Best Practices on Leasing Commercial Real Estate Spaces!

On This Episode of Peak Market Watch...

Best Practices on Leasing Commercial Real Estate Spaces!

Alan Callioni, Managing Director of David Realty Partners, and Anton Mattli will give us best best practices on leasing commercial real estate spaces for landlords, property managers & real estate brokers.

Episode Highlights:

  • The importance of a properly drafted commercial lease
  • The difference between the major types of commercial leases
  • Alan’s favorite lease
  • How to locate commercial tenants and vet them
  • Pitfalls to watch out for
  • Why one should hire a property manager

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Guest Speaker

Connect with Alan Callioni

VIDEO TRANSCIPTION

00:00
atlanta georgia he manages seven
00:03
shopping centers and industrial
00:04
buildings and handles the leasing for
00:07
eight more
00:08
his website is davidrealtypartners.com
00:13
welcome alan it’s a pleasure to have you
00:15
with us today
00:17
uh why don’t you give us a brief
00:18
background about you and your firm
00:20
before we
00:21
jump into questions anton thanks so much
00:24
for having me
00:25
i’ve been a commercial real estate
00:26
broker and primary manager for a long
00:28
time here
00:29
working for reits working as an
00:31
industrial manager i’ve seen a lot of
00:33
different types of properties
00:35
over the years many different market
00:37
cycles
00:39
managed industrial retail office
00:43
and uh been around the block a few times
00:45
so
00:46
very good uh so it’s certainly a
00:49
pleasure to have you on so today we talk
00:51
about
00:51
uh commercial leases and
00:54
uh so alan uh why don’t you tell us
00:59
why leasing is is so important
01:02
well you know in my view leasing is
01:04
where a lot of the value of a property
01:06
is created
01:07
even if you’re an experienced landlord
01:08
or broker i think you’ll pick up
01:10
valuable nuances and tips from this
01:11
interview
01:13
things that will help you increase the
01:14
stability and the value of your
01:15
properties
01:16
it’s the cornerstone no pun intended on
01:19
which a commercial property is valued
01:21
by appraisers investors and landlords
01:24
it’s not just about the numbers it’s
01:25
about the quality of the story behind
01:27
the numbers
01:28
which are detailed in the leases if
01:30
you’ve ever had a lawsuit with a tenant
01:32
often it could be traced to a weak
01:34
lease it all starts with the right form
01:37
this is not to say that there’s only one
01:39
form you should use
01:40
rather we want the most appropriate form
01:42
for the property and the tenants
01:44
coverage and clarity are the most
01:46
important concepts here
01:48
ten dollar words can hide precision and
01:50
cloud understanding
01:51
you want to make certain that all of the
01:53
key areas are covered and are clearly
01:55
outlined so that even a non-real estate
01:57
professional can easily understand them
01:59
i like to include a summary page with
02:01
all of the key terms
02:02
contact information time frames due
02:05
dates
02:06
lease rate and responsibilities clearly
02:08
spelled out in eighth grade english
02:11
with minimal jargon really think things
02:13
through and include special clauses
02:15
for unique situations if you purchase a
02:17
building
02:18
and the leases are on say a four page
02:20
generic form
02:21
watch out remember while length of elise
02:24
is not always a determinant of a good
02:26
one
02:26
brevity almost never is i think that a
02:29
widely held belief is that the lease
02:32
is the least and is somehow sacred but
02:34
you should never be afraid to modify
02:36
existing leases
02:37
to conform with current laws clarify
02:39
points
02:40
limit uses adapt to new conditions or
02:43
simply to better your legal position
02:46
anytime a lease is up for renewal
02:48
convert it to a modern stronger format
02:51
even if it isn’t up to renewal you can
02:53
often convince a tenant to update the
02:55
lease form
02:56
if you have something if you offer
02:57
something in return say a partial month
02:59
of free rent
03:00
or some minor space improvements it’s
03:02
almost always worth it
03:04
modern state-specific attorney-written
03:07
forms
03:08
will have the most up-to-date rules and
03:09
regs so you’re legally covered
03:12
but don’t get lazy if that fancy lease
03:14
form is so old it was drafted on a
03:16
typewriter
03:17
then maybe you take the time to review
03:18
it finally there are many tenants now
03:21
that use english as their second
03:22
language
03:23
so you should strive to break down dense
03:25
legal speak into layman’s terms
03:29
very good points now
03:33
i think particularly for uh for
03:35
landlords that are
03:37
relatively new as well as for for newer
03:39
tenants so it can get
03:41
quite confusing there right there a lot
03:43
of multiple commercial lasers
03:46
uh so what are the most common types
03:49
well there’s three major types the first
03:51
we’ll talk about is a gross or full
03:53
service lease
03:54
