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How to Navigate the Commercial Real Estate Buying Process

Investors often say that buying property is a win-win proposition, no matter your market. Even in times of recession or economic downturn, there’s always a promise that the property’s value can appreciate over time. In the commercial real estate world, this promise is almost always backed up by entrepreneurs looking for space or your own company taking over the property for business purposes. 

Whether you’re a fully-established business looking to expand and find a permanent home, a small business trying to get your feet beneath you, or an investor looking to capitalize on a growing market, an investment in commercial real estate can be a lucrative endeavor. 

Why Should You Invest in Commercial Real Estate?

Compared to leasing a commercial space, buying a property can afford you numerous advantages (both financial and logistical in nature) and can also serve as an investment in the future of your company. From adding manufacturing facilities to additional office space or support centers, having a physical location to expand your business and help your bottom line in the long-run can be hugely beneficial to companies of any size.

Additionally, there are other benefits to purchasing a commercial real estate property as opposed to leasing a space, including:

  • Complete Control. By purchasing a commercial real estate property, you’ll be provided a remarkable level of control over your company’s space. While you’ll be responsible for all utilities, insurance, and maintenance costs, you’ll also be free to make any improvements, expansions, or aesthetic changes you may want to make. 
  • Reliable Overhead Costs. You’ll never have to worry about rent increases when you own your own commercial real estate property. With a fixed-rate loan, you’ll have no exposure to detrimental changes in the commercial real estate market in your area. 
  • Tax Benefits. While your accountant can provide more details about your specific property’s potential for tax breaks and deductions, you’ll be able to write off your mortgage interest, property taxes, and other business expenses you wouldn’t otherwise be allowed to deduct on your annual tax filings if you were leasing a space. 

What to Ask Yourself (and the Previous Owner) Before Purchasing Commercial Real Estate

If you’ve never completed a commercial real estate purchase before, you probably still have many questions. It’s a complex endeavor and one that can flummox any first-timer, so before you make a decision on a property, ask yourself, your team, and the current ownership the following questions:

Why is the Property for Sale? 

There’s any number of reasons to sell a property, but knowing why the seller is motivated can help you understand the market situation and business realities in the area. If you can find out why a property is for sale, it can also help you in the negotiation process if the seller is eager to free themselves of the space.

What is the Property Currently Being Used for? 

Beyond the zoning requirements for the property, it’s useful to consider what the property was previously used for and whether or not it was successful in that space. For instance, if you’re buying a space to establish a coffee shop and the previous occupant was a bakery that failed, you might want to consider a different location.

What’s the Condition of the Property? 

Obviously, you’ll want a licensed property inspector to look into the details of the building’s condition, but it should be apparent from a simple eye test whether the concrete needs repair, drywall needs patching, or if the HVAC/heating systems are aged beyond efficiency. You should conduct a thorough walkthrough and take notes of any damage or potential improvements the space could use should you decide to make an offer. 

What’s Happening in the Surrounding Area? 

The value of a commercial property isn’t just defined by its condition, age, or appearance; it’s also influenced by its location and the neighborhood in which it resides. Take some time to walk around the area and look into any plans for development, upcoming construction projects that could impact your business, or improvements to public transit that could be beneficial to your company’s future?

Important Steps in the Commercial Real Estate Purchase Process

Any real estate transaction involves a lot of moving parts, but commercial real estate investment is a bigger fish. Whereas residential properties used for leasing purposes often garner lower returns on investment and shorter lease terms, commercial real estate requires longer leases (even exceeding 10-15 years) and monthly rent is calculated by square footage. 

If you’re interested in investing in commercial real estate or purchasing a property for your own company, consider these important steps before you begin your search in earnest:

1. Why Buy?

As with any major purchase, you need to seriously consider why you’re looking to invest in commercial real estate property. Is it simply for the promise of a return on your investment? Or perhaps you’ve located a space that better suits the future of your business? Is your current space not accommodating your needs for growth? Look at what you want to accomplish with a commercial real estate investment and then find a property that could provide what you need.

2. Consider the Different Commercial Real Estate Property Types

If you’re simply looking to invest in commercial real estate properties and generate income by leasing those spaces, you need to consider the different types of commercial real estate. Of course, if you’re a retailer, a space built for retail shops should be your primary focus in your search. But from restaurants, coffee shops, retail spaces, office space, professional buildings, large-scale industrial complexes, and mixed-use facilities, each type has its own potential for generating income over the long-term.

3. Ensure Your Financing is Secure

Not only will getting pre-approved for a commercial real estate mortgage help you better understand how far your credit and liquidity can take you, but it will show potential sellers that you’re motivated and ready to move forward on a property. 

4. Establish Your Criteria and Build Your Team

Aside from dedicating the energies of a new property search to a dedicated point person in your employ, it’s important to bring on an experienced commercial real estate agent specializing in your area of interest. In addition, you’ll want to seek out a commercial real estate attorney and a certified personal accountant to keep the numbers and terms on track. 

5. Begin Your Search – and Do Your Homework

Now that you know what you’re looking for, you and your team can begin narrowing down the potential list of properties to tour and consider. It’s important to avoid settling on the first available option if it has shortcomings that might stymie your growth. You should also look into the property’s history before making an offer. How many upgrades/repairs have been performed? Has the building taken any damage from water/mold/asbestos, etc.? Only once you’ve built a list of pros and cons for each potential space should you move forward. 

6. Make an Offer

Once you’ve found the right property for your needs, you’ll want to draft a Letter of Intent (LOI) showing that you’re pursuing interest in securing the space. In the case of a commercial real estate purchase, including a contingency clause in the offer letter can protect you in the event that the property doesn’t pass an independent property inspection. Once you’ve consulted with your real estate agent, accountant, and lawyer, you can move forward with the offer and begin the negotiation process. 

7. Do Your Due Diligence

This part can get messy if you don’t have your proverbial ducks in a row. Once you’ve gotten the offer on the property owner’s desk, it’s time to fine-tune the process. You’ll need to get an ALTA survey, bring on an escrow officer, and property inspector. There’s a ton that goes into finalizing a property sale, so making sure things like property boundary lines, easements, access rights, titles, bills of sale, assignments of contracts, warranties, etc. are all lined up to avoid legal action (upon both the buyer and seller) post-sale. 

Key Terms to Keep in Mind as a First-Time Commercial Real Estate Owner

If you’ve previously invested in residential real estate or have simply leased your previous commercial real estate properties, there are numerous new terminologies you should be aware of before pursuing a commercial real estate transaction.

  • Ad Valorem – Ad Valorem is a tax calculated based on the current value of the property in question.
  • Debt Service Coverage Ratio – This is a metric that analyzes how much of your operating income goes toward paying down your debt each year. 
  • Capitalization Rate – Capitalization rate is measured by how much income the property in question takes in against the total market value of the property. 
  • Cash on Cash – This shows how much income your organization has made versus how much you’ve invested in the property, including the amount of your initial downpayment. 
  • Loan to Value – How much money you’re borrowing against the total value of the property you’re trying to purchase. 
  • Vacancy Rate – This is hugely dependent on the market in your area. Vacancy rate shows the percentage of comparable, vacant properties during the same time period in your immediate area. 
  • Useable vs. Rentable Square Footage – Just because you’re offering a certain square footage doesn’t mean that’s usable by the tenant. “Rentable” square footage can include the usable square footage of the space plus a certain percentage (or pro-rata share) of the building’s common areas, including shared meeting rooms, lobbies, restrooms, utility closets, elevators, parking areas, etc.
  • Net Operating Income – NOI refers to any income you generate from the property after expenses are taken into account, but does not include load payments, value depreciation, or taxes. 

