Jon Brooks: Commercial Real Estate Agent, Brooklyn

Purchasing and Lenders: The differences between receiving Preapproval and being Prequalified.

If you are looking to buy Industrial or Commercial Real Estate it’s important to identify how you are financing purchasing deal. While this seems obvious, often times I see buyers identify their type of financing to me but don’t prepare themselves to show proof of their ability finance a deal. This can erode a seller’s confidence in you as a buyer and reduce your chances of doing a deal.

The NY Times provides a nice breakdown on the difference between being PREQUALIFIED and recieving PREAPPROVAL when looking to recieve institutional financing on purchase of property. Understanding this key difference strengthens your negotiation position. It is highly recommended that you recieve preapproval from your lender because the lender requires you to disclose your financials for their review. While a lender’s preapproval letter does not guaranty 100% that the you will actually receive financing that matches the preapproval, but it’s enough to gain a seller’s confidence in you.

Getting Prequalified by your lender does not usually require to show the lender hard proof of your finances.. Sellers doesn’t recognize being PREQUALIFIED as proof that you are a serious buyer.

If you are currently looking for space in the 5 boroughs you can always call me for advise, call Jon Brooks, agent at 5CRE 212-366-0407, email me at jb@5cre.com.. 

Disclaimer: Not all information above may be accurate. Please before you use any advise in this post or any other post in this blog, consult with a real estate professional and/or attorney. 

Options! Tenants, grab em while you can!

Options in life are a great thing. Who wants to be pigeon holed? When you are leasing a commercial property, options for a tenant is a good thing. My advise is to always ask for them and push the limits.

A tenant’s option I’m referring to in a lease is in reference to the option to extend the amount of years you can remain in the space. For instance you sign a five year deal with a five year option. At the end of the fifth year you can either remain in the space or leave the space with no penalty. It’s your option. I understand tenants are wary sometimes thinking a straight ten year deal is better. Well what of after five years you need to expand? Or after five years you realize that you are paying above market rent? It is clearly to the tenants benefit.And while you have a five year lease with a five year option, why not ask for another five year option on top of it? The worst the landlord would say is no.

Landlords are wary of options. Options take the power out of the landlord’s hands. Especially if they feel like the market for their property will go up. They might offer you instead of a options with increases based on the market value sometimes based on the CPI Index (I’ll explain later on another post).

Options also take away the power of the landlord to sell the property. Not everyone wants to buy a property with tenants occupying the space on a long lease, especially if the buyer is a owner user. The landlord might give you the option, but insist if he sells the property, you must vacate the space.

Commercial Leases: The Question of Security

     If your looking to lease a warehouse, retail location, or office space, you should be prepared to put up security. How much security will you have to pay? Technically, it’s negotiable and there is no required amount.  With that being said, typically on a commercial lease in NYC, a landlord will expect at least 2 months security. However there are many circumstances where a landlord might ask for additional security. I will explore a few of those circumstances.

1. You’re a brand new business

    Every business, no matter how big was a start up at one time. From a landlord’s perspective however, he might consider it to be a risky proposition since it’s well known that a majority of businesses fail in there first five years. For this reason he might ask you to put up additional security.

2, The landlord has questions about your build out

    Lets say your trying to rent a 10,000SF warehouse to start a music rehearsal space. You want to  build 50 rehearsal rooms. But the landlord wants his warehouse restored to its original condition when you vacate the premises. Of course in the lease you’ll be signing you’ll promise to restore the warehouse to the original condition. What if your business goes bust and you’re out of cash? To demolish the space, the landlord will have to go out of pocket and spend thousands of dollars to demolish the space to it’s original condition. If you can’t prove to him that your company has a track good track record, the landlord might then request for additional security to cover demolition costs.

3, The landlord doesn’t believe in your business

    When you provide your financials (tax returns, balance sheet, etc) the landlord might come to the conclusion that your profit margins are thin, you are over stretching yourself, or just simply he/she believes your business isn’t viable. To offset the risk on having you as a tenant, the landlord will ask for additional security.

    I just cited a few examples, but they’re are many more. How much additional security he can ask for? It can be simply an extra month or in extreme cases 12 months of security. Every situation is different. You might be able to circumvent putting up additional security by a) Having a person or entity with assets guarantee the lease b)Illustrate that while you are a new business, you are well experienced in the business you are starting (ie. you had an executive position in another company) c) Showing good personal credit. I should warn however having these things will not automatically mean the landlord will forgo the extra security, but it might give you a fighting chance.