this is the most common lease for mom
03:55
and pop tenants why
03:58
because it’s the easiest for tenants and
04:00
landlords to understand
04:01
if you have a single tenant warehouse
04:03
building this format may work just fine
04:06
this lease is where everything is
04:08
included the tenant pays a set amount
04:10
that includes the rents operating
04:13
expenses
04:14
property taxes and all utilities it’s
04:16
the simplest
04:17
but it’s often the worst for the
04:18
landlord the landlord has no control
04:21
over tenant expenses
04:22
utility usage or tax increases
04:26
if the tenant uses the ac and heats far
04:28
too much
04:29
the landlord must absorb the expense if
04:32
taxes escalate
04:33
the landlord pays all the tax increase
04:36
this can be particularly difficult
04:38
for a landlord in a hot economy like the
04:40
one we’re in now
04:41
where property values keep rising and
04:43
property taxes keep increasing
04:45
the landlord actually may end up letting
04:48
netting less
04:48
income each year because he’s on the
04:50
hook for all of the extra taxes
04:53
also if a tenant goes under and didn’t
04:55
pay the utility say for the past three
04:56
months
04:57
the landlord must pay it the second
05:00
option is called a modified gross lease
05:02
in my view these are better than a gross
05:05
regular gross lease
05:06
this is typically where the tenant pays
05:08
the rents and operating expenses
05:10
but has to pay his own utilities
05:12
separately however
05:14
if the operating expenses are taxes
05:15
increase the landlord is still on the
05:17
hook for all of it
05:19
in either of these leases the landlord
05:22
is vulnerable to increasing
05:23
taxes to counteract this seasoned
05:26
landlords use what’s called a base year
05:28
a base year is a clause found in better
05:31
written gross and modified gross leases
05:33
the base year is a year that is actually
05:35
tied to the actual amount of taxes
05:38
insurance and operating expenses to run
05:40
the property in a specified year
05:43
the actual amount of expenses that are
05:45
tied to the base year
05:46
is called the expense stop this is sort
05:48
of the floor
05:51
of your operating expenses the minimum
05:53
you’ll pay
05:54
as the lease goes on the tenant is
05:55
responsible for paying an increase
05:57
above this base year amount for example
06:00
if a new lease is done in say 2015
06:03
the operating expenses are three dollars
06:05
a square foot for this property
06:06
the base year would be 2015 and the
06:09
expense stop or floor
06:11
would be three dollars a square foot if
06:13
in 2016
06:14
the property taxes insurance and
06:16
operating expenses
06:18
increased to say three dollars and fifty
06:19
cents a square foot the tenant would be
06:21
responsible
06:23
for that increase of 50 cents per split
06:27
suffices to say that even if it’s a bit
06:29
more complicated
06:30
it’s often well worth it for a landlord
06:31
to have a base year clause in its leases
06:34
it’s a tool used by landlords to limit
06:35
their exposure to increased property
06:37
taxes
06:38
and as such it helps to maintain
06:39
predictable cash flow
06:41
the final form is called a triple net
06:44
lease
06:45
the triple net lease format is where the
06:46
tenant pays only its pro rata share
06:49
of the actual operating expenses for the
06:51
property
06:52
the key is that if any of the operating
06:54
expenses say property taxes
06:57
go up the landlord doesn’t pay for it
06:59
the tenant does
07:01
this gives the landlord less risk and
07:03
more control
07:04
the tenants will always absorb the
07:06
increase in expenses
07:08
you can pass along all building
07:09
maintenance and property management
07:11
costs directly to the tenants
07:13
with a gross or modified gross lease the
07:16
landlord would pay these
07:18
this is generally more attracted to
07:19
investors and landlords in fact
07:21
converting a property from gross to
07:23
triple net leases
07:24
is a free way to increase the value of a
07:26
property in the eyes of investors
07:30
okay very good uh thanks for that
07:34
detailed explanation
07:35
so of those which is the best format or
07:39
let’s say your favorite format of these
07:42
leases
07:43
i strongly prefer the triple net lease
07:45
as they’re the ones that give the
07:46
landlord maximum control
07:48
the most predictable expenses and the
07:50
highest potential net income
07:52
with the fewest surprises if you have a
07:54
multi-tenant building particularly with
07:55
a diverse tenant base
07:57
this is the way you want to go okay
08:00
very good so
08:03
when you have a building that that needs
08:06
to be leased up
08:07
uh how do you locate tenants well you
08:11
know i’m very proactive
08:12
i like to visit other nearby centers and
08:14
ask if those tenants are happy there
08:17
i like to approach successful
08:19
multi-store owners in the area
08:21
and ask if they would consider expanding
08:23
these are often great prospects because
08:24
they’ve proven themselves already
08:26
in multiple locations if i have a
08:28
