Wendy and I recently returned from a trip to Kona on the Big Island and we had a chance to visit a dozen or so retail and mixed use properties during our stay. Lots of independent shops in the touristy Ali’i Drive areas and national anchored shopping centers as well including Walmart, Safeway, Costco, Longs Drugs, (haven’t seen a Longs since CVS acquired them), and locally owned KTA Super Store Supermarket. I spoke with a couple of shopkeepers who complained of business being more slow this time of year than usual. Likely a combination of the still recovering big island economy, lukewarm anticipated tourism growth and elimination of direct flights to Kona from Japan as reported in West Hawaii Today on Tuesday.
Of course the mom & pops are always on my mind in sluggish economies especially in big anchor centers where national anchors have leases with negotiated discounted rental and triple net rates, usually at the expense of the small guys. Did they have the opportunity to sweeten their own deal with the landlord? Did they represent themselves in the negotiation? Were they cajoled by the property owner’s leasing agent or just represented by a friend with a real estate license and little or no commercial lease experience? Too often well meaning small business owners, whether retailers, office or industrial users think leasing space means personally contacting the property owner or owner’s representative and well, just renting the space. Here’s why that is often a mistake…
Here in Nevada and in Hawaii, there’s nothing illegal about an agent representing the landlord and tenant in the same transaction as long as it is properly disclosed to both parties. When a potential tenant reaches out to a landlord’s agent, a dual representation relationship develops. Inevitably this creates some conflict of interest, (just ask any attorney), as this landlord’s agent is now trying to represent the best interests of both landlord and tenant. But as a tenant, will you get the best deal if the agent represents the landlord’s interests as well? For the tenant, unfamiliar with the mechanics of commercial leasing, perhaps ignorant of incentives other landlords are offering in the market, or not recognizing poorly located space in a center, this lack of knowledge and information is so costly many small businesses have trouble sustaining a start-up especially during a downturn and end up with a lease that’s overpriced with hidden expenses and inferior space. For the landlord, especially one that is actively participating in the operation of their property, they know what incentives are in the marketplace, what actual, not asking market rents are and what space is inferior in their development. What’s the landlord’s incentive for disclosing these things to a potential tenant? Zero. We saw two centers, one in Kailua and another south of town with space that should concern any potential renter. One, a large corner space with disproportionately small store frontage, the other with small spaces tucked back in little alley ways that looked cute on some architects drawing but is dismal space to lease for lack of visibility and/or foot traffic. In my experience the landlord would talk up cuteness and cheaper rents to lease these spaces but I guarantee cheap rents wouldn’t be cheap enough. What to do…
If you plan to open your business in leased space, whether retail, office or industrial, get in touch with a neutral party, licensed agent with commercial leasing experience. It will cost you nothing as your representative’s fee is paid by the landlord in 99% of all cases. If you need someone to help you with leasing space whether you’re just starting out or looking to expand or move, contact me through this site and I can put you in touch with someone who can help.
P.S. My most impressive Mom & Pop business owner we visited on on the Big Island was Umeke’s. Two locations now for the best Poke on the island. There newest location on Palani Road is a sit-down restaurant with full bar and a small fish market with the freshest most reasonably priced fish in Kona.
In today’s market there is so much commercial space for lease, including space in excess of 20 years old. Just like buying a used car, you have to watch out for lemons when renting commercial space.
A couple of years ago I managed a shopping center that was built in the 70’s, and purchased by a couple of slick out-of-state investors. This lemon had been neglected by its previous owner and was in desperate need of repairs from top to bottom. The new owners had a plan to finance the repairs without having to pay anyone back!
PUTTING LIPSTICK ON THE PIG
If you were a new tenant to this shopping center or were renewing your existing lease, you got the privilege of signing their new and improved commercial lease. It had expanded provisions for the tenants to pay the landlord, through CAM charges, thousands of dollars for repairs that were really gigantic deferred maintenance expenses and capital expenditures.
The investors put up their money to give the center a new face lift and a new look, (the lipstick) which helped them attract a new batch of tenants to share expenses and fill their vacancies. Underneath the lipstick was this pig of a property with a completely dilapidated roof, antiquated electrical service, distressed asphalt parking lot, dead landscaping and a host of other high-dollar repair items.
