Archives for August 2018

Supplies Unchained: Perspectives on Providing 21st Century Distribution Solutions

August 27, 2018 by CARNM

Wayne Gretzky famously claimed the secret to his success was quite simple: “Skate to where the puck is going, not where it has been.” Gretzky’s philosophy struck a chord with leaders in a multitude of industries and for good reason: the idea of consistently being ahead of trends by anticipating what’s coming better and earlier than the competition is how you become known as “The Great One.”
In the industrial market, commercial practitioners are attempting to skate ahead of supply chain innovation in order to capitalize on a robust market. What will the warehouse of the future look like? How will goods be delivered and what specialized handling equipment will process them? How fast can someone get twenty pallets of refrigerated goods from the Port of Charleston to a cold storage unit in Ohio?
These are the sorts of questions Howard Lichtig, SIOR, is asking. Amazon is making a substantial investment in Lichtig’s Cleveland/Akron market, converting two failed malls into distribution centers employing several thousand North-East Ohioans.

Lichtig feels this represents an opportunity, so he’s anticipating future market needs by developing a cold storage hub to accommodate increased demand. “I’ve got land under contract and am working on securing tenants,” Lichtig says. “We have lenders and it appears we can build about a five hundred thousand square feet and accommodate north of 100,000 pallets.”
As the only hub in Lichtig’s market, it’s being built ‘forty-foot clear’ to accommodate future occupants who will be thinking by the cubic foot, and will feature a glycol antifreeze system to prevent floors from buckling, allowing rooms to change temperatures based on current needs.

Lichtig’s Tips for Comprehensive Thinking

Ask your client if they need help comparing markets and utility/labor/costs. They may not tell you what’s going on in another part of their company only because they never saw you as part of that solution
Don’t silo yourself into transaction work. You provide better value by widening your focus beyond rent rate per square foot.
Work with academics to figure out how market trends relate to real estate. They’re not our competitors but our collaborators.

Chris Copenhaver, SIOR, agrees with Lichtig’s assertion that there is a need for more distribution solutions like cold storage hubs. He believes these opportunities further heighten the importance of supply chain solutions and advises clients to “follow the transportation trail.”
“We are taking a deeper dive with our clients on their new locations,” Copenhaver explains, “accounting for distances to major logistics hubs and ensuring they make sense throughout the entire supply chain.” If Copenhaver’s clients can’t easily get their inventory from suppliers, they can’t meet the delivery expectations of their customers in today’s “on-demand” culture.
Copenhaver anticipates a major shift in material handling equipment such as automated retrieval systems and “pick & pack” machines. Construction and design trends in cold storage facilities are costly, because they require a building shell designed to fit around the interior operations, not the other way around.
“Due to the amount of capital corporations have to invest,” Copenhaver explains, “our clients are forecasting the next 20 years of operating efficiencies, labor availability, changes in technology and environmental protection.” Much of this expanding supply chain is fed by goods shipped overseas on deep draft vessels, a phenomenon that led to expansions of the Panama Canal and East Coast ports like the one in Charleston, South Carolina, as well as rapid development of inland ports, which serve as holding facilities for goods.

Copenhaver’s Tips for Effectively Specializing

Gain insight into the shipping industries and how they operate between customers and suppliers.
Educate yourself in cold storage construction and governmental regulations.
If you’re going to pick a specialty, stick with it and network.

Hagood Morrison, CCIM, MBA, SIOR, says this evolution has changed his business. “Folks like me get paid when we fill a distribution center that’s here,” Morrison says. “Before, when you did not have active inland ports with active distribution centers, it meant a simpler process to fill bulk distribution centers.”
Now Morrison’s team must know how to get a shipping container from Charleston to the inland port in Greer, South Carolina, the next day, where it will be retrieved and shipped to a distribution hub. Morrison closely monitors trucking costs and “turn times,” which are measured in the time it takes for a trucker to pick up a container, deliver it, and get back. “I’ve got a matrix schedule which allocates for the number of costs for a facility and number of turns. And I work it constantly because it is a major attractant for my clients.”
At the end of the day, logistics is a fancy word for how things get from one place to another. It’s a complicated, dynamic system of knowledge, demanding attention and dedication to all of the ‘links’ in the supply chain. Commercial practitioners with interest in this corner of commercial real estate must work to understand everything from how to create a hazmat compliant storage facility inside a larger facility to how to get FDA approval for storing coffee inside of a distribution hub that also contains chemicals and uncooked meats. From the Port of Charleston to a grocery store in Akron, practitioners like Lichtig, Copenhaver, and Morrison are providing this value to their clients and there are many more like them out there ready to network in order to get deals done. Will you become one of them?
Jump start your path to a designation with SIOR’s new Member Associate program: www.sior.com/membership/become/member-associate(link is external)

Morrison’s Tips for Learning Port Logistics

Study transportation patterns around your market and understand how trucking costs are constructed.
Put in the time to be able to break down the types of services which support a port and understand what those are.
Invest in education: read the Journal of Commerce (JLC), create a network of SIORs in ports like yours for brainstorming, and attend logistics talks a at SIOR conferences to stay current.