perfect space for a franchise
08:30
i call every possibility on my franchise
08:32
list
08:34
loopnet and costar is an invaluable
08:36
online marketplace
08:38
and you do not need to be a broker to
08:39
have access to it same for
08:42
crexie.com and cityfeet.com also works
08:45
well
08:46
now there’s so many others it makes your
08:47
head spin but you can
08:49
often pay for a short term single
08:51
property subscription
08:53
i’ve used social media such as linkedin
08:56
and you can also offer your current
08:57
tenants a rent discount if they find you
08:59
a tenant
09:01
as far as advertising i think the
09:03
cardinals in with a lot of brokers is
09:05
that they simply don’t give enough
09:06
information but you can use this to your
09:08
advantage when prospects don’t have
09:10
enough
09:10
they can’t make a decision so give them
09:12
all they need to pick your property
09:14
give floor plans dimensions panoramic
09:17
pictures
09:18
aerial photos even a walk-through video
09:20
with you narrating the details
09:22
you can post that for free on youtube
09:24
and then add the link
09:25
to many of your ads this will help you
09:28
weed out the time wasters and those who
09:29
are unclear of their needs
09:32
you don’t want to space to show your
09:34
space to everyone who calls you your
09:36
time is valuable you should politely but
09:38
aggressively
09:39
pre-qualify prospects make sure that
09:41
they’ve already seen your demographics
09:43
the area
09:44
your walk-through video drive-by traffic
09:46
pictures etc
09:48
before you meet them for a showing
09:51
very good uh so the all great ways to to
09:55
find tenants
09:56
right so but now the question is what
09:58
are the key drivers
10:00
uh that you implement to properly vet
10:02
the tenants
10:04
well for me it all starts with a credit
10:06
report i’m always surprised by how few
10:08
landlords could pull a complete
10:09
credit report on prospective tenants i
10:12
wouldn’t bother with one of these
10:13
credit karma credit scores nothing
10:15
against credit karma but you need
10:17
something a little bit more
10:18
in depth than just a number on a iphone
10:21
you know that’s a partial picture of
10:23
besc you can get a free
10:25
complete credit report at
10:30
www.annualcreditreport.com
10:32
this is the government sponsored website
10:34
that has experian
10:35
trendy transunion and equifax for ten
10:38
dollars
10:39
you can even get credit scores next i
10:42
like to look at financial statements
10:44
i always ask for two years to get a
10:46
sense of their success
10:47
if it’s a startup of course as for a
10:49
business plan and bank statements to
10:51
show me how much cash or working capital
10:55
they have this business as we all know
10:58
startups are risky for everyone related
11:00
to it you want to minimize your risk by
11:01
doing your homework
11:03
if a company is weak on finances i ask
11:06
for an additional security deposit
11:07
perhaps two to three months instead of
11:09
just one
11:11
if they’re weak on credit i’ll often ask
11:13
for a cosigner
11:14
on the lease or add a personal guarantee
11:17
a guarantee makes the individual tenants
11:19
fully responsible
11:20
for the lease should the tenants llc or
11:23
corporation go under
11:26
obviously you need to apply stronger
11:28
qualifying criteria to someone leasing 5
11:30
000 square foot
11:31
than you do if they’re only leasing say
11:33
900 square foot
11:34
in the end some tenants will not make it
11:36
no matter what you do you simply want
11:38
them to have as much skin in the game as
11:39
possible
11:41
finally don’t be afraid to loosen your
11:42
screening criteria or your lease rate
11:44
for those tough to lease spaces
11:48
excellent uh so
11:52
once you have found a tenant that that
11:55
you like what are some of the important
11:57
deal points that
11:59
you want to to look at in the lease
12:02
well some people ask about early
12:04
termination clauses
12:05
the landlords generally want long leases
12:07
but tenants generally want
12:09
shorter flexible leases a great way to
12:11
bridge this
12:12
isn’t through an early termination
12:13
clause it gives a tenant the right to
12:15
walk away from the lease at a
12:16
predetermined time sort of an escape
12:18
valve
12:19
if you will i always require the tenant
12:22
give me advance notice
12:23
usually three to four months i do this
12:26
so i can have some time to search for a
12:27
new tenant to refill the space
12:30
i also charge the tenants a hefty rent
12:32
penalty typically equal to two to three
12:36
months
12:39
sorry about that typically equal to two
12:41
to three months of rent
12:43
the penalty money i collect can be used
12:45
to offset our expenses like a broker
12:47
commission
12:48
on the new tenants i rarely offer these
12:50
to new tenants during good economic
12:52
times
12:53
however i did offer quite a few during
12:54
the great recession
12:56
in the end you want to make the deal
12:58
work for the tenant rather than let a
12:59
good tenant get away
13:01
in a good economy odds are they’ll stay
