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To Buy or Lease Commercial Space for your Business?


This is a question with a number of opinions.  I've found these opinions are similar to political views, the conviction many business owners feel toward their opinion is unwavering and anyone who thinks differently is clearly maladjusted!  Many business owners are adamant about owning their own building as a way to build wealth while others prefer to lease space and write off the annual lease payment as an operating expense. 

One consideration right off the bat is the capital expense required to own a piece of property vs. leasing.  Even more so in today's economy given the current loan to value ratios most banks are willing to lend at.  Many business owners view that capital expenditure at a significant cost.  For example, if you need $200k as a down payment toward a purchase, some would argue the same capital is better spent being put into the business to grow the operations.  Where as, if you were to lease the same property your initial costs are minimal and any property management issues are someone else's problem.  If you are among those with this outlook you are in good company as most fortune 500 companies do not own their real estate.

On the flip side, there are others who can't bear the thought of leasing space year after year and having nothing to show for it at the end of the day.  Over the past decade, if this was your philosophy you probably made out well considering the appreciation we've seen across all types of real estate during this time.  Putting aside the capital expenditure required to own real estate, one advantage for a business owner is the ability to own the real estate under a corporate entity or trust and essentially have the business lease the space from the business owner thus giving you the flexibility to write a lease above or below market rents depending on your situation.  Ultimately, this can also lead to an additional stream of income to the business owner.  Also, worth noting is the value that is created once a vacant property is purchased and then occupied by a business.  When this happens the property can now be evaluated by the income generated by the value of the lease and not just the value of the vacant real estate.

These are just a few examples of the arguments for and against owning commercial real estate for your business and there are many more but as I stated above, most business owners feel strongly one way or the other.  I'd like to know what you think on the subject... please feel free to comment below.

Does Social Media Work in Commercial Real Estate?

  • That's a damn good question. Here's the answer, I don't know... YET. Here's what I do know... I know I can't have a conversation with another business owner without them asking if I'm doing anything online with social media and if it's working or not. My response is YES, I'm involved in social media... is it working? Not sure. I'm on LinkedIn, Twitter and most recently Facebook... and to be honest I feel like a toddler in the baby pool who desperately wants to swim like the big kids... or at least I think I want to swim... or better yet, I'm told I need to swim.
  • There is no question social media is all the buzz these days and there are already 1000's of guru's out there who want to show you how to capitalize on this new era of social interaction and networking for business purposes. I recently bit the bullet and signed on to Facebook, despite my wife telling me I was going to scare young children if I joined. I know it's not taboo to be on Myspace or Facebook anymore but I still can't help feeling like I just signed up for the high school yearbook committee all over again. So far I've reconnected with a whole bunch of high school friends I haven't spoken to in years, which is great... but I still don't have a clue how to use it to grow my business. I have a little bit more of a clue with Twitter but really I'm just on there once or twice a day to try to post something relevant to my business or push my blog out there. I'm not the guy telling you I had grape nuts with sliced up bananas on it for breakfast. I feel the most confident on LinkedIn. I'm part of 30some groups and have networked with some great people. That said I know I still have a lot to learn.
  • In my business, commercial real estate, or more specifically, commercial real estate brokerage in the Boston area, my goal is to network with other business owners and companies who have a future need to either lease or purchase commercial space as well as networking with commercial property owners and commercial investors. But like many business owners I'm always scrambling to find the time. Then, when I do find the time, where is my time spent going to be the most productive? Which social media outlet is going to give me the biggest ROT (Return On my Time)?
  • I'm told, "Rome wasn't built in a day" and "this is a marathon, not a sprint", so don't get me wrong, I'm totally on board (obviously or I wouldn't be sitting here at 9:15pm writing this blog article!), I just hope the conductor points me to the right seat after a few too many cocktails in the bar car and sitting next to me is Warren Buffett who tells me he would like me to be his exclusive commercial broker for all of Berkshire Hathaway's companies.

Take advantage of commercial sublease space in the Boston area!

  • Here's an eye-opener for you... now is a great time to be a commercial tenant in the Boston market looking for space!  Okay, maybe it's not an eye-opener... just a fact. 
  • Asking rental rates are down across the board for direct space in virtually every submarket of Boston.  On top of that, there is an influx of sublease space on the market with asking rental rates 15 to 40 percent less than the already deflated asking rates of direct space. 
  • Most companies, large and small, that are offering sublease space on the market just want to stop the bleeding and are happy to do a deal less than what they are currently on the hook for.  If they are paying $20 per square foot they are typically ecstatic if they can get a subtenant paying $15 per square foot, giving you, the subtenant, a 25% discount for the same space.  The primary tenant is still on the hook for $5 per square foot but it's certainly better than paying the entire freight.
  • For example, we are currently in the process of doing a sublease deal with a client where the direct asking rent for space in the building is $17 per square foot and we've negotiated a $10 per square foot sublease deal... that's a 41% savings to our client!
  • The other advantage of sublease space for growing or startup companies is that you can get space in a much nicer building that you otherwise might not be able to afford giving your business the image you are looking for at a price you can afford.  This allows you to get in at a sublet rate for a couple years while you continue to build up your business and then you can have your broker negotiate a direct deal with the landlord if you want to stay in the building.
  • Here's the catch... there is no catch!  If your business is in the market for commercial space it couldn't be a better time.  Whether you are looking for a sublease opportunity or direct space, you're in the driver seat!  Not only is the sublease market competing for you as a tenant, landlords with direct space are competing against the sublease market.  Competition is a great thing as it has an inverse relationship with price... the more competition (supply) the lower the price!

Why Commercial Tenants Should Restructure Their Lease Now!

  • Market conditions in virtually every market across the country are in rough shape. Vacancy rates continue to climb as businesses close their doors and rental rates continue to drop.
  • Landlords are in a tough spot right now. Many landlords, big & small, purchased their properties with the expectation that rents would continue to climb which would in turn increase the value of their property and they would simply refinance their mortgage before the maturity of their loan was due. Well, the opposite has happened, rental rates are dropping and so is the value of their property. Many landlords will be faced with a serious problem and will likely need to rework the terms of their loans with their banks if possible.
  • To do so, landlords need to tell a compelling story to their lender. If that story is that they currently have a low vacancy at their property their banks are probably more likely to work with them to find a reasonable solution. In other words, if you are a tenant your landlord more than likely desperately needs to keep you in the building.
  • Don't get me wrong, I'm not saying because the market is down you're entitled to restructure your lease. After all you did sign a binding lease with your landlord. And if the scenario was flipped and you had signed a long term lease in a market like today and 2 years from now your landlord came to you and wanted more rent because the market was better you would lose your mind. What I am saying, is that if your company is fairly stable and you can foresee the business making it through this recession it makes good business sense to try to negotiate a "blend and extend" type lease restructuring.
  • What is "blend and extend"? There are many ways to do it but basically you extend the term of the lease in exchange for lowing the rent. For example, let's say you had 1 year left on your lease and you were paying well over the current market rents. You or your commercial real estate broker would negotiate with your landlord to extend your lease for an additional 5 year term in exchange for lowering your base rent to a rate more in line with the current market. In many cases this is a win-win. You're able to reduce your rent which goes straight to your bottom line and your landlord locks you in for another 5 years and does not have to worry about trying to find a new tenant in this market.
  • For more detailed information consult your commercial real estate broker or feel free to give us a call. We would welcome the opportunity to work with you.
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