Successfully completing a commercial real estate deal is a monumental accomplishment that takes time, effort, and a lot of energy. But as rewarding as the endeavor can be in the long-term, entering a commercial property ownership role can be frustrating if done without a cohesive plan of action. With the information above, you’ll be better equipped to handle the ups and downs of the entire process.

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The Best Questions to Ask During Your Virtual Office Space Tour

Whether in the middle of a global pandemic or short on time, having the ability to virtually visit a commercial real estate space without having to actually book an appointment is a convenience no matter the circumstances. Being able to visit a space without the time and commitment of an actual visit – let alone several during the course of a day or several weeks – is an immediate time-saver. Everyone’s time and attention are important, so brokers and listing agents should strive to provide an alternative to actually visiting a potential space. 

But there are some obvious differences and drawbacks between a virtual tour and actually visiting the space. Aside from being able to physically inspect certain details and ask the real estate agent questions during the walkthrough, it’s also possible that what’s displayed on the listing website isn’t 100% representative of how the space actually looks. In normal times, you shouldn’t rent any property – commercial or residential – sight unseen and leaving yourself exposed to bait-and-switch tactics and misleading photography or listing details. 

So, just as when preparing for an actual walkthrough, there’s wisdom in preparing your questions ahead of time and knowing what to ask during your virtual tour.

Questions to Ask During Your Virtual Tour

Besides the typical questions to ask during a property tour, the differences in a virtual tour should prompt more discussion. You’ll want to be prepared with a list of questions about the physical aspects of the space, any amenities you may require, and even details about the basics of each room. You can’t walk through and see locations for power outlets and network infrastructure, for example, so thinking ahead and imagining yourself during a physical tour will help you fill in the gaps during your virtual one.

You’ll also want to ask the realtor the following:

  • -Is this space a model property, or the actual vacancy in question?
  • -How recently have these photos and video tours been updated? 
  • -How many workspaces have been previously used in the property?
  • -Have previous tenants made any upgrades or changes to the property?
  • -Are there photos of any damage I can inspect?
  • -Will any tenant build out allowances cover improvements for social distancing requirements?
  • -Does the building have a demonstrated history of companies utilizing distributed working conditions?

These are just a few examples, but with the unpredictable times in which we live, it’s critical that a modern office space can provide flexibility for companies that need to shift gears in a hurry. 

Important Differences to Consider Between Virtual and In-Person Tours

First, it’s important to distinguish between staged photography and the real thing. While you can’t be there to physically verify the authenticity of what’s presented to you, there are a few easy ways to telling between the real thing and what’s on your screen.

  • -Be Wary of the Wide Angle: Despite the need for a “fish-eye” effect to film virtual reality tours and show every corner of a room, wide-angle lenses can misrepresent the actual size and scope of a space. When viewing the property from the comfort of your screen, be sure to get concrete details about the square footage and usable space of each room so you can make comparisons. 
  • -Look for Disclosure: Any images that have been digitally altered or virtually staged should have a disclosure of that fact below. Asking the tour guide what specifically is edited will help you get a more realistic sense of how things actually look inside the property. 
  • -Virtual Staging Tricks to Spot: Real estate professionals work meticulously to physically stage properties for expensive photo and video shoots, agonizing over the artwork, interior design, and even the color of items displayed in a photograph. Virtual staging is becoming more and more versatile, allowing realtors to change items on the fly. But being in a space makes it easier to assess the flow of a room and which objects should go where. If a couch looks like it’s in the wrong place or a table obstructs major walking paths, there’s a good chance the property has been virtually staged. 

Because realtors want to represent how a space “could” be compared to how it might be at the moment (that is, empty and without furniture, in most cases), it can actually be beneficial to ask for a few examples of layouts during your tour. If they don’t have them available, modern technology allows for quick adjustments, helping you imagine how your space could look once you move in.

Best Practices for Your Virtual Tour

  • -Find a reputable broker. Especially because you can’t always face-to-face with a commercial real estate broker, it’s important to ask for referrals, references, and check credentials. What’s this broker’s history and experience in the market? How long have they been working in commercial real estate? Do they specialize in certain types of properties, or is this listing a bonus to their portfolio? These are all fair questions to ask.
  • -Do your homework. Looking through public data on building history, contracts, and construction projects isn’t the most satisfying project on your to-do list, but investigating a potential space beforehand won’t just give you an idea of the space in question – it’ll arm you with more questions to ask during your virtual tour. And given the nature of the virtual tour, it’s important to keep records of written conversations if you decide to close on the property.
  • -Be polite, but inquisitive. You may find yourself spending even more time during a virtual tour than a physical one simply because you’ll need to ask a lot more questions of the realtor than what you can see and inspect in person. It’s easy to feel that you’re using up a lot of the realtor’s time and forcing them to dig deeper on the details than they may be used to. But in our current reality, both parties need to do their homework and get as much information as possible before moving forward. 
  • -Be prepared. Aside from your exhaustive list of questions, it wouldn’t be a bad time for a technology upgrade. Many property listings include an option for virtual reality tours. And while these don’t require a VR headset, the image will appear distorted without one. If you’re trying to make a substantial decision on how to invest in your company’s future, upgrading your hardware isn’t a bad idea. 
  • -Research virtual staging and digital listing techniques. Technology is a wonderful, ever-changing thing. And while photoshopping images isn’t a new technique, it’s a powerful one. Getting a sense of what’s been incorporated into the virtual tour to improve the appearance of the property will help you get an informed perspective – albeit a remote one. 

It’s difficult to predict the future and how things will change during times of crisis. As you move forward with your office space search, it’s more important than ever to be prepared to ask more detailed, specific questions during a virtual tour to ensure you’re making an informed decision for your company’s future – no matter how that looks today.

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The Future of Commercial Real Estate: Going Digital

There’s no tried-and-true method in finding the perfect commercial real estate property. In the “good old days,” you’d look for advertisements in local newspapers, trade magazines, and call around to brokers to meet and discuss your options within their portfolio. But with the growth of the digital media market and diversification of technology, there’s no shortage of resources to help you find the right fit for you and your company. 

The benefits of adopting a digital-first approach for your commercial real estate research makes total sense. Without even leaving your computer (or smartphone), you can access and compare details, visuals, and even participate in virtual walkthroughs to save a lot of time and energy if the property just isn’t the right fit. 

Before we dive deeper, it’s important to know the resources available to brokers, how to identify misleading property listings, and where to look when you need advice in the ever-changing realm of commercial real estate. 

Here are a few ways taking a digital-first approach to commercial real estate shopping can save you time, energy, and money.

More Resources at Your Fingertips

From the perspectives of both buyers and sellers, utilizing the vast amounts of data, listing websites, and market research available via just a few clicks can help you sort and manage your “maybes,” “nice to haves,” and “that’s perfect” properties at any end of the equation. Whether its free services like Zillow, OfficeSpace.com, or even Craigslist, you can easily find and access information about potential properties without even contacting a broker. Of course, paid services exist and are available to get more information about the history of the space, so there’s virtually no limit to the number of avenues you can use to find the right property for you. 

Utilizing Virtual Walkthroughs

Especially now, more and more listing agents are utilizing digital tools to recreate virtual walkthroughs and digital media assets as part of their listing pages. As long as you’ve got access to a computer or a mobile phone, you’ll literally be able to walk through properties and get a sense of the space without having to leave your desk. 