THE SIGNING BONUS
In addition to the bloated expenses the new tenants were about to pay for, many soon found out that the landlord’s 30+ year old heating and air conditioning units they were paying to maintain were constantly breaking down. (No to worry because the landlord thought of almost everything). When they signed their new lease, the tenant agreed to replace the unit if it wore out! A signing bonus if you will. I know of two tenants who paid for the landlord’s new heating and air conditioning units within six months of signing their lease at a cost of about $3,000 a piece.
Another tenant called me a year or so after I had left to tell me his CAM charges had gone from $0.30 per foot to almost $0.60 per foot. For him, that was an increase of $7,900 a year! And for most small business owners, this is a “business killer”.
New and existing tenants trusted the landlord’s leasing agent when they signed these leases. You simply will not get practical, objective and insightful advice from the landlord’s agent about the hidden charges and liabilities in your commercial lease.
Imagine if your Landlord had a Black Hole next to your bank. No matter how hard you worked and struggled to grow your business, there’s this thing with an insatiable appetite, constantly sucking money out of your account. You’re told by your Landlord that the money’s used to keep up the beautiful landscaping or to sweep the sidewalks or to haul away the trash. In reality, the last time somebody watered the plants and swept the walk is when you did it yourself a month ago.
This is often a huge business distraction and what many tenants experience with CAM charges,(Common Area Maintenance), representing one of the three “N’s” of your Triple Net (NNN) Lease. The lease fees you pay monthly toward CAM are supposed to be used for upkeep and other expenses related to maintaining the property, but are often mismanaged, abused and improperly controlled. Here’s an example…
BITING THE HAND THAT FEEDS
A number of years ago, I worked for a Landlord who was also a “silent” partner in a construction company that he self-contracted with to do maintenance and upkeep around his properties. (We’ll call them HoseU Construction). All of HoseU’s regular earnings were generated from the building maintenance work that, coincidentally, was charged back to the tenants through CAM charges. The landlord used this arrangement as a way to royally hose his tenants by charging ridiculously high hourly labor rates, literally making up work, and providing grossly inferior service and labor. Heaven forbid if you asked HoseU to do any personal work as you could count on a fabricated bill with over-inflated costs.
Astonishingly, this situation continues to this day and that Black Hole keeps sucking up all the tenants’ hard earned money. Strong audit provisions and expense caps can prevent this type of abuse as well as who represents you when it’s time to negotiate your lease.
As we all trudge through this recession, (I mean recovery), it’s important to keep looking for bright spots so you don’t get down and lose focus. One white hot, bright spot is the commercial tenant’s leasing market. This is especially true in states hardest hit by the recession. If you’re in the market to rent space right now, it’s time to take the gloves off and give some landlord a right hook.
Almost everyday I see at least one e-mail from other agents offering something free for a potential tenant on behalf of their client/landlord. Mostly it’s a few months of free rent; one was a years’ free rent, and another was a trip to Hawaii for the agent bringing a new tenant! These offers, while not that uncommon, are so numerous today and are offered on retail, office and industrial properties. The recession is forcing landlords to desperately compete for fewer tenants to fill their empty spaces.
This is where the gloves come off. If you’re out to rent commercial space today and using the landlord’s agent to represent you, or negotiating directly with a landlord, please check-in to the nearest psychiatric hospital for an evaluation. Neither the agent or the landlord is going to willingly offer up any incentives for you to rent space and they will squeeze everything out of you they can. (They do it for a living). Even if you are successful in getting a free month, would you call that a victory? I’d call it a slap in the face. By now you know you can have your own agent represent you and your interests for free.
Recently I negotiated a below market-rent lease with, 2 free months rent plus 2 months drastically reduced, 4,000 square feet of new flooring, paint for 10,000 square feet of space, and a cap on CAM expenses all for one client on one lease. On another recent 1,500 square foot office lease we got 2 free months and $12,000 for tenant improvements. These are just some of the carrots that are out there today, but you have to know what you want to accomplish and what to ask for when negotiating.
In today’s sluggish market you have to be armed with your own agent to squeeze every last nickel out of the person you’re negotiating with. If you do it yourself and don’t know about all the offers out there, and I mean ALL the offers, then you’re going to throw money away on an expensive, overpriced lease. While you may not be able to “name your own price”, today it’s certainly something you can shoot for. If you need space, save yourself some money and please call your “free agent“?