13:02
long-term anyway
13:05
we can talk about free rent is that a
13:07
thing in your market
13:08
if you don’t know you should find out if
13:10
so what are the typically
13:12
you know amounts offered in your area
13:14
one month three months
13:16
set dollar amounts you may be surprised
13:18
that in this hot market
13:19
you may not have to offer attendance any
13:21
at all however in atlanta we typically
13:23
offer
13:24
up to one month free base rents per year
13:26
of lease
13:28
we can talk about lease terms should you
13:31
go long
13:32
should you go short longer is ideally
13:34
better for the stability of the property
13:36
the less you turn a space over the fewer
13:38
months you’ll have a vacant space
13:40
waiting to be leased
13:42
less often you’ll have to offer
13:43
concessions less often you’ll have to
13:45
make over the space completely
13:47
for a different use frankly the only
13:49
time i would offer short-term leases
13:51
would be when i’m expecting rates to
13:53
rise suddenly and i don’t want to commit
13:54
to the current rates for the long term
13:57
an example would be that right next door
13:59
they’re building 300 upscale apartments
14:02
and that will triple my shopper traffic
14:05
in the next year
14:06
increased traffic usually means much
14:08
higher rates
14:10
people often ask should i offer annual
14:12
rents or
14:13
flat rents i’m sorry annual increases or
14:16
flat rents
14:17
excuse me there’s nothing inherently
14:19
wrong with offering tenant a flat rents
14:21
meaning no annual increases in rent
14:24
national or
14:25
national or publicly held companies will
14:27
often ask for a flat rates
14:28
all others in my opinion should have
14:30
rent increases
14:32
you can structure it any way you like
14:34
but as a landlord you always want rent
14:36
growth
14:37
rent growth allows compound interest to
14:39
work for you and ratchets up your income
14:41
numbers
14:42
this is important when it comes time to
14:43
sell the property
14:45
then we can talk about tenants
14:46
improvements
14:48
i prefer to give free rent and let the
14:50
tenants handle that on their own
14:52
it’s simply more efficient for the
14:53
landlord or for the broker i insist
14:55
tenants obtain the proper permits
14:57
and use only insured and licensed
14:59
contractors otherwise they’re in
15:00
violation of their lease
15:03
all manner of problems can pop up during
15:04
space renovations
15:06
taking up more time and expense than
15:07
originally envisioned
15:09
don’t get involved if you don’t have to
15:11
also if it’s required
15:12
never let a tenant skip the permit
15:14
process this will come back to bite you
15:16
down the road
15:19
very good all excellent points uh you
15:22
you touched on
15:23
uh obviously as a landlord you want to
15:26
to improve your cash flow right you want
15:28
to protect your cash flow
15:30
uh so but from a tenant perspective
15:34
right what if the operating expenses of
15:36
a building
15:37
uh balloon out of control can attend
15:40
request
15:41
that there are caps or limits on
15:43
operating
15:44
expenses i think they’re also known as
15:46
camps right
15:48
is that something that can be looked at
15:50
they can
15:51
cam also known as common area
15:52
maintenance and the answer is to your
15:55
question
15:55
absolutely either landlord or tenant can
15:59
set a maximum allowable cap on any one
16:00
item whether it’s
16:02
plumbing hvac electrical use whatever
16:04
you like
16:06
it’s a great way to make a tenant feel
16:07
more secure if their expenses have some
16:09
predetermined limits very good
16:13
so uh once you you you found the tenant
16:17
you’ve added all the tenants and you
16:19
think that now you you have a good
16:22
a good candidate how do you figure out
16:26
from a big picture perspective whether a
16:28
tenant is a good fit for
16:30
a particular building
16:33
well there’s hard concerns and soft
16:35
concerns some hard concerns would be the
16:37
actual lease rates the tenant’s
16:38
improvements
16:39
free rents things that cost or create
16:42
money
16:43
does this tend to make financial sense
16:45
for me often when you’re presented with
16:47
one lease scenario versus another
16:49
sometimes people just pick the one that
16:50
sounds better but you or your broker
16:53
or your broker should really perform a
16:55
net present value calculation to see
16:56
which one actually makes better
16:58
financial sense
17:00
and then we could talk about some soft
17:02
concerns the intangibles
17:04
sometimes it’s not about the highest
17:05
lease rate or the longest lease
17:07
it’s about the synergy created when you
17:09
bring in a tenant that creates that
17:10
dynamic tenant mix
17:12
making your center the center that
17:14
people flock to above others in the area
17:16
an example would be an auto repair shop
17:18
next to an auto body shop
17:20
or a casual restaurant next to a bar etc
17:24
let those tenants trade business back
17:25
and forth to create stronger businesses
17:27
for themselves
17:29
