WP&M's Commercial Real Estate blog

DID THE LANDLORD SWEEP AWAY THE GOLD DUST LOUNGE UNFAIRLY?

2012-03-30T13:09:00.000-07:00

In my last blog, I addressed the age-old face-off between neighborhood traditions and the legal
principal of property rights in the pending eviction of the fifty year old Gold Dust Lounge from its Union Square perch in San Francisco. But there is more to this story…

The tenants, two elderly brothers both in their advanced 80s, claim the landlord snuck
subtle changes into the termination clause in their annual lease renewal agreements. What started out to be a right to terminate with 18 months written notice if the building was slated for
demolition evolved into a 90 day notice to terminate the lease for any reason at all. The tenants, desperate for a case to sue the landlord over this apparent chicanery, are claiming “elder financial abuse”. They say the landlord induced them to sign the annual renewals assuring them that “nothing material had changed” [quote from Los Angeles Times reporting].

The tenants could have a case here, but if they were competent enough to operate their business successful from day to day, they were ostensibly competent enough to read and understand the short renewal document they signed each year. There is no better illustration of a tenant’s responsibility to know what is in their lease and understand the impact of each and every lease clause, or at least to utilize experienced resources like a good tenant rep broker to look out for their best interests.

Is there really any argument here?

GOLD DUST DISAPPEARS IN A PUFF OF HOT AIR

2012-03-25T20:06:00.003-07:00

The news that the ostensibly famous San Francisco saloon The Gold Dust Lounge is being
booted out by their landlord after 50 years near Union Square in favor of The
Limited has made headlines. Events like this underscore the juxtaposition of neighborhood culture and market opportunity, forces that often find themselves at cross purposes. Arguments on both sides have merit. But movements to have city planners or elected officials step in are simply wrong. Very wrong.

The law of the land is clear enough on private property rights. The marketplace will dictate what business goes in a given location. Miscalculations and bad judgment often intervene, but in the end, the market – which includes landlords, business tenants, and consumers – ultimately decides the future of the neighborhood. Free market forces do not always move in a straight, true line.

There is another side of this story that will be addressed in my next blog and has to do with paying close attention to lease terms. Did the landlord take advantage of the tenant’s naiveté to get them out of the space? We shall examine the facts.

THE WALMART CONUNDRUM

2012-03-19T19:05:00.004-07:00

I attended a
very informative presentation recently by a senior regional Walmart
representative seeking the endorsement of the Central City Association of Los
Angeles, a citywide business advocacy group. Walmart has been rolling out their small-format Neighborhood Market concept (+/-35,000 s.f.) and their recently announced plan to put one in on the fringes of Chinatown in downtown Los Angeles was met with howls of protest. The representative put up a PowerPoint presentation chock full of dazzling statistics about Walmart’s incredibly diverse employee population, their better-than-average pay scale, and the
fantastic value they bring to their customers. The presentation felt like a defensive move in the face of “NIMBY” resistance they seem to get from so many cities. They are eager to prove they are a responsible, good neighbor dedicated to serving the needs and desires of the shopping population.

The presentation left me with the distinct impression that the world’s largest retailer sees the entire population of the world as either as employees, customers, or suppliers. The conundrum
is that while they pursue their noble goal of bringing their customers good products at the lowest prices, there are many ordinary people in these communities who chose to be business owners instead. And they just can’t survive when Walmart comes to town.

I am sure this grocery-deficient neighborhood will gobble up what Walmart has to offer. And a few family-owned shops and markets will close.

STREET FRONT OR SHOPPING CENTER?

2012-03-12T18:32:00.001-07:00

The renaissance of central business districts like Downtown Los Angeles are challenging many precepts of what makes for a strong retail location. So many franchise brands were born and cultivated in the suburbs. Urban locations are considered non-traditional and relegated to the “B” list. Urban core locations do not align with features found in typical suburban shopping center locations.

The differences include daytime population versus resident population, modes of transportation, and the biggest amongst them, parking. The thought of putting a store in a building with no dedicated parking would scare most corporate vice presidents of real estate to death.

