It was a brilliant presentation of undeniable facts from Larry Kosmont, President of Kosmont Companies about the economic and political forces presently at work in California…and the ramifications to every business in the state.

Mr. Kosmont made his 2012 Economic Forecast presentation to the Central City Association in downtown Los Angeles on Thursday, February 16. Some of the facts Larry laid out were daunting:

• The state is frozen in a dread triangle of high unemployment, staggering pension obligations, and the legislative’s preferred response: tax increases.

• There are 15,000 retired public workers in California with pensions greater than $100,000 annually.

• The casualties resulting from the elimination of the State’s redevelopment agencies will include tens of thousands of jobs and hundreds of projects, including the construction of the vast majority of new affordable housing in the State.

• As California raises its taxes, it continues to lose business to Arizona, Nevada, and Colorado

• Mr. Kosmont describes a “hollowing out” of our business economy: successful businesses are incubated in California, but most of the blue collar/middle class jobs are then exported due to the high cost of doing business here, leaving only a skeleton crew of sales people to maintain the company’s presence.

• Downtown Los Angeles is the brightest spot in the state, as the residential population grows and businesses springing up constantly to be a part of the revival of a once great urban core.

The conclusion: California is not the promised land it once was, but it can be rescued.

Mr. Kosmont’s presentation is available online at www.kosmont.com. It is very interesting reading.

One of the most closely watched metrics in measuring the relative desirability of a business location is traffic count. Having a real estate broker that can access this information in real time is highly valued by tenants who consider this critical information.

But consider this: One of the most heavily traveled roads in Southern California is Pacific Coast Highway. For the affluent population residing near the Pacific Ocean, this road connects all of the communities up and down the coast. Most of the highway is wide and carries a large volume of traffic efficiently. But many of the retail shops that line the highway are struggling or empty. This may have you scratching your head, but stay with me here…there is a very sensible explanation. In some locations along the highway, convenient ingress and egress are sacrificed due to high volume, high speed traffic flow – people are zooming by and don’t slow down long enough to identify the businesses in the area. The rent premium paid for high traffic at these locations is unfortunately wasted; worse, it becomes a burden that could put the business under. What a shame.

There is more to traffic count than meets the eye. It is more than just a number: Is the subject traffic artery busy due to local commerce, or is it a favored route across town or to the freeway? Is exposure of your brand (i.e. your sign) your goal, or is your objective fitting strategically into the fabric of shopping patterns for your target customer? There is no universal right or wrong here. But you need to define what is right or wrong for your business.

You and your real estate broker need to clearly understand your customer and their reasons and methods of patronizing your business. Traffic count is indeed very valuable information, but only if interpreted correctly.

One baseline principle of commercial real estate will never change: location, location, location. But there is a new “place” where all businesses reside today and that is the internet. More and more people every day decide where and with whom they are going to do business using search engines. Notwithstanding the street address of your business is, your online location – where your prospective customers find you on the world wide web – is gaining in importance.

Even if you elect to pay a premium for a prime location, you could be wasting your money if you fail to make a strong initial marketing push. And the internet is one of the smartest places to do it. There are firms that guarantee to move your business web site to the first page on the major search engines. That's a smart way to drive traffic to your new location. And there is a new company based in Orange County, California that is a one stop shop internet platform for streaming internet video advertising opportunities allowing you to rifle shot your message to your potential customers from the top of gas pumps, office building elevators, doctor’s offices, and even on movie theater screens.

Today, having the right address is not enough – you must get the word out in a hurry to make sure your business hits the ground running.

The Use clause of your lease has as much impact on your potential for success as the financial terms of the contract. It has the ability to constrict your growth or let it soar.

Case study: The Garcias were in escrow to buy a popular independent coffee house in the North County area of San Diego, California, but there was just nine months left on the lease. They engaged PacifiCORE to negotiate a fresh lease term. They wanted to get favorable terms for a new five year term but they also expressed concern about restrictive permitted use language in the existing lease. To protect the exclusive use provisions of a national restaurant chain in the center, the coffee house lease allowed specific breakfast menu items that the coffee house could sell that were safely differentiated from the big chain’s menu items, and capped the use clause with the popular and safe “and for no other purpose.”

This put the tenant on a mine field, risking a default if they ran afoul of these restricted uses. Basically, it severely restricted the tenant from trying new menu items and ideas, the key to long term success for any restaurant. After convincing the landlord to share with us the exclusive use provision of the major chain’s lease, we found it to be vaguely worded; not so iron clad as the broker had represented. Our strategy: change the language in the coffee house lease to affirm the exclusive use provision of the major chain restaurant and allow all breakfast items that were not explicitly protected in the other lease. This strategically shifted the burden of proof from the coffee house to the chain restaurant.

In your Use clause of your lease, it is better to be in a position to ask for forgiveness than for permission.

