Property Management is an 80/20 Proposition

Most commercial tenants think of property management and say “thank goodness the landlord takes care of that!”  That is largely true but to think it is entirely so is to put your financial bottom line into the hands of at best a well-intentioned stranger and at worst a totally indifferent one.  While it may be true that the tenant in a large class A office tower does not have to perform janitorial services or maintain the building’s heating and air conditioning systems, they do assume some repair responsibilities inside of their premises and have important administrative duties relating to property management.

Think about it: for every bill you receive, whose responsibility is it to review it for accuracy and actually cut the check?  While there is not a lot of review required when you get a utility or cable TV bill at home, but what about that annual operating expense reconciliation bill you get from the landlord?  Does it accurately reflect the terms of the lease; in particular, the special operating expense lease provisions your real estate broker negotiated on your behalf?

80% of property management is shouldered by the landlord, but 20% is the tenant looking out for its own interests.  Who is looking out for yours?

The Permitted Use Clause – Smothering Restrictions Or Room To Grow?

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:  a young couple was in escrow to buy a popular independent coffee house in the North County area of San Diego, California, with barely nine months left on the lease.  They engaged my services to negotiate a fresh lease term.  They wanted to get favorable terms for a new five year lease but they also expressed consternation over restrictive permitted use language in the existing lease. 

To protect the exclusive use provisions of a national restaurant chain that was located in the shopping center, the existing  coffee house lease listed specified 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 for no other purpose.”  This put the tenant on a mine field, risking a default if they ran afoul of these restricted uses.  It severely restricted the tenant from trying new menu items and ideas, the key to long term success for any restaurant. 

Our strategy: change the language in the coffee house lease to affirm the exclusive use provision of the major chain restaurant (this placated the landlord) and allow all breakfast items that were not protected in the other lease.   This strategically shifted the burden of proof from the coffee house to the chain restaurant.

The Garcia’s coffee house was 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.

When it comes to the use clause of your lease, it is better to be in a position to ask for forgiveness than for permission.  

Aaron Weiner, CCIM, CPM, LEED AP
aaron@bailesre.com

Just How Creative Is Creative Office Space?

It has become a cliché, really.  Any old industrial building with the ceiling removed, a roll up door, and a 2:1,000 parking ratio is now labeled “creative office”.   I even saw a recent blast email from a broker who will remain unnamed referring to such a space in North Hollywood as “trendy.”  Ugh.

A word to the wise: beware brokers touting the coolness of creative office space. 

There is no doubt that we are witnessing a tectonic shift in how workers relate to the physical workspace; not only what they do there and how, but how often they need to show up at the office at all.  Flexible, open layouts, more generous space for amenities like lounges, libraries, and “chill” areas reflects the needs and wants of a new generation of workers.  But there are limits.  A recent article in The Wall Street Journal revealed an issue overlooked by companies knocking down offices and eliminating even cubicle walls in favor of collaborative work surfaces: “pesky, productivity-saping interruptions” as the article puts it. 

Look at this jarring timeline:

• ·         A worker spends an average of 12 minutes and 40 seconds on a task before being interrupted

•       An interruption might take as little as 15 seconds

• ·         It takes that worker 15 minutes on average to get back into the same level of concentration       they were at before the interruption

“Research published earlier this year links frequent interruptions to higher rates of exhaustion, stress-induced ailments and a doubling of error rates,” the article goes on to say.

What is really at stake here is productivity vs. creativity.  A tenant advocate broker must take the time to ask probing questions about what the company does and listen closely to the answers.  The solution is not always a wide open creative office layout, even for technology and media tenants.  At the end of the day, “creative is as creative does” (to paraphrase a lesson from my mom); in other words, it is the company’s culture, talent base, and operating processes that that are the source of creativity, not their office space. 

Aaron Weiner, CCIM, CPM, LEED AP

aaron@bailesre.com 

Why Building Operating Hours Matter – What You Don’t Know Can Hurt You

When it comes to normal operating hours, all buildings are not created equal.  But most buildings provide reasonably convenient access to their tenants 24 hours a day, seven days a week.  So why does this even matter?  Well, if you’re just a plain old 9-5 business, it doesn’t, really.  But is any post-recession business these days  plain or old?

Electricity, telecommunications, and HVAC (heating and air conditioning) are three of the most mission critical services a building provides to its business tenants.  And all three  – and their cost to the tenant – are impacted by the building hours; more specifically, the hours outside of the normal hours of operation. 

With their focus on fundamental lease provisions like base rent, free rent, term, and options to renew, many corporate tenants don’t pay attention to the provision stipulating how much the tenant is charged for using the building after hours.  In some buildings, this can run upwards of $100 per hour!  Leases also state that if a tenant is deemed to use more than what the landlord deems a reasonably  proportionate amount of electricity, they can be surcharged by the kilowatt.  If you are a seasonal business that burns the midnight oil or works seven days a week during certain periods of the year, this can really add up! 

There are myriad ways a good tenant representation broker can negotiate these conditions in the lease document and save a large tenant hundreds of thousands of dollars over the course of the lease. 

Burning the midnight oil doesn’t need to singe your bottom line. 

Where To Find The Guts To Negotiate Tenant Default Language

Of all the lease clauses under the sun, none are more awkward for a tenant to negotiate than the language defining their defaults and the associated penalties.  It feels so self-incriminating for a tenant to ask for more flexibility in how late they can pay the rent or more time to cure if they neglect to pay on time. 