While the use of virtual tours and other digital tools have historically been utilized in residential real estate, it’s not uncommon to have these digital assets available for commercial real estate listings nowadays. In fact, commercial real estate brokers now have plenty of options at their disposal, including virtual tours, staging, 3D floor plans, and drone videography that help give prospective clients a better understanding of how a space looks (and could look) without physically visiting the property. 

More Ways to Reach You

But with all of these advances in tenant-facing technologies and solutions, it’s easier than ever for brokers to see what people are looking for in the market based on keyword searches, key photography, and what’s popular on YouTube. Plus, Google Display Ads will ensure that the property you looked at yesterday will show up wherever you go online. As you go through your search, be wary of services that require you to sign up with an email address, Facebook account, or other restriction before you can view a property. You’ll likely be added to a marketing email campaign, so if you’re just doing preliminary searches or not  really interested in a property, it’s not a bad idea to put a little-used email address to avoid unwanted messages from brokers and listing agents. 

Brokers are also utilizing digital platforms to market their listings and are more accessible than ever before – from posting their listings across listing websites, posting on social media, publishing blog posts, white papers, and even webinars. That’s good for you, as the more information you can gather and share with your team, the more informed you’ll be when it comes to making a solid decision on a new commercial real estate space and the process behind leasing or buying it. 

Streamlining Your Search – and Using Technology to Help

Aside from the obvious benefits of using digital technology in the commercial real estate world, the tools available to help make your search easier and more streamlined are readily available than ever before. This may have been a different story even 5-10 years ago in commercial real estate, but new companies and online resources are making it easier for prospective tenants and buyers to research and complete their transactions online. 

While you’re now just a quick Google search away from finding what you need online, if you’re looking for resources to ease the commercial real estate leasing or buying process, there are notable resources like the National Environmental Title Research Online. NETR is a public directory of all public records platforms in the United States, providing an easy way to locate public records in your area in order to find ownership history, construction projects, and other publicly-available information about the property in question. Not only will this help you understand the history of the building, but it’ll allow you the opportunity to leverage this information during a lease agreement negotiation. 

There are also services like biproxi, a platform that specializes in helping commercial real estate brokers, sellers and buyers. For buyers specifically, biproxi provides an easy way to access data reports, including Phase 1 ESA reports, sales comps, property valuations, and appraisals to help you during due diligence and closing.

And then of course, there are free commercial real estate listing websites like OfficeSpace.com that offer tenants and buyers a comprehensive look at the available commercial listings in their area. And, should you approach a tenant representation broker and move forward with your search, you’ll be able to reference the spaces you’ve located on these platforms, giving them an idea of what you’re looking for and your price range right away, speeding up the process and getting you into your new space faster. 

Assessing the Technological Aspects of a Physical Space

Especially with the onset of COVID-19 and the shift to a more work-from-home tolerant business community, it’s important to look for the infrastructure, resources, and perks that a building itself can provide to its occupants – whether they’re working there full-time, remotely, or on a rotation. Whether it’s smart lighting, integrating charging ports at workstations, server space, modern air filtration systems, or dedicated fiber lines, a listing that shows the most information about a property will only help your efforts in picking the right space for your company’s future. 

Technology touches everything we do in our modern lives, but it’s especially true in commercial real estate. Even as you utilize some of these tips in your research, it’s important to do the due diligence in investigating beneath the surface. Contacting neighboring tenants to ask about the property owner, asking for references on previous tenants, and learning more about any recent improvements or upgrades the building has undergone won’t be found on every real estate listing page. 

Especially as more millennials become an increasingly larger demographic for commercial real estate, you can expect to see more virtual and digital ways to experience potential properties – and that’s a huge win for anyone looking for their next commercial real estate space. 

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How Office Space Will Change After a Pandemic

Many countries and states within the U.S. are beginning to ease restrictions as a result of the COVID-19 global pandemic. While many aspects of life are expected to return to normal, the idea of returning to work – and occupying open-floor/shared workspaces – continues to trouble both employers and employees alike. 

For everyone, this crisis has been inconvenient, worrisome, and dangerous. But for companies seeking new office space, it’s been a complete game-changer. Not only do you have to consider the possibility that your company may never return to “normal,” you have to think about the potential for another outbreak. That means planning for adequate social distancing, contract tracing, and strict adherence to cleanliness and safety should you decide to bring your employees back into the workspace. 

Focus on Virtual

It’s not difficult to imagine a fully virtual office environment after COVID-19. As companies have been forced to move to more flexible, adaptable working environments, the reality of working from home has come to roost for companies across every industry.

For both employees and managers, the shift to working remotely has been swift and sudden. But with ever-changing circumstances and the uncertainty of future working situations, it’s important to be vigilant and progressive to keep your company’s continuity of business intact – no matter what happens day-by-day and week-by-week.

If you haven’t already invested in virtual technologies to keep your team connected, communicative, and performing at a high level, now is the time. 

Create Rotating Schedules

Should you decide to return your employees to a physical office environment, it’s important to take account of not only social distancing protocols, but the potential for spreading diseases and contagions within an isolated office.

Many companies take advantage of larger offices to place multiple workers at workstations. With a global pandemic, these seating arrangements become more problematic. Consider shifting your employees on a work-from-home to in-office schedule, rotating the number of days each employee spends in a shared office during each week. Not only will this help limit exposure, but it will provide an office environment in which your workers will feel safe, more comfortable, and less worried about their health and safety. 

Studies also show that, despite the common preconception that remote workers are less productive, there are plenty of benefits to switching to remote work compared to a mandatory in-office structure. According to a 2019 study, remote workers provide an average of 1.4 more working days per month than in-office counterparts and only sit idle for 27 minutes (besides lunch and breaks) compared to 37 minutes for in-office workers. 

Become More Flexible

It should go without saying, but companies who were already reliant (or capable) of providing remote working situations had a leg-up during the quarantine. That means, whether you’re looking for new office space or re-envisioning your working environment, you need to consider the fact that you may not be able to have all of your employees in-office every single day. Thankfully, there are sleek, modern office spaces available to provide reliable and adaptable working environments – in case you’re thinking about a move. 

It may be infrastructure, adding new and improved ways to keep everyone online and connected throughout the day, or simply improving spacing between workstations, but you need to be prepared to make a shift at a moment’s notice. 

No matter your solution, you are beholden to the safety and health of your employees. Unnecessarily exposing them to dangerous conditions in the workplace isn’t a good move for anyone at this point. Make sure your employees feel safe, contained, and protected in a physical working environment before you give the so-called “all clear.”

Safety First

From touchless hand sanitizer stations to readily available disinfectant wipes, the modern office needs to change in light of COVID-19. In addition to covering the basics, it’s important to limit the number of people per office, open floor space, and the entire office in general. There’s also another factor: housekeeping. Most offices have a contract through the property owner to have housekeeping service the building once or twice per week. Increasing the number of housekeeping visits won’t just help sanitize your office space, but help give your employees better peace of mind during the workday. Rather than having housekeeping come during the nights/weekends, try having basic surfaces like bathrooms, door handles, and shared spaces cleaned periodically during the workday. 

Furthermore, progressive companies should consider implementing more advanced cleaning solutions for employees to utilize. 

Electrostatic cleaning solutions provide sanitizing mists onto surfaces, objects, and shared spaces. It’s not cheap, but it’s a good method to defend against contagious particles and help employees feel safe at work.

And if you’re like most companies, your employees use their smartphones throughout the day for both business and personal affairs. Research has shown that most personal smartphones carry a level of bacteria higher than most public toilets, so investing in UV phone sanitizing stations in your company’s entryway will help protect visitors, employees, and housekeeping staff from unintentionally spreading infectious particles. There’s no proof that these devices prevent or offset the spread of COVID-19 specifically, but the more you can do to safeguard your workplace, the better. 

