BRANCHING INTO COMMERCIAL REAL ESTATE: RISK VS. REWARD

Whether it’s an attorney for a retail chain looking for a corner location with lots of foot traffic or a CPA for a developer of creative space who need tenants, chances are an experienced residential broker’s database is loaded with potential commercial opportunities. How hard could it be to make some calls and bring a buyer and seller together just like they do every day for residential clients?

Actually, it’s very hard.

“You can’t just go in cold,” says Herbert Chou, an associate broker with Warburg Realty in New York City who started in commercial and now operates in both markets. You need a knowledge base before going into commercial real estate.”

Despite all the temptations and all the theoretical upside of crossing over into commercial—higher commissions, diversification of the listing portfolio and not having to deal with emotional residential clients, to name a few—the risks of dabbling in commercial real estate far outweigh the rewards if the broker doesn’t know what he or she is doing.

“If you jump from one to the other, it actually hurts you financially,” says Omar Lopez, a Las Vegas-based broker with Berkshire Hathaway HomeServices Nevada Properties. “A typical residential agent spending $1,500 or more on their base costs, in commercial, would be spending at least $25,000 on the basic systems to represent the client to the best of their abilities.”

Additionally, Lopez warns, commercial has a much longer lead time than residential, and that long and expensive wait from the initial offering to the closing can be brutal for even the best brokers.

“You’ll be in a market that is strongly different. If everything goes right, it most likely will take six to eight months to get paid. Between zoning, permits and partners, so much can go wrong,” says Lopez.”

Lopez had a successful career as a residential broker, but he transitioned to commercial deals when the market started to favor that sector in the mid-2000s. With a practice that is now mostly commercial, Lopez cautions brokers about making the transition willy-nilly.

Perhaps the biggest concern, he explains, is that it might be illegal to represent a commercial client without fully understanding the business. In his state, as like many others, brokers on commercial transactions have to sign off on a “Duties Owed By A Nevada Real Estate Licensee” document, which can hold the broker liable if they don’t exercise “reasonable skill and care.” In other words, it’s illegal to not know what you’re doing – and with bigger commissions, come bigger liabilities.

“People are trying to do commercial but they don’t have the right training, knowledge or education,” says Lopez. “Homes are very different from income-producing assets. You never get a buyer looking at a home and asking, ‘how much power is coming into this house?'”

Wattage, plumbing, insurance and zoning are among the many variables that need to be researched on the back-end of a commercial real estate transaction, Lopez says. To get up to speed on the relevant issues and lingo, he recommends reaching out to a training institute such as CCIM and/or partnering with a local commercial real estate specialist on your first few deals to learn the business and make sure you are covered from a liability standpoint.

“It’s probably best to refer a commercial real estate lead to a specialist…but work close with them to learn the ropes,” Chou advises. “That’s the best approach to start. It’s a learning process for sure. You can’t just dive into it.”

In addition to the technical concerns that exist exclusively to commercial real estate, residential brokers also have to learn the nuances of negotiating these highly complex transactions. Many of the details that need to be ironed out by the broker may not even relate to the current state of the client’s business, but rather the future objectives.

“The negotiation is a lot more complicated,” says Chou. “It’s not just about price. If (an office space) client wants to expand the footprint—if they can acquire a different floor or spread into a neighboring suite—there are a lot of future events that you have to be aware of. You also can negotiate for rooftop access, parking, signage and the naming the building.”

Chou adds that retail properties are little bit simpler, but they still require a specific skill set for brokers.

“Within the category of commercial real estate there are specialties and subspecialties,” says Bruce Ailion, a broker and attorney with RE/MAX Town and Country in Atlanta. “These include investment sales property management. In investment sales someone might specialize in office properties, apartments, industrial properties, churches, NNN properties like fast food restaurants or gas stations. I recently heard someone is specializing in car wash facilities. ”

Ailion recommends specializing in a particular type of commercial real estate even if you’re primarily a residential broker looking to dabble in it. There are many training programs available, but he warns that they can be expensive and require a lot of dedication.

“Knowing the market, knowing the jargon, learning how to market or acquire clients and understanding the concerns of tenants or sellers based on the property type is important. You cannot know the entire market, so specializing in a subcategory makes sense. Likewise, the jargon and technology is different in different categories,” Ailion says. “I recall when I was starting out I happened to get a tenant for a 100,000-square-foot warehouse. I was familiar with dock doors and drive-ins and ceiling height and beam spans, but when the tenant started asking about foundation cuts and weight per square foot the floor could support, I was clueless. Fortunately, the leasing agent took over and I just shook my head.”

With 39 years in both sides of the business, Ailion says he has found a great balance of residential and commercial that can swing to a ratio of 30/70 in either direction depending on the market demands.

Having such flexibility is welcome for an industry as unpredictable as real estate. Dabbling in commercial usually starts with an easy lead, but those who have been there know that it is much harder to get to the finish line.

Big companies, such as Berkshire Hathaway HomeServices, have deep resources to support those looking to dabble, but usually require agents to secure permission from their broker first because there are so many inherent risks, says Lopez, who has received a lot of interest in commercial from the residential agents on his team.

“If they’re not trained (in commercial real estate), they should be seeking somebody they can shadow. That’s the best decision on behalf of their own client,” advises Lopez. “Once you get the skills, knowledge and tools, it is an exciting career.”