2025 Goal - Develop Your Commercial Referral Business

 If you want to increase your opportunities for more commissions, build your referral business?

 A consistent program is the key to success. Begin with a “sphere of influence” list, literally everyone you know. Prepare a brief letter announcing or reminding people on the list that you are in the commercial and investment real estate brokerage business. Add a few comments about your company and then ask for a referral. “Is there anyone you know whom I might be able to help?” You know these people, so end your letter with a handwritten PS. Something personal you know about them. How’s the kids? Been out on your boat yet? See you at the next Kiwanis meeting.

 Send out 5 letters every day, then follow up on the same day a week later follow up by calling those 5 people. “Did you get my letter? Have you thought of anyone I may be of service to?” Now you’re contacting 25 people a week. Initially they probably won’t have anyone to refer.

 But before you hang up ask them for their e-mall address (that is the point of this program) by telling them you will be sending out a monthly Newsletter of Community News. Create a simple email that will cost you nothing but a little time. Include real estate news; Did you know that Sneaker Circus is opening on Main Street? The vacant store on 2^nd Avenue is going to be a new Bakery. Also, community events, will I see you at the Memorial Day Parade? Etc. Close every Newsletter with a PS. “Did you think of anyone I may be of assistance too.”

 The key is redundancy, send your newsletter out on the same date each month, people will look forward to receiving it.  Think about the growth of your referral network adding 5 people a day, 25 contacts a week, adding 100 sources of referrals a month, for basically a half hours work each day, 10 minutes to print 5 letters and 20 minutes for follow up calls to those you mailed to last week. Best of all these folks will be hearing from you every month.

 Do you know any residential real estate agents? Most of their customers work and their businesses may need your services. Create relationships with as many residential firms and agents as you can. Ask them to introduce you to their customers after the house sale closes. Advise them that if you are successful in servicing their commercial real estate needs you will pay them a referral fee. Stay regularly in touch with your new client, after your initial introduction and keep the referring agent in the loop too. Business requirements are constantly changing, maybe they do not need your services this year but next year they will. Also add them to your newsletter distribution list too.

 Building a referral business is creating opportunities for future brokerage. You learn a customer’s lease is expiring in four years. Record this fact in your calendar program but also talk to the customer every four months or sooner to see how their business is doing. Their lease may run for four more years but the customer’s business needs may require a move sooner or maybe now they are ready to buy a building for their business.  Good record keeping is essential. Communicate regularly to develop your relationship with your new customer.

 Make sure the people you do business with do business with you. Does your Dry Cleaner, Hairdresser, Barber, Deli, Insurance Agent, Doctor etc. know what you do for a living? You give them your hard-earned money, so shouldn’t they use your services if they are leasing, moving, expanding or looking to buy a building. Next time you see them, remind them you are a real estate agent or broker and give them some of your business cards to give to their customers.

 Join or create a lead generation group. Bring together 10 people each representing a different business related to real estate moves. For example, meet regularly with an attorney, accountant, banker or mortgage company, a representative of a moving company, office supply firm, an engineer or an appraiser. Meet monthly to exchange information (leads) about companies planning expansion or moves. Each person is required to bring two leads to each meeting; have rules if someone does not bring any leads to two meeting they are out of the group. Replace them with someone else from that industry. An early breakfast meeting at a diner is ideal but you can also do it via a zoom meeting. This referral network will eventually benefit everyone in the group.

 Many of us market our properties via e-mail and social media. Consider adding a line to your transmissions, “Do you know of anyone who may be interested in this property?” Ask your customers for referrals. On all your e-mails consider adding to your signature, “Please let me know of anyone you think I could be of service to at this time. Thanks.”

 Basically, every correspondence should end by asking for referrals. Every conversation should end with “… is there anyone you can think of that I could be of assistance too?”

Marketing Commercial Properties

When you get a new listing, you need to create two marketing pieces, a teaser flyer and a brochure.

The teaser flyer is usually one page sent out to your client list and to other commercial brokers in the area. Effectively offering to co-broke with them if they have a buyer or tenant for that space. Also, it should be posted on as many web sites as possible and on all social media. The idea is to create interest in viewing the property.

All flyers need to include a picture of the building or space, location, zoning, useable square footage, price per square foot or purchase asking price and when the building or space will be available.

With Office buildings include Class A, B, or C, the number of stories and the overall square footage of the entire building, plus the loss factor being used. If leasing space within, what floor is the unit on, a floorplan of the space and what type of lease and length is being offered. Since office flyers require a lot of information, sometimes they need to be printed on both sides.

In the case of retail, what other tenants are in this shopping center and what other major stores are in the vicinity. It should also indicate the base rent per square foot any “additional rent” items tenants would need to pay for.  Potential tenants will want to see a demographic chart showing population, household income, ages and traffic counts.

Industrial Buildings need to define permitted uses, including ceiling height, the number of overhead doors, loading docks and/or tailboards. Plus, information on the types of heating systems, the amount of electrical power and the cost of the real estate taxes per square foot, which are typically paid by the tenant in these types of buildings.

Multi Family and Investment properties also require the number of tenants, percentage of vacancy. the projected Net Operating Income for this year and the CAP Rate used to develop the asking price. Who are the tenants and what each are paying in base rent and additional rent, when their leases start and will end and any options they may have. Sometimes landlords will not give this information initially or may require signing a Non-Discloser of Confidentiality Agreement first.

A client has inspected the property and is interested, we can’t just give them the same flyer at the end of the tour. When we take the listing, we must also create a detailed brochure for this purpose. This should be multiple pages with plenty of pictures, inside and outside and overviews of the area, including google maps of the location.

When the property is for sale buyers will focus on the age and condition of the building, elaborate on the age of the mechanical systems, heat, air conditioning, plumbing, elevators and the roof, specific pictures of these units should be included. Today’s hot topic is climate change, what are the level of carbon emissions produced by this building. Are they increasing or are they being reduced, if so how. It is also a good idea to include some comparable sales and similar properties on the market to justify the pricing.

When a lease is involved, tenants will be concerned with many of the same items that concern buyers, In addition the complete desired lease terms the landlord is looking for need to be disclosed, with enough detailed information that the potential tenant can make an offer.

The National Association of Realtors has provided it members with free tool to help then create their brochure called Realtors Property Resources www.narrpr.com. When you into the site you will see it has two separate sections for residential and commercial. The commercial side has literally 100’s of thousands of properties, previously sold or leased and currently on the market.

To use the system brochure making capabilities you first need to enter your listing on either of their partner sites Brevias or CREXi, within a few days your listing will appear on the NARRPR site. Then you can create a customized report (your brochure). In addition to the material you provide, the system will include all available public records on this property. Legal description, size, lot, price per square foot, ownership history, assessed value, real estate tax history, mortgage information including financial details, maps, photos and traffic counts are all downloaded into your report.

In another section of the site, you can get a report analyzing the demographics of the property.

Once your teaser flyer and brochure have been created you are now ready to start your marketing.

Needs Analysis

You receive a call from a local business telling you they need to move and want more space. Typically, the agent then asks them how much space they need. The business owner pauses, and then says about 5,000 SF. Most business owners are not in the real estate business, and they may be guessing about their requirements.

What the agent should have done when the call came in, is to assure the customer they could help them and set up an appointment with the customer at their existing location to conduct a needs analysis.

You also can be aggressive, visit local business owners in your area. How are their businesses doing? Do they own or lease? If they lease, question if they have any desire to downsize or may they need more space now or in the future? When is their current lease up? If they own the building, the same questions can apply. But added to that is the opportunity to sell them another investment property or sell the building they are in. One option is to sell their building to another investor and remain in the building now as their tenant.

In both cases the first step before you go there is research. What does this company do? Who are the officers, are you talking to the decision maker, who has the authority to sign your listing or representation agreement? We are in the people business; find out what you can about the person you will be meeting, look for something in common. They may have a bio on social media or google them.

In preparing for your interview there are five key areas of concern: Why Moving; Physical Requirements – Now and Future; Pain and Pleasure Issues; Loyalty and Authority; and Financial Strength. Plan what questions you want to ask, and some suggestions follow. Many of the questions are related to leasing but can also pertain to buying and selling properties too.

Why Moving

- Why is the company relocating?
- When will they need to take possession?
- When does their existing lease expire?
- Would they buy?
- Desired moving date?
- Do they need to sell another building first?
- Are they doing a 1031 exchange?
- Would they consider leasing/buying more space than they need, to temporally rent out surplus (for income or future expansion)

Physical Requirements

- Where is the company looking to locate
- Why?
- Would other areas be considered?
- How much space is needed?
- How configured?
- Storage requirements?
- Number of employees?
- Parking - employees, customer spaces?
- What would be the intended use?
- What are your future plans? Where do you see your company in two years, in five years?

One of the key questions when you start the interview is, why do you need more or less space.

 If it’s office space and they are expanding, hiring additional employees, talk about job titles. For example, we will be hiring two additional sales manages, please show me the office of one of your current sales managers. Now we start to measure if the sales mangers office measures 10’ x 12’ (120 SF), make a note of this and also list under additional requirement 240 SF for two new sales managers. In the expansion will you be hiring additional clerical assistants; please show me where they sit now. Review all the job positions, talk about expanding or adding additional conference rooms, file storage areas; when done you will know how much space they are currently in and how much more space they will need. Similar assessments can be made for retail and industrial businesses.

If they are a growing company, will they need more space in two years, five years? This helps focus on what size building to place them in. If leasing one may want to place them in a larger building with a” First Opportunity” clause in the lease, so they would have the first opportunity to take more space in the building if it becomes available.

What else is important to them?

- Space Plan (layout) – View
- Easy Access
- Public Transportation
- Amenities – Cafeteria, Health Club, Child Care
- Visibility – Signage
- Employment Pool (for future employees)
- Proximity to Customers
- Green – energy efficient building

Pain and Pleasure
     - Any issues with your current space (roof leaks)?
     - Where do your employees come from?
     - Will any employees leave your company due to the move?
     - What do you like least about your current space?
     - What do you like most about your current space?
     - If you could describe the perfect office/store/factory layout what would it look like?

Ideally these questions help you build a profile of what is important to the customer.

Loyalty and Authority

- What other properties have you looked at?
- Why did you not consider them?
- Who should I be in contact with to show you space?
- Who will make the final decision?
- Who is authorized to sign my Seller, Buyer of Tenant Representation Agreement?

Getting as much information as possible is your goal. This last question sets the stage for what you will expect from them, if you decide to take them on as a customer/client.

Financial Strength

- What are you paying for your space now?
 - Any additional rent costs (taxes, CAM charges, utilities, other)?
- What have you budgeted for the new space?
- How is your business doing financially?
- Sellers will want to see proof of funds.
- Landlords will want to see three years financials.

If leasing, ask them for a copy of their current lease to break down and verify their actual costs. Be candid regarding how their business is doing, if there are any problems you need to know, now. Landlords, sellers and banks will want to see their financials; they need to know they have or can get the money.

Conclude the interview by asking about their expectations. What are the three most important objectives that you have as pertains to this move? This will give you their perspective of what is most important to them.

Then evaluate, do I want to work with this client? Does the client have a realistic budget and expectations? How much time will you need to devote to completing this assignment? What is the commission potential from this assignment? Be realistic with yourself, sometimes what you have to say, is no.

Assuming the deal makes sense to you, explain any State laws or disclose forms required, and get your Exclusive Seller, Buyer or Landlord, Tenant Representation agreement signed.

Who to affiliate with?

 A student of mine asked me how to choose what real estate firm to affiliate with. It is best to interview with a number of different types of companies to see what the best fit is for you.

 There are certainly a number of things to consider. Some firms ask each agent to specialize, become an expert in a particular segment of the market, office leasing or industrial sales or perhaps retail site selection.  This is fine but sometimes a segment of the market slows down, and there is no activity in your field, and you make no money that year.

 Other firms cross-train the agents to handle whatever opportunities they may encounter. In these offices the specialization is geographic, becoming an expert in that market area. This concentration gives you a better opportunity to systematically meet all the business owners, tenants and landlords in your area. Ideally to become known as the local “Commercial Specialist”.

 Do you want to be a full-time commercial agent or a dual practitioner doing both commercial and residential work? Some companies are strictly commercial, some do both disciplines. In some of the firms that do both there may be a “commercial division”. There can be advantages to both situations.

 In a purely commercial company, there may be a mentoring program, perhaps working with an experienced agent for a period of time to gain experience. Commissions would initially be split with your mentor, being your price to learn the business.

 This could occur in a dual office too, but the other advantage of this type of office is the commercial agents can get referrals from the residential agents in their office. Being a dual practitioner may lead to commercial opportunities, servicing your buyer’s business or investment needs after selling them a home.

 Commercial brokerage is very different from residential. I think of a residential transaction as a one-shot deal, one client, buying one house, one time. Granted they may give you referrals and you may be able to service them again if they need to move.

 Commercial gives you multiple opportunities for future business. You lease space to a tenant for five years, can you service the client again when their lease is up? If you’re not in touch and call them up four and a half years later, probably not. But if you stay in touch during their lease, calling or stopping by every few months, you should be able to service them again. Also consider businesses grow, shrink or go out of business, you can help them when any of these things occur.

 Communicate regularly with their landlords of the buildings you placed  tenant in, who may have other tenants who are not renewing their lease, or they may want to buy another investment property, or sell this one. The beauty of commercial real estate is the opportunity for redundance.

 In either case you need to be trained for the discipline you choose. Online and virtual courses are available, as are many books on all facets of real estate. Knowledge leads to success. Real estate markets are constantly changing, training and updating your skills never ends.

 Should you work with a small firm or large firm? Another key consideration is what kind of training and support, if any, will be provided. In a smaller firm the Broker may be very busy and have little time to train new agents. They may also have their own clients and be in competition with their sales agents for new business.

 Other firms, especially the larger companies may have corporate training programs and educational staff just for this purpose. They may have brokers who manage the business and assist their agents, but they are not permitted to have clients of their own, all leads are passed through to the agents.

 Ask about the company’s websites and marketing tools. Who makes your listing flyers, you or staff?  Is there staff? How are your listings advertised?  Today there are many commercial websites, which charge for subscriptions, do you pay or is the firm paying for the subscription. Bottom line who pays for what?

 The compensation issue – how much of the fee do I get?  This varies considerably, some firms start out with a 50-50 split of the commission and as the agent’s production increases, they get a higher percentage of the fee. Other firms offer 70%, 80%, 90% or more of the commission to the agent. But usually in these cases there are monthly costs to the agent for operating expenses or marketing funds. These monthly fees can be considerable and must be carefully evaluated. Be very clear on all of the firm’s policies, about everything.

 Your market – where do you have the best opportunity? What Brokerage firm(s) is/are dominating your area? If you join them, will you be able to shine or are they overloaded with agents now?

 When considering joining a firm, interview with the Broker and speak with some of the other agents working there now. How are they really doing? What kind of support or training have they gotten? Interview with several companies determine their structure, training, splits and your opportunity for success.

How banks look at Commercial Real Estate (CRE) loan requests

 Initially when applying for a commercial mortgage on investment property the bank requests a copy of the Income and Expense Statement and a copy of the purchase contract.

 They may want to see last year, or several years back, Income and Expense Statements and the current one which is a projection of how the property is expected to perform this coming year. This is also known as the Operating Statement or Proforma.

 The current statement will show the income from actual tenants and project income, based on current market conditions for any space temporally unoccupied. It will also make an adjustment for the possibility of Vacancy or Credit Losses. Adding to the statement any other income to the building not from the tenants (antenna on the roof, billboards, vending machines etc.). This gives us the Gross Operating Income for the property.

 Next the owners operating expenses will be subtracted, including a contingency for emergency repairs which then provides the anticipated Net Operating Income (NOI) for the current year.

 Banks process thousands of commercial loan applications and as the do so, they see trends which are reflected the Capitalization Rates (CAP Rates) they use in analysis. CAP Rates reflect local geographic real estate activities and are prone to gradual change. They will determine, based on actual closed transactions, a pattern for each investment category: office, retail, industrial and multi-family. Then divide the Net Operating Income by the price paid and determine the CAP Rate for that transaction. Patterns emerge indicating what is an acceptable return for investors (CAP Rate) in that particular market, at that time. Banks use these trends in determining if a new loan application will be approved.

 For example, if a property had a NOI of $60,000 and sold for $750,000 would reflect an 8% CAP Rate

 $60,000      =    8%
$750,000

 With this information the banks determine their opinion of value, for mortgage purposes, of a property by dividing the NOI by the CAP Rate they are currently using for that class of properties.

 Next, they will underwrite the property to determine what is called the Loan-to-Value Ratio (LTV). Historically commercial banks have required a downpayment of 30% to 40% of the purchase price. This is done by dividing the requested Loan Amount by the bank’s opinion of value which equals the LTV. An acceptable LTV would be 60% to 70%.

 Banks look at the worst case scenario. What if we make a loan and the borrower defaults and they have to foreclose on the property. This would allow them to quickly sell the property at less than market value to recoup their losses.

 The next step in underwriting is to determine the Debt Service Ratio (DSR) a/k/a Debt Coverage Ratio (DCR).

