As I have traveled these commercial real estate roads for over four decades, what follows are the 10 deadly errors that I have seen occupants make when buying or leasing commercial real estate.
As an aside, I provide Location Advice to owners and occupants of industrial buildings in Southern California…AKA, I sell and lease commercial real estate for a living and have since 1984. That qualifies me as some sort of an expert…if I can only remember why.
These Are the 10 Deadly Errors CRE Occupants Make
1. Buying When You Should Lease
Your business is outstripping its building capacity almost daily, you want to build the business to a point and sell the business, you are sinking every bit of operating capital into the businesses growth, you cannot adequately predict your space needs for next month…much less next year…hmmm, why are you looking to OWN? I outlined a number of the pitfalls in this recent post.
2. Leasing When You Should Own
You have been in business for over five years, your space needs are static, the interest rates are historically low, you have enough idle cash for a down payment, the cost to own vs the cost to lease is comparable…what am I missing? YOU SHOULD OWN! I recently penned a post on this subject entitled Reasons you SHOULDN’T lease #CRE
3. Leasing More Space Than You Need
Somehow that growth spurt NEVER occurs and you end up with way more space than you need…which means your precious profit dollars are consumed in that space.
4. Committing to a Short Term Lease in a Down Market
You are petrified that the business won’t survive and therefore you can’t commit to a lease term in excess of a couple of years…even though the deal is the BEST ever! You then kick yourself that you didn’t lock up the terms for ten years when renewal time comes and the market has shifted back to the owner’s favor. A work around could be a short term lease with a fixed rate option to renew. An owner will generally not agree to such an arrangement in an up market but may in a down market to secure your tenancy. Conversely, an out clause could be negotiated.
5. Committing to a Long Term Lease in an Up Market
I have a client who signed a ten year lease in 2008 (right before the world ended). Fortunately, I didn’t represent him at the time or he might be a former client. Anyway, he now pays a substantially over market lease rate for his space.
6. Waiting Too Long to Consider Your Alternatives
How much time do you need?…A minimum of one year. If you have eclipsed this time frame, you may still be OK, but if you want to move and there is some complexity to the operation…plan on hustling to make it happen.
7. Assuming Your Owner Will Not “broker up” at Renewal Time
Believe me, if you assume that, come renewal time, your owner will not be well informed on market conditions, current lease rates and terms, and the most recent comparable leases transactions…you are sorely mistaken. You owe it to yourself and your company to have representation during your lease renewal.
8. Not Weighing ALL of Your Alternatives
Staying in your existing location, moving, changing the operation to outsource a function. ALL should be considered.
9. Believing That if One Broker is Good, Three Will Be Better
The opposite is actually true. If you have three service providers providing the same service, what suffers is the service to you. Because you have not loyally chosen a representative, the representative has no loyalty to you. Therefore, you will see ONLY the most likely alternatives for your requirement…but not much else.
10. Not Competitively Bidding your Financing
I cannot tell you the number of times, one of my clients (when I ask them who is providing their financing) tells me “my bank”. This can go VERY well or more commonly VERY badly. Remember, unlike commercial real estate service providers, lenders sell money…at a price…the interest rate. You owe it to yourself to get a second and maybe a third opinion before allowing your bank to do your loan.
Photo Credit: “Stamp Showing Error Word” by Stuart Miles Source: freedigitalphotos.net