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Tuesday, February 16, 2010

A well written lease: the key to investment performance

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!

Monday, February 1, 2010

Going green when the economy is in the red

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?