Tenants have been leasing commercial real estate for over 200 years however there are still many myths or misunderstandings about the industry and how the process works. For example many tenants think they have to pay for 100% of the tenant improvement costs when renting commercial real estate property in Austin, Tx. They don't realize that they can negotiate to get most or all of that paid for by the landlord as long as they are a good credit tenant.
Below are a few common misconceptions that tenants have about renting commercial real estate.
- It's Only About Getting the Lowest Lease Rate – While getting the lowest lease rate possible is a component of the negotiations tenants should focus on the total occupancy cost over the lease term. Tenants need to factor in other concessions such as free rent, tenant improvement allowances, age and class of building, amenities, and operating expenses. For example one building might have a lower base rent however another building has lower operating expenses (aka NNN). Or maybe your rate is higher than the tenant next door however you received a $40 sf tenant improvement allowance. You have to look at the whole deal……………not just the base rental amount.
- I Can Find Space on My Own on the Internet – This is partially true. These days there are over 10 different websites that list commercial properties for lease however many of the spaces advertised have already been leased, the data is not complete, inaccurate, or outdated, etc. They are essentially in the business of generating leads, not adding value to the tenant. In some cases the data is misleading. In a hot market most of the best spaces get leased before they make it to those websites. . If you are only looking on the internet for available commercial space then you are missing a lot of great options.
- Commercial Real Estate Agents Are Expensive – Many tenants don't understand that when you hire a commercial realtor to represent you in finding and negotiating space their fee is paid for by the landlord, HOWEVER they are legally obligated to represent your best interests. The listing agents job is to get the BEST deal for the owner or landlord. Just because you don't have an agent that does not mean they will give you a lower lease rate. The asking rate will be the same regardless. The questions is do you know how to negotiate commercial leases to get the best deal. Using commercial broker to help you does not have a negative impact on your deal. In fact they know the market and can help you save time and money.
- Commercial Brokers Don't Care About My Company Needs – A good commercial realtor that represents tenants only is gong to listen to your current and future business needs and help you find space and negotiate a deal that makes business sense. They only get paid when a lease is signed so they have incentive to see things through. The landlords agent has the fiduciary duty to adhere primarily to the landlords needs.
- Renting Commercial Real Estate is Cheaper than Buying – Leasing may require less up front costs however depending on the market your in and type of space it could cost more. Every company is in a different situation and t's important to do a lease vs purchase analysis.
- Owning Owner Occupied Commercial Real Estate is Better Than Leasing – That depends on your situation. If you are a startup with little cashflow and not sure about your current and future needs then it would not make sense to tie up your money into real estate. if you are a stable company with no plans to grow over the next 5-7 years then owning may be the best option. When you buy commercial real estate you tie up your money which means it's not free as operating capital. Also if you get into a situation where you need cash it's not easy to offload a commercial building
- Triple Net (NNN) Commercial Leases are More Expensive – Whether you're in a full service lease or a NNN lease your rent will include operating expenses. With a NNN lease the base rate will be lower. With a full service lease your are paying the operating expenses however they are simply baked into the overall rate.
- You Need to Lease Office Space – Companies are getting more creative with the space the rent these days. Old warehouses and malls are being converted into creative office space, etc. Don't just look at office space. Look at commercial spaces that either work or that can be made to meet your needs. You need to think outside the box.
- We Can't Afford New Commercial Space – Just because the building is brand new and in shell condition don't assume that you can't afford it. Yes you need to make sure you can afford the negotiated rate, however landlords typically give tenant improvement allowances to build out new spaces. If you are one of the first tenants sometimes you will get even more TI allowance as they want to create some incentive and momentum in getting the building leased up. In some cases you will find that it cost less to finish out a new space than it does to reconfigure an existing one.