 There is risk involved in making CRE mortgage loans. What if the building loses some tenants, reducing their cash flow and ability to pay their monthly mortgage payments? If this persists the bank would eventually need to foreclose on that loan and take possession of the property.

 The Debt Service Ratio creates a “buffer”. Banks will only loan out a certain percentage of the Net Operating Income, the cash flow. So, if the building loses some tenants there would still be sufficient cash flow to make the mortgage payments. Today the federal guidelines require a 25% DSR, meaning the maximum Annual Debt Service (ADS is the  total principal and interest payments for that year) percentage would be 75% of the NOI. In fact, some banks today want an even higher DSR of 30%. The DSR is calculated by dividing the NOI by the ADS.

 As an example, an office building has a Net Operating Income of $60,000, the bank is currently using 8% as the CAP rate for office properties.

 NOI  $60,000       =     $750,000 Market Value
CAP    .08 (8%)

 Applying for a Mortgage purchased at an 8% CAP.

30% down payment
7.5% interest rate
20 year amortization
Price $750,000
Down payment $225,000
Mortgage $525,000
Payments $4,229 mo. $50,752 annual

 Debt Service Ratio

NOI $60,000     =   1.18     What is required 1.25 – 1.30
ADS $50,752

 This loan will not be approved. The price would need to be reduced or the buyer needs to put down a higher down payment. The loan amount must be reduced to reach an acceptable DSR.

 If the downpayment was increased by $25,000 to $250,000 the ADS of a $500,000 mortgage would be $48,355 creating a DSR of 1.24. Close enough, no. The FED requires a minimum DSR of 1.25. More down or a lower price is required. Also remember some banks want a higher DSR of 30%.

 If the price were reduced to $700,000, using a 30% down payment, a $490,000 mortgage ADS would be $47,368 creating an acceptable DSR of 1.27.

  In this case if 40% ($300,000) was the down payment a ADS of a $450,000 loan would be $43,502 creating an acceptable DSR of 1.38.

 The underlining problem in this example and today are the high interest rates. They are effectively forcing a reduction in value or a higher downpayment to get a mortgage loan.

Politics and Real Estate

I have voted in many local and Presidential elections, and I encourage everyone to vote. Each day now politics is in the news and on social media. The next Presidential election seems to be continuing as in the past, with strong feelings and rhetoric being expressed by so many people. Congress seems more divided than ever.

Clients are still continuously asking their real estate agents “Who are you going to vote for?”, “What’s your position on…?” This creates a new communication challenge for those of us in the business. We know we must develop trust with our clients, which means being transparent and honest, but will the answer to those types of questions rub the client the wrong way. If we answer, “I don’t talk politics or religion” they may not like that answer either. More than ever, we need to think about what we say.

I once read an article in the Realtor Magazine, “How divisive public discourse is affecting business relationships—and what you can do about it.” by Graham Woods, which addressed some concerns.

Part of the article was basically a caution to agents not to personally participate in social media positions that could affect their image.  “Real estate pros are public ambassadors for their communities, so they should remember that they are representing their business and neighborhoods at all times, and on all forums”. Our success is largely based on the reputation we create.

Marki Lemons-Rhyal, a Chicago-based real estate coach who teaches social media ethics, says “You shouldn’t be a practitioner and shouldn’t have a license if you think, ‘I’ll say whatever I want to say’; remember you don’t ever get to take your real estate hat off. If you get online and rant and rave, about a candidate or policy, that could be sending a message that you won’t work with a certain type of client.”

You may be thinking, this is America, and we all have a right to free speech, which is true. But in our business what we say, especially in public media, can have consequences. At best, you may be losing potential business, but this type of conduct could also be considered a form of discrimination.

Discrimination is defined as making a distinction in favor of or against a person based on the group, class, or category to which that person belongs rather than treating them on their individual merit. We must respect the federal protected classes: race, color, national origin, religion, sex, familial status, handicaps, and most States also protect sextual orientation and gender identity.

Whether you are a real estate practitioner, or a Realtor the National Association of Realtors Code of Ethics cautions us about our public image. It states Realtors shall not deny equal professional services to any person in any protected classes. Furthermore, the Code makes specific reference that Realtors must not use harassing speech, hate speech, epithets, or slurs regarding people in protected classes. This includes all activities, conduct, speech, including occurring outside of the real estate transaction, that is discretionary, such as social media, public statements or just conversations.

I won’t work with you because you’re a Republican, or a Democrat, or because you support _______ or you don’t. Sounds like that could be considered discrimination to me.

Real estate practitioners sometimes must walk away from potential business. In our business some potential clients are prejudice; they want to sell their building or house but tell us “I won’t sell to ______.” (People from a certain country, color or religion) We cannot list their property under those circumstances.

Politics is being discussed everywhere today, in the media, in your office and with clients and customers. You are entitled to your views and opinions, but you must decide if you wish to share them. What messages are your actions or words delivering?

Office Market  Disaster or opportunity?

“Marker Reports” has reported the U.S. market closed 2023 with office sales being 60% less than 2022. In a CNBC interview with Dan Peebles CEO of Peebles Corporation, he cited that, “Washington, DC real estate values are down 60 to 70 percent in commercial office buildings. Los Angeles down 70% or more and San Francisco down 60, 70 percent”. This, decreasing future assessed values of office properties, will reduce the real estate tax revenues for many cities.

In Boston, MA Mayor Michelle Wu is petitioning a temporally increase in the city’s tax rate ceiling for commercial building to deal with the city’s $1 Billion deficit from these plundering office building values. This is being done to be able to continue city services without increasing real estate taxes on residential properties and to insure that homes in the city are affordable.

In Minneapolis, Minnesota, according to a Cushman and Wakefield report 31% of all downtown office space is vacant, largely due to hybrid work models and downsizing of offices. The 31 story, 850,000 square foot American Financial Center is expected to be completely vacant with the next 17 months. It is anticipated the cost to make the necessary improvements to turn the property into a competitive multi-tenant building will be at least $10 million.

Meanwhile the owner of the tower, which is now assessed at $71 million by the city, (which they bought in 2016 for $200 million) will have to pay millions annually in property taxes, energy costs and maintenance while trying to attract tenants. Three office building owners in the city have gotten bids as to what it would cost to demolish their office buildings, with the thoughts that the highest and best use of their properties would be to build apartments on their sites.

The other problem with the market is the high interest rates that are affecting building owners’ ability to obtain loan extensions and workouts and are expected to increase loan defaults and create more foreclosures throughout the country.

Nationwide the office vacancy rate was 18.3% in December 2023.The latest Colliers report indicates office vacancy in New York City has reached a new high in the first quarter of 2024 at 18.1%. Most major cities are struggling with the same problems. The ripple effect on cities is a reduction in the collection of real estate taxes on commercial buildings. This could lead to increasing residential real estate taxes to offset these budget deficits.

According to Goldman Sachs estimates from late 2023, the share of U.S. still working from home is in the range of 20%-25%. The post-pandemic work-from-home, at least part time, seems now to be permanent,and is significantly slashing the need for office space.  

 “Commercial Edge” gives us a good overall view of the market. Nationwide the average office rents are currently at $34.47 per square foot with vacancies at 17.90% and average sales prices at $179.00 per square foot. Below is a chart of a dozen major cities and how they are faring this year, as of February 2024.

This shows us that half are at or under the nation average rent. Ten of these cities have vacancy rates higher than the national average. The average sales per SF varies as it reflects specific buildings sold. Since we have only looked at two months activity, we don’t know how many buildings were sold, is this just reflecting one sale or a consensus of several sales.

But there are a growing group of investors who are looking at the low prices as added value, a “once in a generation opportunity”. Many of these investment companies have been in the business for many years, have experienced varies real estate cycles, and have no doubt these conditions will turn around over time. They are convinced now is the time to invest in commercial real estate.

Black Rock Real Estate Research is of this opinion.  As are SL Green Realty who has announced a $1 billion opportunity debt vehicle and are targeting New York City properties. RXR and Ares Management have formed a $1 billion fund to buy distressed office assets. Ethan Penner and Chad Carpenter launched a new REIT raising $1 billion to fund debt solutions for office owners and investors. Goldman Sachs has a new $2.6 billion fund for commercial real estate lending.

In Don Peebles interview with CNBC he also said, “We’re an opportunity company, so we look to develop when markets are supply-constrained, and then we like to buy when we think there’s tremendous value. And what we’re seeing here in commercial office space essentially is a once-in-a-lifetime opportunity to buy. Nothing like this has happened since the early 1990s…” 

With the current state of the office real estate market, it’s hard to imagine that office buildings will permanently be devalued, and it’s equally hard to think that things will return to how they once were. But what we do know is commercial real estate is ever changing, and it will adapt to new conditions.

Being optimistic, I look at these times as great opportunities for agents and brokers to help the struggling businesses out there, to downsize, if necessary, or to relocate and sign new leases. And to help building owners and investors to sell, buy and/or repurpose their buildings. This is when our clients need us the most!

GREEN Update

 The sun produces radiation, if we get too much sun we get sunburned. Our planet is surrounded by atmosphere, part of which is known as the ozone layer. This ozone layer blocks 90+% of the sun’s radiation from reaching earth.

 We have been burning fossil fuels since the beginning of mankind. They create greenhouse gases, predominately carbon dioxide also known as carbon emissions. The power plants that produce electricity, the systems that heat and cool our buildings, the planes, trucks, and automobiles we use for transportation all create carbon emissions. These emissions punch holes in the ozone layer allowing more of the sun’s radiation and heat to reach our planet.

 The result is an increase in the temperature of the earth and the extreme weather patterns that we are seeing. We are literally seeing the north and south polls starting to melt which increases the depth of our oceans, creating more powerful storms.

Our country and many other countries are finally doing things to reduce carbon emissions. California now has dictated that all new homes be built with solar power. New Your City has created a cap on carbon emissions for all buildings over 25,000 SF, with significant fines if not in compliance.

We now see solar panels everywhere. When the sun shines onto a solar panel, energy from the sunlight is absorbed by photovoltaics (PV) cells in the panel. This energy creates electrical charges that move in response to an internal electrical field in the cell, causing electricity to flow. Solar equipment has come a long way and now makes economic sense.

Solar power is now being used by many municipalities, Rhode Island has set an example by using solar power on all of its State office buildings. RI also passed their Green Buildings Act in 2022 mandating that all State and Local buildings, built with taxpayer dollars, over 10,000 SF must be LEED certified.

 Private companies like Apple have gone solar. Its new corporate headquarters, a 4-story building of 2,800,000 SF, is totally solar powered, as are their huge data centers. One center is 500,000 SF with over 200,000 servers powered and cooled by three adjacent solar farms.

We have seen the many farms that have stopped growing crops and have been converted into producing solar energy.  Now Germany has developed vertical solar panels which will allow the farms to continue to grow crops while simultaneously collecting sunlight to create electricity.

The first vertical solar farm in the U. S. is now being developed in Vermont. It will cover 3.7 acres incorporating 69 vertical rack structures each equipped with two bifacial solar modules, spaced 30 feet apart. The rows will feature crops like carrots, beetroot and saffron planted in between the solar installations.

Indoor farming gives the advantage of being able to grow crops 365 days a year. Metro Crops converted an old factory building in Bridgeport, Connecticut to grow lettuce, kale, arugula, and other produce year-round. In Providence, Rhode Island Gotham Greens converted a former 100,000 SF GE manufacturing plant, where they made light bulbs, into a sustainable greenhouse. They use hydroponics to grow their greens, using less land, less water, and less energy.

 Wind Power started in the Northeast in 2016, with five offshore turbines creating 30 megawatts of power for homes in Rhode Island.  In 2021 two other wind energy projects were approved. The South Fork wind farm will be located 32 miles east of Montauk Point, New York, consisting of 12 wind turbines to provide power to 70,000 homes. The Vineyard Wind project is being built off of Martha’s Vineyard, Massachusetts, and will consist of 62 wind terminals. Construction is expected to be completed in 2024.

 In 2023 the U.S. Department of the Interior approved the Revolution Wind Project also offshore of Rhode Island. This will include the construction of 65 wind turbines to power 250,000 homes. Recently the Interior Department Bureau of Ocean Energy Management approved the construction of Ocean Wind 1, 13 nautical miles southeast of Atlantic City, New Jersey. This will consist of 98 wind turbines and three offshore sub-stations to bring the electricity to shore.

 New York State has recently passed the All-Electric Buildings Act, the first statewide law of its kind in the nation. It outlaws natural gas and other fossil fuel hookups in all new houses and buildings with fewer than seven stories beginning January 1, 2026, and in all new construction by 2029. The end goal being to phase out gas appliances. But there are two problems. The law is being challenged, a lawsuit was filed by 13 plaintiffs including unions, the National Gas and Propane Association and the National Association of Home Builders. The other question is will the power companies be able to provide the necessary electricity?

 We have previously written about the droughts in California and the Southwest. At the end of 2023 and into this year the area has experienced extreme amounts of rain and snow fall, deemed a weather condition called Atmospheric Rivers. This has increased the depth of the reservoirs in Nevada and Arizona considerably but not nearly to full capacity. Concern being for what this summer will bring. California, however, has gotten even more rain, and they are now saying that they expect to be drought free into 2025.

Commission Challenges

Our goal as brokers and agents is to be appropriately compensated for the skills that we bring to the transaction. In simple terms, to be paid a full commission for completing a sale or lease of property. At the point of signing a listing or a tenant/buyer representation agreement is when your commission fee should be clearly stated.

In lieu of the recent National Association of Realtors lawsuit, NAR reminds us, “Compensation is always negotiable. The seller or landlord decides what fee they are willing to pay for their broker’s services and how much that listing broker should offer a broker who brings a buyer or tenant to close the transaction. Compensation is always negotiable, and consumers are encouraged to talk to their broker to understand and agree upon how they expect to be compensated.”

However, if the client then suggests a lower fee, should you concede? No. Think about it. If you reduce your fee at this point, what message are you giving about your negotiation skills.

Rather explain what you bring to the transaction, why you and your company should be retained. People do not know how qualified you may be unless you tell them. What will you be doing to sell or lease or find the required space? Your focus will vary depending upon who you are representing (seller/landlord or buyer/tenant) but generally will include material items and your personality skills and convections.

A partial list follows:

• Market Research – to determine the proper pricing
• Marketing Plan including Internet promotion
• Your resources to find space for buyers/tenants or to list properties
• Pre-qualification of customers – guiding them to determine their specific requirements and financial capability
• Guiding your clientele through the Negotiation Process
• Coordination of all the “players”, appraisals, inspections and environmental tests that maybe required to close
• Your commercial  training and courses you have taken
• Experience - Discuss other properties you have handled
• Promise regular communication.
• Talk about your tenacious personality

You need to create a perception in your client/customers mind that differentiates you from other agents. Show the value of your services, to justify your fee. Remind them that you are making a commitment; you are investing your time and only get paid when you close.

Make sure your listing agreement clearly states your firms commission rate. When you make an offer create a separate commission agreement converting the commission percentage to real dollars based on the value of the offer. So, there is no misunderstanding; if they accept this offer this is how much money they will owe your firm for your services.

Sometimes you get a listing and now have an offer to present that is somewhat lower than the asking price. The client says I will accept the offer if you lower your commission by 1% (or more), what do you do? Too often agents just accept the reduction to make the deal. Remember a rule of negotiations is; when someone gives a concession, it is the best time to ask for another concession. Do not be surprised, if you make this concession, when they ask you to reduce your fee even more.

You should just say no and reiterate what you have done to get this offer and why it is fair based on the market conditions. Everyone tries to get the best deal possible and if you justify your “no”, often they will pay your fee. You can also continue to negotiate the price with the buyer or tenant indicating the owner has rejected their offer. But make it clear to the owner you still expect to receive the full commission they agreed to when you took the listing.

There are several other techniques that can be used to reduce the amount of commission you stand to lose. Owners seem to always think in increments of one percent. “I have been authorized by my broker to reduce my fee by 10% to repeat clients.” (That is 10% of the commission rate previously quoted which will be typically be less than one percent.) Or use fractions; I am authorized to reduce our fee by a quarter (or a half) percent.

Try converting the commission percentage to dollars, our fee is $50,000; do you realize you are asking us to give up $10,000? Or put that in percentage terms, you probably don’t realize but by asking us to reduce our fee by one percent; you are really asking us to reduce our commission by 20%! My broker won’t allow that.

We work hard for our commissions. Know you will be challenged on your fee when taking the listing and when presenting offers. When asked to reduce your fee, be prepared to say “no” and justify your commission.

Lease Protections for Landlords, Tenants, and Brokers

We still have an unsettled market and safeguards have to be built into leases to address all situations.

Percentage Leases Concerns

They can be set up in three different ways.

Many retailers consider the calendar year as if they bought all of their inventory at the beginning of the year but do not realize their profit until the end of the year. In this case they pay a defined rent each month, but when their cumulative sales reach a certain dollar amount, they pay a percentage of their sales each month in addition to the base rent. This continues to the end of the calendar year and then the cycle starts all over again.

