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| Factors to Consider When Looking at Commercial Real Estate |
| By Business & Career |
Published
02/9/2005
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Business Equipment and Supplies
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Unrated
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Factors to Consider When Looking at Commercial Real Estate
For the small business owner, real estate decisions can make or break a budget. In previous articles, we looked at the two factors involved in small business real estate decisions – buying property and renting a business location. The purpose of this article is to provide a general checklist and some helpful tips to consider when selecting your commercial space. Rules for Location - In retail situations, location is everything.
- When a proposed location appears to be somewhat less than ideal for your customers and your business, review the previous rule.
- For service or manufacturing operations, location is still important, but good target marketing and other non-real estate factors may be as important, or more important, than location.
Factors to Consider in Reviewing Your Business Location - How far away are your customers and suppliers from the site?
- Be aware of the general characteristics and demographics of the surrounding neighborhood. Will your customers feel comfortable coming to your place of business?
- Consider the impact and access of other “people generators” such as competitors, malls, shopping centers, airports, hotels and industrial employers, as well as neighbors, schools and residential neighborhoods.
- Consider the ease of access for your workforce, as well as transportation links, sidewalks, and whether people travel by car or by foot. Are tolls or bus fares involved?
- Know all allowable zoning and site plan regulations.
- Know the regulations relating to signs: Consider all local ordinances, including historical district restrictions, colors, sizes, lighting and visibility for customers and suppliers.
- Be aware of the general neighborhood condition and its future outlook for change.
- Consider traffic counts at different times of day and speed limits for access and egress. Are there traffic lanes for turning in and out?
- Know the differences, advantages, and disadvantages of a “near” corner lot, a “far” corner lot, an “opposite” corner lot and an interior lot. Do you want to attract those going to work or those coming home?
- Know the availability of required utilities and the costs to upgrade if necessary.
- Consider drainage factors, flood plain areas and proposed construction plans to access roads or bridges.
- Know about environmental factors such as noise, emissions, outside storage and visual impacts which could affect you or the neighborhood.
- Is yours a “destination” type of business, a “convenience” type or an “export out” type? Location criteria are different and critical for each.
Know Your Lease Types - It is important to know whether a lease is a net lease or a gross lease. The basic concept to understand is that with net leases, the tenant is responsible for at least one additional expense of the space over and above the base rent. A gross lease means that all applicable costs over the base rent, such as building maintenance fees and insurance, are included in the total rent and are the responsibility of the landlord.
- Accepting the responsibility for some of the costs can be either business friendly or a business burden. Be aware of the opportunities to save money or be prepared to accept costs that may be out of your control.
- Be especially careful to define which party is responsible for base costs, and who is responsible for change costs.
Most importantly, don’t try to be in the real estate business unless you know what you are doing. Your undivided attention to your business operation should be your first priority. Business Terms and Negotiations - Every single item in a lease or a purchase and sale agreement (P&S) is negotiable. If you don’t ask for concession in a price or terms, you won’t get it.
- In buying or renting real estate, price is important – but terms are equally important.
- Consider asking for “free rent” for a limited time in exchange for keeping the lease rate whole for the landlord. For example, in a three-year lease, ask for two months of free rent, sign up for a 38-month lease, and agree to pay the quoted rental rate. This helps you and it helps the landlord to predict his cash flow and enhance the property’s long-term investment potential.
- Start-ups should consider asking for step increases in rent to help cash flow early in the business. Be prepared to give back some of the savings in the latter stages of the lease.
- CPI – or Consumer Price Index – can be a four letter word in real estate. It is published monthly by the U.S. Bureau of Labor Statistics and is a good method of describing how costs for certain consumer goods have changed over a period of time. Many people use it to determine increases in rental rates, but the statistics has little direct relation to real estate values. It may or may not be helpful to use this measure in your particular case.
- Options almost always favor the party getting the option. Whether the option is to buy, renew, expand, or to set a pre-determined future price, an option can be a tool to help business grow, expand, and define future cost obligations.
- One of the biggest advantages for the option holder is control over whether it is exercised or not.
Basic Advise - Verbal offers and acceptances are worth the paper they’re printed on.
- A letter of intent, memorandum of understanding, formal offer/acceptance, or other written correspondence will make the proposed transaction move forward in a more professional and expedient manner.
- Don’t be “penny-wise and pound foolish.”
- Get legal advice.
By Gary N. Chabot
© 2002 NH SBDC
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