When I stumbled into commercial real estate I found my personal nirvana. I liked bookkeeping and enjoyed studying business and accounting in college. But I couldn’t see my future in computerized ledgers. I needed more action.
I landed a job working for one of the biggest commercial real estate landlords in Michigan, who was happy to mentor and guide an eager accountant. The firm managed industrial building all over North America. It was a continent-sized game of Monopoly.
One of my first deals was leasing out a segment of office space. The tenant brought a broker to represent its interest and we dickered back and forth. Each time a deal came in I would put it in a financial model so we could understand it better.
Then we would counter based upon the anticipated financial goals for a particular building. But something wasn’t right.
In one instance a broker countered back to us and we made a few changes that effectively charged the tenant more money in succeeding years of the lease. The broker accepted. I always wondered who ran the numbers – the tenant or the broker – and if they knew the overall cost was higher than the initial offer, just built differently. Perhaps the party didn’t care if the cost was higher as long as they could get in the door and start making money. The notion of burying costs, like balloon notes in mortgages, rankles my principles of ethical business.
Hidden costs abound in any deal. Crunching numbers is the single most helpful thing any tenant representative can do for a client.
Some buildings might have a higher base year, making the building more expensive in the long run. Another factor to consider is the rentable use factor. I saw one building with a 20 percent factor while the neighboring buildings had a 10 percent factor. We needed to find out what accounted for the variance.
One building might provide free parking for all employees while a second one charges a use fee for maintaining the lot year round. Free rent offers are a real lure in this economy but how will it affect the bottom line? You might be liable for all building expenses including HVAC, or repairs to the parking lot and roof, which could mount up fast and be far higher than a month’s rent.
If you hire a broker to represent you make sure you hire one with an accounting/financial background capable of running totals on all the facets within the proposals you receive. It just figures that you need to crunch the numbers properly.