The “natural breakeven” is the point in sales the retailer must reach before a percentage of sales must be paid to the landlord as additional rent. This is determined using the following formula: Annual rent ÷ Percentage of Sales = Natural Breakeven Point.

As an example, the rent is $5,000 a month; $60,000 a year (Annual Rent) and a 5% Percentage of Sales is negotiated: $60,000 ÷ 5% = $1,200,000. When the store’s sales reach $1,200,000 the tenant will continue to pay the base monthly rent plus 5% of that month’s sales as additional rent.

The second way, which is common with mall tenants or larger shopping centers is the tenant’s rent is based on a negotiated dollar per square foot plus a percentage of their sales throughout the entire year. Your rent is based on $35 PSF plus 3% of your sales payable monthly.

The other method is where the tenant only pays a percentage of their sales each month.

In the first method Landlords generally have sufficient base rent for their revenue expectations and the percentage of sales in the second half of the year is additional revenue to them.

In the other two methods, especially the later, Landlords need to protect themselves. They will carefully exam the tenants past sales history and current expectations in considering giving them a percentage lease; as the Landlords income is based on that sales revenue.

In these cases, the Landlord considers the worst-case scenario. What if something unforeseen happens and the tenant’s sale volume declines. They are then not collecting the revenue they need.

Often with a percentage lease the Landlord will insist on a Recapture Provision in the lease, to protect themselves. Recapture provision give Landlords the right to take back all or a portion of their property, by terminating all or part of a lease.

It may be triggered if a tenant does not maintain a specific minimum amount of business; reducing the Landlords anticipated revenue.  A poorly performing retail shop can affect the entire shopping centers image and the businesses of all the other tenants, reducing the Landlords income even further. Recapture allows a Landlord to remove
an underperforming retail store, opening the space for a more profitable business.

The Recapture Provision may also be triggered when a tenant wishes to sublease or assign some or all of their space. Market conditions may have changed, and the Landlord could rent the space for more money by exercising their recapture rights and taking back control of the property.

The recapture clause also protects the Landlord in an instance where the tenant attempts to sublease the property for a profit.

Tenants need protection too!

What if the “Anchor” store closes or if several stores in a shopping center close? This reduces the number of people coming to the center and consequently reduces the other stores’ sales.

In these cases, Tenants need Co-Tenancy clauses in their leases. Co-Tenancy clauses can take many forms but give relief to the remaining tenants. The rent may be automatically reduced to a predetermined level, Rent may be changed to a percentage of sales. Tenant may terminate the lease if the Anchor or other vacant stores are not rented within a certain period of time, or if the replacement tenants’ business no longer “feed” the tenants business.

Sometimes a Landlord has a large amount of space available and rents a portion of it to a tenant. Then another tenant is interested in taking the entire space. As an example, in an Office building an entire floor (30,000 SF) is vacated. The market is difficult, and the space has been empty for too long. A tenant wants to rent 7,500 SF and the Landlord agrees to do so. They move in; but the Landlord would prefer a single tenant for the entire floor. The Landlord has a clause added to the lease Relocation Rights. This grants the Landlord the option to relocate the existing tenant to another space in the building.

As you can Imagin relocation is highly disruptive to the tenants. In this case if Relocation Rights are required, the tenant needs to protect themselves by negotiating several things. Landlord to pay for all moving expenses and necessary Tenant Improvements. Rent to be abated during the relocation period. That the replacement premises should be
equal to or superior to the original space. Also, to allow the tenant to terminate the lease in lieu of relocation.
 

Brokers also need protection.

Lease commissions are based on all the financial gain the landlord receives from the tenant, that the Broker placed in the building. The rent the landlord receives each year of the lease including the escalations is added together and multiplied by the negotiated commission rate to determine the commission fee.

A lease has an initial term of 10 years and an option to renew for an additional 10 years. The broker is paid a commission for the initial term on lease signing. The owner sells the building after five years. After the initial term the tenant exercises their right to stay in the building for an additional 10 years.

Normally, a Broker would be entitled to an additional commission from the original owner at the time of renewal (provided your paperwork states so). But now the building has a new owner, would they be required to pay a commission to the Broker when the tenant exercises their right to renew? NO! The Broker has no contractual agreement with the new owner. Their listing agreement and commission agreement were with the old owner.

To protect the Broker, those documents must contain an Assumption Agreement. Stating that if the current owner sells the building, they will require the buyer to sign an Assumption Agreement (in recordable form) whereby the new owner assume the liability to pay the Broker any future commissions that may come due.

Some lease agreements are written only for the initial term of the lease and do not consider the future. To protect possible future commissions, Brokers should add to their listing and commission agreements the following. That if the tenant they placed in the building decides to extend or renew their lease or buy the building the owner will owe the Broker an additional commission and what rate that will be based on.

The Broker of Record and the Agent involved should be stated in every lease. This provides additional protection should they have to go to court to collect a commission fee.

Creating Business Opportunities

As we start thinking about 2024, we need to set our goals for the year and create plans for how to achieve them. What are your goals for yourself, your family, and your business? It is important to write down your goals, as doing so implants them in your subconscious mind. It helps remind you why you are working so hard.

Real estate is a people business, to be successful you need to meet a lot of people. A great source are residential agents in your and other firm’s offices. Ask them, after they close their sale transactions, to refer their buyers to you. Explain you will pay them a referral fee if you do a commercial transaction with their clients.

Meet with the clients and explain the commercial and investment services you can provide. These people may be business owners or be looking for investment property for themselves or be employees who could introduce you to the real estate Director in their company.

Another part of your referral program is to send out five letters a day, reminding folks from your sphere of influence list, current customers, and prior customer lists, that you are in the commercial and investment real estate business. Ask them for a referral, do they know anyone else that you could be of service to? Add a handwritten P. S. to the letter, indicating how you know them. How are the kids? How’s your golf game? It’s been a while since I sold you the house. Will I see you at the next Lions Club meeting?

Follow this up with a phone call a week later, did you get letter? Did you think of anyone else I may be able to help?  Then advise them you will be sending out a monthly email “newsletter” with community news and obtain their email address. That is the real goal of this program. Once a month, creating a simple email is all that is needed, talking about businesses moving in or out of town and upcoming local events.

With this program you are contacting 1,200 people a year (5 letters with 5 follow up calls each day, 25 contacts a week, 100 a month). It will only take you about 30 minutes a day to write your five letters and do your five follow-up phone calls. Plus, the redundancy of contacting them each month thereafter, will keep you “top of mind”. Always close your
e-newsletter; with: “Did you think of anyone I can be of service to?”

Systematically visit two businesses a day in “your” town, speak with the tenant, 10 a week, 40 a month, 480 personal contacts a year with potential clients. Be sure to catalog their information on your computer and plan to revisit them in a few months.

Ask them who their landlord is and make an appointment to meet with them. Do they have any tenants not renewing their leases, are they ready to buy another investment property or sell this building?

Sometimes the business owner is also the building owner. When you visit have some investment property listings with you, then you can immediately talk to them about another investment opportunity. Also ask if they are interested in selling this building.

Read the classified in your local newspaper. Call 2 FSBO’s a day, make appointments to inspect the space they listed in the paper. When you meet with them, you already know they own the building, so treat them as an investor and show them other investment properties that are available. This is another 10 contacts a week, 40 a month, 480 a year.

(Note: NY agents are currently prohibited from phone cold calls, due to the NYS State of Emergency, to solicit a listing. However, you may call a FSBO if you have an actual client for that space.)

With just these three techniques you are creating over 2,000 new business opportunities each year.

Prospect at least an hour each day to build your future commercial business and to accomplish your business goals.

Where else can you find potential clients? At Chamber of Commerce and Service Club meetings; get involved with your community by joining these groups of businesspeople. Be active, join some committees.

When I first joined a Kiwanis club, they were having a fundraising golf tournament. I volunteered and took the job no one else wanted, signing everyone in and recording their scores at the end of play, as a result I did not get to play. But I got to personally meet just about every member of the club.

When you join these groups, what you want to do is to meet as many members as possible, being active on committees will give you more exposure. When you attend the meetings be sure to sit at a different table each time.

Become the speaker at some of these meetings, talking about what’s happening in real estate in your area or topics like how investment properties are valued. Become known as “the Commercial Expert” in town.

Another way to reach potential clients is by forming a “Leads” group. In the group there is only one person from various businesses. You being the only person doing Real Estate. The other members may include, for example, an Accountant, Office Designer, Moving Company, Lawyer, Architect, Insurance Agent, Property Manager, Records Storage, Office Furniture, Janitorial Company, IT Provider, or a Telecommunications Company.

Ideally the group will be relatively small,10-12 people (to keep the meetings short) and meet for “breakfast” once a month. Each person attending brings two leads, contact information about businesses moving into town, expanding, or relocating. Each person represents a different business, so all may contact the leads and offer their services.

But there needs to be some rules otherwise this may become a social gathering and not be developing new business. If any member shows up for two meetings with no leads they are out of the group and another person from that business field will replace them. Once you have a cohesive group with all participating you will see results.

Simply start by approaching someone you know in another business, select another person or two together and have your first meeting, distribute the rules and a contact information form. Also, at that meeting the group can decide on who else to invite.

Meet as many new people, as possible, every day, this is how you create new business opportunities!

The Shoplifting Epidemic

For the most part retail survived (with some major hits) the pandemic. But, now according to the National Retail Foundation, US retailers are closing stores, cutting operating hours and changing product selections due to an increase in crime. In the industry the loss of revenue from various types of crime is called “shrink”, in 2022 this amounted to $112 billion. This includes internal theft from employees, external theft from shoplifting and organized crime theft for the resale of stolen goods.

Large and small stores are being targeted; from Target, Nordstrom, Dick’s Sporting Goods, Walmart, Best Buy and Macy’s to CVS and Walgreens stores. The organized crime and violence that come with it are endangering employees and customers. Best Buy’s CEO Corie Barry stated the company is being force the lock up high price items and this is “Traumatizing our Associates and is unacceptable”. They are closing 20 stores this year. Home Depot CEO Ted Decker echoed the same thoughts, “This isn’t the random shoplifting any more”, it has turned into organized retail crime.

As a result of “shrink” Walmart closed four stores in Chicago and one in Portland. Target is closing 9 stores this October including one in Harlem, New York City, 3 in Seatle, 3 in San Francisco an 3 in Portland. Macy’s in 1^st quarter 2023 closed stores in California, Colorado, Hawaii and Maryland. They plan to close 125 stores within the next 3 years due to the increase in organized retail crime and the high coset to curtail it; more security guards, updated cameras and surveillance systems.

CVS is shutting 900 stores by 2024, Rite Aid is closing 500 stores and considering bankruptcy all due to rampant shoplifting. A CVS store in the DC area has been attacked daily by a gangs of children who routinely strip the stores of merchandise. Street vendors are paying people to go in and steal stuff so they can resell it. These groups of teens, like 45-50 or more, walk in before and after school and at night even stealing food and drinks, which they stomp into the ground outside. The store will be closing.

The number of people in malls has gone up, but the retail sales are still down. Some malls have become gathering places for young adults who frequent casual restaurants and meet with their friends. Also, mall stores are not  immune to the shoplifting issues and many individual stores and the malls themselves are adding additional security personal.

Positive Innovations

On the positive side stores are re-evaluating their space needs and what to do about it. As an example: Kohl’s is now leasing space within their stores to Sephora, Target leases space to CVS pharmacy’s. Pharmacys and banks are now commonplace with grocery stores. These concepts fill surplus space in the host store and create another traffic draw to the location.

Macy’s looking at dwindling mall traffic and bustling suburbs, will be closing existing stores in malls. Their Chief Stores Officer Marc Mastronardi said that small-format stores are part of the solution. They intend to open 30 stores in strip centers which will be one-fifth the size of their traditional mall stores. The stores will offer a slimmed down mix of merchandise, host local events and have a modern open look. Pairing with existing big-box stores, grocers, and popular off-price retailers like T. J. Maxx, in places that have existing high traffic. The stores will be 30,000 – 50,000 SF and 12 are expected to open by the end of 2023.

Rebirth of Toys R Us
In 2017 Toys R Us went out of business. They have just announced plans to open 24 new stores in the U.S. next year, citing their “Air, Land and Sea” expansion. Their marketing plan is unprecedented for a retailer; they will be opening small stores in airports and on cruise ships.

They are hoping to revive their customer’s emotional bond with the TRU brand, Geoffrey the Giraffe, and its jingle, “I don’t want to grow up; I’m a Toys R Us kid”.

Changing the Malls

A JJL survey in June 2023 of 135 malls across the country that are planning redevelopment it found 53.6% include adding housing.

The following is quoted from a New York Times Article
“Facing an existential crisis over empty space, owners are trying to fill malls with residences, building on the live-work-play model sought by young adults.

Seeking to give the Westlake Shopping Center in Daly City, Calif., a town square vibe, Kimco built a main street through it and added more dining options. Credit...Kelsey McClellan for The New York Times

The Westlake Shopping Center, which opened in the 1950s in Daly City, Calif., is one of the first modern malls in the country. It is currently owned by Kimco Reality, based on Long Island, New York, who owns over 500 shopping centers throughout the country. Over the past seven decades, this mall has survived the rise of online retailers, the shuttering of anchor stores and operating restrictions related to the pandemic. Now comes its latest test: the addition of nearly 400 apartments.

The strategy, which is being closely watched by retail experts, is expected to increase foot traffic and generate more revenue from the new residents who may be more inclined to shop in their own neighborhood.

“They’re able to feed off each other,” said Conor C. Flynn, chief executive of Kimco Realty, the real estate investment trust that owns Westlake. “It’s almost like an ecosystem where the customer shops your retail, the retailers will support the apartments and drive a premium for the apartments.”

The combination of malls and apartments is not a new concept, but more landlords across the country are rethinking their use of space in this way. The strategy builds on the live-work-play communities that are built to accommodate the needs of its residents and have been become popular in the past decade with young adults seeking amenities within walking distance.”

Danbury Fair Mall, CT October 10, 2024

DANBURY — The city Zoning Commission unanimously approved a new zone that would allow the Danbury Fair mall to build 140 or more apartments in the empty former Lord & Taylor store praising the mall for “changing with the times.”

“We don’t want to see any seller or property owner getting into a desperate situation because…they haven’t been able to change with the times,” said Theodore Haddad, the commission chairman, shortly before a Tuesday night vote. “I think this petition is changing with the times.”

Haddad was referring to a master plan by Danbury Fair to stay competitive during a time when big retail is declining by rebranding itself as a “24-hour environment” with apartments, entertainment and other non-retail uses. The first step in the mall’s master plan was accomplished Tuesday night when the commission approved a new zone that will give the mall flexibility to attract non-traditional tenants to its 1.3 million-square-foot space.

Connecticut Post Mall

The Milford Planning and Zoning Board at its Oct. 3,2023 meeting approved changes to the zoning regulations that would allow the mall’s owners to pursue building up to 750 apartments on the property.

Commenting on the owners, Centennial Real Estate, approval, Mayor Richard Smith said, “We need this development as much as they (Centennial) do, if not more, I think our knight in shining armor did gallop in, but it’s not Amazon. This is exciting.”

One difference in the new proposal by Centennial is the designation of 10 percent of the apartments as deed-restricted affordable housing – helping Milford increase the number it needs to meet affordable housing targets.

Whitney Livingston, president of Centennial, said her industry has seen dramatic changes in the last decade. She said that most malls were built as an enclosed space with a few large anchor retailers surrounded by numerous smaller retail operations, largely centered around selling apparel and accessories. But those have been eroded by the fall of department stores, the rise of online shopping and retailer bankruptcies.

“Consumers today are looking at more than just apparel shopping,” Livingston said. “They want experience, which means we as mall owners must deliver entertainment, better food and beverage, health, wellness, beauty, lifestyle service, all alongside apparel and accessories in a very different environment. We must offer a fun, walkable, indoor and outdoor experience that includes amenities like art, music, entertainment and vibrancy.”

Livingston pointed out that the Post Mall has been steadily losing tenants under its current setup. As Milford’s largest single taxpayer, it has paid out about $250,000 less in taxes to the city each year – meaning a larger share of city revenue has to come from other sources, including residential property owners.

Smith echoed Livingston’s point in his remarks. Smith related that he had been meeting recently with credit rating agencies, who he said were pleased when they heard that he would be speaking in favor of the mall development.

“We need to be partnering with the Centennials of the world to put them back online so that we can realize the tax revenue and other residual benefits.”

The plan Centennial proposed would be completed in three phases over approximately 10 years and include outdoor plazas and green spaces. About a third of the residential units would come on board in each phase.

White Plains Mall, New York

The fate of the 50 year old mall in White Plains took a different turn. Unfortunately, this mall lost tenants and eventually became functionally obsolete, changed ownership and was demolished last year.

Plans call for the construction of four multifamily buildings totaling 860 apartments including 78 affordable units. Located two blocks from the Metro-North train station the redevelopment will include dining, retail and other commercial spaces.

“This is going to bring life, it’s going to bring public space, dining and street life,’ Mayor Thomas Roach said. The project is being developed by RXR and the Cappelli Organization.

We continue to watch the ever changing retail world!