Lean into Technology

From VoIP solutions for routing calls to remote workers to video conferencing apps like Zoom and Microsoft Teams, providing your team with a vast, reliable set of tech solutions will help keep your team agile – whether they’re in the office or not. 

Outside of the virtual realm, you’ll also need to rethink how you’re using your technology in the workplace itself. As social distancing measures come and go, it’s important to consider some very basic elements of a workspace. Rotating shifts and shared workstations bring about questions of how many people are physically touching and using surfaces like desks, keyboards, mice, printers, etc. If you haven’t yet, it may be a good time to provide workers with a stipend to purchase their own equipment they can use at home and bring into the workplace to limit exposure to notoriously dirty office gear. 

No matter the measures you take in this new reality, it’s common knowledge that companies who try to return to “normal” before the pandemic will likely struggle to adapt. While companies throughout the world are quickly shifting to remote or flexible working environments, it’s important to consider the growing pains of that transition and acknowledging that your employees will always factor their happiness at work around their ability to feel safe going forward. Whether truly, 100% remote work will be a consideration in the modern and future workplace remains to be seen, the more your company can do to understand the new reality in which we live, work, and play will pay dividends moving into the future.

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Commonly Missed Expenses for Building Owners

Sure, you have a budget or estimate of what you expect your occupancy cost to be, but what can you be missing that may impact your actual occupancy cost? The list of expenses included in calculating occupancy cost is long and can include many unexpected or unforeseen items. Having an in-depth understanding of what the lease language includes, and doesn’t include, will help you understand the potential exposure you have related to occupancy cost. Lease language will have a big impact on whether certain expenses are the responsibility of the tenant or landlord, and although the language is typically clear, there will still be grey areas where it’s not so black and white. A seasoned tenant rep will be able to help validate occupancy cost budgets and forewarn of risks involved with certain lease language. With the plethora of different expenses included in your overall occupancy cost, it can be easy to miss or overlook some of these expenses.

CAM Expenses

Common area maintenance expenses, commonly referred to as CAM expenses, are typically paid for by the property owner or landlord and billed back to individual tenants through a monthly payment based on their pro-rata share of a CAM budget. These monthly payments are ultimately reconciled at the end of the year and if the CAM budget was underestimated or missing certain items, the actual expense can be quite higher than expected. Although CAM expenses are described in a lease document, it does not mean it’s clear on how much will be paid towards CAM. First-year CAM payments are usually an estimate based on a proposed estimated budget or actual expenses from the previous year. Neither one of these amounts may be an accurate representation of the actual CAM amount for any given year. Some leases may include a CAM cap where the tenant has a cap on the total amount they are required to pay, ultimately leaving any expenses above that amount the responsibility of the property owner or landlord. A CAM cap can be set at a fixed amount or based off a percentage increase over the actual CAM expense from the previous year. Monetary donations to political or charitable organizations are sometimes passed through as CAM expenses to tenants. This could be a grey area and may not actually be reimbursable items depending on the lease language. A tenant may also have the right to audit or protest CAM reconciliations and can withhold payment for any expenses they feel is not allowable per the lease agreement. This can result in unforeseen legal fees, not to mention lost time and the potential for non-payment.

Repairs

When it comes to repairs, it is usually pretty clear what falls on the property owner or landlord and what falls on the tenant, but again there can be a lot of room for dispute. If it is not specifically listed as a landlord responsibility it usually means it ends up having to be repaired at the expense of the tenant, but if the tenant objects or delays repair that ultimately creates additional damage, the costs can escalate for both the tenant and property owner or landlord and unforeseen legal fees may be incurred. A delay in a tenant making necessary repairs could also impact adjacent tenants to the extent they seek financial reimbursement and even a minor issue can snowball into a very costly scenario. 

Fees and Other Expenses

The payment of fees will affect overall occupancy cost. Property owners or landlords typically have the right, per the lease agreement, to charge certain fees to tenants. These fees may include management fees, administration fees, late fees, maintenance fees, amongst others. The property owner or landlord may incur direct fees itself including late fees, false (fire) alarm fees or non-compliance fees imposed by the city and these fees may not be reimbursable through CAM and will ultimately be an additional, unforeseen expense. Special assessments may be imposed from time to time and will also affect occupancy cost.

Other expenses that can be commonly overlooked include the cost of contracts or inspections required to keep the property operating legally and in compliance with the law. Depending on use, you may be required to have routine inspections done on equipment and be required to have certain monitoring or alarm contracts that can also add to your overall occupancy cost.

Utility

Utility expenses may vary especially if you have a water main break inside your property limits that results in very costly repairs and an unusually high water bill. These repairs may fall outside what tenants are required to pay for through CAM and can significantly increase occupancy cost.

Taxes and Insurance

Taxes and insurance can fluctuate from year to year and these expenses will also impact occupancy cost. There can be a lot of grey areas regarding both taxes and insurance and determining the actual legitimate reimbursable amount may be hard to determine if the lease language is vague. A smart tenant will want to make sure the landlord is not including expenses related to items that are not specific to the general operation of the property and that insurance premiums are not influenced by their negligence at any other properties the landlord may control. 

It can be challenging to accurately predict actual occupancy cost, even with a fixed rent and fixed CAM many unforeseen expenses can arise. It’s best to play the ‘worst-case scenario’ game so you know the financial risks involved in what could be unforeseen expenses that affect actual occupancy cost. It’s wise to account for the time and resources that may be needed to resolve certain unforeseen issues that may arise at any given property. There will always be something that gets overlooked or is unexpected, but the more you can take a step back and look at the big picture and role-play any scenario the better off you will be in predicting what could be your actual occupancy cost.

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Need to Break Your Commercial Lease? Here’s Everything You Need to Know

Committing to a long-term agreement like a commercial lease is a potentially frightening proposition as a business owner – especially if you’re just getting started. But even more uncertain than the lengthy duration of a commercial lease agreement is the possibility that you may need to leave the agreement early. Whether it’s due to insolvency or (hopefully) the need to expand your team beyond the space’s capability, breaking a commercial lease agreement can be a complicated – and expensive – proposition for any company.

Depending on the wording in your commercial lease agreement, you may be on the hook for the remainder of the lease term as well as any applicable penalties and fees. 

Why Would a Company Need to Break a Commercial Lease Early?

Hopefully, the primary reason a company would need to break their commercial lease is to expand into a larger space in order to accommodate unexpected growth. The other (unfortunate) side of the coin is insolvency, bankruptcy, or closure of your business. While there’s wiggle room in between for unique circumstances, these two scenarios are the most common. 

How to Save Money Breaking a Commercial Lease

There are ways to save money on the remainder of your commercial real estate lease agreement. The most common is to locate a subletter, allowing another tenant to take custody of the property for the remainder of the lease under the same terms. However, that leaves you ultimately responsible for any damage to the property until the conclusion of the lease and typically need to be approved by the landlord.  

The potential for locating a subletter depends on market conditions, the landlord’s willingness to approve a subletter, and the wording in your original lease agreement. 

Depending on the language contained within the lease agreement, you may not have the option to sublease the space at all. More moderate terms are common, allowing tenants to sublet the space at the landlord’s approval and at their discretion. Others strictly prohibit any form of assignment or subleasing whatsoever, making the issue more difficult for those seeking to end their lease. 

