CALIFORNIA’S HOT SPOT

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

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?

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!

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

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

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?