Back to Basics: Parking

 Let’s talk about something simple, parking (or maybe it’s not so simple). When someone decides to develop land and put up a commercial building on that site, the first thing they need to do is to read that municipalities zoning code to determine what use will be permitted. Then they need to look at all the other zoning requirements to calculate how big a building can be built. One of the key issues is how many parking spaces will be needed.

 Wouldn’t it be great if all municipalities thought the same way, but they don’t. Here are some examples but check your local zoning. It is common today for Office Buildings to require extensive parking lots, as many of the employees stay in the building all day long. Many areas describe the requirement as a ratio 5:1, meaning that five parking spaces are required for every 1,000 square feet of building.

 Retail buildings will have parking spaces turnover as people park, shop and leave with someone else then using that space. Retail may use a 3:1 ratio, three spaces for every 1,000 square feet. However, unique uses like a showroom or appliance stores would probably have less traffic, thus requiring fewer spaces. Restaurants on the other hand may require more parking. Sometimes the zoning code description seems a bit odd, “One parking stall for each table plus one for each employee” A table being considered having four seats. If a small restaurant had 10 tables, seating 40 people, and six employees they would need 16 parking spaces.

 Industrial Building, warehouses, manufacturing facilities, are often very large but most of their space is for storage or production, with a smaller number of workers in that building, requiring less onsite parking.

 The goal of the zoning requirement is to be sure whatever type of building is being erected, it will have sufficient onsite parking for all the workers and/or visitors in the building.

 Once we determine from the code the potential size of the building and the number of required parking spaces, the land needs to be evaluated. Is it level, a square, rectangle or oddly shaped, any areas unusable, water issues, hills, boulders, trees that need to be removed. A layout of the site needs to be created. To do this we need more information.

 As a rule of thumb, parking spaces need to be accessed using an “aisle” or “driveway”. Assume the code requires a 20’ x 10’ stall for a regular size parking space, we would need a 20’ aisle to access it. Most lots are designed with two rows of parking and an access aisle between them. When creating a parking area “curb cuts” from the main access roads must be included.

 Just to complicate things a little, when building larger office buildings, they may want additional “visitor” parking spaces and many tenants may want assigned parking spaces for their executives, all near the building entrances.

 For each type of building, we also have to determine the number of “handicap” spaces required (which are generally the equivalent of 1 ½ regular spaces in width). Large parking lots may allow a certain number of “compact” spaces for smaller cars.

 A developer is hoping to put up a one story, 9,000 square foot (SF) office building and the parking ratio is 5:1, requiring 45 parking spaces. However, the property layout will only yield 40 spaces, now what? Perhaps a two story, 4,500 SF per floor building would yield the extra parking space needed (provided the codes height regulations allows two stories). Or, with only 40 parking spaces they may have to reduce the size of the building to 8,000 SF.

A Variance (exception to the rules) may be granted by the local Zoning Board to allow the 9,000 SF building with only 40 onsite parking spaces based upon adjacent street parking spaces. Or the Town could have a public Parking Garage in proximity to the site.

 Or, how about the developer building a parking garage or underground parking on the site. The problem with this is its cost prohibitive for a small building, costs for these structures are in the range of $10,000 per parking stall.

 A word of caution about Variances, they could be temporary. You’re hired to lease a store in a five-store strip center. It was previously used as a restaurant, so your immediate thought is to find another restaurant as the tenant. The original restaurant had signed a ten-year lease, which is now up, and they are moving to a larger site. But at that time, they did not have sufficient parking for that use and a Variance was granted.

 This must be looked at very carefully, in some cases the variance will end on abandonment or when that lease expires. Other Zoning Boards may give a short window to replace the current use: the variance will continue if you lease to another restaurant within six months. If not, the use reverts back to retail, and another variance for restaurant use would have to be applied for.

 Rule to Remember: when listing commercial buildings always check the zoning and details of any existing variances.

Back to School

 I went to my local office supply store yesterday; I forgot this is the last week of August and for most kids school starts next week. The store was mobbed with parents and children buying notebooks, binders, pens, and other school supplies. I was reminded how hi-tech education has gotten when I saw the display of flash drives sold out.

 When was the last time you went back to real estate school because you wanted to, not because you had to take continuing education? Has our industry changed – you bet!

 Now we have smart phones with hundreds of apps that can help us get where we want to go, display listings and just about do anything else. I Phone’s that we can do a presentation on; the HP10BII+ calculator designed to do our real estate math. Have you learned how to use all these “tools”.

 Did you know that almost half of our work force today is from the millennial generation? Did you know that we now have six different generation categories? All with different characteristics, different information gathering techniques and buying habits. Do you know the best way to communicate with each age group?

 How well can you read body language? Would it help your business to take a course in negotiating skills?

 As a commercial agent what is your level of “Green” knowledge. Are you familiar with the concepts of energy efficiency, the rating requirements for LEED, what buildings in your market are Green? Are you ready for the customer who says they want to lease space in a Green building? Have you experienced your first green lease yet?

 When it comes to education, there are many resources to help make you a more knowledgeable professional. You can take technical courses on commercial real estate at many local Realtor Boards, and the CCIM (CCIM.com) and SIOR (SIOR.com) institutes offer excellent courses. Other training programs are available from “Top Dogs” Commercial Real Estate Training (tdogs.com) and the Mike Lipsey School (lipseyco.com).

 Today courses are mostly offered through Zoom meetings, or online, by webinar or videos. Using the internet you can find resources and courses on almost any topic.

 Maybe it’s a good time for you to go back to school and learn more about investment property analysis, lease verses buy, 1031 Exchanges, today’s financing or just how to use today’s “tools”. Consider improving your skills, take a course on understanding today’s generations, creating better listing presentations, body language, or negotiations.

 Education is a good investment of your time, so go back to school!

1031 Tax Deferred Exchanges Part 2

The sale of real estate held for more than 12 months triggers Capital Gains taxes on the Net Profits of that sale. These taxes may be deferred by participating in a 1031 Tax Exchange, in essence, by purchasing property(s) to replace the one(s) being sold. However, there are stringent rules and timetables that must be complied with. This applies to the sale of commercial or investment property, but not your personal residence.

The entity that conducts the 1031 Exchange is known as a Qualified Intermediary (QI). The IRS requires that a “third party” conducts the exchange, so the QI will act as a principal in the transaction. How it basically works: the taxpayer will relinquish property title (of the property being sold) to the Intermediary, who will actually sell the property and hold the sale proceeds. Then the QI will act as the buyer of the replacement property being purchased. The QI prepares all the required documentation, provides complete accounting to the taxpayer, and concludes by transferring the title of the new acquired property to the taxpayer.

There are many types of exchanges, in this article we will only discuss the fundamentals. If your client is interested in a 1031 Exchange they should consult a Qualified Intermediary before listing their property for sell.

A few important rules about these transactions:

 1031 Exchanges can only be don’t in the contiguous 48 States, they may sell property in one State and buy property in another.

Qualified Intermediaries (QI): Currently there are no licensing requirements. Clients should request how their monies with be safeguarded, is the QI insured, bonded etc.?

The QI cannot be the taxpayer. Or the taxpayer’s accountant, attorney, or real estate agent, who worked with the taxpayer during the prior two years, they are disqualified from serving as the QI.

Qualified Properties

n       Replacement property acquired in an Exchange must be like kind to the property being relinquished (sold).

n        Like kind means “similar in nature or character, notwithstanding differences in grade or quality.” Both the relinquished and the replacement properties must be held by the Exchanger for investment purposes or for “productive use in their trade or business”.

Over the years this definition has gotten broader now you can mix and match any investment property, for example:  selling an office building and buying a retail center, selling a retail center and buying a multi family or selling industrial property and buying an office building.

n        Personal Property is not eligible for exchange.

General Rules

n        The transaction begins on the date the title to the relinquished property (being sold) is transferred to the Qualified Intermediary.

n         The taxpayer must identify the replacement property(s) (being acquired) within a 45 day acquisition period, following the transfer of the relinquished property.

n       Title to the replacement property must be received within 180

Calendar days after the transfer of the relinquished property.

n        All proceeds of the sale of the relinquished property must be held by a third party, a “Qualified Intermediary”.

n        All cash proceeds must be invested to have a fully deferred taxable gain.

Three Acquisition Rules

n       The Three-Investment Property Rule states that the exchanger must identify up to, but no more than three potential investment properties during the acquisition period.

n       The Two Hundred Percent Rule - This rule dictates that, in the event that three or more like kind investment properties are selected as replacement investment properties, the aggregate market value of said investment properties being purchased may not exceed 200% of the market value of relinquished investment property.

n       The Ninety-five Percent Exception. In the event that rules 1 and 2 do not apply, the Ninety-Five Percent Exception takes precedence. This rule dictates that the aggregate market value of all replacement investment properties must represent        at least 95% of the value of the relinquished investment properties in order for the exchange to still qualify.

Full and Partial Exchanges

When all the proceeds of the sale are used to purchase a replacement property and the value, equity and debt are all “equal to or greater than” a full deferral of the Capital Gains Tax is possible. If all these rules are not complied with, a partial deferral of the taxes may be possible.

n        “Boot” – A term used to describe other non-qualified property received in an exchange, that is not like kind to the property acquired. (cash, stock, personal property)

n        The “boot” proceeds in the exchange are considered a gain and are taxable.

n        For a full deferral of capital gains taxes, the value, equity and debt must be “equal to or greater than”.

Examples:

Full Deferral of Capital Gains Tax – each category is “equal to or greater than”.

                                  Relinquished                 Replacement
                                  Sold Property                Purchased Property
Value                         $450,000                      $600,000
Equity                        $200,000                      $200,000
Debt                          $250,000                      $400,000

 Partial Deferral of Capital Gains Tax

In this case the taxpayer is taking $50,000 cash from the equity they have in the building they are selling. The “equity” is not equal to or greater then, consequently this “Cash Boot” will be subject to the Capital Gains Taxes.

                                    Relinquished                 Replacement
                                    Sold Property                Purchased Property
Value                           $450,000                       $600,000
Equity                          $200,000                       $150,000
Debt                             $250,000                       $450,000

Partial Deferral of Capital Gains Tax

In this case the taxpayer is buying a property for less money than the property they are selling,  their “value and debt” will no longer be equal to or greater than. The IRS considers mortgage reduction a taxable event. Consequently, the taxpayers “Mortgage Boot” of $100,000 will be subject to Capital Gains Taxes.

                                     Relinquished                 Replacement
                                    Sold Property                Purchased Property
Value                           $450,000                       $350,000
Equity                          $200,000                       $200,000
Debt                             $250,000                       $150,000

As one can see 1031 Tax Deferred Exchanges can be very beneficial but they are complicated with many rules (only some of which we have examined in this article). There are many different types of exchanges and clients need to speak with a specialist, a Qualified Intermediary.

The most important aspect of 1031 Exchanges is the timeline. All parts of the transaction must be completed in 180 calendar days. Problems can occur, what if the selected property to purchase is found to have pollution problems during the due diligence period or the income and expenses represented by the seller are not true. One could run out of time!

There is a possibility of doing a 1031 Exchange by acquiring a share of a property through Tenants-in-Common or Delaware Statuary Trust structures, which can usually be closed in a matter of weeks.

The first benefit of 1031 Exchanges is to defer the Capital Gains Taxes when selling investment property to the property being purchased.

Many investors do 1031 Exchanges every few years, each time buying a more expensive property, with the money saved by not having to pay the capital gains taxes at that time, thus increasing their cash flow and wealth.

The greatest benefit is to their Heirs. When the taxpayer dies the property goes to their heirs on a “Stepped-Up Basis”. All the built-up capital gain disappears. The current market value of the property at that time passes to their estate, if the property is then sold there would be no appreciation or depreciation and no capital gains taxes due.

1031 Exchanges – Part 1

We will begin this article by looking at the history of 1031 Exchanges, next month we will illustrate the procedure and rules. Congress, in an effort to pay for the American Civil War, imposed the first income tax in 1861. The Revenue Act of 1861 collected a tax of 3% of all incomes over $800 a year. As time went on, issues of tax policies, rates and “fairness” plus how to stimulate the economy were continually discussed in Congress.

When someone sold a property how could they be incentivized to buy another property rather than hoard the money (that was left after paying taxes on the sale)? After all, if the money from the sale were reinvested into a replacement property there was no economic gain or cash to pay the taxes.  Thus in the Revenue Act of 1921 the first tax deferred like kind exchange was authorized. In 1928 this was formally titled Section 112(b)(1) of the tax code.

In 1935 the concept of using a Qualified Intermediary (Accommodator) to conduct the exchange was added. The Federal Tax Code was amended in 1954 to change the section number from 112(b)(1) to Section 1031. Prior to 1979 exchanges were accomplished in a one day long closing; the relinquished property being sold followed by the replacement property being purchased.

T.J. Starker and his son sold timberland to Crown Zellerback, Inc. in exchange for a contract to acquire certain properties within 5 years. The IRS disallowed this “delayed” exchange. In 1979 the Starker Family sued the IRS and won the case setting precedent for today’s non-simultaneous, delayed tax deferred exchanges. In 1984 Congress adopted the 45 calendar day identification Period and the 180 calendar day Exchange Period; imposing a limit on the length of the exchange opportunity.

The Tax Reform Act of 1986 restricted tax benefits of owning real estate and really catapulted 1031 exchanges into the forefront. The act eliminated preferred capital gains treatment, taxing them as ordinary income; eliminated accelerated depreciation in favor of straight line over 27.5 years for residential property and 39 years for commercial property.

In 1990 the IRS issued comprehensive Tax-Deferred Exchange Regulations which for the most part are today’s guidelines.

Two additional advances have occurred since, in 2002 fractional or co-ownership of real estate known as Tenant-In-Common ownership was authorized to be used in an exchange. In 2004 Delaware Statutory Trusts were ruled as being real estate and therefore as a replacement property solution for 1031 exchanges.

The first benefit of 1031 Exchanges is to defer the Capital Gains Taxes when selling investment property to the property being purchased. Many investors do 1031 Exchanges every few years, each time buying a more expensive property, with the money saved by not having to pay the capital gains taxes at that time, thus increasing their cash flow and wealth.

The greatest benefit is to their Heirs. When the taxpayer dies the property goes to their heirs on a “Stepped-Up Basis”. All the built-up capital gain disappears. The current market value of the property at that  time passes to your estate, if the property is then sold there would be no appreciation or depreciation and no capital gains taxes due.

Negotiating Personal Guarantees

Periodically, like after the recession of 2008 when property values crashed, it becomes common for Landlords to require Personal Guarantees from their Tenants. As the economy recovered toward the end of that decade values had been increasing again and landlords stopped requiring personal guarantees. There thinking was, if the tenant vacated the space there were ten other tenants who would want it and pay higher rent for it! Then the pandemic changed everything. Now in this post-pandemic era of business uncertainty landlords are again seeking Personal Guarantees from their Tenants.

With a Personal Guarantee, if the Tenant defaults on their lease obligation, even if the Company files for bankruptcy, the owner(s) of the business can be personally responsible for the outstanding rent, for the remainder of the lease term. Meaning their personal property is at risk: their home, bank accounts, investments, wages, etc. The amount of the obligation can be significant. In a 5 year lease, if the rent is $25,000 a year (without escalations), the Personal Guarantee required of the owner(s) is over $125,000! In a 10 year lease, if the rent is $50,000 a year (without escalations), the Personal Guarantee required of the owner(s) is over $500,000!

There is no doubt when it comes to Personal Guarantees in a lease the Tenant needs legal representation. The language of a guarantee can be very complex and must cover a variety of issues. In a corporation, all four of the corporate officers may be responsible for Personal Guarantees of the lease. What is the amount each is responsible for, 25% of the liability? Probably not! What does the language of the Personal Guarantee say?

Most boilerplate lease guarantees impose, “joint and several liability” on the Tenants and the Guarantors. This means that the Landlord has the right to collect all of its damages from any one of the Guarantors. The Guarantor who gets stuck with the bill has the burden of seeking contributions from their fellow Guarantors.

There are many “what if’s”, that need to be addressed, In a corporation or partnership, what if one of the officers or partners retires, leaves the business or are bought out by the others? Is there lease liability released? Assumed by the others? Does the Tenant have the right to substitute for another Guarantor at any time? What happens if the building is sold?

Tenant Improvements. Landlords are concerned in recovering the cost of Tenant Improvements (TI) or the cost of removing the improvements in the event the Tenant fails. When a Landlord agrees to do construction or Tenant Improvements they generally amortize the cost over the term of the lease; adding the costs to the base rent. If the Tenant defaults some of this money would not be recovered. This can be addressed with a Personal Guarantee for the construction cost. The amount of the Guarantee should be reduced down with each year that the Tenant fulfills their lease obligations.

When representing a Tenant the Real Estate Agent needs to negotiate alternatives that minimize the liability for their clients.

What is the Landlord really trying to do in imposing a Personal Guarantee? Vacancy is the “kiss of death” for Landlords, it interrupts their cash flow, may hamper their ability to pay their mortgages, or refinance their building. It may take a considerable time to replace a Tenant. So as a starting point one needs to assess the local marketplace and determine in the event the Tenant vacates how long will it take to find a new Tenant and have them start paying rent. With that information the Landlord can be approached with alternatives to the Personal Guarantee.

