First Central Tower, St. Petersburg
First Central Tower, St. Petersburg, Florida

It wasn’t that long ago when St. Petersburg was a Florida joke. People called it God’s waiting room because of its very aged and not too well-heeled population. The place was depressing, especially compared to livelier cities to the south, one of which I reside in.

Times have changed.

For the first time in at least ten years, I drove up to St. Pete with friends to take an exhibition of work by Picasso and Dali, shown wonderfully side-by-side at the spectacular Dali Museum on the city’s waterfront.

Bustling Street Scene

Afterwards, we walked a few blocks along the water and wound up sitting outside at a very nice Italian restaurant called Bella Brava. There I enjoyed the people watching as much as I did the art.

Instead of the rolled-up-sidewalk town that I remember, the street was bustling: tourists checking out menus of the many restaurants, joggers, women with poofy dogs in baby carriages, lovers old and young, you name it.

My favorite was a kid on a skateboard wearing a tee shirt that said, “New York, London, Tokyo, St. Pete.” I wish I’d taken a picture.

We strolled a bit ourselves after a fine dinner. Everyone was impressed with the big city feel because there is so much residential development in the downtown area. I don’t think I’ve seen another area in Florida where you could get along without a car.

Office Development Coming

There’s not much in the way of office development, but smart money is buying. “Office space in St. Pete is still very reasonable,” said Peter Fischbach, commercial broker. “But there is more interest than anytime since 2007 in my opinion.”

Feldman Equities has just added a 17-story office tower anchored by B B & T Bank.

“As with our other downtown acquisitions, this is yet another opportunity for us to do what we do best — renovating and upgrading office buildings in order to maximize their value,” Feldman said in the release. “Downtown St. Pete has a higher quality of life than almost any other downtown in the state. It is a truly ‘walkable downtown’ with hundreds of acres of dedicated city parks that run along the waterfront.

“Downtown St. Pete is in the midst of an impressive revitalization with thousands of new residential units planned or under construction. We are thrilled to be a part of this re-urbanization trend,” said CEO Lary Feldman.

Tenants: Get a Tenant Rep!

Some of the best things in life are free. But few people take advantage. For example one walkingWomenof the best exercise routines on the planet is walking. Put on some shoes and out you go. Health for free. But who does it?

How about wild salmon in the can? At around one third the cost of fresh farm-raised salmon, wild canned salmon is one of the worlds great nutrition values. But most folks turn up their noses.

Some claim that frozen spinach is more nutritious than fresh spinach when bought at the super market. And frozen costs way less than half of what fresh costs. Who knew?

Tenant Representation

stack of legal documentsIn commercial real estate the best value that is almost always ignored is tenant representation. Most tenants don’t even know what it is, much less how it can help them. They willingly deliver themselves to the tender mercies of the landlord or his agent and sign up for five to ten years of liabilities without ever knowing that they’ve screwed themselves.

And to the tenant the service is free. At least there is no cash outlay.

Actually the tenant pays for the service in rent over the term of the lease whether or not the tenant uses the tenant rep service or not. The tenant rep’s pay comes out of the leasing broker’s commission. If there is no tenant rep, the landlord’s broker keeps the whole commission.

Landlord Free Stuff

Often a landlord will offer inducements to get tenants. These include free rent, build-out allowances and moving expenses. No landlord is going to offer this up unless negotiations call for it. Your tenant rep will make that call.

Professional Lease Negotiation

A modern commercial lease can make an IRS agent weep with its fine print, jargon and complicated interactions between clauses. Your tenant rep can navigate that for you and explain to you exactly what you are getting and for how much.

For example there are the concepts: usable space and rent-able space. Often a landlord will try to collect rent on space that is not usable (like a portion of the sidewalk or utility closets). Most people are not going to see these technicalities. That’s why it’s great to have a tenant rep who is experienced in sifting out the tricks and traps in the landlord’s lease.

Rent Security

Are your rent increase specifically spelled out in the lease, when and how much? What about your share of the utilities? Common area maintenance? Are there caps on the raises? A good tenant rep will see these dollars and cents right away and give you choices that you might not otherwise have had.

Managing the Build Out

plasterBoardOfficeHere is where a good tenant rep benefits the tenant and the landlord.

Most tenants have little if any experience in building out space that they have leased. Your tenant rep can help you manage every aspect of the build out from verifying zoning compliances to dealing with architects, interior designers and contractors.

Everyone appreciates the professional oversight of the tenant representative. Even the landlord.

What Happens When a Tenant Breaks a Lease?