The Garcia’s coffee house was recently named the best independent coffee house in San Diego by a popular local newspaper after just six months of remodeling the store…and the menu.

This is a sad story that impacted a well-known national food franchise recently. The names are shrouded to protect confidentiality.

Simply put, the franchisee – a multi-unit franchisee, no less – missed a deadline for exercising their renewal option. They initially contacted PacifiCORE several months after the deadline had passed. They wanted to extend the lease and figured the landlord would gladly renew the lease of a tenant that had run a successful operation and had paid their rent on time, faithfully for the past five years.

One would think so, right? But the perfect storm gathered and the situation ended with a much less desirable outcome. Right on the heels of engaging PacifiCORE, the tenant received an estoppel certificate from the landlord. It seems the property was in escrow to sell. Not only did this put the tenant in limbo – neither the current landlord or the prospective buyer was in a position to unilaterally negotiate a lease renewal with my client, but it introduced a new player onto the stage whose intent and merchandising strategy were unknown.

We nevertheless contacted the potential new owner to communicate the desire of our client to renew their lease. The buyer turned out to be a national player, decisive, and aggressive. Escrow was short and closed within two weeks. After closing, the new landlord informed us of their plans to assemble my client’s space and an adjacent store and lease it to a larger, more recognizable national chain. My client was out of luck with no leverage and lost their capital investment in their restaurant. The franchisor was out a very well located, prosperous unit that advertised the brand well in the local market.

Clients who engage PacifiCORE at the outset of site search and lease negotiation process have an expert and advocate to track critical dates throughout the lease term. Who is playing back stop for you to make sure critical dates are not missed?

This is a story about Frank. You would like Frank. A man with a passion and the courage to start a business based on his passion. Frank opened a small tennis shop in Los Angeles in a redeveloped shopping center I managed that promised to be the new commercial heart of his underserved submarket. The center was going to have big name, powerful anchor tenants and was sure to draw great traffic to his store, and Frank felt the high rent – a new high watermark for his submarket – was worth it.

Because of the developer’s skill in creating this exciting new shopping center, Frank was anxious to get on board and signed a lease that – typical of shop leases – called for rent to start the sooner of 60 days after possession or when he opened for business. Having saved his money to open this store, he jumped into action and had his store open before the 60 days was up. The catch was, his store was open before two of the anchor tenants were built-out and open, including the one two doors down from his shop.

Frank’s tennis shop was out of business in four months. What a shame; a tragedy, really for Frank.

New or changing shopping centers are a potential mine field for shop tenants in these slippery situations. After all, the rent structure for shop space reflects the value created by the potential of the center when it is fully up and running. Negotiate these terms up front so you don’t have to fight for them when your back is against the wall:

• Negotiate free, reduced, or percentage-only rent until specified (or all) anchor tenants are open for business.

• Negotiate reduced rents if one or more specified anchors go dark. While this may meet with resistance from the landlord, it is prudent to ask, since the presence of the specified anchor(s) in the center is to a significant extent what gave the center commercial value in the first place.

• Negotiate reduced rent for shop space vacancy thresholds exceeded in your section of the shopping center. How many food shop clusters in neighborhood centers have we seen with three or four “for lease” signs in the windows in the past couple of years?

• If you lease space in a center undergoing or planning capital upgrades or remodeling, ask the landlord to “put his money where his mouth is” and negotiate reversion to lower or free rent if the work doesn’t commence or isn’t completed by dates promised by the landlord when you negotiated your tenancy in the first place.

Don’t end up like Frank. You can acknowledge the value of your retail space by paying the market rent, but insist the landlord recognize when that value – and your ability to pay – is diminished by dark space in your property.

We have all heard the old adage “Charity begins at home”. The same notion can be applied to going green and living a “sustainable” life, both at home and at work. Many businesses today seek out buildings that boast a LEED certification, whether the more common Siver or the rarer Gold or Platinum. But regardless of whether the building where you conduct your business is certifiably “green”, there are many things you can do to lighten your business’ carbon footprint and save significant dollars if you are paying for your own utilities. Here are a few (with props to a recent, very informative article in the Wall Street Journal):

Change the Culture

Everybody at work has to get on board. Eliminate space heaters in cubicles. Everyone can’t have their own printer at their desk – start sharing between four or more employees. All incandescent task lighting (lamps) should be retrofitted with compact fluorescent bulbs. (You haven’t done that yet?) Turn off the monitor and speakers when you shut down your computer every day.

Plan for Savings

Speak up in the planning for your workspace whether it’s a store, an office suite, or a warehouse. Look into eliminating light fixtures near windows, where natural light is the brightest. If you are in an office building, consider moving private offices to the interior. If your culture just won’t allow for that, then put generous glass in the door wall so natural light flows through to the rest of the space. Pay a little extra to have motion detectors in private offices, conference rooms, and the copy room (and even in the warehouse) so the lights are off when these spaces are unoccupied. Choose an Energy Star refrigerator for the break room.