Increase the security deposit to reflect the anticipated “down time” not collecting rent. This could be 6 or 12 months. Most States regulate residential security deposit amounts, but not security deposits for commercial properties. This money is coming from the business funds not the owner’s personal monies.

An established business with good financial resources may be able to get a Letter of Credit from their bank to guarantee the lease. This is based on the resources of the business with no additional liability to the business owner(s).

Establish a time limit. Most new businesses, if they fail, do so within the first two years of business. Agree to a personal guarantee but limit it to two years. Perhaps offering the Landlord to review the company’s sales after two years and if the business has increased in sales, remove the guarantee.

Landlords want to see a record of payments that establish credibility. It is a five year lease; ask the Landlord, if we make all our rent payments on time for three years will you remove the guarantee?

Cap the Guarantee. Agree that if the Tenant terminates the lease the Landlord should be able to find a replacement tenant within 6 months. Tenant agrees to pay rent for up to 6 months after lease termination (or until another tenant commences rent payments, which ever period is shorter). This is sometimes referred to as a Liquidated Damages Clause; Tenant agrees to a preset and mutually agreed amount of money to settle any default.

Loss Mitigation. Whenever a Personal Guarantee is required, a Tenant should insist on a Loss Mitigation Clause in the lease. Generally, before a Landlord can go after the Guarantor they must “mitigate” their loss by taking and using all security deposit, actually marketing the space and only after a replacement Tenant is found; determine the amount of loss. The Landlord may include in determining the total loss: the number of months not receiving rent, marketing costs, legal costs, renovation expense and real estate commissions. This process may be regulated by local laws.

Back to Basics Retail Properties

Stores may be free standing, found in strip centers, shopping centers or malls. Retailers differ in their preference but have a common concern about finding the right location for their business.

A strip center is a single building that has been divided typically into 5 to 10 stores. The structure allows for reconfiguration of the individual store sizes. Stores are either inline next to each other with common demising (dividing) walls., consequently their signage is limited to their front window and door. Or they are end caps, stores located at each end of the center that have the advantage of sign exposure on two or three sides of the store and the possibility of drive through service.

Adding an anchor tenant with the small stores creates a shopping center. Anchor stores are large in size (often a supermarket or department store) and do their own advertising drawing customers to their store and the other shops in the center. Historically anchor tenants pay less in rent and the smaller stores “gladly” pay higher rent to benefit from the anchor stores advertising.

Retail stores are measured by square footage. Measurements taken from the outside walls wherever possible including the thickness of the exterior walls. When stores are adjacent to another store they include half of the thickness of the demising wall(s) in calculating their total square footage.

 Moving up in size, a number of anchor stores, also known as big box retailers, may be clustered on a site without small stores; this is known as a power center. When we have several anchor stores and a large number of specialty shops we call this a regional shopping center or mall.

Retail pricing begins with a base rent per square foot and often passes through additional rent costs to the tenant. Commonly included are their proportionate share of real estate taxes, utility costs and common-area-maintenance. In other cases, when there is a single tenant in the building, there may be a Triple Net Lease (NNN) structure, whereby the tenant pays all the operating expenses of the property.

Commercial practitioners can lease any of these stores or sell the properties as investments. Buyers and tenants will be interested in the tenant mix. What are the businesses of the other stores in the center and surrounding area?  Hint: when you list a store for lease, analyze the tenant mix to determine what type of business is missing from the area.

Demographics provide statistical data usually in rings, 1-3-5 mile or 5-10-20 mile radiuses from the site. Population, median household income, number of single family homes (rooftops), number of apartment units and age breakdowns within the ring are used by retailers to determine if their business would be successful at that location. Traffic counts, the number of cars that pass the site each day and in cities pedestrian counts can also influence site selection decisions.

Unique only to retail are Percentage Leases. These can be structured in various ways.  In addition to the base and additional rent, a percentage of all retail sales is required, common in the larger malls. Sometimes, the tenants base rent may be reduced and a percentage of sales is added. For example, an Anchor tenant’s fixed rent may be $3.00 below market value but they also pay 2% of their retail sales. Or in lieu of rent, the tenant just pays a percentage of all sales.

Many retailers look at their business by the calendar year, considering they buy all their inventory at the beginning of the year and make their profit at the end of the year; actually, starting to make a profit in May, June or July of each year. In addition to their base rent they will have to pay a percentage of sales when they reach a defined cap (start making a profit), for the remainder of that calendar year Then the cycle starts all over again the following year. This is called a Natural Breakeven Point.

In this case the percentage of sales is negotiated then applied to a formula: Annual Sales divided by this Percentage equals the Dollar Amount of the Cap (the amount of sales that must be reached for the additional rent to be due).

When listing properties find out everything your customers will want to know.

The pandemic was a huge challenge for retailers and changed how many are doing business today. Smaller stores, less inventory, curb side pickup, online sales and delivery, more social media advertising are all parts of the “new” retail models. Malls are becoming more mixed-use offering combinations of shopping, living, entertainment and dining.

The consumers are changing too, the high inflation and interest rates have people buying less products. The concepts of recycling and reuse are having some retailers adding pre-owned items to their product lines.

In most areas, the present economic uncertainty has retail rents declining and lease lengths being shorter. Unfortunately, this will probably continue well into 2023.

On a positive note, the traditional “churning” by national chains is back. That is a review by national retailers of their various stores sales activity. Those locations that are not being productive may be closed. But, at the same time many of the “national” retailers are also looking for and opening new locations to replace the ones closed.

Some local business may be struggling and in some areas the vacancy rates in retail are up, but empty stores create lease opportunities for agents and brokers. Don’t let the market “talk” affect you, get out there and make deals happen!

Back to Basics – Office Buildings

Users or investors may purchase office buildings. Or tenants may lease part or all of a building. In all cases customers want to know the overall size and type of building. Most office buildings are classified as A, B or C, others are designed specifically for medical use.

Class “A” properties represent “the best available space”, they are the newest, fanciest buildings featuring many amenities, the latest technology, and are built in the most desirable locations. Class “B” buildings can be thought of as a “tired class A”. At one time it was a class A, “the” building to be in, but then someone built a newer, more modern building. Both classes of building appeal to major companies looking to project an image of success to the customers that come to their offices.

Class “C” buildings may be recently constructed, designed to be highly functional, minimizing common areas and maximizing rentable square footage. Class “C” could also be older building that may be reaching structural obsolescence. Perhaps built 70-80 years ago, possibly without elevators or central air conditioning and typically found in “downtown” locations. Tenants for class “C” properties are mostly concerned with keeping their rent expense as low as possible. Usually, their customers do not come to their offices; consequently they are not concerned with a buildings appearance.

Medical space will typically consist of many small “examining” rooms with each having a sink. Most will also have an area to take x-rays, which would require lead in those walls. This unique construction is very expensive, so once a building is designed for medical use it will stay that way. Renting or buying medical space is consequently higher priced than traditional office space.

Many office buildings are large with multiple tenants. Landlords desire to be paid for “every square inch” of their building. In these properties tenants get to exclusively occupy and use a certain amount of space but they also share “common areas” with all the other tenants in the building. So a tenant ends up occupying Net or Usable Square Footage but paying for this space plus their proportionate share of the common area, known as the Rentable or Gross or Billable Square Footage. Different terms are used in different areas and by various landlords. The important concept is that tenants often have to pay for more space than they occupy.

How is office space measured? The general authority on space measurement is BOMA, the Building Owners and Managers Association. Generally, a building is looked at in three ways, certain parts of the building are considered “structural” and would be included in the base rental charge. For example: Thickness of exterior walls, exterior balconies, mechanical penthouse, upper stories of atriums, and major vertical penetrations (staircases and elevators).

The tenants occupied unit square footage is measured from the inside of the walls within their unit and includes all usable space and storage areas. If there are demising walls, internal walls dividing the space, like a private office, that space is included. Tenants must absorb HVAC convectors, columns and interior building projections in their measurements.

The common areas of a building may consist of lobbies and atriums (at floor level), public corridors (and include the thickness of the corridor walls), public restrooms, janitor, electric and phone closets, mechanical rooms, and loading docks. Such measurements will include the “common areas” on all floors.

When a building is first constructed an architect or engineer will measure all the space in the building and determine the overall amount of usable square footage and the amount of common area square footage. The percentage difference between the Usable and Rentable space is known as the Loss Factor or Core Factor. For Example: a building is 100,000 SF in total space, 15,000 SF of that space is common area. The Loss or Core factor would be 15%.

Technical and communication services are a concern of every business. What systems are in the building for phone and Internet access? Agents must determine what hours the building is open, some tenants require access 24 hours a day 7 days a week. Not every landlord however allows this, or they may provide such access only for additional cost. What are the arrangements for employee and visitor parking? If a building has amenities, i.e. health club, child care facility, cafeteria, restaurants, etc. they should be noted when the property is listed.

In addition to the physical appearance, qualities of the building and pricing, investors will need a financial analysis. Space for lease requires the costs and lease terms. What is the rent and what does it include? Some landlords charge additional rent for utilities, common area maintenance, taxes and other items; tenants may also be billed for their proportionate share of common areas in a building. Lease length must also be defined. When does the lease begin and end, may the term be extended? Will the rent be increased in future years; will the escalation be a fixed percentage or based on a Cost-of-Living index? Does the space being leased require any improvements; build outs, who will pay for them?  

When listing office properties, you need to find out everything your customers will want to know.

Since the pandemic the current concern is how much of the building is vacant? This being compounded with “distancing” workstations and the work-at-home issues.

A recent study has listed the 10 cities in the country with the emptiest office buildings. They include Atlanta 14.1% vacancy, Los Angeles 14.4%, Denver 14.6%, phoenix 15%, Chicago 15.1%, Washington D.C. 15.5%, San Francisco 16.4%, Dallas-Fort Worth 17.2%, Houston 18.8% and San Rafael, CA 19.3%.

The reason for the high vacancy rates varies. Some markets, like Chicago and Denver, have high vacancy rates due to excess supply from new construction. Other markets have a retraction in office demand after a pullback in the major industry segment in that market, like Houston with energy and Washington, D.C. with the federal government. Other markets, like San Francisco and New York, may potentially see more impact from remote working than others, because of their higher cost of office rent, cost of living and cost of commuting. 

A concern is, if occupancy rates remain low, the consequential reduction in cash flow, may lead to owners defaulting on their loans.  As the current high interest rates make re-financing, no longer an option. Overall, the values in many of our office buildings has been reduced.

A spokesperson for Moody’s Analytics CRE has forecast that they expect occupancy rates to start improving by 2025. In some regions like the “Sun Belt” States they have already seen some occupancy improvement, largely due to less new office space construction and less work-at-home employers.

Another solution with some of these buildings is to repurpose them. We have seen a trend in 2022 to convert some office buildings to residential use, especially in cities that have rebounded strongly from the pandemic, such as New York City and Miami.

The “experts” seem divided with the question; is now a good time to buy office buildings? On the positive side the prices are down but the interest rates continue to rise. Will the current cash flow require a larger down payment? Another concern is many leases were started before the pandemic. When these leases end will the companies want to renew, but for less space or look to move to smaller units elsewhere. Historically we can look at real estate cycles, which tend to repeat themselves, and anticipate a turnaround within the next five years. With this asset class stabilizing and starting to grow again. Right??

Back to Basics - Industrial Buildings

Industrial properties traditionally consisted of three major groups: warehouses (used for storage, production, and manufacturing), Research and Development (R&D) and distribution.

Warehouses may hold goods for a long period of time. The ability to store or stack goods changes the focus with most industrial buildings from square footage to cubic space; ceiling height being a significant measurement.  Under steel (US), i.e. 24’ US, twenty-four feet under steel is the measurement from the floor to the bottom of the steel girders that support the roof. Goods may not be stacked higher than the bottom of the roof supports. The distance, span, between the columns that hold up the roof is important to many businesses especially if they store trucks or vehicles in the building.

Access to these buildings may be by overhead doors (like a garage door at a home, but large enough for a tractor trailer truck to enter). Loading docks are platforms of a height that match the bed of a truck allowing goods to be rolled off the truck. Tailboards allow a truck to back up to a building entrance (usually the size of the rear of a truck bay) and roll goods off the truck. Sometimes a declining ramp is constructed below grade to allow this function. Listings should indicate how many of each type of loading facility the building has.

Generally, warehouses contain 10% office space. Their size is described by their square footage, which is measured from the outside of the building including the thickness of the exterior walls.

A factory or manufacturing plant is an industrial site, usually consisting of buildings and machinery, or more commonly a complex having several buildings, where workers produce, manufacture, or assemble goods or operate machines processing one product into another.

We find R&D buildings are generally half laboratory for research and development of new products and the balance of the building is used for storage.

Distribution centers may hold goods for a short period of time, often having access from two sides of the building. Visualize a food distribution center having trucks delivering full loads of one type of product, meats, dairy or produce on one side and other trucks on the other side picking up portions of all the products for delivery to grocery stores.

The advent of e-commerce has developed another type of distribution building that offers bulk storage and acts as a “last mile fulfillment center” with small trucks making local deliveries. Amazon has 110 Fulfillment centers in the U.S. ranging in size for 600,000 SF to 1,000,000 SF

In recent years another term has been added to descriptions of industrial buildings in some areas, flex buildings. It is actually not a building but rather a type of zoning. Over the years products have gotten smaller and overnight delivery of most products is now possible. Consequently, demand for some of the warehouses in the 75,000 – 100,000 SF range has been reduced. With no tenants or buyers interested in these buildings, the owner cannot afford to pay their mortgage and the real estate taxes are not getting paid as well. The local municipality needs their real estate tax revenue so they rezone the property from industrial to flex zoning allowing multiple uses in the building. Now the building may be used in part for offices, part retail showroom, some self-storage or even apartments, restoring the tax revenue.

Key concerns of industrial “users” also includes amperage (power in the building), sprinklers, floor load (literally how much weight can a floor support, especially important in multi-story buildings), and available technology access. The current occupant may not use computers, butyour customer may be very hi-tech. If the building is not currently“wired” find out what phone and internet access services are available – your customers will want to know.

Industrial companies may be somewhat flexible as to the location of their facility, but need to consider access to major highways, transportation expenses, labor availability and labor costs. Employees may require access to mass transit.

Sale listings for industrial buildings typically quote the price per square foot as buyers compare this cost with other buildings and new construction. Often an industrial owner will list properties for either sale or lease (make sure your listing agreement covers both contingencies).

During the pandemic to today the demand for industrial buildings has increased dramatically. The 3^rd quarter of 2022 demand was up 13.5% over 2022. Vacancy averaged only 4% in 2022. Low inventory and higher demand created higher rents and sales prices. In addition to the traditional uses we are finding many retail businesses seeking industrial storage space for their overstocked merchandise.

A problem that does exist is that 70% of industrial buildings were built before the 21^st Century and 1/3^rd of these buildings are over 50 years old. New construction was halted or delayed during the heart of the pandemic due to building materials and labor shortages. However now there is over 500 million square feet in construction, expected to be completed in 2023, which will start to keep up with demand.

These new buildings will be more people and environment friendly featuring high leverage ventilation systems and other green policies and procedures. Warehouses will feature high tech production and automation. Delivery vehicles are going electric. All to provide a healthier work environment and help reduce carbon emissions.

Many companies are re-evaluating their supply chains and we are seeing a trend back to onshore manufacturing, USA production.

Tenanted industrial buildings may also be sold as investments. These investments tend to have less turnover and longer leases. Many are Triple Net (NNN) leases with the tenants responsible for maintenance, real estate taxes and all other expenses. They are effectively renting “empty boxes” with no need for expensive buildouts and rarely need renovations.

Investor concerns today include the high cost of capital, a slowdown in rent growth and tenant performance. Tenants are concerned with the economy and their businesses performance. Consequently, they seek flexibility in their leases, ability to sub-lease and other escape clauses.

Overall industrial buildings stood the test of time and thrived during the pandemic. I think the key word for today is stabilization. The values (rent and sales) will hold for now but as the new inventory completes construction vacancy will gradually increase and create future price competition.

Back to Basics

Investment Properties

One method by which investment properties are evaluated is known as the Income Approach to valuation. Banks typically use this method when they appraise investment properties. This direct return method of valuation focuses on the cash flow produced. The annual cash flow results from subtracting the owner’s operating expenses from the gross operating income and is referred to as the Net Operating Income or NOI. Buyers use the NOI of a property in developing their purchase offers.

Gross Operating Income has several components. Potential Rental Income (a/k/a Rent Roll) consists of actual and projected income for all rentable spaces. Additional rent charged by the landlord must also be included, such as utility pass throughs, CAM (common area maintenance) charges or real estate taxes.

This income is adjusted for a vacancy contingency, initially in percentage terms, based on the possibility that part or all of the space may be vacant for a certain period of time. In calculating potential lost revenue from vacancy consideration is also given to the number of units in the building, available space in competing properties and overall market conditions. Then this date is converted to dollars and subtracted from the Gross Operating Income.