But while the rest of the franchise world frets, brands like Subway and Five Guys are gobbling up urban street front locations. Subway must have 10 locations in Downtown Los Angeles (where I live) and all of them are open 24 hours.

It’s time to think out of the parking lot, don’t you think?

WHAT DOES BUILDING IMAGE MATTER FOR YOUR BUSINESS?

2012-03-05T10:00:00.002-08:00

Tenants often struggle with the building image factor of site selection, whether the site is retail, office, or industrial. While a good agent who has taken the time to really understand the client’s business can advise them, it is crucial to help them see the logical answer for themselves. And the determination of how much weight to put on curb appeal is indeed logical.

The experienced reader will certainly make the case for location over building image. This conventional wisdom is sound, but properties occupying better locations often maintain a higher image with respect to design and materials, if only to maximize the rent of their superior location. So for purposes of this brief missive, let’s assume location and image run parallel.

Building image absolutely filters through to the public’s perception of the business located within. If the desired perception of your business is sophistication, class, and quality of goods or
services, then tired, second-rate properties must be passed over. Chances are, the price point of your goods an services are higher, justifying the higher rent commanded by the building. If the desired perception is value and/or convenience, then the “B” or even “C” class buildings might be perfectly suitable for your business, given the owner maintains base standards of cleanliness, maintenance, and safety. These base standards must never be violated. A good real estate advisor will keep his or her clients mindful of this.

Warehousing and distribution tenants address the very same concerns. If the commodity is food products, better building image (and the higher level of building and common area maintenance
that usually accompanies them) are extremely important. If the commodity is recycled materials or galvanized pipe, then image could move in priority below other considerations, such as
truck ingress and egress and loading dock door dimensions, for example.

There are many options in any given market. Choose wisely…and logically.

RETAIL TRENDS: DEPARTMENT STORE CHANGES AFOOT

2012-03-02T10:18:00.001-08:00

The high-profile, large-scale barometer of retail health, the department store, is in flux. Three
of the biggest retail tenants on the planet all made print in the Wall Street Journal on February 24. Sears is shrinking, almost to the point of a retreat from the national-scale department
store class. Bloomingdales, the tony NewYork-based icon is adopting grocerystore marketing tactics, and J.C. Penney is touting a grand future.

Big pronouncements are nothing new from department stores. Their size assures them notice
from national media such as the WSJ and their corporate suites make the most of that. But it remains fascinating to see how this outsized model is evolving – some say devolving – from the days they were considered the pinnacle of retail merchandising. Nobody would doubt department stores are struggling to maintain relevance.

Sears will be closing – and in many cases selling – 1,200 stores across the nation in a last-ditch effort to stop the hemorrhaging from a futile attempt to reposition the chain pursuant to their merger with Kmart. The fact is that a venerable merchandising brand has been allowed to deteriorate from pure physical neglect. They have short-changed their physical plant, allowing their stores to deteriorate. Simple property management common sense. The only real value left there is in their great product brands, including Craftsman tools and Kenmore appliances. Whether they can rebuild on those nuggets is anyone’s guess.

Bloomingdales is ditching their branded credit card loyalty strategy for a bar code fob used by the major grocery chains. This doesn’t, in this writers view, detract at all from their upscale values. In a word, smart. And Ron Johnson, the new CEO of J.C. Penney, formerly of Target Corp and Apple, has pronounced department stores the “number 1 opportunity in American retail.”

But just like in the business world in general, the real work in retail is done on a small scale, on the shop level. As always, this is where new ideas, new energy, and the vast majority of retail jobs come from. And this is where we will find reliable indicators of a reemerging economy.

CALIFORNIA’S HOT SPOT

2012-02-23T20:50:00.000-08:00

The state of California is reeling from a huge budget deficit anchored to seemingly insurmountable unfunded pension liabilities. And yet, there are signs of life again in one city after what has felt like a long, cold economic winter. The Downtown Los Angeles commercial real estate market is on fire!