By: Jacob Knabb (NAR)
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The Tenant Side of Commercial Leases: Special Risks, Special Attention

August 27, 2018 by CARNM

No matter which business sector it serves, the commercial real estate lease is a detailed, binding contract created to define the terms of occupancy. Yet, beneath this definition lurks the second great purpose of the document: commercial leases are also designed to offload as much risk as possible from the landlord and onto the tenant. It’s for this reason that caution must be undertaken by prospective tenants and their brokers. Qualified, experienced legal representation is an absolute must when negotiating commercial leases. This article will barely scratch the surface by looking at some common issues and risks in the details of commercial leases.

Gross vs. Net Leases

Roughly speaking, the two biggest families of commercial lease types are gross leases and net leases. While both represent big risks to tenants, gross leases offer the greater chance of the lease language obscuring hidden pitfalls. This is because net leases outright leave the tenant with responsibility to pay property expenses beyond rent (taxes, insurance, maintenance) almost as if the tenant were the owner of the property. Gross leases, on the other hand, lay out tenant expense beyond rent in details that need attention right down to the units of measure being used and the calendar years being referenced. Getting the right “fit” with the details of a gross lease is a serious undertaking that depends on meticulous attention to those details.

What’s at Stake? Way More Than Rent

A commercial lease can be dangerous because it can easily contain the seeds of destruction for a tenant. From a tenant’s standpoint, the proposed mechanisms and rhythms of a commercial renter’s term of occupancy might be easily imagined and sketched, but when they make it to paper, it’s a different story entirely. This is because the commercial landlord is guaranteed to be concerned with contingencies and eventualities, largely invisible to the tenant at negotiation time, that add up to produce that landlord’s total costs of ownership of the project or property. The lease is the number one tool landlords use to protect themselves against these costs.
Total costs, whether or not they are related to the activities of a particular tenant, are commonly assigned by landlords to all tenants in a property, using a wide variety of mechanisms and formulas that, to the unfamiliar or unprepared, can shackle a tenant with unexpected and burdensome expenses down the road.

Pro Rata: Dividing the Whole Building Among Tenants

Pro rata shares of expense categories are an overwhelmingly common mechanism for negotiating and determining costs borne by a single tenant in a multi-tenant space. The Latin term simply means “proportion,” and space consumed against the whole building is used to determine dollar obligations of tenants. If a tenant is signing a gross lease for 35% of the “usable space” in a project, then there is a rough expectation that the landlord will be using that 35% as a factor in calculating expenses charged to that tenant.
It’s the question “35% of what, exactly?” that offers a glimpse into the dangers. “Usable space” can be counted up a variety of ways, and finding out exactly how the term is defined can mean many dollars of difference to the bottom line. For example: does the useable space referenced in an office lease include or exclude structural columns or entry/exit ways? What about elevators, ductwork, or stairwells? Because each property and each landlord has a differing answer as to what is “usable” vs. “rentable”, the tenant risks paying for space they don’t actually occupy.

Common Areas, Loss Factors, Load Factors

Parts of a building shared with all tenants are defined as common areas. Common areas can include elevators, hallways, lobbies, parking lots, and other non-private areas of the property. They require maintenance, and landlords under gross leases usually will not bear those costs themselves.
The way a landlord charges a tenant for the maintenance of this non-private space is not usually in rent but in an adjustment calculation against the space provided. The landlord often does this one of two ways. Either the tenant will pay for the space advertised but have that space reduced (called a loss factor) or the tenant will get all the space advertised but will pay more per square foot (called a load factor).
The method chosen is influenced primarily by reconfiguration options present in the space. If the space is retail and is subdivided permanently, the landlord is likely to use the “load” method to cover the common area costs, adding a cost per square foot. Alternatively, when the space is new construction the tendency will be for the landlord to use the “loss” method, delivering less space.
Depending on the method used, a tenant can end up with significantly less space than expected, or conversely, can end up paying significantly higher cost per-square-foot than is advertised. This is where an experienced broker earns their keep, by anticipating the final outcome – real space occupied and real dollars paid – and guiding a tenant through the ways to get there. A broker will raise the issues early and learn the specific calculations put down by the landlord, do their own measurements, and compare against what’s being offered.

Your Mission: Find All the Risk

Common-area calculations are only one of a set of concerns where advertised per-square-foot rent and the lived reality on the ground can be significantly different. Base year calculations, escalation clauses, measurements of floor space that don’t resemble reality: all of these and much more can add up to giant risks tenants and their brokers must identify, specify, and negotiate early in the process. After the lease is signed is the wrong – and most expensive – time to learn about these risks.
By: Rob Warmowski (NAR)
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The Property Management Side of Commercial Leases: Five Lessons I Wish I'd Known Then

August 27, 2018 by CARNM

C.S. Lewis wrote “experience is the most brutal of teachers.” But why learn the hard way when you can benefit from the mistakes of others? Here are five costly mistakes I’ve witnessed over my 18-year career in leasing and property management. I’ve concealed the names to protect the not-so-innocent offenders, but every word is true. Helping landlords avoid these pitfalls can save them money and headaches!