i recently did a women’s gym where we
17:31
did the lease and then we did a smoothie
17:33
shop
17:34
a few months later right next to each
17:36
other they love having each other next
17:37
door because it’s such a natural
17:39
fit it increases shopper traffic for
17:41
both tenants
17:43
yeah that’s that’s only a great idea uh
17:47
so once you have agreed on the lease you
17:49
have a tenant in place
17:51
uh so what are some of the potential
17:53
problems
17:54
uh that you may have to contend with
17:57
once
17:57
once you have a tenant or tenants in
18:00
place
18:02
well if you have a number of tenants
18:04
you’re going to have some that pay late
18:05
and those means and you have to enforce
18:08
late fees
18:09
i prefer to not have any side agreements
18:12
or verbal agreements with tenants
18:13
if you get in and this will get you in
18:15
trouble every time
18:17
if you make changes to the deal even
18:19
temporary ones such as a covet related
18:21
rent discount
18:23
put it in writing as an addendum to the
18:25
lease and have both of you initial it
18:27
now if a person is chronically late that
18:30
may lead to a default
18:32
um but it’s okay because if you’ve
18:34
chronic if you’ve kept that chronic late
18:36
payer
18:37
papered properly with all those late
18:38
payments then you know even the tenant
18:41
calls and or emails and it says the
18:42
check’s in the mail you know we
18:44
have we’ve heard that a hundred times
18:45
before uh if as long as you sent your
18:47
your late letters and default letters if
18:49
you have to go to court down the road
18:51
you’ll at least build your case against
18:53
the tenants so you can show
18:54
you’ve followed away
18:58
very good so
19:01
now another question is right
19:05
unless you are you have a property that
19:07
is in a just a core
19:08
top location whether it’s times square
19:10
in new york city as a
19:12
as a prime example that would everyone
19:14
know uh
19:16
in a lot of instances one probably could
19:18
say that
19:19
commercial space is kind of a commodity
19:23
right so how as a property owner can you
19:26
make sure that your property is unique
19:29
and stands out from the competition
19:32
well through creativity and flexibility
19:34
in your leasing
19:35
you want to offer tenants options they
19:37
didn’t even know were available or
19:38
things that other landlords
19:40
won’t imagine a startup tenant who needs
19:42
to keep his leasing
19:43
expenses low to start but expects to
19:46
expand rapidly in the coming years
19:48
an example would be like a technology
19:49
firm they start you start in a garage
19:51
and
19:52
three years later you’re in forty
19:53
thousand square foot uh you can offer
19:55
the tenants a right a first refusal
19:57
to expand into any adjacent spaces
20:01
if and when it’s available that will
20:02
mean it’s current needs now of low cost
20:06
and to expand when he can afford it down
20:08
the line without having to have the
20:09
tenant
20:10
relocate this costs you nothing but
20:12
really helps attendance with his
20:13
long-term planning and he’ll sincerely
20:15
appreciate it
20:17
think of a tenant who wants to lock into
20:19
a long-term rate
20:20
for five years but is not sure he can
20:22
commit for that long
20:24
you can offer him the right to an early
20:25
termination for a small penalty
20:27
again no cost to you but it helped that
20:30
tenant commit to your property
20:34
excellent points another question i have
20:38
is and uh
20:39
it’s kind of related to also what we do
20:41
right we are commercial
20:43
mortgage brokers so we get a lot of
20:46
questions from from borrowers why why
20:49
don’t we just go
20:49
directly to a lender so we can save the
20:52
the brokerage fee
20:54
so when it comes to a landlord that has
20:57
space that they need to lease out
21:00
they’re a similar question probably can
21:02
be brought up
21:03
so why should i hire commercial real
21:05
estate broker
21:07
to market that that space why can’t
21:10
i as a landlord go alone and do it
21:13
myself
21:14
well of course i’m biased being a broker
21:16
but i always think you should hire a
21:18
broker and just hear me out
21:19
an experienced connected local broker
21:22
will have a better handle on the lease
21:23
rates than you will
21:24
they’ll be able to find the pressure
21:26
points solve problems sue the tenant’s
21:28
worries and make it work for both of you
21:31
do you do as a landlord or property
21:33
manager do you even know the correct
21:35
market rates
21:36
are you up to date with proper
21:37
concessions are you an active marketer
21:39
or you’re just doing it passively
21:41
you will benefit from a great broker’s
21:44
experience
21:44
connection and local market knowledge
21:47
now
21:48
it’s important to remember that in a
21:49
strong leasing market everyone looks
21:51
like a hero
21:52
you know but the problem with that is
21:53
that it hides a lot of leasing mistakes
21:55
but it doesn’t mean you you’re doing the
21:57
best job for yourself
21:59
if a good broker can even get a dollar
22:01
