Buying commercial real estate is not the same as buying a residential property. While there are some initial steps prospective buyers can do on their own, it’s best to get some help from an expert as the commercial real estate search progresses.
“On the commercial side, there are so many ways to lose money on a deal without the right assistance,” says Terry Coyne, SIOR, CCIM, an executive vice president with Grubb & Ellis. “It’s the ‘unknown unknowns’ that you’re hiring someone to handle.”
Smart Business spoke with Coyne about commercial real estate transactions, how the process unfolds and when to bring in help.
What are the first steps when looking for commercial real estate?
To get started, you can conduct a simple Internet search using any typical search engine. There are also a few dedicated commercial real estate websites, such as CoStar and Loopnet, which can be good vehicles for finding commercial space, comparable sales and public records. However, many of these sites only give users access to a limited amount of information, then lead you to a representative to get the remaining details.
Those sites can get you a little more in tune with the properties available in the market, some of the industry terms and the geography, so when you’re calling a broker you are prepared with some general information. But keep in mind the information you’re getting about commercial real estate on these sites is most likely coming from brokers. It’s hard to find information from owners or developers.
The commercial real estate industry is not good at using the Internet for selling a product. Most of what’s out there will just lead you to a broker or salesman — sort of, ‘Call us and we’ll help you.’ The prominent strategy is to withhold information to get you to sign up with them or contact them regarding a search or a sale.
What’s the next step after an Internet search?
The next step would be to call around and qualify brokers. What you’re looking for is whether the person is a tenant or buyer representative, and some people do both. You have to ask yourself whether you feel comfortable with someone who handles one side or both sides of the transaction.
If you work with someone who handles just one side there’s no conflict of interest, since they’re working for the best deal for either a buyer or a seller. However, if he or she handles both sides, you can argue that they know the market better because they’re seeing it from both sides of the transaction, but there may be a conflict of interest.
Also, look for certain designations or titles attached to the representative’s name, such as SIOR or CCIM, which stand for Society of Industrial and Office Realtors and Certified Commercial Investment Member. SOIR means the representative has been in the industry for at least five years and has hit a certain volume of transactions. CCIM is similar, but indicates that person has also taken college-level classes.
Find a broker who knows the market well because he or she will likely have information on properties that are not yet on the market. The broker can do the investigative work; he or she has knowledge of the area and good intuition, which will save you, as the buyer, time.
Have a broker come out and talk to you about what kind of space you’re looking for. Show him or her the space you’re in and work with him or her to understand his or her process. It’s not unusual in the first meeting for a broker to ask for a representation agreement, which says you’ll only work with that broker. This helps prohibit a prospective buyer from using the broker’s resources, such as time and gas, and then squeezing him or her out of a deal. While you can certainly negotiate his or her fee, there’s no doubt he or she is owed money for the time spent on the deal.
What happens once you’ve found a property you’d like to buy?
When you’re interviewing a buyer or landlord, make sure you understand the services he or she is offering. You’re weighing all of the factors that go into a lease — rate, term, tenant improvements, etc. Also, conduct a financial analysis and look at the design services being offered.
When you’re looking at renting a 20,000-square-foot office space, for example, you’ll want to know how your business will fit the space, which will be laid out in a fit plan. It’s paid for by the landlord and comes into play when you’re being considered as one of the top three potential tenants. At this point, you’ll also start negotiating lease terms and looking at possible incentives from the city.
When your broker is negotiating city incentives, he or she is pitting cities against each other. They’ll negotiate sewer and water rates, the kilowatt charges per hour and other details, so it’s important to work with someone who has experience in those types of negotiations.
As you move toward closing, all the due diligence components require some shepherding by your broker because there are typically many consultants involved. Brokers basically help coordinate the process.
Terry Coyne, SIOR, CCIM, is an executive vice president with Grubb & Ellis. Reach him at (216) 453-3001 or firstname.lastname@example.org.
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