When you’re on the real estate field every day, it’s easy to know the winning plays. But if you’re a business owner who doesn’t get a look at the playbook very often, it’s more difficult to select the right route.
Here are some traps to avoid:
1. Calling from signs. The truth of the matter is that signs are used to get people to call whether or not there’s any true vacancy in the project. The space appears as though it’s suitable from the outside, but the inside may be radically different. For this reason, the hit or miss efforts of calling off signs to determine availability is a poor way to assess the market, its condition, and its opportunities.
2. Not being honest about one’s real estate needs. This is critical to developing a plan for the firm. Overestimating growth (because it sounds good) or underestimating short term needs is a sure fire way to create the need to move sooner than a company would like. A good space planner, in conjunction with your broker, can assist in creating an efficient layout/design for your firm. Ask who was in charge of your last move how soon they’d like to do that again!
3. Not communicating with your Broker. There is no such thing as over communication. By dialoguing on a regular basis with the professional entrusted to handle your real estate needs, issues will surface and be put to bed before they can become an impediment to a successful transaction.
4. Not acknowledging the cyclical nature of real estate. The deal that was cut by a firm five or ten years ago has relevance to where real estate was in that cycle, at that moment in time. It may have been a tenant’s market and the terms of the leases struck at that time may not be available in the current environment. Issues such as vacancy rate, new projects under construction, construction costs and interest rates all play into leasing rates and the overall health of the market.
5. Not comparing leases correctly. While it’s true that the arithmetic of real estate is just that – arithmetic – with no exponents or square roots, improperly comparing lease terms can generate a “false positive” when it comes to results. The real estate professional knows correct methodology (and will most likely use specific software designed to perform the analysis) but will also factor extrinsic elements such as location, landlord, physical plant, etc into the equation.
6. Not knowing when to stop negotiating. Today’s CEO no doubt has an extensive history of being the one responsible for a great deal of the negotiation that has occurred in the firm’s history. It's true that there is a fair amount of negotiation involved in the procurement of real estate. However, you have to know when to stop. The over negotiated deal is one that drags on, raises the legal costs on both sides, and often dwells on points that are not truly germane to the tenant. ”Negotiating for sport” often builds an unstable foundation for the landlord / tenant relationship that will exist for the term of the lease or beyond. Should a tenant’s financial situation change during the term of the lease or administrative milestones in the lease are not adhered to, the landlord may be less likely to offer any relief.
7. Not understanding rent and occupancy costs. Rent is a component or a subset of total occupancy costs. Taxes, property operating expenses and tenant’s obligations with the respect to capital expenses factor into the total dollar obligation that a tenant signs on to. By focusing solely on the rent component, an incomplete economic picture is created that the tenant may then incorrectly rely on for planning purposes.
8. Not understanding CAM charges. This is the first cousin of number seven above. "Common Area Maintenance" or "CAM" is that pool of operating costs that all buildings generate. Snow removal, grass cutting, parking lot lighting and maintenance, alarm, sprinkler and elevator system monitoring are just a few components. The fear that management is using these accounts as a profit center is patently false; they are auditable expenses which are competitively bid on a regular basis. Your landlord’s property manager will be able to tell you exactly how often, especially given that it is not in the landlord’s best economic interest to have his building be the most expensive to operate in the market.
9. Not getting the right counsel to review the lease. Or as we like to say, the right tool for the right job. New legal issues and the vernacular of the real estate industry is well known by those that practice on a regular basis and can offer the sharper counsel than those that see one lease every two or three years. If you think leases are pretty simple, just read one used by an institutional owner of real estate.
10. Not treating the broker like the professional they are. Today’s real estate professional more than likely is educated by organizations acknowledged by the industry professionals as having measurable standards and a rigorous education tract. Membership in these groups is often not only by classes taken, but also by industry experience measured in transactions and years. The SIOR designation and CCIM are examples. In addition to having the financial acumen, market knowledge and the transactional dynamics, the professional should be a respected member of the real estate community.
For more advice on being real-estate savvy, contact Owen Rouse at orouse@manekin.com