fifty more square foot say than you’re
22:03
asking
22:03
then they’ll pay for themselves they’ll
22:05
have direct contact with all the
22:07
franchises and brand name companies
22:09
i’ve seen you know uninformed landlords
22:12
try and go it alone and ask
22:13
for a far above market rents only to
22:15
have their spaces vacant for six months
22:17
that’s six months of lost income
22:19
far more than the cost of a broker
22:21
commission or worse the opposite
22:23
they end up giving the space away
22:24
because they were unaware that the
22:26
leasing rates
22:27
suddenly increased since the space was
22:31
last left for lease
22:32
my point is in trying to save a dollar
22:34
you may be costing yourself a lot more
22:36
in the long run
22:38
an example would be back in 2007 when i
22:40
sold the strip center to a local
22:42
investor
22:43
i advised him to take on a broker for
22:44
the vacant spaces
22:46
he decided to do it himself he was a
22:48
very successful business owner and
22:50
thought he could handle it
22:51
he ended up making so many mistakes
22:53
mainly through hubris
22:54
he just didn’t adjust his rates when the
22:57
market started to weaken in 2008
22:59
and by 2009 his center was half empty
23:02
he nearly lost it to foreclosure by the
23:04
time he hired someone to turn it around
23:07
i think it was best said in that old
23:08
movie top gun don’t let your ego write
23:11
checks that your body can’t cash
23:14
now i’m dating myself right you can
23:17
expect leasing to get more difficult in
23:19
this coming year
23:20
a recession is coming at some point
23:22
eventually who knows when
23:23
it’s certainly going to be exacerbated
23:25
by the lingering covert problems
23:27
major companies are walking away from
23:29
their office leases as more and more of
23:30
us work from home
23:32
many retail stores can no longer justify
23:34
their brick and mortar footprint
23:36
with more and more of us turning to
23:37
online retail you should make sure you
23:40
have a strong broker in your corner
23:41
to advise you well during the commentary
23:44
turbulent times
23:48
very good points uh so let’s assume that
23:51
the landlord decided
23:52
that it’s the right and smart way to
23:55
to hire a broker to lease out uh
23:58
the space uh so and
24:01
maybe it’s a property that is in a good
24:03
enough location that it also could
24:05
attract national
24:06
credit tenants so then the quite next
24:10
question that comes up
24:12
for a landlord is should i hire one of
24:14
these large national firms
24:17
or should i hire a local broker
24:20
that’s actually a great question it
24:21
depends on several things a local broker
24:24
will be more apt to respect and service
24:26
a listing if it’s a smaller space
24:29
national brokers tend to fader tend to
24:31
favor larger listings
24:32
it’s just the way it is i’m sure i’ll
24:34
get some hate mail for that but
24:35
local brokers share commissions on all
24:38
listings
24:39
some national brokers will not share
24:40
commissions on investment property sales
24:43
but we’ll usually do it on leases it’s
24:46
important since you want all brokers to
24:48
be aware
24:48
and hopefully promoting your listing
24:52
national brokers will tend to be more
24:54
plugged in with national tenants so
24:56
if that’s you know if you’ve got a prime
24:58
corner then obviously you’re looking for
24:59
a
25:00
you know a kroger or a chase bank
25:03
obviously go with the national broker if
25:05
you have a smaller space that would
25:07
never attract a national tenant a local
25:10
broker would be just fine
25:11
you know you know because it doesn’t
25:14
always matter
25:15
if you have to look at your own
25:16
circumstances and see what you’re
25:18
actually needing
25:19
you know the name and the size of a
25:20
company is no panacea
25:22
it often comes down to the individual
25:24
broker what’s their level of experience
25:26
and track record in my area
25:28
with my type of property in my size
25:30
range
25:31
what’s their marketing strategy how many
25:33
listings do they have in my immediate
25:35
area
25:35
you should ask the right questions to
25:37
get the right broker for the job
25:40
excellent points yeah so uh now
25:44
let’s say you’ve you’ve you have the
25:46
property lease that where you hired a
25:48
broker who
25:49
brought in all great tenants and it’s
25:52
all hopefully fully leased
25:54
uh now the the next question really is
25:58
now what do i do with with that property
26:00
on a day
26:01
by day basis and week and week and month
26:03
by month
26:04
should i manage it myself or should i
26:07
hire a property manager
26:10
again i’m biased here since i’m also a
26:11
property manager but i think it almost
26:13
always makes sense to hire a property
26:15
manager
26:16
usually when people are wealthy enough
26:17
to own a shopping center or a large
26:18
commercial building
26:20
they would be best served to pay a small
26:21
fee to have it professionally managed
26:24
if a landlord’s time is worth say one
26:26
hundred fifty dollars an hour
26:28