Notwithstanding the dissolution of the Community Redevelopment Association – all of the CRAs in the state were vaporized by Governor Brown – there are scores of projects driving the most dramatic renewal of any major city in the country. There are no fewer than 70 active development projects in or near the downtown core, ranging from restoration of Clifton’s Cafeteria on Broadway to the construction of Farmers Field, the only purely speculative professional football stadium built in; well, forever. LA does not yet have an NFL team.

Values are going through the roof. The owner of the Downtown Car Wash, a fixture for more than 30 years in the South Park district near LA Live and Staples Center has announced he is selling after getting serious interest from several developers for his parcel of three quarters of an acre after listing it for $25 million, or $683 per square foot. That’s just the dirt.

Population is growing dramatically, but the numbers will astonish you for reasons you might not expect. There are – get this – 45,000 residents living in downtown LA, While this is a 300% increase from just 10 years ago, these numbers are still surprisingly low for a major internationals city. Growth is relative. But the trend that cannot be quantified is that downtown is emerging as the coolest area in downtown LA. You have to have lived in our fair city to understand what a radical change that represents after being the black hole in the middle of the megalopolis for 50 years.

Keep your eye on Los Angeles.

THE FUTURE OF BUSINESS IN CALIFORNIA

2012-02-16T18:30:00.000-08:00

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.

TRAFFIC COUNTS – FRIEND OR FOE?

2011-11-01T09:13:00.000-07:00

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.

LOCATION, LOCATION…COMMUNICATIION!

2011-10-25T22:19:00.000-07:00

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.

YOUR USE CLAUSE - FREEDOM TO GROW

2011-10-20T14:25:00.000-07:00

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.

CRITICAL LEASE DATES - A TALE OF WOE FROM THE WORLD OF WINGS

2011-10-12T13:50:00.001-07:00

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?

Successful Lease Negotiations Address More Than Rent

2011-04-29T18:48:00.000-07:00

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.

"Green" Begins At Home

2011-03-03T09:50:00.000-08:00

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!

Long or Short? Think Hard About Lease Term

2010-12-29T16:36:00.000-08:00

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.

Stand Tall With Your Landlord

2010-05-26T10:30:00.000-07:00

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!

So what's happening the the world of distressed real estate?

2010-04-06T11:16:00.000-07:00

All owners of commercial real estate are curious about the trends in “distressed” real estate, whether they are one of the troubled owners or just wondering how all of this is going to affect the value of their property. The news media is reporting stats like two thirds of all commercial real estate loans coming due in the next year are underwater. This portends high rates of foreclosures and falling prices.

I attended the Distressed Real Estate Summit in Los Angeles on February 3. Panel after panel of phenomenal speakers gave the 500 attendees a good feel for what is happening out there today. Things have changed…dramatically.

The market mood and what is actually happening on the street is schizophrenic. Several speakers related the buoyant mood at the recent lenders conference in Vegas. Institutional debt is off the sidelines and itching to be invested. LTVs have gone from 50% just 90 days ago to 70%. But here is the “Catch 22″: nobody can agree on what “V” is today!

There are hundreds of billions in equity capital — what I like to call “dry powder” — also looking for worthy real estate assets to invest in. All of this debt and equity capital is targeting the few choice real estate assets out there, creating a bidding frenzy. Well located properties on the market are generating 30 to 50 offers. Cap rates are actually compressing as a result! If you are seeking an IRR greater than 12% on prime assets, you are out of the game. Can you believe it? I was stunned.

Lenders continue to “pretend and extend” and aren’t foreclosing as much as the vultures thought they might. This is exacerbated by the FDIC’s directive that lenders work out their loans with the borrowers. And this includes all of the CMBS (Commercial Mortgage Backed Securities) debt that is upside down out there: the special servicers (the administrators of these loans owned by countless institutions that own a sliver of each CMBS loan) are also approachable.