As we’ve discussed in more depth and detail, subletting a commercial real estate space allows you to reassign the financial responsibilities associated with the lease until its conclusion, but typically leaves the original leasee (you) responsible for any damages to the property until the original term is complete. But, on the other hand, if you find a reputable subletter who will pay their rent on time, care for the space, and has the intent to sign a new lease when your original term is done, it can be a huge financial boon for your business – especially if you’re moving into a larger, presumably more expensive, space. 

How to Negotiate a Lease Agreement with Easier Termination Terms

Having a tenant representative broker on your side during the initial lease negotiation process will help you lay out any “must-haves” on your end of the bargain, helping you with early termination penalty clauses and options for buy-outs within a certain timeframe. Landlords, especially in down markets, will want to provide themselves enough time to make necessary repairs and list the property on the market before your exit, so having language in place for early exit notification and stipulations on penalties will typically be the best outcome you can get in this situation.

However, in places with booming commercial real estate markets, landlords may be willing to negotiate on an amendment to the lease agreement to leave early with more favorable terms. The bottom line: if the landlord can secure another tenant at higher monthly rates within the timeframe, you may be able to break your lease with minimal penalty. 

The other factor where a tenant rep broker would be an asset in negotiating for subletting or assignment, therefore allowing you (with the landlord’s approval) to pass along the remaining term of your lease to a third-party. In most cases, you’d be ultimately responsible for the original security deposit and their monthly rent, but would require them to pay you the monthly rent until the lease expires. It’s a more convoluted process than many landlords are willing to accept, but if you have leverage during the initial lease negotiation, you may be able to afford yourself this valuable early exit strategy should the need arise. 

How to Protect Yourself Against the Possibility of Breaking Your Lease Early

Aside from the aforementioned legalese and negotiations, businesses wishing to protect themselves against the possibility of terminating their lease early can do the following:

  • Be realistic: Does your company need this much additional square footage? Will you reasonably grow at the same pace you expect from your business plan at the time of signing? Are market conditions moving in the right direction to invest in a long-term commercial lease agreement, or are you being overly optimistic? You need to ask yourself – and your team – these important questions before making such a substantial investment in a commercial real estate lease and lock yourself in for the duration. 
  • Perform a third-party business audit: As a business owner, you’re constantly looking at the numbers. With a boost of success, it’s normal to feel validity in your achievement, but you can also get rose colored glasses. Before you make a substantial investment in a long-term commercial real estate lease agreement, consult with a business analyst or financial advisor to make sure you’re approaching this next step with the best data possible. 
  • Find office space with room for growth – or retraction: While some spaces may not be glossy or glamorous, they could provide room for your company to expand or retract with an amendment to the lease agreement as needed. Making a moderate expansion in a new space is ideal, but if you’re uncertain about the future prospects of your company, then you should find a space that can accommodate a modular office concept should the need arise. 
  • Be flexible with a smaller space: Even if you’re bursting at the seams at your existing space, moving to a slightly larger or otherwise more suitable facility on a shorter-term lease agreement could be beneficial as your company grows. While space for additional employees could be a struggle, alternative working solutions like rotating work-from-home days, remote workers, and a monthly rental for shared coworking spaces for your employees could mitigate these stresses and keep everyone productive. 

As with any business agreement, you’ll want to ensure all your bases are covered before you approach your landlord with a request to break your lease agreement early. Depending on your history, duration of tenancy, and market conditions, the property owner may be more willing to allow you to end your lease agreement earlier than anticipated. Be sure to give them plenty of time as a notice and consult with your tenant representative broker to ensure the process goes as smoothly as possible for both sides.

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Should You Buy or Lease Commercial Real Estate Space?

If you’ve already established a successful business and are looking to expand your available space, you’ve got a couple of options to consider: buying or leasing commercial real estate. 

There are benefits and downsides of each and carefully investigating aspects of both is your best way to make an informed decision. 

When to Consider When Leasing Commercial Real Estate

If you’re taking your next step in business growth or just got your first round of financing and looking to expand, a commercial real estate lease is probably your best option. Not only are landlords and property owners less strict about financials and business history than financial lenders, you don’t want to get stuck in a 30 year mortgage payment if your company doesn’t survive a sudden market shift, economic downturn, or other insolvency situation.

Most commercial lease agreements range between 3-10 years depending on the real estate market in your area, so your business analysis and growth potential should be mapped out to at least the ten year mark before approaching a property for lease.

When You Should Consider Buying Commercial Real Estate

You’ve built a business, shown consistent growth, and have plenty of cash on hand, but your current space isn’t doing what it needs to do for future growth. Now is the time to consider purchasing a permanent location for your company. 

Especially if you’re in an industry with specific requirements for space to accommodate specialized equipment or handle heavy warehousing and shipping, purchasing or building on land you own could be the better option in the long-term. But these types of purchases require more significant planning, preparation, and savings in order to justify in the eyes of a financial lender. 

Banks want to ensure that their investment will pay off and that your company will be in business long enough to see the loan through to completion. 

Pros and Cons of Buying vs. Leasing Commercial Real Estate

Benefits of Buying Commercial Real Estate

Equity

As with any real estate transaction, the owner of the property will benefit from any increase in value according to market conditions – and that means equity, or perceived value, from lenders. 

Should your company need an urgent cash flow increase, you may be able to use the equity in your commercial property as collateral against a business loan or mortgage. This isn’t possible if you’re leasing a commercial property and will limit your ability to grow or adjust as market conditions change, so if you’re able and ready to purchase a space, you’ll have a greater financial advantage moving forward. 

Assets and Collateral

Having a commercial real estate property on your real estate portfolio is a nice boon – as long as the property appreciates. 

Potential for Rent and Additional Income

Most companies that purchase commercial real estate occupy at least 51% of the property, renting the remaining space out to other companies and tenants. While the additional income potential is obvious, you’ll also be acting as the landlord for each additional tenant unless you hire a property management company, but that will cut into your profit margins. 

Tax Benefits

When owning your own property, you can calculate your pax benefits by deducting interest expenses, any depreciation expenses, and anything you pay toward the property outside of the monthly mortgage payment. But compared to commercial real estate leases, where you can deduct the entirety of the monthly rent payment, you can’t deduct mortgage payments. 

Complete Control Over the Property

While landlords can dictate (within certain terms) the amount of monthly rent increases you’ll pay, having a fixed mortgage loan payment means you’ll be able to budget the exact same payment number every month for the length of the loan. Furthermore (and perhaps more importantly), you’ll be able to change any features, make upgrades, or simply add a new coat of paint to the property without asking permission. 

Downsides of Buying Commercial Real Estate

Increased Upfront Financial Requirements

Compared to leasing a commercial property, you’ll need to invest substantially more in upfront costs when purchasing a space. Because of the nature of the loan, lenders require a down payment and/or collateral against the loan. This typically consists of 10-20% of the loan, but depending on your credit, you may need to provide even more upfront. Additional costs include any due diligence you need to perform before the sale goes forward and closing costs when you complete the transaction. 

Liability

As the property owner, you’ll be responsible for the health and safety of the people inside it as well as dealing with the repairs and maintenance of the space. And if you decide to rent any portion of the property to other tenants, you’ll be liable for their actions, making additional insurance policies an must-have financial burden. 

Risk of Market Depreciation

While investing in real estate is typically a smart move, getting locked into a mortgage and then having the market go south can be a painful pill to swallow – especially if your lender is unwilling to refinance your mortgage loan. And should a market adjustment affect your business and force you to sell the property, you’ll be on the hook for any loss in value incurred. 

