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

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

Tenant Improvement Allowance -- It's Not Just How Big, It's How Long

So tell me, how does it feel when you negotiate $100,000 of landlord-funded tenant improvements in your lease, you use $75,000 to get the premises ready for your occupancy, and then find out there isn’t any allowance left a year later to replace the broken down air conditioning unit on the roof?  You just got the shaft, dear tenant…twice!

That is a common retail refrain, but it happens a lot in the worlds of industrial and office real estate as well.  Most leases – especially the commonly used “industry standard” ones such as those published by AIR Commercial Real Estate Association – are skewed heavily in the landlord’s favor.  Language in these leases often state that the landlord allowance is for construction and improvements to the premises that relate to the initial space plan and that are performed prior to the lease commencement date; in other words, “use it” for only this work and within this time frame “or lose it”.  Most tenants and many inexperienced or oblivious real estate brokers don’t give this much thought.  The tragedy is that most landlords don’t even pay close attention to this detail; that is, until the tenant surprises them down the road with a request for funding for subsequent improvements, and then they turn the tenant down flat.

I’m giving away a valuable trade secret here, so pay attention!  Delete the language that puts time restraints – direct or implied – on the use of tenant improvement dollars provided by the landlord.  It is amazing how infrequently I find landlords accepting this change to the lease.  The poor soul at the top of this blog could have been $25,000 to the better if his broker had done this for him!

 

What I can't tell you is the secret to getting the landlord to allow you to use your tenant improvement allowance for fixtures and telecom systems that are typically disallowed by the standard form leases.  For that one, you will have to pick me to represent you.

 

Aaron Weiner, CCIM, CPM, LEED AP

aaron.weiner@weinerproperty.com

 

Corporate Image: Inside vs. Outside -- Does Your Broker Get It...Or Even Care?

Did you sign a lease for a beautiful new building only to watch employee morale disintegrate after you moved?  What the heck just happened?

Your corporate image is reflected in many ways, including your branding and marketing materials, but perhaps in no way more dramatically than in your place of business.  Tenants, be they retail, office, or industrial in nature, choose buildings based on their outside appearance  or “curb appeal”.  While there is no discounting the way a building looks from the street, experienced and knowledgeable real estate brokers know that what you see isn’t always what you get.  Poor brokers and naïve tenants overlook the fact that there are two distinct audiences for their corporate image:  the outside world (their clients and the public at large) and, no less important, their employees. 

On the outside is the architecture, the building skin of granite or glass, the expansive lobby and the corporate identity (not necessarily theirs) on the top of the building.  But what is important to your valuable employees?  Think ease of parking, the speed of the elevators, the smell of the bathrooms, and the comfort of the suite.  What do you think it does to productivity to have your employees chronically complaining that they are too hot or too cold in their work area, or worse, going home feeling sick because they are hypersensitive to these temperature extremes?  Or when they take longer lunch breaks because the food amenities located in or nearby the building are lousy?

How else does a building impact your business operations?  Is that impressive grand lobby in your three story suburban building inflating your rentable square footage and costing you more relative to other alternative buildings?  Are you setting yourself up for surprise billings from the landlord because they are doing a poor job managing building operating expenses?  It might surprise you to learn that these are all things a good real estate broker can identify before you sign your lease.

Think about it: those companies rated as “the best places to work” in your local business journal never cite the exterior appearance of the building.  It’s all about happy employees.  And happy employees make for happy clients.

Aaron Weiner, CCIM, CPM, LEED AP
aaron.weiner@weinerproperty.com

The Myth of "No Free Rent"

Did you ever sign a lease only to feel your stomach turn when find out that you left two months of free rent on the table?

Tenants are understandably intimidated by improving market conditions.  Space is actually getting leased up again.  Rents are slowly climbing out of the doldrums of the recent deep recession.   In some  submarkets they are rocketing up.  Tenants succumb to pronouncements of landlord rep brokers that “the space won’t last long”, “the premises are being leased ‘as-is’”, and that “the landlord is not offering any rent concessions.”

Those pesky brokers – are they lying?  No – they are just doing their job; that is, to gain the best advantage of improving market conditions for their clients, the building owners.  They are professional salespeople.  And the best ones are great salespeople.  Most tenants are blinded to the fact that they need an advocate who understands the landlord’s position in the market and who isn’t cowed by the pronouncements of their brokers.  Consider: When two professional brokers get down to negotiating a lease, the sales-y rhetoric evaporates and is replaced with the language of the deal.

Let me tell you: in all but the most in-demand micro-markets and neighborhoods, rent concessions are still on the table.  It helps to have an agent who knows whether that building you really like is really as hot as the owner’s broker would like you to believe it is.  Quality tenants are highly valued.  There are flex points in the economics of the lease that will allow a good agent to tailor the deal to your specific needs.  Believe me. 

Aaron Weiner, CCIM, CPM, LEED AP
aaron.weiner@weinerproperty.com

Vanessa's Tale of Woe

Have you ever signed a lease for a location you loved that turned out to be a ulcer-inducing money pit?

Retail business owners are constantly taking on the burden of searching for their new locations.  No sooner do they identify the perfect spot than they find themselves in lease negotiations with the landlord.  Even if they have signed leases in the past, they are intimidated by the process because the landlord’s agent and the landlord obviously have far more experience with leases.  They feel presumptuous questioning the language of the lease; they rationalize that if it has the AIR label at the top, it must be the standard form that everyone else signs and so they sign it.  My friend Vanessa did.  Poor thing…

Vanessa has a big idea for a casual take-out restaurant in downtown Los Angeles.  The agent that showed her this former restaurant space answered only the questions she asked about the condition of the premises.  She did not have an experienced advocate to dig any deeper.  She signed the lease and took possession, only to find that the electrical service was woefully inadequate for her operation.  Right after she spent $10,000 for the necessary upgrades, she learned that the premises had no air conditioning!  That will cost her another $7,500.  Are we having fun yet?

Could an agent negotiating on Vanessa’s behalf have gotten the landlord to spend the $17,500?  Maybe not.  But with a lease hanging like a carrot on a stick in front of the landlord, some rent concessions might have been negotiated using the argument that the tenant was about to perform improvements that would add lasting value to the landlord’s building.   But at this juncture, Vanessa has zero leverage.   She’s coughing up the dough and it’s coming right out of her marketing budget.

A good tenant rep broker could have probably saved her half of those outlays and at no cost, because commissions to all brokers in the deal are paid by the landlord.  And you can take that to the bank.

 

Aaron Weiner, CCIM, CPM, LEED AP

aaron.weiner@weinerproperty.com

THE FUTURE OF BUSINESS IN CALIFORNIA

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.