Amidst all of the excitement in the capital markets, the fundamentals remain grim for most commercial real estate; from worst to best, hotels, office, retail, industrial, and multi-family. Fundamentals will remain in the doldrums as long as unemployment remains high and job growth is absent.

What I took away from the day is that the next couple of years will be a roller coaster ride. Many investors, including the very big hitters are having doubts that the tsunami off distressed real estate opportunities will ever materialize. I think it is a windy road we’re on, with unpredictable weather ahead. Stay tuned.

A well written lease: the key to investment performance

2010-02-16T11:14:00.000-08:00

Many investors are taking a fresh look at income producing real estate after reading that there may be great deals out there. Other investors are hanging on to their existing income real estate investments wondering if and how they will be affected by the vagaries of this vicious down cycle.

In either event, the focus is on prudent, professional management as it always is when real estate values are sagging. Believe me…I’ve been around this block a few times. At the very heart of good property management is a sound, well written lease, the contract between the landlord and tenant and very crux of the relationship. I could put on a three day workshop on writing a good lease, so I will just address some key principles and concepts on this week’s blog. Look for future blogs to address many of these subjects individually.

The term “good fences make good neighbors” is the rule of thumb here. If the three most important words in real estate are “location, location, location”, the three most important words in leasing would have to be “clarity, clarity, clarity”. Using the bullet points below as a guide will keep you in good stead:

Using an industry standard form produced by an organization such as the American Industrial Real Estate Association (AIR) is a good start. They have versions to fit almost any situation. For more information, visit www.airea.com. Avoid defaulting to your old lease form or the form used by the previous owner. The AIR forms are constantly revised to keep up to date with evolving legal precepts.

State the name of the parties accurately or you may have trouble enforcing the lease later in case of a default.

Don’t forget to enter a date at the top of the lease: this is unrelated to the lease term dates, but will serve as a critical reference in all future official or legal correspondence. You would be amazed how many times as a property manager I received a new, fully executed lease from a national institutional client, authored by their $500/hour attorney without the lease date filled in. Amazing!

Make sure the rent schedule is clearly stated. Favor actual dollars (i.e. $3,250.51 per month) over dollars per square foot ($2.05 per square foot per month), as the latter focuses attention on the size of the premises which is often contested down the road by sophisticated commercial tenants or gadfly consultants.

Accurately and clearly spell out the parties’ mutual repair and maintenance responsibilities. This is a key to avoiding fights later.

Address respective insurance requirements thoroughly. In particular, this is an area that has evolved legally.

Make sure the default provisions are clearly spelled out. These will serve as the rules off engagement in case of a battle down the road.

Your property manager should be fluent in all practical lease matters. If he or she isn’t, keep looking!

Going green when the economy is in the red

2010-02-01T11:12:00.000-08:00

Barely two years ago, those of us in commercial real estate were dealing with a tsunami of a different sort from the torrent of financial distress we are bracing for today. The words on everybody’s tongue were “sustainable” and “green”. After experiencing fits and starts over three decades, the concepts of energy and water efficiency really took hold this last time around. Every major corporate boardroom put in place initiatives to make environmental stewardship a part of their “brand” and corporate culture. If you have corporate clients, have you noticed the blurb at the bottom of their emails asking you to lighten your carbon footprint and “think twice before printing this email”?

Green, however has always been a double edged blade: it lightens our impact on the environment and non-renewable resources, but it costs money, also green. When the economy hit the proverbial iceberg, environmental initiatives were one of the first to be thrown overboard. But unlike times past, these ideas have absorbed deeper into the cellular structure of these corporations, and when the market returns, so will their sustainability initiatives.

Now that corporate America — indeed, corporate Earth — is tuned into these concepts, green building features are seen as necessary to meeting a new environmental standard. Here are a few that demonstrate relatively short term ROI (return on investment):

Waterless urinals – Go ahead ladies, hold your noses. These devices go against every notion about cleanliness we have ever been taught. You have to wash urine away! Not so. Just gravity does the job perfectly. There is a device in waterless fixtures that puts a light film of oil over the urine in the trap, in effect putting a lid on the odors. The fixtures themselves are a bit more expensive than a traditional urinal, but the elimination of the plumbing during initial construction and the water savings more than offset that.