Courtroom sceneI am often asked whether people who break leases get sued.

The answer is, “it depends.”

“On what?” you may ask.

Quite simply, it depends on whether or not it’s even possible to recover any money. For example, a young woman signs a lease to run a restaurant in a thriving building that I own. She brimming over with enthusiasm, ideas and optimism. She loves to cook and her friends love her creations.

After she opens the doors to customers, she’s disappointed that there is not a line. How do I know that she’s disappointed? Because after a few of these ventures, you can just tell. However, optimism rears its smiling face. “Word of mouth!” she declares.

Word of mouth will bring them in.

Then advertising.

Then special promotions.

Then the money runs out. The rent comes later and later. When it’s past due for a month, I drive by the building and see that the space has been vacated during the night.

This is not an unusual tale. I”m sure that it happens several times a day across the U.S.

I clean out the space and then clean it up. I put a coat of neutral paint on the walls, wash the windows and put up a “For Lease” sign.

Three months later I sign a new lease the the optimism begins all over again.

In this case, which is a rough telling of an actual tenant (if you are a landlord, you probably thought I’d stolen the story from you), the girl’s parents had guaranteed the lease. I tallied up the expenses I’d incurred, including back rent, rent during the period that the property was vacant, marketing expenses, cleaning and painting, deducted the security deposit and sent the bill to the parents.

Their attorney contacted me promptly. We did some token bickering, settled on a number. The lawyer wrote up a settlement agreement. I signed it. Three days later, I had a check. Case closed.

Lease guarantees are almost a universal feature in commercial leases. Whether or not the cases wind up in court will depend on the potential for recovery.

I have been following a case in New York City where a huge law firm with 450 partners went bust and declared bankruptcy. Almost immediately  the landlord went after the partners, all of them, who had personally guaranteed the term of the lease (which is not set to expire until 2020). The suit for $1.6 million was filed over a year ago. I assume that the meter is running on the back rent and that the partners will do whatever is humanly possible to avoid paying.

My guess is that in the end they will lose.

Of course these folks understood from the beginning that they were liable for rent in case of a default. Hey! They are lawyers.

But many people who sign commercial leases pay no attention whatsoever to the legal obligation that they undertake when they sign. They are often shocked when the landlord calls on them to perform .

The only thing duller than reading a lease would probably be the mumbo-jumbo that we all agree to when we download software. But a lease is a live document that can have a profound effect on a business and on the people who own the business.

Tenants. Read the lease! If you need a cheat sheet to help you understand the terminology, check out Peter Fischbach’s lease term glossary.

Should I Hire a Leasing Broker?

I’m a great believer in spreading the work around. I most fervently believe this when a job wake_max_monais best done by an expert who makes a living by performing the job well.

The work performed by a good leasing broker fits that definition.

A leasing broker is responsible for getting tenants into your building. She places ads, shows prospective tenants the space and serves as your representative in negotiating the lease.

The leasing broker gets paid from commissions earned when tenants sign a new lease, usually around six percent of the rent paid during the term of the lease.

Obviously it’s in the leasing broker’s interest to get tenants and get leases signed.

Alas, some leasing brokers do not tend well to their interests (or yours). These tend to post a sign outside of your building and wait for the phone to ring.

Not All Leasing Brokers Are Alike
This means that you need to do some homework before signing with a leasing broker. Ask around. Get recommendations from other landlords. Interview aggressively. Your leasing broker is practically a business partner. You can probably find some prospects at the Commercial Brokers Association website.

You leasing broker should know the market your building is competing in. No matter how much you love your office building and how much rent you think it should fetch, it operates within the laws of supply and demand and your prospects will compare it to other leasing opportunities. Your leasing broker should know what those opportunities are and keep your rents within the current market. Otherwise you will not get tenants.

You should be able to trust your leasing broker’s judgment about the market and follow his recommendations for how much rent to charge.

Market Space and Vet Prospects
empty-office
Your leasing broker should have a touch of merchandising savvy. Is the vacant space best shown with some rented office furniture? Or should you throw on a coat of paint, wash the windows and show it empty loaded with potential?

Will you need to build out the space for a new tenant? Your leasing broker should have the chops to work with space planners, interior designers, even architects in constructing the new space. Your broker should also keep up with the costs so that you recover the investment over the life of the lease.

Your broker should thoroughly check out your tenants credit and business history. New tenants are not much good if they can’t pay the rent.

Negotiate the Lease
Commercial leases are drawn in favor of the landlord. There is usually plenty of space to give if your new tenant is real estate knowledgeable or has a good tenant broker. It is up to your leasing broker to keep your best interests in mind when negotiating the lease.

