A friend of mine told me that his landlord was trying to raise his commercial rent from $3.25 to $5 per square foot per year. I was surprised, because most people I know are either having their rent reduced or at least frozen. My friend explained that he really didn’t want to move his company because the location was convenient for him and for his employees.
He has a 50,000-square-foot space with low ceilings on the second floor of a building that is half-empty in a neighborhood that has seen better days. When I saw my friend, he was seriously considering re-upping at the higher rate. This is not an uncommon story. What is uncommon is the real estate environment we are in. My advice to my friend was to convince his landlord that he was ready to move — and, if necessary, to actually move.
With the collapse of the real estate market, record low interest rates, increased financing from the Small Business Administration, and the drop in demand, the game has changed. All businesses should be looking at their occupancy costs, whether they rent or own their property. And yet, a recent report by CIT Group, a provider of financing to small businesses and middle-market companies, found that only 28 percent of small-business owners believe that buying real estate right now is a “great” or “substantial” opportunity.”
That percentage is surprisingly low. The report also indicates that even though interest rates are at historic lows, only 13 percent of small businesses who own their property are “very likely” or “somewhat likely” to consider refinancing, while 24 percent were “not very likely” or “not likely at all.” I’m sure there are many cases where a business owner is unable to refinance because the property value has gone down or the business doesn’t have the necessary cash flow. But I am also sure that some small-business owners are helping their lenders bottom lines more than their own by ignoring this opportunity.
The study also showed that most small-business owners do not understand the advantages and opportunities of the S.B.A. loan program. Of the small-business owners surveyed, only a small minority understood that S.B.A. loans allow borrowers to make a lower down payment (14 percent of the respondents), make a lower monthly payment (12 percent) and pay off the loan over a longer period of time (15 percent). That means that 86 percent of small-business owners do not realize that the S.B.A. program requires only a 10 percent down payment — which might allow many of them to buy a building.
I got an S.B.A. loan about 13 years ago and it allowed me to buy a building that I otherwise would not have been able to buy. In that sense, the loan did what it was supposed to do. I now provide 102 jobs, up from the 40-some I had when I got the loan.
Even if you don’t have the down payment or a good credit score, there are ways to buy a building. Some buildings for sale have no mortgages and owners who would be very happy to finance the deal themselves. For them, the alternative is to sit with an empty building, paying all of the expenses, which can be substantial. The point is this: if it makes sense for you to own a building for your business, there has never been a better time to pull the trigger. There are all kinds of creative deals out there.
What if you lease and don’t want to buy? There are still opportunities if you understand the game. I recently ran into a company called Interstate Tenant. The company assists large industrial tenants (100,000 square feet and up) across North America with negotiating leases or finding new space. Interstate only represents tenants; it doesn’t sell, buy or invest in real estate. Brian Netzky, the company’s president, says there are six things to remember when negotiating a lease:
1. The rent you pay is your landlord’s cash flow. Because it creates and builds equity, that cash flow is valuable. A rented building might lose half of its value if it falls empty. To get the lowest rent, you must show you are prepared to move.
2. Don’t confuse getting a rent reduction with getting a deal that represents the current market. These days, it isn’t that hard to get a reduction. But getting your rent down to where it really should be is another story. (On average, Mr. Netzky said, he has been able to lower his clients’ rent by about 22 percent.)
3. Be wary of a “blend and extend.” This is where landlords reduce your rent in the short term but extend the lease with escalations. Frequently, the reductions are too small, the escalations too large.
4. Don’t think that your landlord will pass the savings on to you if you choose not to hire someone to negotiate for you. Landlords don’t do that. It also tells the landlord that you have no intention of looking around. You probably don’t have the market knowledge or credibility to get the rent down to the bottom of the market.
5. Many brokers have direct or indirect conflicts and are hesitant to be aggressive in negotiations with large landlords. Down the road, these brokers may hope to represent the landlord. Investigate the broker you are working with.
6. Don’t tell yourself that you don’t want to rock the boat because you are friendly with the landlord. That is how landlords get higher-than-market rent.
Business is not all about finding new customers. These days it can be easier, and more profitable, to lower your expenses.
Jay Goltz owns five small businesses in Chicago.