Decreased Flexibility 

Compared to commercial lease agreements, which can last between 2-10 years or so, a mortgage on a commercial property can be between 15-30 years or more. With that kind of long-term commitment, it can be difficult to adjust to your company’s needs should you have to expand. 

Benefits of Leasing Commercial Real Estate

Increased Liquidity and Fewer Financial Requirements

There’s significantly lower financial requirements when leasing commercial real estate than attempting to buy a property. You’ll need some cash on hand for inspections, attorney’s fees, and whatever deposits the landlord requires, but ultimately, your credit and financial requirements will be much more lax compared to applying for a mortgage loan on a commercial property. 

Tax Benefits

Just as with purchasing commercial real estate, you’ll have tax benefits associated with leasing a space. 

When calculating your taxes, you’ll be able to factor in:

  • Monthly lease payments
  • Contributions to property taxes and insurance
  • Utilities and maintenance costs factored into your lease agreement

However, unlike purchasing a property, you’ll be able to deduct the entirety of your lease payment when calculating your taxes. That means more savings overall than you’d see if you owned the property. 

Increased Flexibility 

For a medium-term lease agreement (5-10 years), you’ll have greater flexibility in changing to a smaller or larger space should your company’s needs demand it. When compared to purchasing a space outright, you’ll be able to adjust your needs more quickly than being locked into the same property for a 30+ year mortgage. 

Downsides of Leasing Commercial Real Estate

No Equity or Real Estate Investment Opportunity

Because you won’t own the space in which you occupy, you won’t recoup any money on a sale should the market value increase during your occupancy. Any money you put toward a monthly payment won’t ultimately benefit you in the long-run. 

Higher Monthly Payments

Depending on your lease agreement, you may be contributing to property taxes, insurance, and utility costs your landlord passes along to you. Plus, if property taxes increase alongside your monthly rent after the first year (again, depending on the terms of your lease), you’ll be paying more than a monthly mortgage loan payment on a comparable – or better – property. 

Decreased Control 

If you choose to lease a space, you’ll be at the whims of the landlord as to any changes or alterations you might need to make your business more comfortable and successful. Furthermore, there’s the common practice of annual escalations, which say the landlord may increase your monthly rent up to a certain amount each year, making it difficult to budget appropriately. 

What to Ask Yourself About Buying or Leasing Commercial Real Estate Space

Whether you’re planning to purchase or lease commercial real estate, you’ll want to consult with a tenant representation broker to help guide your search and help with the negotiation process. And while you may need to take out a line of credit or business development loan to secure a commercial lease agreement, it’s a different beast to apply for a commercial real estate mortgage. For that, you’ll need a longer business history, more detailed business planning, tax and financial statements for several years, and a substantial down payment and/or collateral in order to secure the mortgage. 

As with any substantial business decision, you’ll want to do a cost/benefit analysis before you make your choice. But between leasing and buying commercial real estate, you’ll also want to consider the following:

  • The current size of your company
  • Current space limitations (and how it hinders future growth)
  • Average monthly cash flow
  • Financial capital and lending potential
  • Availability of space in your area

When you’re considering the potential pros and cons for either leasing or buying commercial real estate, the number one determining factor should usually be costs. But you’ll also want to consult with a commercial real estate broker, lawyer, mortgage adviser, and an accountant before making a decision one way or the other. 

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The Best Time to Start Looking for Office Space

As exciting as looking for new office space can be, it’s also a daunting undertaking. Whether you’re looking for your first permanent office space or hoping to expand, the process is very similar. Aside from the logistics of actually relocating, ensuring continuity of business, and finalizing the lease negotiations, you’ll need to take one crucial factor into consideration: timing. 

The best time to start looking for office space is hugely dependent on your own situation. Real estate brokers and landlords alike will be pushing to close a deal as soon as possible, but remember one thing: you know your business better than anyone else. There’s a certain level of gut feeling that goes into making such a substantial investment. With this guide, you’ll be better equipped to determine when you should begin looking into additional office space and establish a foundation for your company’s future.

When’s the Right Time to Begin Looking for Office Space?

The common consensus in seeking new office space is this: you can’t start early enough. Most commercial real estate transactions take several months and involve a bevy of professionals. From building inspectors, local permitting, real estate brokers, and contractors, you’ll likely be waiting to move into a new space at least 3-6 months after you’ve signed a lease. 

Even if your company isn’t quite ready to move into a new space, your sales and growth projections should show exactly when you’ll be outgrowing your current space. Utilizing those figures, you’ll have a clearer picture as to when is the right time to move locations – but that should include the search process. Once you’ve hit your goals and have reasonable growth projections nailed down, you’ll want to start looking for new office space right away. 

Of course, your company’s finances will determine just how much you can afford, so before you begin your commercial real estate search, it’s important to reduce any financial liabilities on your books. That could include business or personal debts, loans, or lines of credit tied to your company and its stakeholders. 

In order to get a clearer picture as to your company’s ability to lease a new property, you’ll want to employ a business analyst, a tenant rep broker, and a real estate attorney to help you negotiate a lease agreement in the future. As for your company’s participation, the best plan of attack is to designate a small committee to begin searching for a new property about a year from a desired move-in date (ideally, this would closely coincide with the termination of your existing lease agreement). Set a criteria: desired square footage, budget, lease term, amenities, nice-to-have features, and essential components for your next space. 

How to Reduce the Length of the Search Process

While it’s easier than ever to find suitable commercial real estate spaces, the biggest deterrent to a speedy transition is the lease negotiation process. That’s why it’s so important to make your company as attractive as possible to prospective landlords. That means getting pre-approved for business loans, establishing your needs and priorities when it comes to a particular space, and showing a willingness to move quickly in order to get a deal done.

Moving quickly requires expertise, and a tenant representative broker has exactly that. With their experience in the market, relationships with other landlords, and savvy with the transaction process, they should be able to take your lead and get a deal done fast – to your ultimate benefit. 

However, an eager potential tenant could demonstrate desperation in the eyes of a landlord and could hurt you in the negotiation process. It’s a tricky tightrope, but having several options available to you throughout the negotiations will help with leverage and provide a fallback in case things go south with one option. 

What to Keep in Mind While You Look for New Space

There’s no way to tell exactly what your company needs without knowing the nature of your business and your culture. That’s why it’s so important to bring in your internal team for the search process. Creating a search committee within your existing organization won’t just be a great asset for you when looking for a new property, but it will create a sense of inclusion in finding your next home. 

Aside from the personnel considerations, you’ll want to consider each property based on your needs. If you simply need an office space, determine what priorities you’d like to set to improve conditions for your team and make the best use of the available – and hopefully – larger space. 

If you’re operating in a specialized industry, look for opportunities in the vacant space to improve and upgrade to best suit your needs. Obviously, if you’re working in manufacturing, you’ll want space to install equipment and store your products. But the best option is to go with your gut: does the space feel right? Can you envision working here for several years? Is there room for expansion and growth? These factors don’t always make it on the commercial lease agreement terms, but you’ll know the right spot when you find it. After all, you know your business better than anyone else. 

How to Deal with Your Existing Landlord

During your search process, you’ll want to consult your existing lease agreement: does it contain any language about assignments? What about subleasing? Either terms contained within your lease agreement may contain restrictions about your ability to lease your existing space early. However, if there’s no language about subleasing or assignments, you’re welcome to do either at your discretion – but this is rare. Landlords want to control the quality of the tenants occupying their space; others will flatly reject a tenant’s ability to assign or sublet a rented space. In some lease agreements, landlords will permit subleasing with their consent and approval. If you have a good existing relationship with your landlord and have found a subtenant that would suit their needs, you shouldn’t have a problem. Otherwise, you may be on the hook for early termination penalties should you vacate the property prematurely. 