Knowing who your landlord is before signing a commercial lease is something soon-to-be tenants rarely think about. Who your landlord is can have everything to do with enjoying a peaceful tenancy and being left alone to focus on your business.
Getting married the day after a blind date would be about the same as committing to a lease without checking out a prospective landlord beforehand. It rarely works out and before the relationship fails there’s lots of stress followed by expensive consequences. The word miserable quickly comes to mind
Landlords come in a variety of flavors that are either actively or passively involved with their properties. Actively involved types may manage the property themselves. Perhaps the property is a family investment and personally managing the property gives junior a job. Or maybe a third party manager acts as the landlord’s agent but the owner is still active at a personal level with the day-to-day operations, (the type “A” owner). Active landlords may also be an in-house management company for a development company or the management division of a REIT, (real estate investment trust). Kimco, Regency Centers and Simon Property Group are examples of retail REIT‘s.
Passive landlords will generally manage their property through an agent such as a property management company. They may only visit the property occasionally and you may or may not ever meet the actual owner during the entire term of your lease.
Regardless of the different types of landlords, what you really want to know is if they’re a bad or difficult landlord. Do they manage their properties professionally and have the respect of their tenants or are they slum lords? Worse yet, is your landlord a crook? One that manipulates leases to their advantage at the expense of their tenants.
How would you know if you’re about to sign on with a bad landlord? One way is to talk with a few tenants at the property and ask the right questions. The other way is having that knowledgeable agent/representative we’ve discussed before looking out for you. Someone with experience will know what properties to avoid and what questions to ask.
In these recessionary times there’s no excuse for taking advantage of tenants and today most landlords are mindful of it. But the bad landlords are still out there, sloppily managing their properties, making mistakes and intentionally or unintentionally making their tenants lives miserable.
There’s no reason to get married on the first date, so don’t.
To your prosperous business. Cheers!
In our last post, we discussed the importance of having good, competent representation when negotiating a commercial lease. To summarize, the person representing you should have good local knowledge and experience with the type of property you’re trying to lease.
Today I want to write about trying to lease space at a property that’s been troubled financially, perhaps a newer project, that has a new owner. This scenario could apply to any type of property that uses a triple-net lease to “pass-through” certain operating expenses to the tenant, however it is specifically applicable to retail properties.
There a many projects around today that fit the example described above. Most were developed between 2005 and 2008 when rents were sky high and lenders couldn’t find a project they didn’t like. Many tenants both national and independent signed leases with over inflated rents. Then the housing bubble burst, credit dried up, consumers pulled back and landlords buckled.
Today there’s still an allure about these projects seen by prospective tenants because there’s vacancy, they’re newer, (attractive to established tenants in older properties and by start-ups wanting something nice that’s now somewhat affordable). There may also be the attraction of a national retailer or two left still doing business.
Now the Lions. A new property owner is going to be anxious to put their own touch on the property trying to overcome any stigma left over from the failed ownership. For instance, the landscaping may have died off or maybe additional signage will be constructed. Whatever it is, you can bet your umm, mule these costs will be passed through to each tenant for reimbursement of the landlord. The unexpected surprise cost to each tenant is often thousands of dollars.
How would a person leasing space know this? They wouldn’t. In fact many tenant representing agents wouldn’t give it a thought. This costly oversight will take almost every new tenant by surprise within the first year of their lease.
Only someone with expertise in managing and leasing specific property types will know this and be able to protect the tenant before the lease is signed. Even then some agents are indifferent and will pass it off on the attorney who reviewed the lease when the stuff hits the fan. You have to know and trust your agent or be eaten.
To your prosperous business. Cheers!
I read an article today from the Arizona Republic entitled “Citadelle Plaza Makes a Comeback”. It’s a good story about a newer upscale shopping center in Glendale getting new owners and new energy following a bankruptcy filing in 2008. A likely victim of the housing and lending crashes.
As I read the article, I started thinking about things I would want to achieve and to protect a client from if I were representing someone interested in opening a retail shop or renting office space. In particular, renting space in today’s market, at a good project that’s been troubled, but that appears to be on the rebound. The latter is a situation I’m intimately familiar with after managing a couple of struggling and recovering specialty shopping centers in 80’s and 90’s.
First, and most importantly to get the best deal possible, is to have your own experienced, independent representation. And guess what it’s FREE! That’s right, the property owner will pay your agent to represent you! So why doesn’t everyone do that?
