Renting first commercial property - is this normal?

Question

I'm looking for a commercial space in the North Atlanta suburbs to start a doggy day care. There are a couple of places I've been interested in, so I got in touch with a lawyer who said "don't sign anything then send me the lease proposal when you get it and we'll take it from there". Sounds reasonable. Sounds like the process I've read about.

Then I find this space. Large B class office. Good location for the price, even has a proper grassy yard. I get in touch with the broker who sends the owner to meet me. I'm having trouble understanding the owner as English is not his first language, but he seems OK about doggies all over his property, is happy for me to fence in his yard and there are some nice big signs on poles for advertising. I like this place and ask to see the lease.

Next thing the broker is ringing up asking for more rent because it is doggy day care. I say "no" and remind him I am looking at other properties too. Then he wants $50 up front so I can apply for the lease. He wants bank statements. He wants references. He wants me to fill in a long form that wants to know every last little thing about me. The sort of detail that puts me at real risk of ID theft, I'm thinking.

I figure this is just a credit check, but I am unhappy giving up my life on a plate, so I offer to pay a lot of rent up front in advance instead. If I can show I don't need credit, why would they need to check?

This is wonderful. They love this. Now I'm getting frequent emails referring to the upfront rent as a 'security deposit' (dream on) and they still want that goddamned form filled in handing over my whole life! And I still don't have a lease proposal to show the lawyer but I'm supposed to go round pestering the professionals in my life for personal references for a lease I haven't even had sight of yet?

At this stage I'm thinking I need some real help. People - is this type of third degree normal for a commercial real estate lease and I'm being paranoid? Checking into the broker, he does residential. I think this is a favor for his friend, the owner. Who is not listed on the county website as owning the property (he says he just bought it).

Either this is a pair of dufuses or I'm paranoid. Any help apreciated! Any commercial property appreciated too, if its 150ft from the nearest residential neighbor, has a road with 20,000+ eyeballs and is easily visible, with the potential for a yard.

Joel Owens · Answer

Alex the PERCEPTION is that mom and pop tenants think they are more valuable then they actually are.

I do retail all day long but on the transaction side buying the centers with clients and then development myself.

Tenant rep brokers is a very low income business. If rent is 50,000 a year times 5 years that is 250,000. Do that times 3 percent and gross to the broker if own the firm is 7,500.

From an owners stand point if I want to sell down the road I better have a very deep file on my tenants including ongoing liquidity and net worth statements along with monthly and annual disclosing of sales figures for the business location.

We look at health ratios for certain industries and class of tenants. If tenants are trying to pay a certain rent with weak sales then they are not even going to last or want a rent reduction. These types of businesses can be hobbies for people. So if you apply for instance and net worth is 100,000 but build out is 50k and with survival money you have to turn a profit in 6 months or you go under that is a huge red flag.

If on the other hand you are worth 1 million and doing the business as a hobby it could break even or lose money and with that personal guarantee you could still pay the rent. Water fountains and other things mentioned while look interesting have shown to be LIABILITIES for owners which is why you do not see them as much today.

High retail with 20,000 cars as day lend more to strict retail only businesses willing to pay high rate per sq ft. I have found some companies such as insurance agencies like the road frontage exposure if they can get it cheap otherwise they want to go to warehouse for less per sq ft or office space. Retail is usually the most expensive space per sq ft out there versus office,warehouse,etc.

If an owner can back fill a space with a national tenant where the center is worth a lower cap rate on resale then why would a landlord not do that? I have also seen landlords if they are just filling up a center reserve the right to move your business to another space written into the lease just in case a national tenant comes inquiring about  a specific unit. Mom and pop tenants tend to just want to be in a good location but national tenants are very picky about the placement in a center and their tenants walk ability and traffic flow.

Ash Patel · Answer

You can fill in only the parts of the form that you are comfortable with and see if that is good enough.  At the end of the day, a good tenant landlord relationship is crucial.  If you are having this much friction, I would pass.  Find a cool landlord like me!

Russ Wallace · Answer

Alex, I suggest locating an experienced commercial broker who specializes in industrial and/or flex space leases and is willing to work with a start-up business owner. They should be able to navigate the process of securing a satisfactory location without you having to do anything unnecessary, e.g, paying one year's rent in advance . Do yourself a favor; get competent help finding the right location so YOU can focus on the business being successful.