You’ll also need to provide your landlord with a written notice of your move (usually 30 days in advance and by certified mail). The notice should include the following:

  • Today’s date
  • Name of landlord
  • Property address
  • Notice of intent to vacate and at which date
  • A forwarding address 
  • Signature of tenant

Your landlord will likely reply by mail or email and discuss next steps. Be aware that they’ll want to put the property on the market as soon as possible and begin showing the space to potential tenants. 

Ensuring a Smooth Transition to a New Office Space

If you’ve never relocated to a new office before, you should know one thing: starting early is your easiest way to avoid headaches. Planning, searching, making decisions, and finally executing the plan could take over a year – and that’s generous for small-to-medium sized businesses. 

The most important part of initiating an office move is to communicate clearly and honestly with your team. Not only will this move affect their workspace, it’ll impact their commute and daily routine, so the more notice you give, the more excited they’ll be about a shiny new office.

You’ll need help dealing with the nitty gritty details of the new space, so enlist some of the more excited employees to help manage seating arrangements, purchasing of new furniture, equipment, and decor, and to inventory existing possessions that may be obsolete or unneeded in the new space. 

You’ll also want to ensure everything is packed, moved, and unpacked according to your needs once you get to the new office. Because continuity of business is key, having someone there to supervise the movers and ensure everything is setup correctly for day one will help avoid a painful first day. Getting necessary infrastructure like internet, phones, and cable connected before the move-in date goes without saying. 

Lastly, looking back at the old space, hiring a professional cleaning service will help once you’ve cleared out your equipment and furniture. Any unneeded or unwanted furniture should be donated, recycled, or sold at warehouse auction – and you’ll need someone to help organize that, too. 

Once you’ve settled in, completed your months-long journey and started a new one, don’t forget the small stuff: your employees will want to celebrate – and so should you.

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Things to Consider When Choosing a Location for Your Commercial Space

Whether you’re opening your first public location or expanding to a new one, business owners tend to get more excited about finding a shiny new commercial space than they are determining whether it’s a viable one. But your company’s image and success are as tied to the right location as they are the quality of your services, making the search for the right space a critical factor to commercial viability. 

It goes without saying that many business mistakes or shortcomings can be corrected after the fact, but a bad location is something that’s nearly impossible to correct. That’s why it’s so important to consider the location of a potential new space above all else. Here’s what to look for as you begin your search:

What to Consider When Looking for a New Space

There’s a laundry list of things to look out for when searching for new commercial real estate, but before we break down the specific needs for offices, retail, and industrial space, let’s look at the basic, barebones factors you’ll want to watch out for when starting your search:

Budget – You’ll want to set a fixed budget range to avoid overspending. You’ll want to incorporate taxes, monthly utilities, costs of renovations, upkeep, and any new equipment or furniture you’ll need to make yourself at home.

Available space – Moving to a new office usually means expansion, but you don’t want too much space – or too little. That’s why your space requirements should be measured against your projected business growth over the course of the lease term. Plan to add 150-200 square feet per each future hire in an office or industrial space in addition to any equipment you’ll want to install.

Aesthetics – If you want your business positioned among high-visibility brands, you’ll want to look for space in downtown or business districts. Stores, restaurants, and personal services should aim for street-level properties or space in established shopping structures. 

Competition – Obviously, you don’t want to oversaturate the area with similar services. Opening a coffee shop next door to another coffee shop probably won’t be a successful endeavor, so do your research on companies within walking distance of your desired location before you commit. 

Opportunity for Growth – Especially important for office and industrial spaces, you’ll want to consider the ability for expansion within the building in the event that your company expands much faster than expected. While that’s certainly the ideal situation for any business, it can be a significant headache if you need to break your lease too early and relocate once again if the neighboring space isn’t available. 

Access – Parking is a major issue no matter the industry you’re in. Retail and restaurants need parking for customers, offices need space for clients and employees, and industrial firms require ample space for shipping, delivery, and storage. 

Zoning – Depending on your local zoning laws, an ideal location and space may not be zoned for your specific use. Do your homework into the available zoning designations for the space and your ability to rezone the property to meet your needs if possible. 

Offices

Accessibility – If you’re serving clients, you’ll want to ensure they have access to parking so they can come visit your office without a hassle. But even more crucially, having a location that’s convenient for your employees to commute to work can help motivate your team and help boost productivity. Check for parking, walkability, and access to public transit when looking for a new location. 

Amenities – Studies show that employee productivity increases when workers have access to sunlight, inspiring views, fresh air, and appealing lighting. While these can come with a higher price, sticking your growing business in a basement might not be the best long-term solution for improvement or retention. Secondarily, things like onsite fitness centers, cafes, and daycare facilities will help attract and retain talent. 

Infrastructure – If you’re a company that relies on high speed internet, you’ll want to look for a building wired and serviced for fiber or gigabit internet. Depending on the location, this might not be possible, but as you expand and grow, so will your needs. Ask the property owner about the building’s capabilities and investigate what internet service providers (ISPs) are available in the area. 

Proximity – Being close to thriving shops, restaurants, and bars shows that your company is operating in a growing environment – and it helps with employee morale.

Growth potential – Every office move is (hopefully) an expansion, but if you take on a larger than expected client that requires a greater headcount than you anticipated, you’ll want to make sure that the building has the capability to offer additional space should you need it. 

Retail

Demographics – Obviously, you’ll want to be where your customers are. And while location factors greatly into this (you probably shouldn’t open a dollar store in a boutique shopping mall), it’s also the breakdown of who lives, works, and visits the neighborhood in which you’re setting up shop. These can be hard to quantify, but doing some reverse-engineering on what other businesses see in a location can give you a good perspective. 

Accessibility – Ample parking, easy walkability, and access to public transit are important factors for retail spaces, no matter the city. This shouldn’t be a problem in suburban shopping malls, but dense urban areas are prime for renovation and construction, which could put a damper on a fledgling new business, so do your research on your city’s future planning before making a commitment. 

Visibility – Every company wants to be known to potential customers, but retailers need to be seen. Street-level properties provide opportunities for flashy signage, sandwich boards, and flyers, but if you’re tucked away in an industrial office mall, it’ll be harder to attract anyone but your most loyal of customers. 

Industrial

Space – And lots of it. Any industrial space will need ample room for parking, shipping, and logistics, but growth should also be a consideration. Overspending on industrial space may not sound like a good investment now, but having unused space as your company grows will only lessen your headaches in the future. 

Access – If you’re dependent on your supplies and products moving in and out of your facility on a regular, consistent basis, you don’t want your vehicles stuck in snarling downtown traffic. Finding industrial space along major highways or with easy access to interstates and airports will alleviate your supply chain woes. 

Security – Look around the area – are there lots of vacancies, or is the street full of other industrial companies? Are there chain link fences and barbed wire around some properties? How’s the lighting along the road? Industrial areas are prime targets for criminals, especially if they’re deemed insecure. Check your local crime stats for the area and ask the landlord about the security features at the facility. 

What Tenants Should Ask Property Owners

We’ve covered this topic fairly extensively in the past, so we’ll keep it brief:

  1. 1. What’s the length and type of the lease?
  2. 2. What utilities and additional costs are included in the monthly rent?
  3. 3. Is the lease assignable? Renewable?
  4. 4. What happens if the building is sold?
  5. 5. Has the space been updated in the recent past?