 Other income to the building, aside from the tenants, is also accounted for, i.e. income from advertising billboards or antennas on the roof. Added into the Performa this creates the Gross Operating Income of the property.

Next is the calculation of the Operating Expenses. This category includes all operating expenses paid by the owner except annual debt service (mortgage expenses). Debt service is not an expense of the building, rather it’s an expense of the owner if they choose to finance their purchase.

Depending on the size of the building Property Management expenses may be included, which are usually calculated as a percentage of the Rent Roll. A contingency fund for Repair and Maintenance expenses (unexpected major problems – not routine maintenance) is also considered as an expense if actually used. How much money should be included in this category is primarily based on the age and condition of the building. Subtracting the Total Operating Expenses from the Gross Operating Income equals the Net Operating Income (NOI).

A CAP Rate (Capitalization Rate) may be practically thought of as a desired profit percentage of an investor. It is based on the concept that a correlation exists between the income a property produces and its market value. Value may be determined using this formula:

Net Operating Income (NOI)   = Market Value

                                               Capitalization Rate (CAP)

For example: If a building had a NOI of $100,000 and the current CAP Rate was 10%, the building would have a value of $1,000,000. ($100,000 ¸ .10% = $1,000,000). Note this is based only on the current year’s performance; some investors project future performance in determining value.

In addition, two other methods of valuation should be considered. The Comparable Method (comps), looking at actual previous sales and what “competition” is currently on the market in the area. The Cost Approach is used with some Industrial buildings and “Green” buildings looking at the construction costs to replicate this building with the same features. These methods of valuation give an agent the ability to answer the question, “What is my property worth?” 

Another way to look at the CAP rate is as the Return on Investment (ROI). If they purchased the property for all cash one can divide the current annual cash flow, the NOI, by the purchase price and determine the percentage return on the investment for the current year. For example: Purchase Price $500,000, current NOI (cash flow) $60,000, Return on Investment 12% ($60,000 ¸ $500,000 = .12%).

However, in most cases when a property is purchased it is leveraged, bought in part using borrowed funds, other people’s money. Most commonly the structure involves a down payment, Initial Investment, paid by the purchaser and a mortgage loan from a bank. The total amount repaid on the loan each year, including principal and interest, is called the Annual Debt Service. If the question is again posed “what return is the investor getting on their investment?” Two formulas are needed to determine the Cash on Cash Return. When properties are financed the Return on Investment is called the Cash on Cash Return.

Net Operating Income (NOI) – Annual Debt Service = Cash Flow Before Taxes (CFBT)

Cash Flow Before Taxes (CFBT) ¸ Initial Investment (II) = Cash on Cash Return (CoC)

The “Taxes” referred to in these formulas are the Income Taxes the owner may have to pay on this building this year.

For example: A property is purchased for $1,000,000 with a 30% down payment (typical in today’s market) $300,000. A mortgage is obtained for $700,000 with a 20-year term and 7.5% interest rate. The annual debt service is calculated to be  $67,670. Assume a NOI (annual cash flow) of $100,000. The Cash on Cash Return is 10.78%.

$100,000 (NOI) – $67,670 (Annual Debt Service) = $32,330 (CFBT)

$32,330 (CFBT) ¸ $300,000 (II) = .1078   Cash on Cash Return of 10.78%

It is important to realize this reflects the current return of the current owner on this investment, or how the property performed financially this year, based on a purchase price and down payment that may have been made several years ago.

A buyer is usually not concerned with the owner’s Cash on Cash return on their investment. The return would only be significant to the buyer if they were assuming the current mortgage – which is rare in commercial transactions.

Usually, the current sales price reflects an appreciation in value that would require a higher down payment. Loan terms and interest rate will also vary. Some owners desire to hold paper or give a purchaser a mortgage themselves to gain the benefit of the interest on the loan and for other tax advantages.

Buyer’s focus on the current and/or future cash flow(s), using the Net Operating Income to determine their purchase offers. 

The real value of the property has a few other steps, Once the Cash Flow Before Taxes has been calculated, the owners Income Taxes for this year, on this property, can be calculated and paid, with the After Tax Cash Flow remaining. By dividing the After Tax Cash Flow by the Initial Investment (down payment) the real Cash on Cash return can be calculated. This will generally increase over time, reflecting the current equity the owner has in this property.

New Year’s Resolutions for Commercial Real Estate Agents

1.     Meet two building owners or tenants in your town every day.

Systematically meet every business owner in your town. Two a day, ten a week, forty prospective clients/customers a month; you will become “The Commercial Agent” in town.

2.     Join and attend Chamber of Commerce meetings and volunteer to serve on committees.

                             Who belongs to the Chamber or Service Clubs? Your future clients; get active in the group to become known.

3.     Call FSBO’s until you get two appointments for tomorrow.

The only reason an owner runs their own ad is because the vacancy is costing them money. Find them a tenant, restore their cash flow and they will be happy to pay you.

4.     Attend Commercial open houses and meet 25 new agents before you eat!

Networking contains the word “work”. At these events work at building up your list of other agent contacts, who may have the buyer or tenant for your next listing.

5.     Catalog everyone you met yesterday (building owners, tenants, agents) into the address groups on your computer.

Multiple address groups; retailers in 1,000 SF – 2,000 SF, office users in 3,000 SF – 4,000 SF, building owners (investors). Blast your new listing to these potential buyers!

6.     Stop by and see two prior clients/customers each week.

Just because they signed a 5 years lease does not mean they will stay there that long. Their business is booming after two years, they need more space. Can you find them more space and sublet the space they are in, and collect two more commissions?

7.     Daily review of all new commercial listings in your area; arrange to co-broke and add to your “comparable” data base.

You need to know every available property in your market area. Your customer asks: “On the way here I passed a building for sale on Main Street, do you know the size and asking price?”

8.     Develop and meet with your  “leads” group once a month.

A” leads” group consists of up to 10 people, but only one person from any industry (one architect, one accountant, one from a moving company, etc.) meeting regularly to exchange information about potential customers

Call MLS commercial expired’ s until you get two appointments for tomorrow.

Expired listings are gold. The owner is frustrated, maybe the agent was not trained in commercial and the property was not marketed properly, time for a change.

10. Join and attend monthly commercial organization’s meetings.

Meet and add other commercial agents to your distribution list; be added to their lists. Great for those new in the business, “pick the brains” of the experienced agents.

These resolutions need to be part of your daily prospecting, which is required for success in our business.

Consider two more resolutions to be the best at what you do.

11. Expand your skills – take educational courses; earn a Certification or Designation.

There is a lot to learn in this ever changing business, stay current and expand your knowledge and services offered.

12. Read business and motivational books.

Knowledge is power. You need to be a “10” every time you make a presentation or meet someone new. Do what it takes to be there.

          Now get out there and make it a great year!

Options

The word “option” is used in several different contexts in commercial real estate.

Option to Extend or Renew

A lease may be written for a specific term and have an option for the tenant to extend the lease term for an additional period, or periods of time (i.e. the term of the lease is five years with a five year options to renew). If the tenant does not exercise the option to extend the lease, the lease ends at the end of the initial term. The rent may be pre-defined for any option period, or determined by a formula, or negotiated at the time each option is exercised. Another method for calculating option rents is a “dual appraisal”. This takes into consideration current market conditions and values. The landlord and the tenant each obtain an appraisal of rental value and use this information to negotiate the future rents.

Option to Expand

A tenant may expect their business to grow and think they may need more space in the future. Rather then move they may look to take more space in the building they are in. At the time they are negotiating their lease they may ask the landlord for an Option to Expand or a First Opportunity Clause. Meaning, if more space becomes available in the building in the future, this tenant will be given the opportunity to rent that additional space, before it is marketed.

Option to Buy

In a lease a tenant may have an “Option to Buy” the property. This is usually for a specific time period and may be for a pre-determined price. If a longer period of time is given to exercise the option to buy a dual appraisal method could be used to determine the sale price at that time.Another form of an option to buy is known as a Right of First Refusal (ROFR). In this case if the owner decides to sell the property, a tenant with a Right of First Refusal would have the opportunity to match a purchase offer from a third party and buy the property. You did not bring the buyer and seller together and would not be entitled to a commission.

 In the case of a Right of First Refusal, your listing agreement must state that if an existing tenant in the building exercises their ROFR and buys the property, as a result of the offer you presented, you are entitled to a full commission. You must also disclose to your customers and other Brokers, if you are co-broking, that someone has a Right of First Refusal to buy the property.

Option to Purchase

When a property is on the market for sale a potential buyer may obtain a Purchase or Sale Option from the owner. Effectively the buyer is purchasing the right to buy the property within a specific period of time. The owner is being compensated for taking the property off the market and not selling it to anyone else during this time period.

For example, a sales option could be used when a property is desired for a use that will require a change of zoning. In some areas the procedure could take a long time. An owner may not want to sell their property “subject to” zoning approval and wait to close. A Purchase Option would compensate the seller for taking the property off the market and give the buyer time to obtain their approvals. The monies paid for the sales option are fully earned by the owner. At the end of the option period the buyer must close on the property or the agreement to purchase ends. Frequently if the buyer goes forward with the purchase the monies paid for the purchase option will be credited towards the sale price.

Brokers must be careful that their listing agreements cover all these possibilities and indicate what commission would be due if any of these options are exercised.

Assumption Agreements

Often a lease will have an option for renewal by the tenant. If the option is exercised the Broker is usually entitled to an additional commission. But what happens if the building is sold before the option becomes due? Is the new owner responsible to pay the Brokers commission? The answer is no unless the listing agreement or lease addresses the issue.

The original listing agreement (contract) is between the original owner and the Broker. Upon sale of the building (title passing) that relationship ends. The Broker has no agreement (contract) with the new owner. The new owner has no obligation to pay a commission to the Broker. This may also apply to a 1031 Exchange or Assignment of a Lease.

Listing agreements should contain a clause to address this contingency. Typically, the clause directs the building owner, if they decide to sell the property, to have the buyer sign an Assumption Agreement (in recordable form). In so doing the new owner accepts the liability for future Broker’s commissions that may become due if a tenant exercises their option to extend the lease.

Without such a clause in your listing agreement an option commission could be lost upon the sale of the building. In a large building many tenants may have an option to extend or renew their leases; different Brokers may be eligible for future commissions. With Assumption Agreements the buyer is taking on the responsibility to pay these future commissions if those options are exercised. The amount of money involved could be significant and require price adjustments in closing the transaction.

From a marketing point of view, this sale should not come as a surprise. Once you place a tenant in a building you should communicate regularly with the tenant and the owner to develop future opportunities.

 Even though a tenant is in a lease, their business could require more or less space before the lease term ends. Consistent communication would allow the Broker to become aware of the problem and solve it. Find and lease larger/smaller quarters while sub-leasing the current space to another tenant.

Constant communication with the landlord can lead to an inside track as to when other tenants may be leaving the building creating available space you can rent. This constant communication with the landlord could also lead you to having the opportunity to sell the building!

Are QR Codes Coming Back?

In 2010 I wrote the following article. Use of QR codes were active then but seemed to fade away a few years later. The Covid-19 pandemic has seen a resurgence in the use of these “quick response” data icons. Medical and testing facilities are making appointments then sending QR codes to confirm. When they arrive at the facility they simply scan in the code for contactless registration.

Vaccinated residents of Massachusetts are now able to get a digital record of their covid-19 vaccine history including a scannable QR code, that can be stored on their smartphone and presented to businesses requiring immunizations for entry.

QR Codes in Commercial Real Estate

QR codes have been around for quite a while, originally created in 1994 and used to track parts in vehicle manufacturing; today they are finding new applications in the marketing of many products. QR Codes are matrix barcodes (two-dimensional codes) that can be read by a QR scanner. Our mobile technology now allows a smart phone or a mobile phone with camera to add a QR scanner program and read the QR code (symbol shown).

A QR Code is simply a bridge to a website that when scanned with a mobile device takes the consumer directly to that website. This QR codes takes you to my website, www.CommercialEd.com.

You will be seeing these codes on commercial signs in the future. Think of the possibilities for commercial real estate. The buyer or tenant is driving around and sees your sign—they immediately want more information. Scanning the QR on your sign takes them to a web site created specifically for that property, or a link to a full presentation of marketing materials for that building, or a video journey through the building. The link could also be to the agent’s personnel web site, a company web site, other listings or just about any URL imaginable.

One of the technical things that need to be considered is whatever web page or site the customer is directed to must be optimized for viewing on a mobile device.  

The application is not just for signs; a QR code can be placed on flyers to immediately bring more information to the consumer about that property or the agent. They can be used as an enhancement on listing presentation materials taking the customer to the agents’ other listings.  Some agents are even putting the QR symbol on their cars!

To work with QR’s you need a program to create your QR link and you will need a QR reader application for your mobile device. Just “Google” or otherwise search the internet on your computer and you will find a number of sites to help create your QR symbols and readers. There are a number of sites that provide this service without charge. I have used www.scanlife.com myself. Many people now know of the barcode system but for the benefit of those who don’t, add some small text indicating a QR reader is required and suggest a site where they can find it.

As mentioned earlier a great application is to have the QR take the customer to a video of the property or the agent introducing themselves and their services. Use a QR on your business card and bring the customer to your promotional video. Now, that’s a powerful business card!

Today many cell phones come with built in QR code readers, no apps required. Now “Dynamic QR” codes are editable and trackable. A free QR code generator from Beaconstac’s even supports multi-lingual QR codes. This QR code when scanned converts to the language the user’s smartphone is set to, displaying the message content in the language the user prefers.

A major advantage for use in real estate is speed. The consumer scans the QR code and instantaneously can view a property brochure or video 24/7.

We see these QR codes more and more. They are being used on CT Lottery tickets, restaurants are using them to order food and even pay the bills. Toco Bell and Berger King have introduced them into their ordering systems. Just received my phone and credit card bills with a QR codes now on the envelopes and last night on the CBS news they posted a QR code on the TV to get more information about a topic!

I teach at Westchester Community Collage who now requires that anyone going onto the campus must be vaccinated. My vaccination ID card has a QR code on the back for verification purposes.

Considering that many of our future real estate consumers are Millennial or iGen aged, and they “live” on their smartphone. It may be time to start integrating QR codes back into our real estate marketing.

Retail Downs and Ups

Retail stores in the US saw 2021 Black Friday traffic decrease by more than 28% compared to the pre-pandemic period, in a report from Sensormatic Solutions. It says American consumers are increasingly turning towards digital channels for shopping for various reasons, all linked to the Covid-19 pandemic. These include shut-down stores, fears of catching the new omicron variant, or supply chain disturbances that result in half-empty shelves and late arrivals. 

Covid-19’s disruption of the supply chain is really being felt this year, Adobe further suggested, finding that out-of-stock messages on retail websites spiked 124% compared to two years ago. It’s mostly appliances, electronics, housekeeping supplies, and home and garden items, that are out of stock.

CVS to close 10% of its stores

Another retail shocker was announced on Nov. 18, 2021, CVS Health Corp. said it would be closing about 300 stores, Reuters first reported. But that's just the first phase. The pharmacy chain has plans to close about 300 stores every year for the next three years, resulting in roughly 900 store closures by the end of 2024. The store closures will begin in the Spring of 2022, according to CNBC.

Brick and Mortar

Diane Wehrle, marketing and insights director at Springboard was a speaker at the December 2021 ICSC national conference in Las Vegas. In an interview with GlobeSt.com she indicated that the closure of retails stores, due to the pandemic, led to an increased retail spending online. However, “the majority of retail spending continues to remain in store,” she explains. “The fact that even a global pandemic has not significantly dented the extent to which consumers shop in stores demonstrates the continuing importance of in-store retailing and reinforces its long-term future.”

“The importance of brick and mortar retailing to shoppers is reinforced by the fact that over half of those consumers who are now working from home have not changed their shopping habits from before Covid (Springboard US Retail Consumer Survey), which demonstrates why a number of pure online retailers are currently investing in brick and mortar stores that will trade alongside their digital offering.”

Overall, she says that while the impact of Covid is likely to be felt for an extended period of time, the basic human desire for person-to-person interaction and sensory stimulus that sit at the heart of in-store shopping will ensure its longevity and ensure that brick and mortar retailing will outlast this global pandemic.

Globe St. also interviewed Hillary Steinberg, senior advisor of MDL Group/CORFAC International, at the ICSC, who echoed similar thoughts.

“We see retail soaring by as much as 13.5% over 2020,” she explains. “People want to get out of their homes and go shopping, they want to see items in person and they want to eat at restaurants while they make their purchases.”

She notes that people are seeing items advertised specifically to their interests on Instagram, Facebook and YouTube, and then are heading to the shopping center for instant shopping gratification. In addition, she says that “New, unique and specialized retailers and restauranteurs are opening with the mindset that they want to own their own store rather than work for someone else.”

"We have some of the best chain restaurants and then some very unique restaurants that you won't find anywhere else, that's kind of what we want to be."

They are also revamping their food court choices of fast-food eateries to provide a variety of food types and price points for everyone.

