Got a brilliant start-up idea? Avoid 5 common mistakes new businesses make when leasing commercial space.
One of the best things about practicing commercial real estate in Frederick County is the entrepreneurial culture.
It’s a rare week that MacRo doesn’t get a call from prospective clients launching new businesses or medical practices, or moving start-ups from dining rooms and garages.
A structure of bricks and mortar is a significant investment for any business, but particularly for one in its infancy. Costly mistakes in real estate acquisition can often be the difference between start-ups that make it and those that don’t.
Following are just a handful of the missteps that commercial property virgins commonly make:
1) No business plan.
It’s not unusual for would-be entrepreneurs to show up at the MacRo offices with a great idea for a new business having no clue as to how much it will cost to manifest what the cash flows and revenues will be. That’s okay–we actually prefer to begin advising on real estate acquisitions early in the process.
What we do find cringe-worthy are clients who decide to push forward and lease space before they develop that fleshed-out business plan. Here’s why:
- It puts the client in a terribly weak negotiating position. This often means paying higher-than-market lease rates and tying up personal assets to guarantee a lease.
- The client doesn’t have a clear sense of how much real estate the business can afford — potentially putting the business in jeopardy if cash flows ultimately can’t sustain lease payments.
2) Hire a commercial real estate virgin to represent them.
Unfortunately, a real estate license is a real estate license — agents can legally broker commercial or residential deals with it. That doesn’t mean they SHOULD, however. The world of commercial real estate operates very differently than residential real estate, which is a blog post in and of itself.
Here are just a few of those differences:
- Residential real estate has in place an enormous amount of protection for buyers and tenants, which largely do NOT exist in the commercial world.
- Price is only ONE of many negotiating factors in a commercial deal. In leasing for example, every commercial market, including Frederick, has a selection of concessions routinely used to sweeten deals and lure tenants — these can be worth tens of thousands of dollars or more — and concessions differ for each segment of the commercial market. (Get yourself a good commercial broker if you want to know the goodies you may be entitled to when you lease commercial space!)
- There are a host of complexities in the commercial real estate world including zoning, building codes and change of use permits that need to be factored into the decision making process when a business is leasing property. Failure to do so can result in unforeseen and sometimes catastrophic expenses down the road.
- Seasoned commercial brokers KNOW THE COMMERCIAL MARKET. The last thing a new business needs is a 10-year lease in a turning market.
Don’t get us wrong–Frederick has many real estate professionals who successfully straddle the residential and commercial real estate worlds, and they are competent professionals in both. Just be sure you don’t hire one who is a commercial real estate virgin.
3) Underestimate the costs of rehabbing commercial space.
In the Frederick market, the small-business tenant can often eat the lion’s share of tenant improvement costs to make space usable for its intended purpose –whether retail, office, restaurant or medical. It’s a big investment, and as they say, you can’t take it with you. When the lease expires on the dress shop, that gorgeous wide-plank wood floor now belongs to the landlord.
As a means of getting an accurate picture of the required improvements, take the time to get solid estimates from reputable contractors for costs of planned improvements BEFORE negotiating lease rates and concessions.
4) Forget about parking.
This sounds like a no-brainer, but it’s surprisingly easy to get so caught up in the location and the interior of a property that prospective tenants forget to check whether available parking is adequate to their business needs. Lack of parking can be a business killer! Check lots and garages at various times of day to monitor the ebb and flow of parking usage BEFORE a lease is signed.
5) Fail to have an attorney review the lease.
As mentioned earlier, there is little in the way of protection for tenants built into commercial leases, which are largely written in such a way as to protect the property owners. A competent real estate attorney who knows Maryland real estate laws can ensure the tenant’s rights and best interests are represented as much as possible within the framework of the negotiated deal.
Planning to lease space for your new or expanding business? MacRo can help you avoid the landmines that commercial real estate virgins often step into.