Monthly Archives: December 2017

Is It Better to Buy or Lease Commercial Real Estate?

Clients ask me this question quite a bit.  The answer depends on many factors and it is different for each client depending upon the current market parameters and their unique circumstances.

Right now, the California commercial real estate market for retail, office and industrial properties for sale and for lease in which I specialize in is pretty hot and has been for many years.  Prices for both sales and leasing have exceeded all-time highs historically in most California cities especially in Southern California where most of my transactions take place.  So, when prices are high it means that it’s not a good time to buy or lease, right?  Not necessarily.  And what if you have a business and have to do one or the other, which one do you choose?

I define businesses that can occupy at least 51% of a building as “owner/users”.  Many times owner/users can pay more for a building because they can get a better loan than investors buying properties not occupying at least 51% of the building.  They also usually get better tax treatment when owning rather than leasing.  Owner/users have been buying quite a bit in the last couple of years.  They are buying even though prices are high, because of low interest rates and preferential tax treatment. The draw for these types of buyers is that it is better compared to leasing and, many times, that proves to be the case.  If they don’t occupy the entire building, but at least 51%, then they can lease out the rest of it which can also add to the positive bottom line.

Whether you are an owner/user, or a business that can’t qualify as an owner/user, you have to compare the costs of leasing versus buying.  You have to take into consideration not only the loan and down payment costs, but also the tax implications.  This is where your unique circumstances come into play.

Here are some common reasons why you shouldn’t or can’t buy.  In these situations, leasing is better:  If you don’t have enough money for a down payment, if you can’t qualify for a loan, if you might significantly expand or contract your space in the future, if you don’t have money for building improvements that landlords take care of if leasing instead, and many more reasons.

There are many factors that go into figuring out if it’s better to buy or lease.  Every situation doesn’t come out with the same answer.  A good broker can advise you and help you to figure out the right answer for you.  More on how to find a good deal on a property to buy in any market.

If you want to learn more about leasing, buying and/or selling any and all types of commercial spaces in California or if you have questions about any subject related to commercial real estate, please contact David Massie of DJM Commercial Real Estate at david@djmcre.com or 805-217-0791.

Who Pays Your Commercial Real Estate Broker and How Much?

Although the answer might seem obvious to some, this question is asked of me quite a bit in my role as a commercial real estate broker in California.  Generally in California for retail, office and industrial properties (and I am going to focus only on these since these are the ones I specialize in), the landlord or seller of a commercial property pays your broker a commission for your broker bringing you to the property. Many people believe that commissions are negotiable. This is true to some extent in theory and legally. In reality, about 99% of the time there is a market standard commission in the commercial real estate industry for a particular type of commercial property lease or sale that everyone agrees to.

The total commission usually paid by a landlord or seller is 5-6% of the total rent over the lease term or the sale price.  This commission amount can vary.  This is especially true for more expensive properties for sale in excess of 10 million dollars. In those cases, the commission total is usually less and can instead be a set fee of say $200,000 as an example.  The landlord/selling broker enters into a contract with the landlord/seller for the entire commission, but then has to split that in some fashion with a tenant/buyer broker unless the landlord/seller broker also represents the buyer. (This latter scenario is called a dual representation and something I strongly recommend against ever doing as a tenant/buyer for many good reasons; more here on this subject.  In Southern California, the splits vary between the two brokers depending upon whether the deal was retail, office, industrial or other type of property.

Let’s assume a 6% leasing and sales commission for our examples that follow.  Retail and industrial deals usually split the leasing/sales commission evenly (3% to each broker). Office deals usually pay 4% to the tenant’s leasing broker with the remaining 2% going to the landlord’s broker. But, for sales, the commission is split evenly. Therefore, in this example, it would be 3% to each broker.  Note that industrial deals for leasing and sales tend to be at total of 5% and not 6%, but office and retail are usually 6%.

So, if you are a tenant or buyer, you can see that hiring your own broker to represent you doesn’t cost you anything. It also doesn’t make your deal more expensive, because the landlord/seller is already paying one commission and requiring his broker to split that fee with another broker as necessary.

Bottom line:  It’s a no brainer to always have your own broker representing you when leasing or buying. It doesn’t cost you anything.  Having your own broker should save you time, money and headaches.  You do have to choose your broker wisely to get the most of them (more here on how to find a good broker).

If you want to learn more about leasing, buying and/or selling any and all types of commercial spaces or if you have questions about any subject related to commercial real estate, please contact David Massie of DJM Commercial Real Estate at david@djmcre.com or 805-217-0791.