management
linkedin latitude.net  twitter latitude.net  Contact Us Today (805) 884-8480

Avoid These Common Pitfalls in Commercial Lease (or Purchase) Transactions

By Rick Longpre on Jan 14, 2015 at 02:26 PM in Investing in Commercial Real Estate, Santa Barabara Commercial Real Estate

By Rick Longpre, President Latitude Inc.

Avoid These Common Pitfalls in Commercial Lease (or Purchase) Transactions

        I. WRONG PERSON LEADS SEARCH:

All too often a business searching for commercial space places a person in charge of the initial search who has:

  1. limited or no experience with real estate
  2. limited or no understanding of the business’s real estate requirements
  3. no authority to act on behalf of the organization.

While it might be helpful to have an assistant contact brokers, preview properties and limit the time required of the responsible executive, that person should not fall into the category above. Consider that even a modest 2,000 square foot office lease in downtown Santa Barbara could cost $2.50/sq. ft. and run for 3 years or longer. That is a financial commitment of $180,000 or more. Ask yourself who is the appropriate person within the organization to put in charge of that assignment.

     II. PRINCIPAL IS NOT ENGAGED IN THE PROCESS:

As with any business process, a real estate search does not effectively progress without all parties being engaged in the process. All members of the principal’s team must commit to communicate quickly and effectively with an agent. Failure to do so often leads to missed opportunities.

   III. WORKING WITH MULTIPLE BROKERS:

For very small requirements (typically under 1,000 square feet), brokers are often notthe best resource. However, a good broker will steer you in the right direction with leads, referrals, and other resources. Some clients believe that the best practice is to work with multiple brokers. While the multiple broker approach my be reasonable in certain, limited circumstances, it is not typically a effective strategy. Consider that brokers work on a commission only basis and naturally, allocate their time where they are most likely to earn that commission. Therefore, the transactions that get their undivided attention are where they are most likely to earn a commission. This may be where they have:

  1. An exclusive listing agreement (rarely do you ever see a “non-exclusive” listing for precisely this reason)
  2. An exclusive tenant representation agreement or
  3. A tacit or explicit verbal commitment that they have exclusivity.

Without it, the tenant will often not get the responsiveness and focus that they deserve and need. A good broker will get the job done.

   IV. NOT STARTING SOON ENOUGH

Real Estate transactions involve a complex process requiring significant lead time to the target completion date. It is the rare transaction that is completed, in a few weeks or even a few months. Give yourself enough time to achieve your goals. It is not too early to start planning your move a year in advance. A professional broker can help juggle all the many variables in the transaction to find the right space, at the right time, on the right terms.

     V. NOT UNDERSTANDING THE “MARKET”

Almost everything in real estate is negotiable, however, the economics of a transaction are ultimately strongly influenced by “the market,” i.e. what is happening with similar properties in a similar area. Terms of a lease likely to have a significant influence on be the economics of a transaction, aside from rent, include: length of term, specific property costs passed through to the tenant (“triple nets” or “NNN” or “CAM”), reimbursement for tenant improvement (TI”) costs, and periods of rent abatement, among others. The real estate market is fluid, potentially changing over a matter of months. Tenants must understand the “market” in order to have reasonable expectations for, and/or take advantage of, the opportunities that are presented.