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.

Aloha!

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.

Kona Sunset

Kona Sunset

(Part 1 of a 3 part post)

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!

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