CRE 101

Signing a commercial property lease? “Soft” factors

Part 1 of 3: “Soft” considerations

So you’re about to be signing a commercial property lease…

In the insurance industry, you can sign a policy for simple products like life or vehicle insurance, safely and at low cost by yourself. Innovative companies like simply life insurance or naked car insurance have sprung up to respond to this.

But if you’re thinking of business insurance, which is more complicated, you’re going to want to lean on the services of a registered professional.

It’s exactly the same with the incredibly complicated world of commercial property. This article focuses, for purposes of simplicity, on the simple act of signing a commercial property lease on a new property, or renewing your existing lease…

Leases involve big numbers and long term financial commitments. A wrong decision can hurt a tenant for a long time.

There are two approaches here.

  1. For those comfortable to “wing it” you need to navigate through the non-obvious complexity in CRE multiplied by the high volumes of data needing processing. This article and others is essential reading for those brave souls.
  2. For the others… Enter high pedigree commercial property professionals. They certainly can’t do your job, be it manufacturing products, or selling widgets online, or managing accounts. But, equipped with the right tools and data, they can help people like you make the right decisions around commercial property. Both for you and for your business.

To keep things short, this article is first in a series of three is a “don’t leave home without” list of items you need to consider around signing a lease

Trust and incentives

As Charlie Munger of Berkshire Hathaway fame says “…

I think I’ve been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I’ve underestimated it. And never a year passes but I get some surprise that pushes my limit a little farther.”

Commercial real estate is incredibly complex. You want a skilled advisor who you can trust. And you need to make sure you can trust them. To protect yourself, consider the advisor’s incentives:

  • Does their remuneration vary depending on what option they pick for you?
  • Are their objectives aligned purely with giving you a good deal?
  • Do they have any biases?

Ask the questions, and get the answers – ethical brokers will be happy to provide transparency here.

Generally, brokers are paid by the landlord (with the costs amortised over period of the lease), while certain corporate real estate service providers are paid by the tenant.

Avoiding a commercial property lease “lemon”

First know what you want, then ensure your decision-making is based on near-perfect information.

Most people are not lucky enough to marry the first person they held hands with. There are a couple good reason for this. In simple terms, people like to gather more data before making big decisions.

Same with your commercial property decisions.

Before you start, have a clear idea of what you want – what are your most important success factor. Then second factor. Then third. Prioritise these, for example: most important is: cost, then 2) short travel distance, 3) address perception, 4) good access to retail, 5) flexibility etc. This prioritisation is not as easy as you think it is – and only you can do it.

Then get access to a comprehensive list of the alternatives. Not a subset of the market – you want all options. Then evaluate these alternatives. Remember, commercial property is an information imperfect market – your advisor has the skills to, firstly, harvest all the data, and, secondly, to create decision-friendly order out of this data chaos.

And, once you have all the data, out of respect to your advisor, make a decision. Remember, with these professionals, their time is incredibly valuable.

But always make sure you get comfort you have the model answer of options. One good way to ruin a dinner is to hear that a mate is paying 15% less rent than you, for better space, on friendlier terms, simply because he saw a deal or deals that you didn’t…

Landlord reputation and ease of doing business

Ignore branding and media noise. Focus on facts. During the duration of a lease, you may need certain changes on your property to implemented, you may want to relocate, you and the landlord or property manager may be inconvenienced by “acts of God” or variables outside of their control. Ultimately these matters require a negotiation between two parties. The more rational, solutions-orientated and competent/process-optimised your landlord or property manager is, the better the outcome.

Certain landlords outsource their property management inhouse, so it is recommended you evaluate also their property manager. A property manager, depending on the landlord and your lease, will, in many instances, be your first port of call.

So talk to other tenants / industry insiders, lean on your skilled advisor/s.

Why this article

A more educated and informed customer raises the performance bar for industry professionals. A raised service bar rewards the great professionals, and creates incentives for the good professionals to further up their game. More strong property professionals improves the prestige and professionalism of the industry across the board.

This means that the cream rises to the top, and the good guys win – tenant, landlord, and broker/consultant/advisor.

If you have found this useful, the remaining two articles in this series cover flexibility and feasibility considerations and financial considerations.

We hope this article has been helpful to you, and welcome any comments or questions.

Good luck!

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