The 130 store Stamford Town Center Mall in Connecticut is also expanding its “Restaurant Plaza”. Currently occupied by Pieology, Peter Chang and the Capital Grill, they will soon be adding a Brazilian steakhouse Terra Gaucha and the Mexican restaurant Puerto Vallarta. They also continue to provide various fast-food restaurants throughout their mall.

Shopping center owners are preparing for post-pandemic shoppers, focusing on dining choices beyond the food court plus more “pub” type eateries. Some vacant spaces are being filled with entertainment type businesses like bowling alleys, movie theaters and even fitness centers.

To draw consumers back into their shopping centers owners are creating a
 “shopping-recreational experience”.

Post Pandemic Leases

The Covid-19 pandemic has had and continues to have a profound effect on both Landlords and Tenants; it will change lease terms for the future.

Traditionally it was best for tenants to have a relatively long lease, five years or more and/or renewal options. If business was going well remaining in the same location was preferred unless they needed to move due to growth. Landlords too like longer leases as vacancies disrupt their cash flows and cause additional marketing expenses. But currently the trend is for shorter lease terms and multiple renewal options, tenants and new businesses are unsure of the future. When will this pandemic really end or will there be another resurgence? A two-year lease and three one-year options may be requested by tenants also concerned about product and materials availability and sales activity. Landlords will reluctantly go along with the shorter terms rather than have the space vacant.

Tenants are seeking an “exit plan” for any future events that prevent their business from operating as usual. Many leases do not have Sub-lease and Assignment clauses. Tenants need these clauses in their leases which would allow them to sub-lease all or part of their space or assign the lease to another tenant. Tenants, especially in the office category, may be looking to shrink their footprint as a result of a portion of their workforce working from home full or part time. They would want the lease to allow them to “giveback” to the landlord that unused space. Landlords may not want to do that due to concern about finding another tenant. A solution for these situations would be if the tenant would take responsibility for finding a replacement tenant themselves. Thus, giving the tenants exit options and the landlord not having any period of vacancy.

Both landlords and tenants were unprepared for Covid-19 repercussions of government mandated shutting down of businesses. The business closures affected tenant’s ability to pay rent, and landlord’s ability to pay their mortgages. Although many commercial leases have a “force majeure” or “Act of God” clause, allowing tenants to reduce rent payments or terminate leases in extraordinary circumstances. A pandemic was never contemplated, and the word is not included in the typical definitions of what “force majeure” events are, as a matter of fact “pandemic” has yet to be clearly defined. One of the things changing in new leases will be a clearer definition of “force majeure” events including defining government shutdowns.

In the future sales may be tied to what happens when a “force majeure” event is triggered. If a retail store is closed will the rent be totally abated and if so for how long. If the store is then partially opened what is a fair amount of rent to be a paid to the landlord. For example, a restaurant was initially closed, then it was reopened but only for take-out, doing only 25% of their previous sales. This contingency would need to be defined in the lease, what we may see in retail leases is a shift to “percentage leases” during these periods; tenants paying a percentage of their monthly sales as rent.

We will also see more tenants requesting “Co-Tenancy” provisions in their leases. If an anchor tenant or neighboring stores “go dark” (close) as a result of these “Acts of God” events, the tenants rent would automatically be reduced or be abate or allow for lease termination.

Historically Mall developers seek “anchor” Tenants; major retailers who draw people to their stores though their advertisements and merchandise mix. To entice them to open in their location Landlords offered “sweetheart” leases with very low rents; the Tenants do pay their share of the taxes and Common Area Maintenance charges. Smaller size merchants (inline Tenants) seek to open their business near these anchor stores to get the benefit of the customer traffic; and pay high rent to do so. With one or more anchors and 25 -100+ smaller stores you have a regional shopping center with the largest ones, often enclosed, called Malls.

What happens when these anchor stores like Sears, Macy’s, Kmart, JC Penny, Sports Authority, or even the neighboring stores in a small strip center, “go dark”? Without the traffic to the shopping center the sales in the remaining stores plumet. Co-Tenancy clauses are designed to protect tenants when other stores become vacant but seems to have a new application in the post pandemic era.

Co-Tenancy clauses can take many forms, generally they allow the Tenant, when the other stores go dark, to reduce their rent payment to a predetermined amount or convert their rent obligation to a predetermined percentage of their sales. They may also allow the Tenant to terminate their lease if the anchor or other stores are not rented or reopened within a certain time frame. Now the definitions of the Co-Tenancy clauses are seeking to be applicable and triggered if we have another pandemic or government mandated closures.

Another ramification of the pandemic were mammoth delays in processing permits and zoning applications, and getting inspections and appraisals completed. Most of these workers are back to work now processing this backlog. But construction and buildouts are being hampered by a backlog of materials and supplies. We hear of over 100 cargo ships in California harbors that may not be unloaded until 2022!

Leases are often subject to buildouts (alterations or new construction) being delivered in a timely manner or before the tenant can move in. These delivery issues will now have to be addressed in the leases, whoever is doing the work will request as much time as possible, without penalty when delivery delays are out of their control. A tenant doing their own build out may want the ability to push back the lease commencement date for delays in obtaining materials or permits. Landlords with have the same concerns and issues if they are responsible for construction.

The Changing Fast-Food Industry

The pandemic created a surge in business for the fast-food industry. These companies have learned that consumers are looking for safety and more speed at their locations, plus more convenience with off-site ordering and delivery services.

In October 2020 Burger King introduced its new store prototype featuring a second floor suspended kitchen and dining room over six drive-thru lanes for pickup and delivery. Drive-thru guests have their order delivered from the kitchen via a conveyor belt system, providing a touchless experience.

This new design also reduces the building footprint by 60%, making it ideal for urban cities.

In March 2021 McDonalds announced its expansion plans with a focus on digital, delivery and drive-thru. In 2020 they added delivery to 28,000 of their locations with plans to expand that. During 2021, they are going to open 1,300 new stores worldwide, with 500 of the locations in the United States, and will modernize 1,200 existing locations.

McDonalds is significantly shrinking the size of their stores by eliminating indoor dining, thus allowing for additional drive-thru lanes.

Two more giants in the fast-food industry have just announced their plans.

Taco Bells newly designed buildings are called “Taco Bell Defy”, the company says they will “defy norms and define the future.”

These stores will feature four drive-thru lanes, three for mobile delivery  order pick up and one traditional order style drive through lane. The second floor kitchen will deliver the food through a contactless lift system. Mobile customers will scan orders using QR Codes. There will be video and audio communication available with staff.

Wendy’s hamburger chain intends to open1,200 new locations by 2025; 700 in the United States; with 50 open by the end of 2021. However, 30% of these will not be their traditional brick and mortar restaurants, rather, these will be “ghost kitchens” delivery only!
 

As an experiment they have opened eight of these units in Canada; the positive results have them using this as one of their future models. These “pod” like units can be set up in parking lots and can reach desired markets without paying exorbitant rent.  A spokesperson from Wendy’s noted, "…we want to bring Wendy’s to people through the convenience of delivery, and we think these dark kitchens can help us do that."

The Office Market Challenges

There is tremendous speculation within the industry as to what future office space will look like and how it will be used.

Probably the biggest challenge is what will become of the “work-at-home” concept. At the height of the Covid-19 pandemic, Co-Star reported the 62% of American employees were working from home. Some workers liked the flexibility, but other found it difficult especially parents who also had to home school their children at the same time.

Another factor is the commute or lack thereof. The Urban Land Institute did a study which showed an average of 227 hours a year saved by not having to commute. In addition to the time saved, there were cost savings; health and exposer concerns by those who take mass transit and the reduction of vehicular traffic, which was a plus for the environment.

Our younger generations, many living in small or shared apartments or at home with parents are eager to get back to working in the office building environment. According to Emerging Trends in Real Estate the office atmosphere offers more opportunities for collaboration, learning and making business and social connections.

A survey by Deloitte found that 68% of employers plan to implement some type of hybrid workplace model this year. With a consensus leaning to working-at-home two days a week and staff rotation in the office the other days. This also adds to the overall concept of social distancing by reducing the daily number of employees in the space.  

As we start looking at the physical office design the primary concern is indoor air quality, ventilation, and filtration. This cost burden will fall on the building owners, but employers are concerned for the health and safety of their workers. This may mean upgrading HVAC systems, putting higher caliber filters in place, or even building redesigns to include operating windows.

The pandemic put new focus on virtually technology, this will continue to a permanent part of new business models. According to a report by JLL, offices will need more conference rooms or the smaller version “huddle rooms” to provide multiple areas for video conferencing or presentations. They also see more office plans with bench style seating to enhance collaboration, fewer enclosed private offices, open workstations available on an as needed basis, no more assigned desks. Other permanent post -pandemic designs will include hand-sanitizing stations, touchless technology, and other social distancing measures.

A Cushman and Wakefield report points out the key word is workplace flexibility. Companies are still trying to figure out what to do with the remaining uncertainty about the virus and the work-at-home population.

Some companies headquartered in cities are considering hub-and-spoke models by opening satellite offices in the suburbs where their workers live. This would shorten their commute and, in many cases, eliminate concerns for taking mass transit. The number of employees working in these “outposts” would also be reduced aiding future social distancing workplace designs.

Will office vacancies continue to increase? According to Co-Star report as of the Second Quarter 2021, Nationally office vacancy had exceeded 12%, up 2% over the same time in 2020. No one really has all the answers yet; let us hope that this pandemic finally gets controlled.

Another challenge for office employers is a shortage of labor and the increase in “job-hopping”. They are focused on attracting new hires and retaining talented employees. The office designs need to cater what workers want today and offer other building amenities.

Employees want to be energized and connected thru shared meeting spaces and flexible open spaces. They want to be able to engage with others and at the same time feel safe and comfortable in the office environment. Today’s employee, after a year of working at home, needs to retain some of that freedom; to get outside of the “box”. Perhaps a roof top lounge might give them the break they need. Or that flexible work schedule with two days still work-at-home.

Employers have many challenges, and it will take time to sort out what the new normal will be; and it will not be the same for every company. Hence the “job-hopping” is expected to continue for some time.

Back to Basics – Overcoming Objections

Objections are often statement’s not questions. A statement does not require an answer. Agents often over-react to a statement by a buyer or tenant. They may just be thinking out loud or considering qualifying issues. Showing them a building, the buyer may say “not sure this is big enough.” Or “that’s a lot of money for this space”. Neither is a question they will sort it out for themselves. With some work-at-home rotations we can fit here. This location should be worth the price.

With these types of objection’s, it is best to ignore their comments, but not them, acknowledge the comment, “I heard you” but do not respond to the statement. 80% of these objections will be solved by the client and go away. Caution: answering an objection may create a defensive or confrontational reaction.

A true objection is something that is preventing a listing from being signed or a sale/lease from happening. In the later context it is a buying sign; there would be no objection if there was no interest.

Real Objections

There are two common objections we get every time we try to list a property. Price, owners think their property is worth more than market value. Commissions, they think we get paid too much!

Value Objections

When the owner says, “Are you kidding my property is worth $1,000,000,000,000.95!” Is that a perception issue? Is it really priced too high?

This objection to value is overcome by education and facts and should be handled in the listing presentation itself. To prepare you need to update your “comparables” daily. Because there are fewer commercial transactions than residential we need to look to both closed sales and leases and also what is currently on the market (competition) for our “comparables”. Create your own comparable files by checking the commercial listing services for new listings, reading the news and trade papers for news of closings. When you read of done deals call the agent and congratulate them and ask for the final closing prices.

Prepare to justify your suggestion of market value in your listing presentation. Find 3 or 4 similar type properties in your comparables, different size buildings are OK. Divide the building price by the square footage to determine the price per square foot. Show the client the math for each building and what the average sales price per square foot is for your area. Multiply the average price per square foot by the square footage of their building as the basis for your value assessment.

When the owner says, “My building is worth $_________.” Challenge them by saying,” The comparables I just showed you don’t seem to justify your asking price. Perhaps I don’t understand something. Why are our numbers so far apart?

Sometimes owners say, “Another broker told me my building was worth $________.” Answer with, “Why do you think an agent would tell you your building is worth more than these comparables show?”

“Maybe they are trying to get me to give them the listing.” “What’s your opinion of an agent who would inflate your buildings value just to get the listing?”

Priced right sells or leases. Overpriced properties waste your time, and you make no money. Are you prepared to walk away? Do I want you as a client? If the owners asking price is up to 15% or 20% over market, I may take the listing with a “hook”, but any higher over market I walk.

“I am certainly willing to try to sell/lease your building/space at that price. But I want you to agree that you will be willing to reconsider the price if the property/rental unit doesn’t sell/lease in 30 days.”

Better, “Frankly, I have to make a decision if I want to invest my time and resources into marketing your property. Would you consider reducing your price to $_____ if we do not get any activity within the first 30 days at your price?” Then write in your listing agreement, on __date__, listing price is reduced to $_________. Have owner sign so the reduction becomes automatic.

You can use these same techniques for lease, be sure when comparing numbers you have the total cost per foot including base rent and all additional rent pass throughs.

Investment Properties are compared using the Capitalization Rate (CAP Rate) of the properties. A Cap Rate is determined by the formula: Net Operating Income (NOI) divided by the Value (price) equals the CAP Rate which equates to the Return on Investment (ROI), Prepare by finding and determining the CAP/ROI on 3, 4 or more of your investment comparables. Remember as the price goes up the return goes down.

Ask the owner, “If you were buying investment property today what would be the minimum acceptable ROI to you?” They may say, “6.5% - 7%”. Then do the math using the NOI and their asking price to see what return they are offering to a buyer. “At the price you are asking your only offing a 3% return!” Educate – show them the math.

Also explain, ‘A lower return on the invest will require a higher down payment to finance. The higher the down payment required the fewer potential buyers.”

Commission Objections

            Now let’s look at overcoming commission objections. This too should be addressed in your listing presentation. You need to show the client what you can do for them, that they cannot do for themselves, itemize the skills you bring to the transaction. Also create a detailed list of how you are going to market their property or space. Show them examples of marketing pieces and how their property will look on the websites you use.

            It is human nature to try to get a good deal. Often people ask will you to reduce your fee or cut your commission just as a matter of course. Sometimes a simple “no” will suffice. Learn to say no, nicely, “no, any other questions?”

Understand if you agree to lower your commission, what message is being delivered about your negotiation skills. The client may feel you may not fight to get them the price they want, and they may not higher you. Stick to whatever commission rate you asked for, never lower your fee to get the listing.

They ask, “Would you reduce your commission?” Reply with a “chuckle”, “Is this a test to see how I negotiate? I won’t lower my commission and I will get you the price you want for your building.”

Challenge the owner with a question when they ask “Would you reduce your fee?” “How do you react when your customers ask you to reduce your prices (fees)?”

          Commission challenge response, “I’m glad you brought up commissions, I did make a mistake, our company just raised our sales fee to X%. But since I did make a mistake, I will honor your listing agreement at Y% that I quoted you.

Understanding the math, clients have a perception that reducing your commission by 1% or 2% is not a lot of money. Before we look at an example, remember all commission rates are negotiable, the numbers used here are only for illustration. Calculate your commission dollars based upon your commission rate and suggested price, then recalculate based on 1% less and 2% less commission, see how much money you would be losing if you lower your fee. You will find the reduction in percentage terms can be 14% to 35% of your hard earned money.

Say to the client, “I know 1% does not sound like much but do you realize you are really asking me to reduce my fee by ___15%___ ?” Or. “I know 1% does not sound like much, but you are really asking me to reduce my commission by ___$5,000. ___.”

 When they tell you, “The other agent said they would reduce their fee.” Reply, “I can appreciate that… can I tell you why that makes me nervous? If other agents do not have the courage… to stand up to you… regarding their own worth… how strong could they be… defending you… and the price we set on your property…    [name], I have that courage… do you feel I can sell/lease your property?  (yes) Terrific!  All we need to do is…simply… sign this agreement… so I can help you get what you want… in the time you want… won’t that be great?”

Another way to response, is to ignore their statement and respond with, “I am an awesome negotiator. Once I list your property, I will treat it as if it were my own. I will not give away one dollar of your equity… you may choose to, but I won’t.” Understand there may not be another agent, this may be a test of your negotiating skills.

Referring to your commission the client says, “That sure is a lot of money!” Answer, “Do you realize on a typical commercial transaction I only receive a quarter of the commission. There may be another agent involved, my broker gets half, and then I still have to deduct my expenses and pay taxes.  Taxes! Out of that I pay 24% income tax plus 15.3% self-employment tax and good old State tax. I’m sorry, but I just realized I have to increase my commission fee.”

“Your commission is too high.” “You want to receive the maximum dollars possible for your building. I am known as a tough negotiator and I will negotiate a top dollar deal for you, but I don’t negotiate my commission.”

There is a time and place to use some of these replies but what will really convince the client to pay you your worth is in your listing presentation. Given an objection to your fee, you may want to review your marketing plan and the skills you bring to the transaction again with the client.

Back to Basics:

Developing Your Commercial Referral Business

Want to increase your opportunities for commissions, build your referral business?