Go with Waterless Urinals

Get with the program! The myth that this idea stinks – literally – has been busted. Ask any guy who has used one: they don’t smell…and they don’t splash. Hallelujah! The technology is elegantly simple (like all good ideas are) and the savings are enormous. It is one of the few green decisions that will not cost you extra dollars up front, because you eliminate the plumbing that supplies the water!

Beyond Energy

Opportunities exist beyond your energy bills. Most people do not realize that a large component of what makes a building “green” is what materials are used in the construction and where they come from. Purchasing furniture or millwork (cabinetry) manufactured within 100 miles has a huge environmental advantage over products shipped 2,000 miles in trucks. Think about it. And the opportunity to choose products manufactured from at least partially recycled materials – from carpeting to furniture – is endless today.

The bottom line (which will improve as a result): It’s really pretty easy. Do it!

The lease on your facility is likely the first or second largest expense line item for your business. The lease term – the duration of the contract – is a fundamental as well as very strategic aspect of your lease. After thinking through your business plan and taking into account risks (and how to mitigate them), you will come to a natural conclusion as to what term length is best in your case. This goes both for franchisees assuming the liability by signing the lease as well as franchisors who create the master strategy for their brand.

Let’s look at two key dynamics of the lease term: long vs. short and options to renew.

Long vs. Short

The default lease term for a retail shop space is five years. This is a reasonable amount of time: long enough for a business to establish itself in a given location or, perhaps, demonstrate it doesn’t have the “legs” to keep going. From a landlord’s point of view, it is a “bankable” duration; that is, a sufficient amount of time for lenders to underwrite. Terms can be longer and shorter, of course, and there are pros and cons to both.

A long term lease – five years or longer – is more attractive to the landlord who covets a continuous stream of income without the interruptions of vacancy and leasing expense. In return, landlords will be more flexible with lease rate, lease concessions, and tenant improvement allowance when considering the possibility of a long term lease. There are benefits to the tenant, too. The negotiating leverage suggested above should also translate into lower rents, giving the tenant more control over what can be a very volatile expense item.

The “con” side of a long term is based on the precept of the lease as a liability. If circumstances change – which they most certainly can do – and you need or want to escape the lease because of business failure or the desire to move to a different location, a long residual term is a heavy weight to bear. The alternative is to sublease the space, but that puts you squarely in the real estate business, not doubt not what you envisioned when you installed your sign and opened your store. There is one instance where a longer residual term is a boon to the departing tenant: if the business is for sale, the lease term – assuming the rent is at market rent or lower – is an asset and adds value to the business.

The contingent liability of the lease is eased by a short lease term, but you will encounter more resilience from the landlord when it comes to rents, concessions, and the investment of capital for premises improvements. There is also the amortization of your own capital investments to consider, particularly for businesses such as restaurants, dental offices, or dry cleaners that require expensive electrical and mechanical systems for their operations.

Lease Options

Options to renew the lease are quite common: loved by tenants but not so much so by landlords. All of the benefits accrue to the tenant, since it is their “option” to exercise or decline. However, with the new FASB lease accounting standards coming down the pike, publicly traded companies will need to think twice about the complicated bookkeeping rules associated with rent expense projections before negotiating renewal options into their lease. But by all means, negotiate them and try to get the rent rate for the option period fixed in the lease, or at least adjusted by a defined factor such as the consumer price index.

In summary, let your business be the driver of the ideal lease term.

These are challenging economic times. We have seen them before and we will see them again. From our personal perspectives, they seem like they will never end.

Tenants -- large and small -- are under tremendous pressure. You signed a lease when the economy was booming and expectations were high for your new business or new location. You found a facility that fit your needs perfectly and negotiated a lease with a much bigger business enterprise than your own: the landlord. You were proud of yourself for establishing a fair market rent with periodic increases that were about the same as you had heard were typical for the submarket.

Now you are facing stiff headwinds. Your revenue growth did not keep pace with the business plan you shared with the landlord before lease negotiations commenced. In fact, you just lost one of your stable customers to bankruptcy and others are calling you with reduced orders. The rent is weighing you down and you fear the increase coming just two months down the road could sink you.

Does this scenario sound familiar?

Well, it's time to set your fears aside and realize that the landlord is feeling the same pressure to be creative and protect his real estate business interests. A failed tenant or broken lease is a vacancy with no rental income. The landlord wants to avoid this. With a modicum of understanding of the landlord's business, you can quickly convince him you are a tenant worth sticking with.

For the past 27 years I have managed property for landlords of all stripes and been a landlord myself. I will be offering a webinar in the near future providing no-nonsense tips on how to "classify" your landlord and sensible tactics on how to do business with them. If you would like to receive details on this opportunity to gain useful insights and ask those questions that have been nagging you, please add your comment to this blog or contact me directly at aaron.weiner@weinerproperty.com.

More to come!