Perhaps they think it’s like renting an apartment from a simple two page “standard” lease. How hard could it be, right? Others are conditioned to “deal direct” because they’ll save money. Seems logical that negotiating your own deal directly with the owner or the owner’s agent might land a sweeter deal.
In reality, most landlords aren’t saving money dealing with you direct and therefore aren’t going to pass on any savings. Plus saving you money isn’t really going to be one of your landlord’s priorities.
Landlords typically have their property listed with a real estate company or are paying someone in-house to do their leasing. If a listing agreement is in place, then the landlord generally has to pay the listing agent no matter who does the deal. If there’s someone leasing in-house, then they too are being paid either by salary or commission or a combination of both.
Leases, particularly in shopping centers, are complicated triple-net contracts. (More on triple-net later). Unless you’ve managed shopping centers in a past life and understand these forms, then signing one on your own is likely to be an expensive and painful experience. Doesn’t free competent representation sound pretty good?
What about using the landlord’s agent to represent you? Let’s say while driving around, you saw a “for lease” sign at a property and called on it yourself. It happens thousands of times a day. The extremely nice agent, working for the landlord tells you that he/she will be happy to represent you in getting a lease and you agree. Do you still think you’ll get the best deal? In many states this is perfectly legal as long as the arrangement is properly disclosed. In some states however it’s illegal because there’s a conflict of interest.
Here’s one example why you won’t likely get the best deal. The landlord tells his agent, (and now your agent), that he’ll give a new tenant 6 months free rent to sign a lease, “but don’t advertise it”. This agent cannot ethically tell you that you can get 6 months free rent. Sort of a don’t ask don’t tell situation. On the other hand, your own independent agent with good market knowledge probably knows that every landlord in town will offer you free rent. A good and knowledgeable neutral agent would automatically be asking for free rent along with any other known market concessions out there.
The list of don’t ask don’t tell secrets is often times big. New tenants will inevitably end up having left thousands of dollars on the negotiating table using the landlord’s agent or negotiating on their own behalf.
A prospective tenant can avoid this serious pitfall by finding someone you trust in advance of calling on a “for lease” sign yourself. I encourage you to call on your own if you see a property you’re interested in, but tell the agent up front that you’re represented by another agent. Then find an agent with strong local, commercial market understanding and expertise in the type of property you’re after. Interview the agent just like you would if you were to hire someone to work for you. That is exactly what you’re doing.
Poor representation is probably the biggest lion waiting in the grass.
In my next post we’ll discuss how to avoid more lions when leasing commercial real estate.
To your prosperous business. Cheers!
From developers to investors, brokers, and agents, tenants and landlords, everyone in real estate today is struggling in a market that few have ever experienced. If you’re a shopping center tenant that signed a lease between 2006 and 2009 you’re likely overpaying by 10 to 40% in today’s market. This is just one of the things your landlord would rather you didn’t know.
Additionally, over the last 30 years I have seen hundreds of small business owners get trashed by their landlords. Most had signed very complicated triple-net leases without fully understanding what they were agreeing to. Only later did they realize that what they had signed obligated them to years of paying unanticipated recurring costs that continually go up. Eventually they became a slave to a minimally profitable business or they simply failed. The “net” charges in “triple net” and the reason and rationale for having to pay these as a commercial tenant is a convenient landlord mystery.
As a commercial property manager for 25 years, I was often the one doing the trashing. I grew very tired of seeing good people suffer and fail, in fact I was ashamed.
Then I decided to do something about it. To seek redemption. To help protect business owners from unscrupulous landlords and their leasing agents; from real estate agents pretending to honestly represent a tenant’s vital interests and avoid the ethical issues that always occur when tenants and landlords are represented by the same agent in the same transaction. (The latter generally being a disaster waiting to happen for the tenant).
In future posts you will learn secrets to protecting yourself when leasing commercial space. You will read stories of business owners and how they lost everything because they didn’t have competent advice before signing a lease. You will also learn tricks from some of the dirtiest landlords imaginable and how to avoid their traps.
Please browse around the site and feel free to comment on what you like or don’t like. Plus if you’re a commercial tenant, take advantage of my FREE lease analysis. I will be able to tell you where the problems lie in your lease, (which for the most part you already know), but more importantly what you can anticipate as the lease term matures and how you can possibly fix these issues now.
Here’s to 2010 and your prospering business. Cheers!