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Posted by attorney Stephen Schreiber

For many commercial businesses, the cost of their office or store is their highest fixed expense. Whether or not you purchase or lease space, understanding the fundamentals of commercial real estate as they affect your business is essential. Once you buy or lease you have made a serious financial commitment that can make or break your business. ********

It has been said that the three most important things in real estate are location, location, location. For many businesses that is very true. For others location is not as important. And for almost every business there are different criteria for what makes a great location. But one thing seems for sure. You can't fix a bad location. ********

If you are in the retail business, you will want a retail location. That typically means a location within a certain kind of shopping district. If you are a doctor you might want to office near the hospital or other medical campuses or you might want to office downtown or you might want to office at the mall, depending on whichever better suits your particular practice. An urgent care clinic that takes walk-ins would need a more prominent and easily accessible location than a doctor who only takes individual appointments. Even what is 'prominent' is going to have different meanings for businesses that have different customers. ********

To choose a location you first need to determine who is your primary customer, where they shop for your services, and how they (and your employees) are going to get there. If you are selling on the internet you probably don't need much more than an office and some warehouse space. You would find that in an industrial park. But there is more to location than just that. How do you get your goods and ship your product? Should you be near a railroad, shipyard, post office, airport or home? Is it a safe area? What kind of commute? Is there public transportation nearby? Is there convenient parking (for customers and employees)? Where are you going to eat lunch? ********

If you are a restaurant, then with few exceptions, you will need to be visible. Except in very dense urban areas and commuter hubs, you will need to have convenient and accessible parking. You will also need to know how you get deliveries (and garbage removal) and how your employees will get to work. [When I was with Fridays, we used to consider whether some high income locations had adequate bus service for the busboys and kitchen staff.] You should evaluate every location on the basis of the safety and security of your customers and employees. Customers will rarely frequent places they do not perceive as safe. [Note, I said perceive. Once a major mall in Houston placed security personnel on every level of their parking mall to address a crime problem in the neighborhood, but they dressed the additional security guards all in 'customer service' uniforms to change the focus from a need for security to a commitment to customer service.] *********

As you can imagine, the 'best' locations get premium prices. Prices are negotiable, but you have to know what people are asking and what people are settling for in that particular market. For example retail space on Broadway in New York City is not the same as retail space on Broadway in Denver. You need a local expert, a knowledgeable real estate broker. Office brokers know office rents, retail brokers know retail rents, and industrial brokers know the industrial rents. Get a specialist. ********

Not all real estate brokers are the same. Despite what you mother tells you, your cousin who dabbles in real estate on the side isn't necessarily as proficient as someone with a bigger firm who has a lot of experience in the particular market you are prospecting. You want a broker who has access to (and understands) demographic information as well as traffic studies, competition maps, the latest deal information (who is going where and why) and sales trends - someone who understands the dynamics of the metropolitan area so that you can locate in the portion of the market that gives you the best access to the most of your targeted customers. If it is intended to be a multiple store market, you will want to project your sub markets in the metropolitan area to determine ideal store placement. In each submarket you want to place your store in your customers' 100% location. ********

Make sure your broker is working for you. Most property is 'listed' by the seller/landlord with a real estate broker. The listing broker is working for the seller or landlord and is trying to get them the highest price/rent, and the broker gets a percentage of that amount as a 'real estate commission' for doing so. Usually the listing broker will 'split' the commission with a buyer's broker (or tenant's broker), as half a loaf is better than none (although it is not always a 50/50 split). Some buyers and tenants will try to negotiate for themselves in hopes of saving half a broker commission, but most listing brokers will not split commission with a buyer/tenant and in some places it is illegal to do so. Many landlords and some builders have their own in house staff instead of a listing broker, but they too will typically pay a buyer's broker commission without increasing the purchase/lease price and will rarely give you a lower price for not using a broker.

When the buyer/tenant is not represented by a broker, the listing broker may act as the 'transaction broker', which in theory means that the broker does not act as an advocate for either party; but in reality, the broker is most likely to favor getting the best deal for the seller/landlord since they are more likely to be the continuing source of business. Also, the transaction broker is vested in completing that one particular transaction and is more likely to gloss over site or deal issues rather than steer the buyer/tenant to a better location. A buyer/tenant broker will get a commission at whichever location you make a deal and a good one is more likely to focus on the client's needs than trying to fit a square peg in a round hole just to secure a commission. So, if the seller/landlord is going to pay the commission anyway and you are going to pay the same price or rent, why not have a broker who is more likely to be specifically serving your interests? ********

The good thing about a buyer's or tenant's broker is that they have an implied duty to get the best deal for the buyer. But, don't be naive; there are many lazy brokers who just want you to make a deal, any deal, so that they can get a commission. A good buyer/tenant broker is going to want to know about your business and needs, who your customer is, and what your growth plans are, so that you get the best location at the best price for your business. The broker should be a specialist in your real estate area (office, retail or industrial) and have market experience in the geographic submarket you focus on. Most brokers are going to want you to sign an 'exclusive' representation agreement before they will help you find a site. That is to protect them from doing all the work and then you having your cousin close the deal and take the commission.

Just the same, don't sign any exclusive representation agreement until you are sure this broker is qualified and is actually going to do the work necessary to get you your best location. Many brokerage firms have you interview with a seasoned expert who sells you on their expertise and then assign your work to a junior associate. Make sure your agreement states who is going to be doing the work on your account. Also, be careful. Some buyer/tenant brokers' agreements state that the buyer/tenant will pay the broker a fee if the seller/landlord doesn't. In some instances this is appropriate, but I don't recommend it, unless you have a fixed fee that you can afford to fit into your budget. You should always try to have the landlord agree to pay the broker commissions in your letter of intent, as it can be a significant dollar amount and can affect your start up cost proforma. ********

Never sign a brokerage contract without reading and understanding it. I always cross out language in a contract that I don't understand. That way if it needs to be in the contract, the broker will tell me why, and then we can redraft the language in terms that I can understand. Never sign anything you don't understand.

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