1. “Disaster Years” as Base Years

Using a base year to calculate operating expenses is simple. First, establish how much it costs to operate a property in a specified year – the base year. In subsequent years, the tenant pays its pro rata share of operating costs in excess of the base year’s costs. Got it? Great! In my neck of the woods, Houston’s suffered two straight years of disasters: the 2016 Tax
Day Floods and Hurricane Harvey in 2017. If a tenant is “slick” enough to use one of them as a base year and the landlord had high expenses restoring the property, expenses may never be recovered from that tenant. One of my largest tenants was a global oilfield services firm occupying multiple full floors. During renewal negotiations, they’d slipped a disaster year past the landlord and leasing director. They didn’t pay an OpEx bill for years! Here’s a tip: If a disaster happens after a base year has been selected, build in a clause allowing for expense recovery utilizing a different year.

2. Casualty Clause in a Firebug’s Favor

Many moons ago, I managed a 13-property portfolio with a mixture of office, retail, and industrial sites. What no one told me during the interview was that nearly 25% of a retail site had just been destroyed by fire. Thanks! A karaoke bar was the origin of the blaze, which fire marshals deemed “incendiary.” This lead to further investigation into the tenant’s culpability and infuriated the property owner, who didn’t want to lease to the same tenant after restoration. But guess what? The lease forced the landlord to give the “fire bug” the right of first refusal to occupy the suite. Needless to say, the landlord quickly had all of his leases re-written. The lesson? A quarterly lease review should be standard operating procedure.

Top 3 IREM® Classes to Hone Your Property Management Skills

MANAGING COMMERCIAL PROPERTIES (CML201)(link is external)
Students will apply concepts in an interactive, hands-on format by engaging in the decision-making process for a variety of property types, including office buildings, shopping centers, and industrial properties.
Marketing & Leasing Strategies for Retail Properties (MKL404)(link is external)
Walk away from this course knowing how to craft the perfect balance of retailers, drive retail traffic to your property, and improve tenant sales. Conduct market analysis using regional and neighborhood demographics and psychographics and get the low down on key elements of leasing, include concessions, renewals, tenant mix, and broker commissions.
Budgeting, Cash Flow, and Reporting for Investment Real Estate (FIN402)(link is external)
Master the necessary budgeting and accounting skills to help meet your owner’s goals, improve NOI, and make an impact on your property’s value. Explore real-life scenarios to better understand the full financial picture of a property, and walk away prepared to identify opportunities and confront challenges.
Learn more about these and other courses at www.irem.org/education(link is external)

3. Team Tenant vs Team Landlord

On the residential side of real estate, the proper and legal way to conduct an intermediary transaction is drilled into our psyches. (re: We’re petrified of landing in mediation, arbitration, or litigation for misrepresentation!) Residential practitioners are very clear on how to request permission from clients to enter into intermediary and how to assign agents and conduct proper communications. Things aren’t so prevalent on the commercial side where it’s not uncommon to discover an assumed intermediary status buried in the final clauses of a lease. This is an expensive lesson if an unaware broker representing a tenant ends up with no commission after working for weeks. Moreover, landlords and property managers can find themselves in a precarious position by attempting to walk both sides of the line. The best bet? If you’re unsure about how to be an intermediary, pick a side!

4. OT HVAC Is a Hot Button Issue

Boy, oh boy! I have seen it all when it comes to OT, or after-hours, HVAC billing. I’ve seen tenants get reamed with unjustifiable hourly rates as high as $65 in a C-class building. In this scenario, the tenant used after-hours air for an additional three hours per day, Monday through Friday, costing nearly $47,000 annually – comparable to one full year of rent. This became a major sticking point during renewal negotiations. Conversely, I’ve seen landlords miss a billing opportunity because multiple tenants on the same floor are riding on another tenant’s OT HVAC request. The solution? Ask housekeeping to report which tenants are in their suites after hours on a regular basis. They’ll be more than happy to share as these are generally the tenants who ask them to come back and finish later.

5. Learn the ABCs of CPI

Expense Reimbursement CPI calculations can be uber complicated and landlords can lose thousands if performed incorrectly. Midway through my career, upon starting a new job at a REIT, I was handed a binder containing two-inches of documents. My boss gave me one directive: “Get our money back.” I’d acquired yet another nightmare situation. This time, a non-GSA, local government tenant owed the landlord nearly $90,000 in CPI-based expense reimbursements spanning several years. The problem? No one at the company understood how to use Cost of Living indexes and appropriate formulas to calculate proper billing amounts. After revamping early miscalculations, and several commissioners court meetings later, we successfully recaptured $86,000. Ownership also learned a valuable lesson. Let’s just say the landlord was no longer impressed by a 15-year lease that recovered virtually no expenses.
By: NAR
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