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Should I Lease Office Space from a Local Real Estate Entrepreneur or an Institutional Investor?

08/15/2014
Troy Golden, Chicago Commercial Real Estate Blog, cre trends blog

Business owners looking for office space often encounter two types of landlords: the local real estate entrepreneur, and the institutional investor. Both landlord categories have their advantages and disadvantages for the office tenant. 

The “local real estate entrepreneur” landlord may come in many forms: a locally-based individual or family, a local developer or construction company. In general, the upside of dealing with a local real estate entrepreneur is simple, direct communication. Office tenants do not have to make their way through layers of corporate management to negotiate deal terms or to make a property management request. These owners also tend to be more flexible and creative in the deal terms they will consider. If your landlord resides in the same property as you, you can also hope for a quicker response time and superior property management. 

Some local landlords are responsive, well capitalized, and manage their property well.  Others, however, are just the opposite. Office tenants may discover they are dealing with an “accidental” owner (eg, someone who has inherited the property) who is neither knowledgeable nor emotionally invested in the well-being and reputation of the property.  Local real estate entrepreneurs are the first landlords to lose their property when a recession hits.   

Life insurance companies, banks, pension funds, REITs, and other funds invest and lend money in commercial real estate property in turn for dividend payments or loan payments. If the investment or loan is large enough, the institution will have a say in the choice of tenants and the terms and conditions of the lease.

Institutional investors insist that their commercial properties hire reliable and professional venders: office tenants at an institutional property can expect good property management and a responsive leasing broker. Office tenants can also assume that, with institutional investors, sudden expenses won’t send the landlord into a financial tailspin. Institutional investors are larger and better capitalized than local entrepreneurs, so they have more resources to invest in their properties and tenant build outs.      

The added layer of oversight will complicate your dealings with the landlord. For example, your desire to sublet your current space may be perfectly OK with the owners, but they typically won’t be able to sign off on the sublease until the investors have given their permission. Usually good business sense will motivate the investors, but you may find that their criteria are overly exacting. Office tenants also have comparatively less influence with a large institutional investor than with a smaller local landlord.

Business owners should leverage the expertise of their tenant representation commercial real estate broker when searching for office space. Ask your tenant rep brokers about all prospective landlords early in the search process. For more on tenant representation, read Why Should I Retain a Broker to Negotiation My Office Lease? For more on the site selection process, read How to Find the Right Office Location in 10 Steps.

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By: Troy Golden

Senior Director, SCGroup Real Estate

Phone: 630-805-2463

Email Troy: tgolden@scgroupre.com

Visit Troy's blog: http://oakbrookofficereport.org/

Connect with Troy on LinkedIn: www.greateroakbrookbusinessleaders.com

Visit the SCGroup Real Estate website at www.scgroupre.com

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