NYT: Saving on Real Estate In a Down Economy

By EILENE ZIMMERMAN

From 2009 to 2010, the commercial real estate market in the United States seemed bottomless. Whether seeking manufacturing, office or retail space, those looking to lease or buy were in the driver’s seat, said Fred Schmidt, president and chief operating officer for Coldwell Banker Commercial in Parsippany, N.J. After the supply of space hit a peak in the fourth quarter of 2010, he said, the market began a slow recovery — “but it’s definitely still a tenant’s and buyer’s market.”

Many small businesses have taken advantage of the market to negotiate more favorable lease terms or lower rents or to move to better space. Some were able to buy a building, a pipe dream for many in the prerecession real estate market. Still, putting together a deal requires timing, cash and market savvy. The best deals take time and tenacity, so start looking long before your lease expires, said Brian Netzky, president of Interstate Tenant Advisors in Lincolnwood, Ill. “Don’t be reactive, because then no matter what the economy is like, you’re in the worst position.”

Below are several examples of small-business owners who have taken advantage of one bright spot in a dark economy.

PAYING CASH UPFRONT Tired of paying rent for office space, Andrew E. Samalin called a broker last year and started looking for a building to buy. At the time, Mr. Samalin, a principal in an investment firm, Samalin Investment Counsel, was paying a high $4,500 a month for 700 square feet in suburban Mount Kisco, N.Y. In March 2010, he found a building in nearby Chappaqua that had been built in 1865 and needed work. The previous time it had been up for sale — at the height of the market — the asking price was $1.3 million. This time, Mr. Samalin saw an opportunity.

The seller would take only cash, so Mr. Samalin offered $600,000. After his offer was accepted, he put up $250,000 in cash for renovations. “I knew I could get the mortgage financing in place later,” he said, “but if I offered the cash upfront, I could get a really good price for the building.” The mortgage came after renovations were complete, because then it was less risky for the bank.

Mr. Samalin’s mortgage payment is now $3,500 a month. But he had enough extra room to take in a tenant, who pays $2,400 a month, reducing Mr. Samalin’s portion to $1,100. Because of the Small Business Jobs Act of 2010, the entire cost of the renovations was tax deductible. Mr. Samalin said he feels pride in owning a restored historical building, and his staff and clients love the space. “I consider this one of the greatest deals of my life,” he said.

NEGOTIATING AGGRESSIVELY Mark Censits, owner of an upscale wine, beer and spirits shop, CoolVines, wanted to move his Princeton, N.J., location — 350 square feet on the outskirts of town — to a bigger, better location. In 2007, when the market was still strong, he found 1,500 square feet in the center of town. The building’s opening was delayed for three years and by the time it was ready for tenants last fall, the market was tanking. “I was able to reopen discussions twice, each time negotiating more aggressively,” he said.

Because there were few creditworthy tenants bidding, Mr. Censits used CoolVines’ record of success — and the expectation that it would bring foot traffic — to persuade the landlord to lower the price from about $41 a square foot to $35.

The soft market also prompted Mr. Censits to move another location, this one in Westfield, N.J. “I knew if we were ever going to expand, this was the time to do it,” he said. The original Westfield store was 750 square feet and cost about $54 a square foot. Mr. Censits found a new location that offered 2,400 square feet downtown with parking, and is located between Williams-Sonoma and Banana Republic stores.

Feeling confident after the success of his Princeton negotiations, Mr. Censits started with a lowball offer of $33 a square foot; he got the space for $37, and the landlord agreed to freeze the rent for three years. After that, increases are limited to 2 percent annually for the seven years. “I also got him to do a significant amount of demolition to the place — probably $50,000 worth — so we could build it out the way we wanted,” Mr. Censits said.

PAYING LESS FOR MORE Three years ago, when the lease on his manufacturing facility was ending, Scott Pievac thought he was ready to buy new space for the Sam Pievac Company, which makes retail displays and fixtures and was founded by Mr. Pievac’s father. At the time, however, prices were high and inventory low, so he continued to rent in Santa Fe Springs, Calif.

This year, when he started shopping around again, he found few people wanted to sell in the middle of a downturn. But with the help of a broker, he located an old Firestone tire storage plant for sale in Chino, about 25 miles away. The price was $65 a square foot, a great deal, he said. “That building would have been $100 a square foot five years ago. It had been on the market a week, and they had five offers.”

Several factors converged in Mr. Pievac’s favor. His broker introduced him to the broker representing the sellers, and they found they had mutual friends. The Sam Pievac Company had been in business 50 years and was financially stable, making it an attractive candidate.

In addition, the Small Business Administration increased its lending limit on loans for the acquisition of fixed assets in 2011 to $5 million, which helped Mr. Pievac arrange the financing he needed. The total cost of the building with improvements was $7.2 million. The company moved into the new warehouse space in April, and the office space will be ready this week.

Mr. Pievac’s rent used to be $42,000 a month; now, he has more space, owns the building and pays $40,000 a month.

FINDING COMFORTABLE SPACE In early 2010, the employees of M. Studio, a design and branding agency, were spilling out of their northern New Jersey offices. Jenna Zilincar, a founder and creative director, said four people were crammed into 800 square feet that they called “the hamster cage.”

Ms. Zilincar wanted to move closer to her clients and was able to find several affordable options in Asbury Park that had not been available a year earlier. One space was triple the size of M Studio’s previous office. The space needed modifying, Ms. Zilincar said, but she got the landlord to put up walls and take out doors, creating offices and a conference room. Ms. Zilincar was also able to sublease two small offices she did not need, substantially reducing her monthly costs.

Now, M Studio has five people working full-time in an open space. The office has a waiting area, a conference room and a kitchen. Ms. Zilincar also got the landlord to put in hardwood floors, outside lighting, air-conditioning and baseboard heating. She and her broker negotiated a slightly lower rent than the asking price, no increases for a year and a half and a $50 increase for the 18 months after that. If she renews for another three years, the increase will be 5 percent.

Ms. Zilincar believes the new space has helped her close deals. “People’s level of comfort went up because this space is more legitimate,” she said. “We don’t have to meet clients in coffee shops anymore.”

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