There can be many concessions, options, addendums to the lease. It’s the leasing broker’s job, in consultation with your the landlord, to see that negotiations yield you the best opportunity for profit of the the life of the lease.

Your tenant broker needs to make sure that concessions, leasing commissions and other long term charges are accurate and properly amortized over the life of the lease and assure that you get value in return for your concessions.  You should double check your tenant broker’s work in this.

Keep Good Tenants
Finally, you know there is know tenant better than a known tenant, one you already have, but whose lease is coming up for expiration.

Your leasing broker should prepare for that date and have a marketing campaign ready to go.

Your leasing broker should explore every avenue to keep the tenant in your building, including expansion, build-out allowances, extra parking, whatever it takes to get the good tenant to re-sign.

You know of course that the leasing broker gets a commission on renewals as well.

But it’s worth it. A happy long term tenant who pays on time is the lifeblood of your commercial real estate investment.

 

Common Commercial Lease Disputes

negotiationsThere are many issues of contention in any lease. Here are just a few found in leases for commercial space and suggestions how they may be resolved.

Personal Guarantees
Landlord Point of View: Get a personal guarantee since it drastically discourages the tenant from abandoning the space.

Tenant Point of View: Avoid personal guarantees whenever possible.

Middle Ground: Agree that upon abandonment, the tenant pays the landlord unamortized portions of improvements that the landlord has made on the tenant’s behalf and leasing commissions.

Further, it is reasonable for a tenant to guarantee a minimal level of performance on a building built to its specifications.

Purchase Option
Landlord Point of View: Landlords prefer to avoid this. The landlord usually feels that he is taking the major risk and should have the reward if the price of the real estate increase.

Tenant Point of View: Sometimes a tenant will want a purchase option for the building. Usually this is a case where the tenant is the only occupant of the building

Middle Ground: Provide the tenant a first right of refusal.

Foreclosure
This is ugly, of course. The tenant has negotiated a lease and started a business. If a lender forecloses on the landlord’s mortgage,  the tenant’s right to use the retail space is terminated unless there is a separate agreement. Foreclosure usually extinguishes all claims to the property.

Landlord Point of View: The landlord by necessity has to do what the lender asks or no loan. Therefore, no separate agreement.

Tenant Point of View: Obtain a non-disturbance clause in the lease, which specifies that the lease cannot be terminated by foreclosure.

Middle Ground: Usually none.

After foreclosure the lender is the new landlord and must decide whether to evict tenants or not. Usually, the lender has a specified amount of time to send eviction notices. If the lender fails to do so, the previous landlord’s leases remain.

In addition, if the tenant is paying market rates for the space and is successful, the lender is likely to keep the lease since the rent offsets the costs of maintaining the building and is attractive to new buyers. However…

Case one: The tenant is paying below market rates.
Landlord Point of View: Terminate the lease and negotiate a new lease with at-the-market rates.

Tenant Point of View: The tenant is in a weak position. With a business successfully established in a location, moving can be a huge risk, even a cause for failure. So usually the tenant has no choice, but to sit down with the new landlord (previously the lender) and negotiate the best rates he or she can.

Middle Ground: Good faith negotiating.

Subleasing
Landlord Point of View: Landlords have a strong objection to a tenant profiting from a sub-let. The landlord feels entitled to the higher rent.

Tenant Point of View: Sometimes a tenant’s best option is a sub-let and usually wants that option written into the lease.

Middle Ground: The lease often contains a clause limiting the types of businesses which can sub-let from the tenant. There also might be a clause restricting subleasing to landlord approval, not to be unreasonably withheld. As far the tenant getting a higher rate than he or she is paying the landlord, expect lots of negotiations!

Expansion Options
If the tenant has good reason to expect the business to grow, he or she might want to have some sort of option to expand the leased space and at the current rates.

Landlord Point of View: A good landlord cannot afford to be tied to a commitment to guarantee space to a tenant who may or may not need it.

Tenant Point of View: If the tenant has good reasons to expect growth in business, he or she would definitely want to plan for expansion.

Middle Ground: Grant the tenant a right of first refusal if the landlord has a prospect for contiguous space. Specify what the new rent will be: either the current rate the tenant is paying or the rate the new tenant is offering.

Dedicated Parking
Landlord Point of View: Landlords are reluctant to have parking dedicated to a single store. One reason is that store may be busy at a certain time of day, but the parking is restricted 24 hours a day.