No question, tenants enter into lease agreements with optimism and high hopes for the future.  What a drag it is to ponder their own failure!  But there is always some probability for administrative mistakes or failure and the need for the tenant to protect their interests is as important here as with any other  clause of the lease that has financial ramifications to the tenant.  Some leases are drafted by the landlord with draconian terms that penalize the tenant severely for minor slip ups.  An experienced broker is knowledgeable of fair and reasonable terms that most landlords will agree to and can help the tenant to save face by going to the mat on these issues on their behalf.

A good tenant representation broker will insure that all terms of the lease are fair and equitable no matter how unpleasant they are to ponder!

Traffic Counts -- When More Is Not Necessarily Better

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. 

Enterprise Zones -- The Best Kept $100,000 Secret In The Business

There exists a golden opportunity for tenants – large and small –  to save potentially tens of thousands of dollars every year at their leased properties – one they don’t even have to squeeze out of their landlord!  And their current broker (if they even have one working on their behalf) may be too myopic to know about it and bring it to their attention.

Enterprise Zones are created by state governments to incentivize business investment in geographical regions of under employment or economic blight.  In many states, such as California, these zones cover huge swaths of real estate and include areas you would never expect to qualify.  Few people realize, for instance, that virtually every corner of downtown Los Angeles is within an Enterprise Zone!

The economic incentives come in the form of income tax credits for new hiring.  Usually, these credits repeat year after year over the first five years of employment  and the incentives do not expire as long as the tenant is doing business continuously at the eligible location – the gift that keeps on giving!

So find an expert in your market who can show you where the Enterprise Zones are and can in turn coach your tenant clients to maximize their savings.  I have one.  Her firm has saved my clients hundreds of thousands of dollars and has helped me earn their undying loyalty.  And for me, that’s the “End” Zone!

 

Aaron Weiner CCIM, CPM, LEED AP

aaron@bailesre.com

The New Tenant Creditworthiness Game

Landlords will forever insist on seeing financial statements before finalizing a lease deal with a tenant, whether they are a small business or a publicly traded company.  And they should.  But what does a tenant do if their ship has been tossed – and perhaps badly damaged – in the hurricane of the recent, extended recession?  And, I mean, who amongst us hasn’t suffered?

I represent tenants who, in some instances are looking to downsize for the sake of their very survival.  It is unlikely their financial statements are going to inspire many landlords to spontaneously break into song.  So, does this tenant need to resign themselves to rejection?  Absolutely not.

Landlords have suffered a parallel fate as their struggling tenants.  They naturally prefer tenants that have capital reserves that will better insure that their rent will arrive in the mail every month.  But today they are forced to look beyond the numbers, and brokers need to coach their tenant clients how to tell their story in a persuasive way.   That comes with taking the time to learn about the clients business and ask some difficult questions to get at the truth.

I recently  had a client – we’ll call him Stuart – who is a prominent interior designer for large homes and hotels.  His industry was decimated by the recession and the very fact that he survived at all was a testimonial to his reputation and perseverance.  We presented the landlord with a couple of years of personal tax returns (since the landlord would require a personal guaranty on the lease.)  This gave the landlord the facts.  They are what they are.  Starting off with honesty is always the best policy.  But what we submitted with the numbers was Stuart’s story: his long history in the business, his impressive resume of clients worldwide, and his nimble resizing of the company to insure its continued viability.  We worked together on the story so it hit what I knew from experience would be a landlord’s hot buttons .  We proceeded to final lease documents without a single question from the landlord.

The facts + a success story that reaches back to more robust economic conditions = the new creditworthiness. 

 

Aaron Weiner CCIM, CPM, LEED AP

aaron@bailesre.com

When “Triple Net” Isn’t Really Triple Net – Kellogg’s Swale Tale in Detroit

Can the landlord force their tenant to cure all latent defects at a property under a NNN lease?  The answer is yes…if you let them!  Tenants take this on the chin day in and day out without a good, experienced broker in their corner who can come out swinging!

Properties can have latent defects even if they are brand new.  The benefit of brand new is that there are construction warranties in place.  Did the broker make sure those warranties were addressed in the lease to protect their tenant against construction defects?  If not, the tenant just got the shaft!  If the warranties have long since expired, did the broker get wording into the lease that latent defects would be the landlord’s responsibility?  Admittedly, those assurances are hard to get, but you gotta ask!   Putting protections into the lease regarding premature and extensive repairs to a property that is being tendered in “good operating condition” is the stuff of another blog post, but I wanted to share an interesting story that involved my client, The Kellogg Company.

Kellogg was 3 years into a five year lease at a free-standing, single tenant facility in the greater Detroit, Michigan market.  This was a classic triple-net situation: the tenant was the only one using the property.   I got a email from Battle Creek: the Detroit distribution center manager was complaining that a broken concrete drainage swale running down the middle of their truck court was breaking up and causing damage to their trucks.  After reviewing their lease and finding what I expected – pure triple-net without any carve outs – I took a few minutes to reset the client’s expectations; after all, it was their truck traffic that caused the damage.   But before I came to any final conclusion, I asked them to take several photos and send them to me.

What the photos revealed was that the concrete swale was poured with the rebar very close to the surface which arguably caused the concrete to spall.  The rain and freezing temperatures took care of the rest.  I presented the problem to the landlord thusly: the faulty construction of the swale was the root of the problem.  And the tenant was considering their options with respect to renewing this lease.  Can you guess what the outcome was?  Problem solved…and at no cost to the tenant!

The moral of the story here is that the tenant or their broker must give these situations a closer look before incurring the cost of repair.  And if you think you need the leverage afforded by a Fortune 100 tenant, that’s not necessarily the case.  So long as the tenant has held up their end of the lease and paid their rent on time, they are golden.

Nothing is absolute when it comes to business.

 

Aaron Weiner CCIM, CPM, LEED AP

aaron@bailesre.com