Fluorescent lighting – the relative efficiency of the modern iterations of fluorescent tube technology — T-8 and T-5 — are well documented (the lower the number, the more energy efficient). The energy cost savings are significant and, with rebates offered by most electrical utilities today, pay back in about three years. This pay back can be shortened by using motion detectors which let lights turn off in unoccupied areas. For the past seven years, I have worked with a Fortune 100 company who recently changed their warehouse lighting specification throughout the U.S. to T-5 fixtures with motion detectors. If you have been in the property management business for a while (or manage very old industrial properties), you will recall how fluorescent lighting was the standard until high output fixtures like high-pressure sodium and metal halide took over. What was old is new again…

Xeriscaping – I put this one down just because it is such a cool word! But seriously, this is all about being sensible when it comes to landscaping your property. Using materials that are indigenous to your region and eliminating thirsty turf grass will seriously lower irrigation water and monthly maintenance bills (mowing grass is the most labor-intensive task in landscaping). It can also be striking in appearance. Hook up with a local landscape architect who is on board with sustainable landscaping and you might be amazed!

Being able to feature even these few ideas will give your building the status of being “with it” with today’s new sustainability standards and will make it stand out in a competitive leasing market…and has the leasing market ever been more competitive?

Tenant cries for help

2010-01-27T11:19:00.000-08:00

If you own commercial real estate today, you are likely to have received a pleading phone call from one or more of your tenants asking for rent relief. Ignoring or denying these pleas might result in your having another vacant space in your building, but you just hate to buckle under to such demands; after all, you don’t have the right to call the tenant in a strong economy and ask them to pay “just a little more rent”.

These strategies are tried and true and might make sense for you:

Clearly define the term of the rent relief. Try to dole it out in increments of three to six months at a time.
If the tenant’s rent is already below market, negotiate a rent trade-off: get them to agree to a new rent schedule for the balance of the lease term in exchange for a rent concession now.
Amend the lease term in a manner favorable to you in exchange for a concession
If the request comes from a retailer in a shopping center and their lease has a % rent clause, you might consider allowing the tenant to pay just percentage rent for a while, but at a higher rate than what is stipulated in the lease. When the base rent break is over, the percentage should remain at the newly negotiated level, improving your chances of recovering some of the rent concession through percentage rent overages when their sales pick up.
Ask to see the tenant’s financials. Every tenant is jumping on the bandwagon in this economy and holding their hand out. Save your concessions for the tenants that matter the most and who really need it. A retail property manager friend of mine was just telling me about how Walgreen’s approached him for a rent reduction at one of their really strong locations. I mean, really!
Always ask the tenant to prepare a business plan for you showing what they are doing to improve their bottom line during the rough economy. Perhaps you can induce the tenant to do some cross merchandising with another tenant or invest in some strategic marketing initiatives. If you are willing to extend a concession, the tenant should be a captive audience for your ideas. If a retail tenant has lost heart and is just dying on the vine, keeping them around could be toxic for your center, so consider cutting bait and letting another successful tenant use the space temporarily or for storefront merchandising.

Any approach that helps the tenant survive and gives you some security in return is worth exploring. and see the silver lining: these challenging times present great opportunities to show some heart and fortify your landlord-tenant relationships.

Is your property open for business?

2010-01-21T11:18:00.000-08:00

It’s one thing to own a commercial income property, but another to run it successfully. The former takes capital, the later requires a strategy, planning, a head for contracts and budgets, a team of supportive vendors and contractors, market savvy, a bit of a competitive streak…and, yes, some capital (that will usually be available in the form of spendable rent).

This blog is a place to get insights into what makes commercial property tick and how to “tock” to your tenants. Running a commercial property is about facing daily challenges and capitalizing on opportunities. My posts will range from bite-sized tips to overarching principles that should be a the foundation of any property management business