“A journey of 1,000 miles must begin with a single step” – Lao Tzu
The biggest companies in the world were start ups at one point and the most successful real estate investors had to buy their first property. Startups go through rounds of funding where investors must analyze how much if any capital to invest. Are they worth betting on? Real estate brokers and agents must make the same determination but a real estate professional’s investment capital is time.
So what startups and new businesses are worth investing in? When it comes to that aspiring real estate mogul, how do you tell the difference between the dreamer and the doer? What deals are worth your time? My article on qualifying clients, What’s Your Time Worth?, will help you determine whether or not to work with a client. This article will focus specifically on working startups, new businesses, and first time investors. It will focus on the issues they face and unique requirements in leasing or purchasing commercial space for the first time.
A client’s financial strength is important in every deal. In leasing, landlords must analyze a potential tenant’s financials to determine their risk of defaulting. This helps them determine an appropriate security deposit and can also affect the concessions they’re willing to make. When it comes to purchasing commercial real estate the importance is much more cut and dry… you either have the money or you don’t or you can get the money or you can’t. Banks have lending requirements and investors have specific things they look for before lending to an individual or company.
So when you’re dealing with a startup make sure they have money. That means they either have money in the bank or have investors backing them. They need to be able to show that they can perform (pay rent). The landlord will need to see evidence of that so you need to see evidence of that before you decide to work with them.
The same goes for your aspiring investor. Do they have any money or, more specifically, do they have enough money? You don’t have to be a banker but you want to familiarize yourself with the financing process to understand if they can get traditional financing or will have to go through other channels. The less likely they are to be approved for a bank loan the less likely a deal will get done.
This leads us to another major issue: collateral. Banks need it before they’ll make a loan and landlords need it before they’ll lease space.
If a company has a history of leasing commercial space along with financials that are acceptable (further expanded on in my article, XXX) most landlords will be content with a security deposit equal to one month’s rent, this being the minimum security deposit in most commercial leases. If a company does not have a history of leasing commercial space and/or financials that are acceptable to the landlord though a personal guaranty may be required. This collateral most often takes the form of their home but can extend to other personal assets. The same is true when requesting a loan from a bank or private equity source.
If a company isn’t willing to invest in itself why would an investor, bank, or landlord? Why would you? The answer is you wouldn’t. So if a client isn’t willing to put their personal assets on the line when necessary you need to walk away.
Working with startups and first timers requires a significant amount of education. We’ve all heard the distinctions that 1) we know what we know, 2) we know what we don’t know, and 3) we don’t know what we don’t know. In commercial real estate you’ll come across clients in all 3 categories.
Clients that know what they don’t know are the best to work with. They acknowledge that they are not the experts and defer to the real estate professional’s expertise. Most clients fall into the category of not knowing what they don’t know and require more education and hand holding. Then you have clients that know what they know or, perhaps more accurate, think they know what they know. These clients can be the most difficult. In every case the real estate professional must make clear that they are the expert not the client.
This distinction is particularly important with regards to startups, new businesses, and first time investors because if their budgetary expectations or requirements are unrealistic then there’s little chance of a deal getting done. After educating them on market conditions if they’re unable or unwilling to modify their budget there’s no deal.
Many startups and new businesses are so busy trying to get their business off the ground that it’s hard to project where they’ll be in a year let alone 3-5 years. Unfortunately that’s typically the minimum term that most landlords require. You can always look for a short term sublet but ultimately the landlord will have to review the company’s financials and consent to the subletting.
If a company isn’t willing or able, for whatever reason, to enter into a minimum 3 year lease term then they may not be ready to lease commercial space.
Every company or real estate investor has to start somewhere. Just like venture capital firms invest in startups so too do real estate professionals. That initial investment of time helping a new business or real estate investor navigate the complex process of leasing or purchasing commercial property can pay dividends. Of course, you can also lose your investment.
Real estate professionals must make prudent decisions with regards to the clients they choose to work with especially when it comes to startups, new businesses, and first timers. In real estate, where time is money, you need the tools to analyze which clients are sound investments. There’s no sure way of telling which startup will be the next big thing or which investor will be the next real estate tycoon, but you can hedge your bets using the principles outlined above.