why would they do work that he could pay
26:30
someone thirty dollars an hour to handle
26:32
we only have so many work hours in a day
26:35
so there
26:36
would be losing 120 per hour when they
26:39
do 30
26:39
an hour work i can understand being
26:42
frugal but not foolish
26:44
besides most landlords are busy
26:45
professionals or business owners
26:47
that will not be able to handle timely
26:50
issues like a dedicated professional
26:52
manager would
26:53
a recent example i know of an owner that
26:56
had a huge pothole that needed repair
26:58
the landlord said i’ll get around to it
27:00
however weeks later it still wasn’t
27:02
fixed
27:03
and then a shopper drove over it and
27:05
badly damaged their car
27:06
costing the landlord about fifteen
27:08
hundred dollars to repair the car
27:10
not to mention the loss of goodwill and
27:11
embarrassment a good property manager
27:14
would have been all over that handled it
27:15
right away
27:17
another example would be the application
27:19
of sands and snow melts to icy sidewalks
27:21
when it gets cold
27:22
this is an infrequent yet very timely
27:24
thing when it’s needed
27:26
a simple slip and fall could land you in
27:27
court with a lawsuit for negligence
27:29
and cost tens of thousands of dollars
27:31
for you to settle
27:34
yeah very good point there
27:38
so i think we now also have kovi 19 that
27:43
is on
27:43
on everyone’s mind right we have some
27:47
some locations uh or worse than orders
27:51
when it comes to
27:52
to local restrictions as well as to
27:55
local regulations where
27:57
uh local authorities restrict
28:01
evictions of commercial tenants giving
28:03
them some
28:04
some additional rights so
28:08
talk to us a little bit about how
28:11
how leasing now should be done
28:14
doing the age of uh kovit 19.
28:17
you’re absolutely right the effects of
28:18
cove have been very uneven some states
28:20
have been
28:21
draconian in their responses and some
28:24
lazy fair
28:25
but generally it’s decimated restaurants
28:27
salons and spas while barely affecting
28:30
many other categories
28:32
many landlords are trying to pivot from
28:33
these categories if possible for example
28:35
if you have a
28:36
traditional salon that can be carved up
28:38
and cut up into
28:39
individual salon suites that offer
28:41
greater perceived safety
28:43
restaurants that are fine dining could
28:45
maybe pivot to takeout or more delivery
28:48
those are faring much better you need to
28:50
ask yourself
28:51
as an owner what prospects are
28:52
unaffected or at least less affected by
28:54
covid
28:55
and can i actively seek those out case
28:57
in point we lost the fine dining
28:59
restaurant tenant in september
29:01
we ended up replacing them with a
29:02
popular pizza takeout and delivery shop
29:05
since so few restaurants are open to
29:07
dine in customers this pizza shop’s
29:09
business is actually up over 25
29:11
during covet so they’re doing great you
29:13
know
29:14
with any space i always ask if things go
29:16
badly what’s my turnaround strategy
29:19
what are my changes and how much will
29:23
those options cost
29:24
you just want to do whatever it takes to
29:25
make your property more covered
29:26
resistant you know
29:28
another leasing assignment i had in
29:29
october was for a new construction
29:31
fast food restaurant i dreaded getting
29:33
this because i knew it would be a very
29:34
difficult space to lease of all things a
29:36
restaurant during covent
29:38
however since it was just being built i
29:40
was able to convince the landlord to
29:42
redesign the building at the last minute
29:43
we got rid of the drive-through
29:45
and we began marketing as a medical
29:47
space within about 30 days
29:49
we filled it with an urgent care center
29:51
with a 10-year lease so
29:53
it actually came out smelling like a
29:54
rose on that one
29:56
wow that’s great uh so
29:59
obviously you you touched on restaurants
30:02
right there are some other
30:03
uh tenants that and the industries that
30:07
have been suffering more than others
30:09
doing kobe 19
30:11
and i think landlords really need to be
30:14
very proactive now
30:16
uh so as a landlord and and brokers what
30:19
what can
30:20
they do to be more aggressive when it
30:23
comes to marketing their property in
30:25
that environment
30:27
you know for me being nimble and
30:29
creative is key
30:30
even if i don’t currently have a vacancy
30:32
i advertise spaces for lease that i
30:34
think
30:34
may come vacant in the next 90 days or
30:37
so that way if a tenant doesn’t renew
30:39
his plans
30:40
or goes under moves away i’m not caught
30:42
off guard i have a roster of interested
30:45
prospects to call
30:46
for example i manage a center where a 5
30:48
000 square foot tenor
30:50
recently went away in june um since i’m
30:54
in very close touch with my tenants
30:55
i saw that she’d really been struggling
30:57
since april so i began advertising the
30:59
space
30:59
in advance just in case she went under
31:02
and she did
31:03
i quickly repositioned the space to
