Commercial Classroom: You don’t know what you don’t know! - by Edward Smith

October 03, 2017 - Long Island
Edward Smith, 
Smith Commercial Real Estate

This column is offered to help educate agents new to commercial and investment brokerage and serve as a review of basics for existing practitioners. 

You can’t just dabble in commercial and investment properties; you need to know what you are doing. Unfortunately, we see some residential agents trying to service a commercial real estate opportunity without being properly trained. Sometimes agents don’t realize how different commercial transactions are; without the right education they may end up unable to help their client, or exposing themselves and their firm to liability.

In most states, the “Laws of Agency” are basically the same. It must be made clear to the consumer who you are working for and you have fiduciary duties including disclosure and reasonable care. What do you have to disclose? Everything! This means you need to know what is going on in your market area. Put another way, “You should have known.” 

An agent listed a 2,000 s/f building on an acre of land. The buyer asks, “Can I expand the building?” Agent looks at all this land and says “Sure.” The agent never checked the zoning for; buffer zone, setbacks, variances, does not know the floor area ratio (FAR) or parking requirements etc. If you don’t know what some of these things are, that’s the point.

Reasonable care includes performing financial analysis and valuation; basically you must know your market area. That means knowing what other commercial properties are on the market and what has sold or leased. From a practical point of view, an agent lists one commercial property, a buyer is meeting him or her to view it and upon arrival says, “On my way here I noted a vacancy on Main St., what can you tell me about that building?” You need to know what is going on in your market. A new shopping center has just been approved, and construction will start soon. Does this make your clients property more or less valuable?

How do you measure commercial buildings; landlords expect to be paid for every square inch of their buildings. In office buildings the thickness of the exterior walls are considered structural and are excluded from measurements. Tenants will exclusively occupy a part of the building, with space being measured from the inside of the walls, called usable, a/k/a net or net usable s/f. They will pay rent based on the rentable, a/k/a billable or gross s/f, which includes their usable s/f plus their proportionate share of the common areas (atriums, foyers, corridors, including the thickness of the corridor walls, public rest rooms and other areas). Retail and industrial space is measured from the exterior of the building and includes the thickness of the exterior walls. If adjoining another unit half the thickness of the dividing wall is allocated to each tenant. This is referred to as the gross s/f and this is what the tenants rent is based upon.

Working in the commercial market requires knowing the terms and the formulas. What is a loss factor or core factor? How do you convert usable s/f to rentable s/f? From a financing perspective, what is loan to value or debt service ratio and how do you calculate them.

Investment properties require additional skills: Operating  statements, financial analysis, cash flows and spreadsheets; how to determine net operating income, value, internal rate of return, net present value. What do you know about capital gains taxes and 1031 exchanges?

Learning about the different types of leases, the key lease clauses and what needs to be negotiated by the agents before the attorneys can draft a lease are essential. “Green” has many perspectives from greenhouse gases, climate changes carbon emissions, to the impact of energy efficiency on the operating costs and value of buildings; plus now we have green leases.

Yes, there is a lot to learn to prepare an agent to do commercial and investment property transactions. If your company does not have an in-house commercial training program, seek out training courses at local Boards of Realtors or colleges or find an experienced commercial agent willing to mentor you. Now you have some idea of what you need to know.

Edward Smith, Jr., CREI, ITI, CIC, GREEN, MICP, CNE, is a commercial real estate consultant, instructor and broker at Smith Commercial Real Estate, Sandy Hook, CT.

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