For the November issue, Fargo INC! asked me to address some of the commercial real estate questions, issues and concerns that I run into most frequently. I came up with seven, and while most of the answers are more complex than the shortened version I provide here and vary with individual circumstances, I did my best to summarize them below.
1. What is the best location for my business?
It varies for every business. It’s true that location is everything, but for some people that means being on the outskirts of the city versus a primary street with heavy traf c counts. The better the location, the higher the price, and thus you need to know that your business can afford the location and if that location is going to create greater sales for your business.
If you are a destination or a service industry, you can save money by choosing a location not on the primary streets in the city. For example, a trucking company’s biggest location factor is access. For some businesses, it should be proximity to workforce, and for others, it should be traf c counts and retail climate.
2. How many years should I sign a lease for?
This is usually a point of negotiation between the tenant and landlord—often with the tenant wanting a shorter term than the landlord. Shorter is not always better. As a tenant, you want to secure your space for as long as you know it will continue to work for your business.
If you nd a landlord who is willing to accept a one-year lease, it may be hard to get further concessions, such as fit-up dollars, which may be more important to you than the shorter lease term. You also want to have extension options in your lease. I know a number of businesses that have lost their space to an expanding neighbor because they had a short-term lease without options to extend. Ultimately, the term is just one piece of the puzzle that you need to consider when signing a lease.
3. What is the average price-per-square-foot (PSF) for commercial space?
There are averages to use, but it varies by property type and subcategories. You have to define your wants and needs before an average can be determined. For example, brand-new, high-end office space (Class A) can be more than $20 PSF, whereas slightly older office space off the beaten path (Class B) can be $14-$16. Class C can be $12 PSF or less. Retail can be $16-$32 PSF for the most desirable locations. Industrial pricing varies from $5-$12 but is valued based on size of lot, access, side-wall height, loading docks, etc.
4. What do CAM, NNN and Gross mean when looking at lease space?
A triple net lease (NNN) means taxes, insurance and maintenance are paid by the tenant. These costs are sometimes also referred to as common area maintenance (CAM) fees or operating expenses. In an NNN lease, the tenant pays a base rate and then pays all expenses associated with the space. NNN fees are often referred to as CAM fees when a property is rented to multiple tenants. These fees can range from $1-$8 PSF so it is very important to understand what is included in the CAM fees and how much it is going to cost your business as it is an additional expense on top of rent. CAM fees fluctuate from year to year based on the actual expenses the property incurs. The details should be spelled out in the lease, but both parties should also have a common understanding of these terms.
Absolute NNN leases are not all that common across all property types— most often it is an NN, or modified net lease. Modi ed net leases usually split up the maintenance obligations between a landlord and a tenant. For example, if the roof leaks or needs to be replaced on an absolute NNN lease, the tenant needs to pay to have it fixed or replaced. Often in modified net leases, the landlord agrees to take care of the structural components of the property, and thus the landlord would pay for that expense. In a gross lease, the tenant pays a set monthly rate for the space, and the landlord pays all real-estate expenses. Sometimes, but not always, this rate includes utilities.
In a gross lease, the tenant pays a set monthly rate for the space, and the landlord pays all real-estate expenses. Sometimes, but not always, this rate includes utilities.
5. Do developers work with commercial realtors or do they work directly with business owners?
Most developers have a sales team, which is often composed of licensed commercial realtors. Some developers do the leasing and/or sales themselves or have an internal sales team. Holding costs are what can turn a pro table development into a non-pro table development. Thus, the goal once a property is developed is to get the lots sold or buildings leased. Many developers use realtors unless they themselves have the time and resources to handle the project.
6. How do I get started in investment real estate?
The best advice I can give is to be ready to invest.
A) The beginning of the process is talking with your banker. Discuss the max purchase price that you and the bank are comfortable with. Often the primary factor behind this is the amount of money you will have for a down payment. The bank will also have other requirements on the performance of the property.
B) Find a real-estate attorney you would like to use when it comes time to prepare and review contracts.
C) Find an accountant who is well- versed in real-estate accounting. If you don’t have a contact for these professionals, ask a friend, family or business associate for a referral to someone they have done business with.
You can start your search at anytime in this process. However, having a team in place is going to be critical to a successful transaction. Good investment properties will not remain on the market very long. When you see a property of interest, you will want to be able to move quickly while still protecting yourself. Having the right people on your side is key.
7. When is the right time to sell my business?
This is often a question that a business owner should have asked a few years in advance. It’s hard to consider selling when business is going well and expanding, but it is a better time to sell than after the business peaks and starts to decline.
Many business owners ask this question at retirement age, which doesn’t always line up with the right time to sell. You want to start planning an exit strategy approximately three years before you plan to sell if this is an option. This gives you time to train key employees to take over tasks currently handled by the existing owner. It is a lot easier to sell when a buyer has trained, reliable people in place rather than jumping into a business where the exiting owner is the main person who knows the entire business.
This period also gives you time to make sure your accounting is being done correctly and in a format that a buyer and buyer’s council will want to review prior to purchase. Business sales often take an extended period of time. It is best to research selling—even before you are ready to sell—whether for retirement or other reasons.
About Dan Hicks