“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.

 ***

Financials

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.

Personal Guaranty

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.

Budget

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.

Lease Term

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.

 

5 Principles for Qualifying Clients

In any commission based business, time is money. As in any business you have to analyze your return on investment… and in real estate, time is your investment. So how do you qualify clients/leads? How do you determine how to use your time and how much of it you spend on each deal?

Someone tells you they want to lease or buy commercial space or you get referred to someone who’s looking to lease or buy commercial space. There’s a lead on a company looking to move. Whether or not you decide to work a deal and the amount of time you spend on it is directly related to the likelihood of it closing and the size of the commission respectively.

There are 5 things every real estate broker must analyze when deciding to work with a client:

1. Client Experience

   Is this is a startup or has the company been in business for years and, if so, how many? Have they leased commercial space before? Is this a seasoned investor or an aspiring one? Clearly the more experienced the client the better. They’ve been through the process and require less education and hand holding. They’ve established a track record that makes them less of a risk to landlords as well as your investment. I have another blog post on working with startups and first-timers: Venture Real Estate: Investing in Startups, New Businesses, and First Timers, which outlines the specific issues they face.

2. Timing
   

   What’s the timing on the requirement? Is there a lease expiration date approaching or is someone looking for space or to invest with no immediate need? The worst thing you can hear from a client is “I’m not in a rush.” A requirement should have a timeline and the more immediate the timeline the better. Urgency dictates need and the greater the need the more likely a deal will close.

3. Need/Driving Factor

   Clearly an investor looking for another investment property is better than a first time investor but there are certain factors that drive client decisions that must be weighed when investing in a deal. A company looking to lease space for the first time is the highest level of uncertainty. Oftentimes there’s nothing driving their need to take space other than their desire to do so. Next you have a client whose lease is expiring but they haven’t grown so there’s the possibility they might renew their lease in their existing space. The best case scenario, lowest level of uncertainty is a client whose lease is expiring and they’ve outgrown their space. This means that they must find and lease a new space by a specific deadline.

4. Size of the Deal

   The bigger the deal the more money involved… for both parties. More money for you means a bigger commission. More money for your client means more at stake/risk and, therefore, the greater the likelihood of issues arising that might compromise the deal. You can’t let the allure of a large payday cloud your judgment with regards to your investment of time. You have to analyze to what degree the size of the deal will affect the other factors determining its likelihood of closing.

5. Specificity of the Requirement

   The more specific the requirement the better. It shows that the client knows what they want. If they know what they want the more likely they are to make a move. Knowing what they want means being able to clearly articulate how much space they want, what type of property, what their budget is, where they want to be, etc. If a client can’t make these simple decisions then what is the likelihood of them signing on the dotted line?

Not all deals are created equally and shouldn’t be treated equally when it comes to your investment of time. Ideally you want to work the largest deals that are guaranteed to close. In the real world though, whether or not you decide to work a deal or take on a client at all should primarily be based on the likelihood of the deal closing. You then prioritize the deals based on the factors listed above.

Every real estate broker and agent must approach each deal like they’re making an investment… because you are. You’re investing your time, of which you have a finite amount. Every investor wants to get the highest return on their investment, and by learning and applying these 5 principles to qualifying clients/leads you’ll be able to maximize your income in an “eat what you kill” world.