Frank Chin · Answer

Look at it from the owner's standpoint. Years ago, my first career was credit so I understand some of the issues. Being in REI myself for 35 years, my dad owning commercial real estate for another 50 years, there's additional issues.

I owned a rental once, the the landlord next store owned a convenience store 2 doors down. I used to go there one or twice a month to check out my property and to chitchat, and often about REI, since at that point he was in it for 40 years. One day, his property manager was with him, and they were talking about another property he owned where the next store landlord consistently evicting tenants, get another one in, and its the same thing.

Then, they bought up the fact the landlord rents to Russians and was wondering what that has to do with it. His PM says that the Russians often come in, pays 4 months rent in advance to entice the landlord, sometimes more. So I said "what's wrong with that"? He says that's the only rent you'll see, and the landlord spends months in eviction court trying to get rid of these guys. They never want to show their finances saying it's none of your business.

I look at it this way. When I'm the landlord, when I'm the credit manager, I'm letting you use a property, here in NYC, worth hundreds of thousands of dollars, these days, a million dollars or more. And I have tenants tell me I have no rights to ask about their finances? I don't know the supply and demand for commercial properties where you are, but where I am, my dad has enough renters coming by needing his property that he doesn't need to start arguments with potential tenants. He once was complaining to me about such a prospect. I told him "if he starts off this way, some day you ask him to keep his sidewalk clean or you'll be in trouble with the city, he'll probably tell you to get lost. So,  for my dad, it's NEXT.

And yes, commercial is different than residential, and the vetting is more vigorous. In fact, a serious landlord would ask you "how experienced are you in the doggie care business", something my dad would ask you. Would you say "it's none of your business"?

Martin Z. · Answer

"the PERCEPTION is that mom and pop tenants think they are more valuable then they actually are."  Well said, well said...

Dennis H. · Answer

Bigger picture to consider - Commercial leases are often multi-year. If you go under for financial reasons, it hurts a lot more than having a tenant move out of an apartment building since there are less people to reduce the burden and the vacancy period is longer. The owner would also have to pay additional leasing commissions and TI's for a new tenant - more costs out of their pocket.

Don't take their request personally as they are just acting as responsible landlords.

Alex Miles · Answer

Fascinating stuff Joel. I had no idea the landlord would want to know so much.

Before the place with the two numpties, I had walked away from a property I'd wanted very much. In many respects, despite needing significant repair, it was perfect - location, size, cost. If I had my choice of every location in the US, I would have chosen this one. It had just one insurmountable problem - a type of infestation that is very hard to deal with. However, since walking away I did some research and got offers of help, and the leasing agent and owners are keen to have me and willing to bring the building up to spec - I think because no-one else has been willing to give it a go, so when the agent reached out again to see if I'd changed my mind, I was happy to hear from him.

I thought the way I'd approach the build out is this.. Landlord does the repairs. Landlord does the decorating - which will be bright and neutral. I pay for the doggy specific things - all of which I can take with me if I go - special indoor gates, flooring, fencing, splash pool.

If my business fails - at least they brought their building up to spec and someone will want it. This place is going to be gorgeous. Just getting rid of the slime green exterior will do wonders. I mean you look at that and it's "next!!"

Chris Goershel · Answer

Alex,

I'm a commercial real estate broker in the Metro Atlanta area. If you'd like to message me directly I'd be happy to discuss the leasing process for commercial space in Atlanta and see if I can be of any help.

Thanks

Alex Miles · Answer

Thank you everybody. If it is normal to pay a fee, then I can pay one for the next property, if they ask. The problem I am having with commercial brokers is getting my foot in the door. This sort of business needs a certain scale. I am also trying to avoid strip malls as they rarely have outdoor space. You see these places with gardens and splash pools on their advertising - and the facilities don't exist! I'd like them to on mine. I found another place last night that would be perfect, and I emailed the broker (why does that never work? I always have to phone!)

Martin, I'd expect to be able to assign the lease if necessary, and they could have more than a year up front. Ash - please move to Atlanta!

Martin Z. · Answer

"there's an application fee" Yes, of course, when they complete a credit check, it costs money.

If this is a new business you're starting, statistically, and from a property owner's point of view, you are more likely to fail than to succeed. Imagine leasing a new car, or financing a new house, leasing commercial property requires a close look into your credit as a personal guarantor.

Renting first commercial property - is this normal?

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