Tenant Point of View: Tenants naturally want parking near their store dedicated to their customers.

Middle Ground: The lease grants the tenant dedicated parking for several specified hours of the day.  The tenant marks the dedicated spots with portable signs.

 

 

 

 

 

 

Keeping Tenants

Downtown office building with parkingGood tenants are the best investment a landlord can make. All other investments are in the service of finding and keeping good tenants.

Turnover costs are horrendous. An investment in commercial real estate is really an investment in a stream of payments…you know, rent. Protecting and nurturing that stream is job one for landlords.

Good tenants are successful business people. Successful business people consider all options. When the lease is close to expiring, your good tenant is going to seek out a good tenant rep and check out the options. Here is just one example http://commrealestatestpete.com from my neighborhood.

Even if your tenant is totally happy with the current space, he might and should evaluate the commercial real estate market, if only to create leverage with you, the current landlord.

Here are some of the reasons your tenant might want to look around:

1. Your tenant feels like a move would put him/her closer to customers. Not much you can do about that.

2. Take advantage of the current market. That means, landlord,  you need to know what is available out there and be prepared to counter. Experienced real estate brokers can find opportunities in any economy.

3. The business has changed and the tenant has more/different space requirements. Again, it’s the landlord’s job to know these things and be prepared to accommodate the needs of the tenant. This could mean a tenant improvement investment. In many, many cases it’s worth it to have a bird in the hand.

4. Your tenant may feel that he/she can improve on the quality of the building. What is it that your tenant wants? Better Internet? A fitness center? You the landlord may or may not be able to step up here and invest money to make money.

Here are some great reasons why your good tenant should stay with you. If you don’t have a great business relationship with your tenant, consider letting your leasing broker do the negotiating, if you have faith in him or her.

Great tenant, you should renew your lease because:

1. Dangle concessions in front of your prized tenant. These could include a reduced rental rate, resetting base years for operating expenses, reserved parking spaces, or remodeling dollars, just to name a few.

2. You will not have to endure the headache, disruption and expense of moving. Moving is traumatic for people and businesses. Plus moving expenses can get out of hand quickly.

3. Keep your good employees. A move might make the commute a burden for someone who is a valuable member of your team.

4. I can give incentives to improve the space. After an occupancy of several years, a good operating team will have many great ideas for making the current space better. (Do all you can to make it happen).

5. Avoid disruption. This may prove critical to keeping clients.

One advantage, and there are many, that landlords have over tenants is that landlords tend to play the long game better. What is my property going to look like three years from now?

There is no greater tactic in the long game than planning for lease renewals that you know are coming up. Think ahead.

It Comes and It Goes

And it always will.

Commercial real estate values rise and fall in immutable cycles.

In a recent report the Commercial Real Estate Development Association tells us the recent new development is at a post recession high.

Florida, where I live (secretly) is number six in terms of the dollar value of new development. It’s good to see that development money is going to other projects beside condos and apartments.

http://www.naiop.org/en/About-NAIOP/News/NAIOP-News/2014/Economic-Impact-2014.aspx

Reduce the Cost of Insurance – Six Ways

Fact: Business insurance costs money.Industrial property
Fact: You are probably paying too much.
Explore these ways of lowering your insurance premium. Get a good agent to help you. It will be time well spent. Surely there is something else you can use the money for.
1. What do insurers think are the risks in your line of business? Business insurance premiums are based on risk calculations among other factors. Know what the risks are and figure out how to reduce exposure. Obvious actions like regular machinery maintenance, defensive driving courses, alarm systems and so on can reduce your insurance premium.
2. Group rates are lower. Does your Chamber of Commerce or trade association have insurance plans on offer at competitive rates. Do the lower premiums make the cost of membership worthwhile? Occasionally organizations like the Better Business Bureau offer business insurance discounts.
3. Find out about package deals. This is one “bundling” that can save you money. Many underwriters offer a business insurance policy that combines property, liability, loss of income, records insurance policies, business vehicle insurance and more.
4. Sometimes changing the location of your warehouse or business can make a huge dent in insurance costs.
5. Compare! Insurance websites have tools that provide multiple quotes. You’ll not be an expert, but you will have enought knowledge to deal effectively with an agent or broker. Learn the essential aspects of business insurance and study your coverage to determine where you can make savings.
6. Read your lease! You might be in for more than just rent with insurance requirements. Make sure that you have a good tenant rep when you negotiate any commercial lease.
Insurance will be an important part of your business forever. Getting to know it well can get you the most for the least and makre for a more robust bottom line.