Whether you're looking to buy commercial real estate space or lease it, the quality of your due diligence will directly impact your ownership or your tenancy experience. The more home work you do up front, the better your results will be. Here are some tips to help make the process of analyzing potential spaces more fruitful.
Understand Market Norm
To spot a good deal, you have to first know what a good idea is. If you're used to paying rents in New York City, even a grossly overpriced space in Des Moines will seem like a steal. On the other hand, if you've never rented space in an oil boomtown, the cost of even a small office in the heart of the Bakken in Williston, ND will shock you.
Fine details make a difference too. Just because you come from a market where triple net rents are the norm doesn't mean that you might not end up leasing space in a place where full service leases are normal. Even more granularly, full service leases can vary from place to place with some spaces including janitorial service and others not.
The way to manage this is to work with a local expert tenant representative. While you might be able to do some of your own due diligence using the Internet and some basic research, an industry professional has access to the tools to really get an understanding of the market.
Calculate True Occupancy Costs
It isn't enough to understand what the norms are in a market. You also need to apply those norms to calculate what your true occupancy cost will be. Part of due diligence is to figure out the costs that go above and beyond just those that are covered by a lease or a mortgage and operating cost accounting. These can include the costs of compliance with area-specific labor regulations, business licenses and taxes, and just about anything else that you can imagine.
Do Your Own Measurements
Measuring a building might seem like a straightforward process. However, many owners fail to take measurements that comply with the highly specific and technical definitions that are present in most leases. Simple errors like measuring from the inside of a wall instead of from the midpoint between the wall's interior and exterior sides or vice versa can cause swings in a space's size that can add thousands of dollars of annual costs. The only way to be sure of what you're renting or buying is to measure it yourself.
Read the Fine Print
While it goes without saying that due diligence is about reading all of the fine print, it's easy to skip details in the rush to a closing or to a lease signing. Nevertheless, it's easy for a landlord looking for an advantage to slip an unfavorable term into a lease or for a seller to tweak a purchase agreement to reduce his liability. Understanding exactly what you're signing, and getting the necessary help to do this, is a key part of successful due diligence.
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