STOP Giving Advice. TUESDAY Traffic Tips

Say what? This from a guy who makes a point of advising us every week. What's up? Today, I discuss a VERY important part of the advice you give and more importantly, when it's requested. This and much more on this week's VIDEO TIP for commercial real estate professionals.

STOP Giving Advice. TUESDAY Traffic Tips

90% of you DON'T do this. TUESDAY Traffic Tips

Today, thanks to my friend David Mudge from Lee Riverside and Rod Santomassimo of the Massimo Group, I discuss a subject that nine of ten brokers fail to do. This and much more in this week's VIDEO Tip for commercial real estate professionals.



90% of you DON'T do this. TUESDAY Traffic Tips

Hidden Costs in a Commercial Real Estate Lease

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That commercial building you just leased has some hidden costs that make sneak up and bite you - akin to a rattlesnake lurking in the bushes.

The bite may not be as painful as a snakes but certainly more wallet draining.

So what are these costs and more importantly how can you limit the costs in your next commercial real estate lease.

Let's dive in, shall we?

Type of lease. Take a look at the lease you signed. Across the top should be a reference to the type of lease - generally Net, Triple Net, Gross, Full Service Gross. Each has a unique mechanism for handling expenses and who is responsible. By the way, these expenses are in addition to your base rent. As an example in most NNN leases, you, as the occupant, are responsible for all the costs in addition to your base rent. In a gross lease, the landlord typically maintains, repairs, and replaces the roof - but most other expenses are yours - they just inflate your base rent.

Base rent increases. The base rent you negotiated generally is only for the first year. Typically, in succeeding years your rent will be increased by some escalator. These days we see 3-4% annual increases in the base rent. When times aren't as robust, owners are willing to negotiate a base rent that doesn't tick up throughout the term.

Abated rent. If you were successful in convincing your landlord to concede some months of base rent as an incentive for your tenancy, good for you! Just know if should fail to fulfill your obligation for the full term, you may be liable for repayment of the abated rent. As an occupant, changing the word "abated" to "free" may limit your repayment exposure.

Operating expenses. Property taxes, insurance on the building, maintenance of the foundation, roof, and walls fall into the category of operating expenses. As the tenant, you are responsible for paying these expenses - in addition to your base rent - when they are due or reimbursing the owner for these expenses. Some owners prefer to estimate these expenses for the upcoming year and then bill you monthly for the costs. Great. However, if the owner over estimates the costs, you've a refund coming. The opposite is true if he mis-calcs the other way - you owe. Be aware, these expenses increase over the term of your lease. Owners typically are afforded the right to annually "pass through" these increases to you . A major one to avoid is the increase in property taxes as the result of a sale.

Common area maintenance. Sometimes referred to as C.A.M. charges, these nasty little costs are for mowing the grass, watering the bushes, trimming the trees, sweeping the parking lot, emptying the trash bin and powering the lights outside. If you lease a location within a business park with multiple tenants, plan on this charge adding several hundred dollars a month to your rent.

Repairs and maintenance. The heating, air conditioning, warehouse sprinkler system, plumbing, and roof (if a NNN lease) are all yours to maintain and repair. So what happens if one of these systems needs a full replacement? That can be significant bucks! Generally, the owner must replace it if the cost to repair it exceeds a certain percentage. However, the owner may bill you for the replacement over a period of years.

Liability insurance. The cost of insuring the building against fire and destruction is billed to you as the tenant. You must also carry a level of liability, contents, and loss of rent coverage.

Avoid these expenses. Unfortunately, I'm not privy to a way to completely avoid the expenses - however, you can be aware they exist and put safeguards in your lease to limit your exposure. One suggestion - ask that your C.A.M. charges be capped at a certain annual increase. Another suggestion - negotiate property tax increases, in the event of a sale, be limited to a certain percentage. Finally, before you sign the lease, ask for a complete accounting of ALL the expenses in addition to your base rent.

Are you in a DEAL Hole? TUESDAY Traffic Tips

The TV streaming industry refers to a "show hole" - that sinking feeling you get when you've binge watched every episode of Breaking Bad and you wonder what will consume you viewing time. We experience a similar sinking feeling when we near the end of our pipeline - "deal hole". Today, I discuss a remedy for "deal hole". This and much more on this week's VIDEO tip

Should you CONFIRM Appointments? TUESDAY Traffic Tips

No brainer, right? YES, you should. We must manage our time wisely. However, is there something you're missing? Are you giving folks an excuse to cancel your meeting? I discuss this and the California RSVP on this week's VIDEO Tip.

Can Commercial Real Estate Affect your Company's VALUE?

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In a word, YES! But since it’s a New Year and I've a few more words, let's examine specifically how, shall we?

Your business falls into one of several broad categories – retail, manufacturing, warehouse and distribution, or service.

 

Each business has specific needs for a location – some can be managed from your home office and garage while others require thousands of square feet of commercial space from which to operate. A retail business must rely on visibility or stores nearby to attract customers.

 

Depending upon where your company falls in this spectrum, dictates your facility costs.  

One of the biggest facility costs is rent – that sum you stroke each month to yourself, if you own, or your landlord, if you lease.

 

We can layer in utilities, licensing, compliance, improvement costs, and location operating expenses such as property taxes and insurance.

 

Don't forget to add in an amount for the gardener and trash man.

 

All of these costs comprise a line item of profit reduction.

Speaking of profit, your businesses worth is a multiple of said profit. A potential buyer, of your business, will analyze the Earnings (profit) Before Interest Taxes and Amortization also known as EBITA. Then, depending upon the buyer’s appetite to acquire your business, the multiple will vary and thus the value will ebb and flow.

Generally, business buyers are either attracted to your business to expand their own – known as a strategic buyer or looking for a “value add” opportunity  – referred to as a private equity buyer. If the strategic buyer has local facilities, your commercial real estate will be viewed as a hindrance – they have space and don't need more. Conversely, a short term lease at below market rents will repel that value seeking private equity firm – because their facility costs will increase in the near term and reduce the business earnings.

Recently, I've witnessed commercial real estate crater two business sales – one a merger and the other an acquisition. In the former, a printing operation seeking a strategic partner, found resistance to the long term over market rent on their production facility. Every buyer looking to merge or acquire was faced with a costly surplus of buildings – an insurmountable challenge. In the latter example, a buyer walked away because the lease for the business was set to expire next month, the rent was half of the market rent, and the landlord was unwilling to re-write a new lease with the buyer. Boom. Deal over.