Tenant beware: when a commercial real estate find is too good to be true

For leaseSometimes a commercial real estate deal can seem too good to be true. Do crazy things happen in our market? You bet, every day In fact.





Unheard of rental rate

A landlord is asking way under market rent for their property. To some people unfamiliar with leasing this could seem like a great bargain. To me, I would suggest this raises a bright, red flag.

Is the landlord simply unsophisticated and is unaware of the market rent? Possibly, but I think most of the time it falls under the category of “hard to lease” property.

Perhaps there are inherent parking issues with the site plan that makes it hard to retain tenants. Maybe there are known building issues that are causing people to vacate.

Most local agents will have a historical knowledge of buildings in their market. They can shed light on their past experience with tenants in the property. You need to do your homework.

Rock bottom occupancy costs

Every property you look at is quoting $5 psf in occupancy costs but you’ve found a hidden gem with estimates of $2.50 psf! Before you sign on the dotted line it would be prudent to get a few more details.

What is the landlord including in your occupancy costs? During a negotiation for lease it is not unheard of for a tenant to see the breakdown in current operating expenses.

Typical costs would include property taxes, building insurance, property management, building repairs and maintenance, landscaping and snow removal. On a stand-alone building there may be an expectation from the landlord that you pay some of these costs directly and therefore they are not included.

You want to make sure you’re comparing apples to apples. Just because one property has a lower occupancy cost does not mean it will work out to less expense for you in the future.

Long term vacancy on dynamite location

You have noticed a property that seems like it’s been vacant forever. Now’s your chance to swoop in and solve all the landlord’s problems but taking him/her any kind of deal. You’re doing them a favour; or are you?

Without any prior knowledge of the landlord’s motivation, you cannot assume a long term vacancy signals desperation on their part. They may have litany of reasons their property is vacant.

Landlords will sit on vacancy because they have redevelopment plans in mind. Another reason can be their reluctance to take just any tenant. They may have a real vision in mind for who best fits onto their site.

Right, wrong or otherwise, it is the landlord’s discretion as to who they will accept for tenancy. Taking a deal under market rent diminishes the asset value of their investment property and therefore just any deal may not suffice.

Move on down the road?

I’m not recommending arbitrarily walking away from a deal in any of these scenarios. I would advise that you know what you’re getting into. Using proper representation can assist in the process of weeding through properties and rental terms that best suit your business needs.

In our previous Where to Watch for Hair Growth on CRE Investments, we focused on purchaser pitfalls that could also be useful. Have you ever walked away from a deal because it was not what you initially thought it was?

Posted by Kelly Macsymic


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