Top Tips for Finding the Perfect New Location

1. Enlist Help

Outside of an internal search committee to help offset some of the stress that comes with a new location hunt, a tenant representation broker and a real estate attorney will help you identify appropriate locations and avoid pitfalls that come with the search. Since they’ll already have relationships and experience in the market, you could gain valuable insights you can’t find online. 

2. Take Your Time – and Don’t Jump at the First Offer

Changing a business location takes a lot of time. Expect the process to take at least 12 months from the time you begin looking. Even if you’re staring down the barrel at a lease agreement expiration, taking your time to ensure you’re finding the right location for your needs will save you from disappointment in the future. 

3. Keep Your Options Open

Especially important during the lease negotiation process, you’ll want to have 3 or 4 other properties on your “probably” list in case your first choice doesn’t pan out. That way, you won’t be beholden to a stubborn property owner and have a fallback option if they’re unwilling to meet your needs. 

4. Speak with Previous Occupants and Neighboring Businesses

It’ll take some time, but doing your homework and tracking down the previous tenant can give you insights into the condition and viability of the space in question. It’ll also give you a look into the actual relationship between a tenant and the landlord. You should also contact neighboring businesses to see if they’re familiar with the property owner and get their opinions on the viability of the space for your specific business. 

Choosing a new commercial space is a complex and time-consuming task, but if you take your time, determine your priorities, do your research, and investigate all your options, you’ll be better prepared to make this important step for your company’s future. 

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Common Questions About The Cost of Opening a Restaurant

In the restaurant industry, there’s a common joke: “What’s the difference between opening a restaurant downtown and burning $1 million on the street?” Answer: none.

Despite the known upfront costs in starting a restaurant, one of the most common mistakes restaurateurs make is to underestimate the initial capital and budget requirements associated with starting a restaurant. 

While every business endeavor – restaurants included – are up to particulars and unique in their own way, we’ve expanded our previous guide to further break down the upfront costs and estimates related to starting a brand new restaurant. When combined with our other resources, this should better equip your company to prepare for the ups and downs associated with budgeting, equipment and build out, and dealing with a potential landlord.  

How Should I Calculate My Monthly Restaurant Rent?

The amount you’ll pay for restaurant space each month is dependent on the market, location, and specific terms you established with your landlord. The easiest way to predict properties that might be in your price range is to analyze the listing, check for the cost per square footage (which is pre-tax), then multiply that number by the square footage of the space listed.

Some landlords will establish different monthly rental terms based on length of lease, your finances, whether you have proven experience in the restaurant business, and the duration the property has been vacant. While these factors aren’t guaranteed, they’re useful leverage when starting a lease negotiation.

What Should I Expect to Spend on Equipment and Build Out?

The primary thing you’ll need to secure in order to start a restaurant is equipment. After all, it’s difficult to cook without a stove. A recent survey by the Restaurant Owners puts the average cost of building out a 1,000-square foot bar and kitchen with the proper gear and equipment at about $75,000, or $80 per square foot. 

Secondhand equipment is likely available, as other restaurants may have closed and need to offload their assets. But just because you’re getting a deal doesn’t mean you’re in the clear. You’ll want to hire an equipment technician to evaluate the equipment before you make a purchase. 

And as far as remodels, upgrades, and repairs are concerned, you’ll need to negotiate with your landlord. Who’s responsible for what? What happens if a larger issue is discovered during the build out? With the demand for architects, construction contractors, and subcontractors in major cities at an all-time high, it’s important to factor in the length and cost of these improvements. Simply installing a new floor in the restrooms could run you as high as $50 per square foot – if you’re lucky. 

How Should I Prepare for Cost Overruns and Delays?

According to the Restaurant Owner, the average restaurant remodel goes over estimates by about 34%. Anything from construction delays, permitting issues,  and contractor and subcontractor schedules can throw a wrench in your plans. Meanwhile, you’re still paying rent and likely have your top-level staff and management hired. Should delays continue, you may lose those you’ve trained to other jobs, which is why budgeting for a six-month rent and labor contingency is recommended to avoid further headaches. 

How much does it cost per square foot to build a restaurant?

Depending on the market and location, it’s estimated that the total investment in building a new restaurant (in addition to purchasing the land and associated soft costs) could range between $250,000-$2.5 million for square footage between 1,000-10,000 square feet.

For example, opening an Applebee’s franchise location requires significant total investment. In addition to the $35,000 franchise fee, it’s estimated that franchisees will need to invest between $1.97-$7.1 million. 

How much does building a commercial kitchen cost?

According to the Restaurant Owner’s survey, the average cost of equipping an existing 1,000 square foot bar and kitchen is about $75,000, or $80 per square foot. Building a commercial kitchen from scratch within an existing space, however, could run anywhere between $250-500 per square foot. This takes into account flooring, walls, lighting, ventilation, electrical connections, fire prevention measures, plumbing, gas connections, and equipment. 

How much does a restaurant remodel cost?

In order to renovate or remodel an entire restaurant (dining room, bar, and kitchen), you’ll want to budget $250-500 per square foot in the kitchen/back of house area and between $150-300 per square foot in public-facing areas. 

If you have a kitchen with 1,000 square feet and 2,500 square feet in the dining area for a total space of 3,500 square feet, you can expect to spend between $400,000 to $800,000 for a complete remodel. 

Depending on materials used, quality of finishes, and craftsmanship, you may be able to cut down costs – or send your budget through the roof. 

How Can I Save Money While Opening a Restaurant?

  1. Buy used equipment: This is one of the easiest ways to significantly cut down on initial expenses. Because the installation of a commercial exhaust hood alone could run into the tens of thousands, cutting down on the actual purchase is highly recommended. Chances are, if you’re moving into an existing restaurant space, the previous tenant will be willing to part with the already installed equipment. If not, look for auctions, restaurants going out of business, or local restaurant supply stores that buy and sell used kitchen equipment. 
  2. Cut corners where needed: You probably don’t need a full staff until 2-3 weeks before your soft open. Rather than keeping them waiting for your restaurant to open and risk losing them to more immediate opportunities, hold off on the initial orientation, training, and trial shifts until you’ve got your soft open dates secured. Furthermore, investing in high-quality menus, signage, and decor right off the bat might not be worthwhile until you’ve had an ample sample size of customer feedback. While it’s important to make a first impression, you won’t know what your customers think of your establishment until you’ve had a steady stream of repeat diners.
  3. Don’t jump on a full liquor license right away: Unless you’re going for a high-end cocktail bar, you can get by with a partial liquor license and serve beer and wine. Because full liquor licenses are often more expensive and time-consuming to secure, offering a full bar at the outset could delay your open date. 
  4. Invest in the important stuff first: High-quality tables and chairs, dining and glassware, and reliable point-of-sale systems will carry your business further than cheap, “it’ll do” solutions that can break down and require replacement. Plus, these elements are highly valued on the secondary market, so even if the restaurant closes, you’ll be able to recoup much of the initial investment. 
  5. Don’t splurge on advertising: While sales and marketing are crucial for getting the word out about your new restaurant, your best chance at earning repeat customers in your area is to keep them informed about your open date. Post flyers, keep your social media feeds current about your restaurant’s progress, and place a limited advertising run in local outlets or social media. You might also invite local media figures, business people, local politicians, social media influencers, and other restaurant professionals to an exclusive soft launch to spread the word and put your best foot forward ahead of a public opening. 

If you’re feeling lost in the dark as your dream restaurant project begins to take shape, you’re not alone. Every restaurateur needs help determining the value of a location, the content of their menus, and researching their prime demographic. But with this information in mind, you’ll be better equipped to handle the turbulent nature of the restaurant and culinary business no matter what city or market you’re hoping to operate in.