31:05
attract new users i found an established
31:07
medical technology school that was
31:09
actually using a lot of distance
31:10
learning
31:11
they signed a six year lease and they’re
31:13
operating just fine
31:15
basically unimpeded during this covert
31:17
time
31:19
very good so i think you just
31:21
highlighted
31:22
the importance of of using a broker
31:25
right you can bring
31:27
ideas to the table how to market that
31:29
property
31:30
right would you as a landlord think of
31:33
uh
31:34
approaching a medical education or
31:36
another medical type of company
31:39
maybe you do but then you still need to
31:40
find them right so i think it’s
31:42
it’s only worthwhile so hopefully
31:46
someone hired you and you’re able to
31:48
fill fill
31:49
all the space so the question now is now
31:52
the building is full
31:54
and now what’s the way forward
31:57
well it’s great your building’s full but
32:00
you shouldn’t be afraid
32:01
not to renew tenants that don’t work
32:03
well that perhaps don’t contribute to
32:05
your current tenant mix or simply too
32:07
much trouble to keep around the
32:09
the late payers the chronic complainers
32:12
perhaps the people make a little too
32:13
much noise you know
32:16
second don’t fight the market you want
32:18
to adjust and adapt
32:19
your outlook and your expectations to
32:21
the market don’t get too hung up on your
32:23
own story of or version of the market
32:26
third and last uh tenants come and go
32:30
for a variety of reasons you can’t fight
32:31
it but always strive to protect those
32:33
core
32:34
tenants you know the ones that really
32:35
drive traffic to your property the one
32:37
that you’re known for
32:38
you know we have one two we have one
32:39
building where a stage three a big gym
32:42
is their tenants and people it’s called
32:43
the stage three building i mean
32:45
it it’s just that’s just it’s like like
32:47
a local landmark in our town now so
32:49
you know so your point is you want to
32:51
build on them protect them and they’ll
32:52
serve you well
32:54
yeah that’s a great idea right so
32:56
everyone recognizes the building
32:58
so it it helps everyone right it helps
33:00
you as a landlord as well as
33:02
absolutely yes so uh
33:05
i thank you you had a great value here
33:08
uh and obviously i think
33:12
everyone hopefully after listening to to
33:15
your outline is convinced that
33:17
one should use a leasing broker to to
33:21
to lease up a commercial building but
33:24
let’s discuss
33:24
uh leasing commissions obviously it’s
33:26
not free
33:28
so could you touch on that a little bit
33:31
and how it’s different
33:32
for from residential leasing of course
33:36
um well first and foremost it’s former
33:38
negotiable
33:39
there are lots of formulas depending
33:41
upon what state you live in for a mom
33:42
and pop tenant you might pay one month’s
33:44
rents
33:45
or five percent of the total base rents
33:48
if it’s a triple net lease
33:50
for a national accredited tenant you
33:52
might pay one month’s rent
33:53
plus four percent of the total base rent
33:55
because you can always expect to pay a
33:57
higher commission
33:58
for a high quality national name brand
34:00
that does say a five
34:02
seven or ten year lease you wanna
34:04
negotiate with your broker but don’t
34:06
skimp
34:07
remember brokers will tend to show the
34:08
listings that pay them well it’s simply
34:10
good business practice for them
34:12
give them a good reason to show yours in
34:15
conclusion
34:16
leasing is a fairly simple subject that
34:18
virtually anyone can master
34:20
it just takes a conscientious person and
34:22
a willingness to ask for
34:24
professional help when needed you should
34:26
be proactive
34:27
or hire brokers and property managers
34:29
that will strongly advocate for you
34:31
for economic and coveted related reasons
34:33
this will be a tougher year
34:35
for leasing but it doesn’t mean you
34:37
can’t thrive in 2021
34:39
use everything at your disposal to
34:40
protect your properties
34:43
all great points thank you very much
34:45
alan
34:47
so i think you added a great value to
34:50
our listeners
34:51
uh so if if someone would like to
34:54
to reach out to you how can you be
34:56
reached
34:57
i can reach that a-l-a-n at d-r-p
35:01
brokers drp as in david roger
35:04
paul allen at drp brokers
35:08
i’d be happy to share a free net present
35:10
value calculator
35:11
i can share some of my other articles
35:13
that i’ve written such as leasing from a
35:14
tenant’s perspective
35:16
so people understand both sides of the
35:17
coin happy to
35:19
offer any sort of commentary that can
35:21
help anyone so okay
35:23
very good and you you cover what
35:26
what areas of the market just at the
35:29
from a
35:30
geographic perspective
35:33
i’m licensed in both the state of
35:35
georgia and the state of new mexico
35:37
okay very good so thanks again alan that
35:41
was
35:42
very valuable and appreciate you coming
35:45
on
35:46
thank you so much for having me love to
35:47
be back again