3 Most Common Questions in Commercial Real Estate

I recently considered the three most frequently asked questions I receive as a commercial real estate professional. Part of my research involved polling several of my colleagues. I believe the questions and the responses are interesting. I hope you do as well.

These are presented a la David Letterman — from least to most interesting.

                                                                                                                              Photo Credit:   Raconteur

                                                                                                                             Photo Credit: Raconteur

No. 3: Can I make changes to my space and if so, who pays for it? 

Generally, and it depends.

Changes to a location such as an additional office, power upgrade, sprinkler retrofit, paint and carpet, moving walls, installing racks, distributing power, etc., generally can be accomplished subject to ownership approval and governmental approval with the proper permitting and code construction.

Changes to the square footage — such as adding a structural mezzanine, changes to the common area, fencing required parking spaces, creating windows in bearing walls — is not so easy.

Changes are typically paid for in one of three ways:

The owner pays for all the cost and concedes the cost (this is rare). The occupant pays for all the cost (even rarer), or some combination of the two. This combination could be an owner paying for the refurbishment of the space (paint, carpet, and cleanup) and conceding the cost, and paying for the cost of a sprinkler retrofit and amortizing the cost over the term of the lease.

The “acid test” of who pays depends on the owner’s financial ability, the owner’s motivation, the general or specific nature of the improvements (think: future marketability) and the market (is the competition delivering space to the market completely refurbished).

Sometimes an owner will be willing to compensate a tenant in the form of free or half rent to offset the cost of changes.

No. 2: How do commercial brokers/agents get paid? 

The owner of the property pays us.

A common misconception is the fee adds to the purchase price or lease rate. The reality is that an engaged professional can achieve a much higher purchase price than the typical owner because of market knowledge and experience.

On the occupant side, an experienced location adviser can negotiate a better lease rate and concession package because of our knowledge of comparables, availabilities, motivation and our expertise. The net result is a better deal for both parties.

No. 1: How much is my building worth? 

That depends on many factors.

We consider the market — whether it’s up trending or down trending — recent sales and current availabilities. If the market is trending up, chances are your building is worth more than the comps suggest.

If the market is trending down, you might be best served to price the building lower than other recent comps and preempt a long marketing cycle.

Marketing time plays a role. How long can you afford to market the building? A fire sale motivation will cause the building to be worthless. Does the building have special amenities — such as excess or surplus land, excess power, fenced yard, freezer/cooler space, special AQMD permits, etc.? For the right buyer or tenant, these amenities can add to the price.

Did I leave any out? Please comment below with your question and I will promptly respond.

Article Resource: OC Register