A consistent program is the key to success. Begin with a “sphere of influence” list, literally everyone you know. Prepare a brief letter announcing or reminding people on the list that you are in the commercial and investment real estate brokerage business. Add a few comments about your company and then ask for a referral. “Is there anyone you know whom I might be able to help?” You know these people, so end your letter with a handwritten PS. Something personal you know about them. How’s the kids? Been out on your boat yet? See you at the next Kiwanis meeting.

Send out 5 letters a day, then a week later follow up by calling those people. “Did you get my letter? Have you thought of anyone I may be of service to?”

Before you hang up ask for their e-mall address telling them you will be sending out a monthly newsletter of Community News. A simple email that will cost you nothing but a little time. Include real estate news; Did you know that Sneaker Circus is opening on Main Street? The vacant store on 2^nd Avenue is going to be a new Bakery. Also community events, Will I see you at the Memorial Day Parade? Etc. Close every Newsletter with a PS. “Did you think of anyone I may be of assistance too.”

The key is redundancy, send your newsletter out on the same date each month, people will look forward to receiving it.  Think about the growth of your referral network adding 5 people a day, 25 contacts a week, adding 100 sources of referrals a month, for basically a half hours work each day, 10 minutes to print 5 letters and 20 minutes for follow up calls to those you mailed to last week.

Do you know any residential real estate agents? Most of their customers work and their businesses may need your services. Create relationships with as many residential firms and agents as you can. Ask them to introduce you to their customers after the house sale closes. Advise them that if you are successful in servicing their commercial real estate needs you will pay them a referral fee. Stay regularly in touch with your new client, after your initial introduction and keep the referring agent in the loop too. Business requirements are constantly changing, maybe they do not need your services this year but next year they will. Also add them to your newsletter distribution list too.

Building a referral business is creating opportunities for future brokerage. You learn a customer’s lease is expiring in four years. Record this fact in your calendar program but also talk to the customer every six months or sooner to see how their business is doing. The lease may run for four more years but the customer’s business needs may require a move sooner or maybe now they are ready to buy a building for their business.  Good record keeping is essential. Communicate regularly to develop your relationship with your new customer.

Make sure the people you do business with do business with you. Does your Dry Cleaner, Hair Dresser, Barber, Deli, Insurance Agent, Doctor etc. know what you do for a living? Next time you give them your business, also give them some of your business cards and ask for referrals.

Join or create a lead generation group. Bring together 10 people each representing a different business related to real estate moves. For example, meet regularly with an attorney, accountant, banker or mortgage company, a representative of a moving company, office supply firm, an engineer or an appraiser. Meet monthly to exchange information (leads) about companies planning expansion or moves. Each person is required to bring two leads to each meeting; have rules if someone does not bring any leads to two meeting they are out of the group. Replace them with someone else from that industry. An early breakfast meeting at a diner is ideal but for now you can do it via a zoom meeting. This referral network will eventually benefit everyone in the group.

Many of us market our properties via e-mail and social media. Consider adding a line to your transmissions, “Do you know of anyone who may be interested in this property?” Ask your customers for referrals. On all your e-mails consider adding to your signature, “Please let me know of anyone you think I could be of service to at this time. Thanks.”

Basically, every correspondence should end by asking for referrals. Every conversation should end with “… is there anyone you can think of that I could be of service too?”

Referral opportunities are all around us. Work your referral business every day. It’s simple, just ask for the referral.

Are you in compliance?

Having taught thousands of students, I frequently get to see their business cards and am impressed by their titles; Director, Vice-President, Managing Partner, etc.

Recently, I have been adding Ethics training to some of my courses, using the NAR Code of Ethics as reference. I found the following under Article 12:

“Realtors® shall be honest and truthful in their real estate communications and shall present a true picture in their advertising, marketing and other representations…Making sure their status as a real estate professional is readily apparent…”

Even though this refers to Realtors®, we are talking Ethics, which applies to all Real Estate agents everywhere.

Under Standards of Practice 12 -13 it further states:
“The obligation to present a true picture in advertising, marketing, and representations allows REALTORS® to use and display only professional designations, certifications, and other credentials to which they are legitimately entitled.”

I got to thinking about these titles I frequently see. They are technically for corporate officers of a firm. Could all these agents be owners or officers of real estate firms?

Doing some research. I found many real estate agents are granted titles by their brokerage firm. Examples include President, Executive Vice President, Senior Vice President, Vice President, Managing Director, Director, Partner etc. The idea is to enhance an individual’s stature as an effective salesperson. This is misrepresentation and would be an ethics violation.

A title of “Vice-President or Director of Retail Services” could be interpreted by a consumer that this person has extensive experience in leasing and the sale of retail properties. In fact, they may be a relatively new agent who is only an Independent Contractor with the brokerage firm. This could also create liability for both the agent and the Broker.

In New York the Department of State issued an opinion indicating that granting titles to gain marketing advantages was a false and misleading use of the titles and a violation of Article 12A of the License Law. The only titles allowed in NY are Licensed Real Estate Salesperson, Licensed Associate Broker and Licensed Real Estate Broker.

NY Real Property Law, Section 441-c, allows the Department of State to revoke, suspend, fine or reprimand a real estate broker or salesperson if that licensee is found to have: Violated any provision of Article 12-A of the Real Property Law.

In our profession our reputation is everything, we must be ethical and do the right thing. Are you and your firm in compliance? If you have inadvertently been using an inappropriate title now is the time to correct it.

Pandemic Marketing – Back to Basics

As a result of the covid-19 virus there are many opportunities for commercial real estate agents to help struggling businesses and themselves. Businesses may be looking to downsize by moving or by sub-leasing some of their space if stuck in a lease. Some maybe facing closure and are looking for a replacement tenant for themselves to entice the landlord to release them from their lease obligations. How do we find out, we talk to them, the old fashion way, face to face. Visit businesses in town, using social distancing and wearing masks. See if you can be of assistance to them.

Note: New York State still has a ban on “Cold Calling” but that is specific to phone calls.

This in person “Cold Calling” is a business building activity we should have been doing before the pandemic arrived. Basic marketing “101” tells us to spend some time each day prospecting business for the future. One technique is to systemically go door to door introducing yourself to all tenants and building owners in town. Visiting a minimum of just two business a day, that’s 10 a week, 40 a month, new prospects. Meeting current tenants and owners now may be timely to help them, and it helps develop your presence in the community as "the commercial go to person".

Now that you have made initial contact you want to stay in touch. If you meet a business owner who is a tenant determine when their lease is up. To catalog this valuable information you can buy all sorts of software programs or you can simply use the “word” and calendar programs found on most computers.

You determined their lease is up in 2 years; enter in your calendar program to follow up on this 6 months prior to the lease expiration. However, you also want to regularly stay in touch, so enter a follow up visit date in 3-4 months; these subsequent visits continue to develop your relationship with the potential client. With each visit end by asking for a referral "is there anyone else you know, that I may be able to help?"

If when their lease expires they decide to stay in their location, consider them a source of referrals or a potential buyer (more on that in a moment) until they need to move.

Just because someone signs a 5 or 10 year lease does not mean they will stay there the entire time. Business is booming and they need more space, thing are slow they need less space. We can help them find new space and possibly sub-lease the space they are in. (and get paid for it!). By repeat visits if they need to make a move, you are top of mind and you get the call.

Each time you catalog a building set up a simple “word document” about the potential client you just met. Include whatever information you have gathered, name, address, owner or tenant, type of business, how much space they occupy, when they expect to move and lease expirations. Include any personal information they shared with you about their family, etc. You learn they are going on vacation next month. Keep this chronological record of activity for each call or visit. Before you talk to them again consult your log. You may want to begin your conversation with a question like, “How was your vacation? This type of personalization develops relationships.

In your initial visit you learned they lease 2,500 SF of retail space. Set up files in your computer by size: for example, retail tenants leasing 1,000 – 2,000 SF, 2.000 - 3,000 SF, etc. When you list an retail building for sale in the area a bit larger, say 4,000 SF email the opportunity, to all your retail tenants leasing space less than that, they may be ready to buy! Do the same thing for office and industrial tenants.

Don’t forget about building owners; in prospecting you meet the building owner, they may have their business in this building or not; either way they are an investor. Your investor files can be cataloged by size, price category or both. Get those new investment listings out to these buyers.

Taking the extra time to really catalog all you learn, leads to future business.

Situation Critical

Time is running out for the Hospitality and the Airline industries. The Covid-19 Pandemic has devastated those industries. Nationally, according to the American Hotel and Lodging Association, as of November, 2020, 57,180 hotels in the U. S. have closed and they predict that unless the industry receives Federal assistance another 71% of remaining hotels will not be able to survive another 6 months. Jobs lost in the Hospitality industry total 1,918,827 and that number could double if more hotels are forced to close. The tax revenue lost to the States and Local governments has reached over $16.8 billion dollars.

Most major cities throughout the country have been exceptionally hard hit with covid-19 and the subsequent restrictions. Tourism is practically non-existent as is business travel both contributing to empty hotel rooms. In New York City the following hotels have permanently closed: Hilton Times Square, two Courtyard by Marriott’s Herald Square and Fifth Avenue, Omni Berkshire Place, Blakely, Maxwell, New York Marriott, W, New York Downtown and the Excelsior hotel. Also closing is the Roosevelt Hotel, a city landmark that has been open almost 100 years, built in 1924, named for President Teddy Roosevelt

In a report on the Hotel industry by Price Waterhouse Cooper they interviewed Vijay Dandapani, President of Hotel Association of NY, representing 300 hotels in NYC. He indicated that in the summer of 2020 only 7% of the city’s 120,000 hotel rooms were filled. In 2019 occupancy was 80%. As of September 58%, of all rooms were still closed, a hotel is losing money with only 40% occupancy. Hotel Revenues have declined 81.6% over 2019.

The vast majority of hotels in the city cannot pay their property tax bills, and to make matters worse NYC is charging hotels 18% interest on overdue property taxes: during this pandemic! Dandapani said, “We are not asking for a tax break or a handout. We are merely asking not to be penalized for late tax payments so that we can keep our doors open and keep workers employed.”

According to a report on CNBC, 34 percent of the hotels in New York City are delinquent on their debts. The report quotes an executive at a leading hospitality investment bank as saying the closures thus far are merely “the tip of the iceberg,” with more likely to follow – especially in the Times Square/Midtown area.

Dandapani also said: “If half of the city’s 640 hotels survive it would be a great outcome.” CBRE is calling 2020 the worst year for hotels since the Great Depression.

The real question now is what to do with these closed hotel buildings. In most areas, larger cities have a housing shortage, particularly of affordable housing. Some of the hotel owners and investors are considering converting these buildings to residential use.

That may be easier said than done, with concerns for zoning changes, building codes and costs of conversion. Traditional hotel rooms will likely require extensive renovation to add kitchenettes. Hotels that cater to business travelers may contain a lot of meeting and event space that will have to be redeveloped. Most of the units would probably be studio size but adding a connecting door between two units could make if “family” size.

Converting traditional hotels for senior living could solve some of these problems. Common areas can be used for craft and activity rooms. If the operator is offering assisted living, room sizes can remain small and meal service can remain centralized.

The best opportunity for conversions are extended stay hotels and motels. They have the advantage of already having a bedroom, bathroom, living space and a kitchenette, all in the unit. Consequently, they will not require extensive and expensive modification of existing mechanical, electrical, and plumbing systems.

In NY Gov. Cuomo has proposed a five-year plan to incentivize the conversion of commercial buildings and hotels in NYC into residential units. The plan would easy the zoning restrictions on light and air requirements for those conversions. Under the proposal, hotels and offices can go residential if the owner agrees to set aside at least 20 percent of the apartments as affordable housing. Details of the plan have yet to be worked out.

Airlines

In a report from Airlines for America the demand for air travel is depressing. In May of 2020 air travel was down 89%. As of October 2020, over 20% of all aircraft in the U. S. were in storage on the ground. According to the TSA, who counts air passengers on a daily basis, on January 16, 2021 there were 690,438 people flying verse the same day a year ago when 1,781,893 people flew: 61% less passengers this year!

A CNBC report stated the expected losses for the U. S. airline industry for 2020 will top $35 billion. United Air Lines had reported losses last year of $7.1 billion and Delta Air Lines lost $12 billion in 2020. Over 30,000 workers have been laid off because of the reduction in flights. In January 2021 total air passengers were only 45% of 2019 levels.

Airlines for America President Nicholas Calio said, “We’re flying fewer people than we have since the start of the jet age in the 1950’s.” The airline industry is unlikely to financially break even in 2021, and it will take years to recover from the additional covid related debt. They don’t expect to resume pre-covid passenger volume until 2023 or 2024.

Both industries are truly fighting to survive, and both are counting on the federal government for assistance. We do not know what is in the next covid-19 relief bill or when or if it will pass Congress. But we do know with vaccines now being distributed this pandemic will come to an end.

This news about these industries sounds grim but think of the real estate opportunities for developers, investors and Brokers.

Repurposing buildings is a viable alternative for the hotel industry and other commercial buildings but solving the airlines problems is another issue. But if some airports were to eventually close, we in real estate could help with the land redevelopment.

What’s Next

The first deliveries of a Covid-19 vaccine are bringing optimism back to everyone weary of the virus, the lockdowns, and the restrictions. We must all be patient and continue to be safe, wear masks, social distance, frequent hand washing and minimal gatherings with family and friends.

One of the things we expect to see in 2021 are rents dropping in several sectors. As a result, building values would decline and CAP rates would increase. This should, especially with the low interest rates, entice investors to come off the sidelines and start buying again.

Office

The office sector has been dramatically affected by the pandemic. Companies are concluding the work-at-home is reducing their
requirements for space. Some are considering a permanent 3/2/2 work schedule, rotating employees in the office. Work from home three days a week, in office two days and two days off each week. Bill Gates, the founder of Microsoft, has announced that his employees can work from home permanently for at least 50% of their working hours. He also predicts that 30% of “office life” will not exist after the pandemic and a 50% reduction in business travel.

Large Cities are experiencing the highest office vacancy rates in years; Los Angles 15%, Chicago 15.3%, San Francisco 20% and NYC 14.9%. Such large vacancies will certainly drive office rents down.

The Real Estate Board of New York (REBNY) is looking at the office vacancy in NYC optimistically, pushing the idea of converting upwards of 210 million square feet of “less than luxurious” office space to apartments and condos to help deal with the general shortage of housing units, especially affordable housing.

Another problem is getting workers to return to working in their office buildings, concerns for the filter systems in those building and mass commuting exposure issues.Nationally about 25 percent of employees had returned to work as of Nov. 18, 2020 the Wall Street Journal reported, citing data from Kastle Systems, a security firm that monitors access-card swipes in 10 major U.S. cities. While that is up from the low point in April of less than 15 percent, it represents a slight dip from the high point of 27 percent in mid-October, this is due to the current second wave of the virus. The lowest return to work cities are New York City at 15.9% and San Francisco at 13.4%.

The President of the REBNY, James Whelan stated in October 2020 only 10% of NYC office workers have returned to their offices. He also said, “It would probably be fair to say we haven’t hit bottom yet.”

But another more optimistic group JNY Capital and United Hoisting Co. are developing a 425,000 square foot “Green” office building at 38-42 12^th Street in Long Island City. Called “The Oasis” the building will be built to “Passive House Office Standards”. Which were first developed in Germany, passive house specifications require buildings to use ultra-low levels of energy, usually using insulation systems that require less heating and cooling, it will also have solar panels, a green-roof system and a high efficiency mechanical system, among other features. A rendering is below.

“We have created an eco-conscious building that offers a safer and healthier office environment for workers to return to and a benchmark for sustainability and innovation,” said JNY vice president Moshe Pinsky, who added the project is expected to break ground in the first half of 2021.

Retail

The tracking firm, Retail Next said the foot traffic on Black Friday 2020 was down 52% in the North East over 2019. Buyers are still hesitant to return to “normal” in store shopping. Unfortunately, more store closures, especially in Main Street areas, are expected.

But not all the retail news is bad, J.C. Penny’s, who declared bankruptcy in May 2020 as a result of store closings due to the Covid-19, is back in business. Two of their major Landlords, Simon Property Group and Brookfield Property Partners purchased 160 of JCPenney's real estate assets and all of its owned distribution centers.  But the company also plans to permanently close nearly a third of its 846 stores as part of its restructuring, which would leave it with just over 600 locations.

In retail Landlords and Tenants working together to find solutions is today essential. With many stores closing, especially restaurants, the rents will be going down in this sector too.

All of this available inventory is creating opportunities for real estate agents throughout the Country.

Multi Family
In Multi-Family we previously reported a mass exodus from large cities, in New York City there are now over 15,000 unrented apartments. However, according to Douglas Elliman, the average rental price in Manhattan in November was $2,743, a decline of 22%. This and Landlords offering significant incentives on new leases created a surge with over 4,000 residential new leases signed in November 2020. That is an increase of 30% over the same month last year. CoStar reports the San Francisco residential rents have fallen by over 20% since March. In addition, Nationally Multi-Family rent collection was down 24% in December 2020 per a Globe Street report. All indications are residential rents, especially in the larger cities, will decrease in 2021.

Covit-19 Continuing Updates

Social Distancing has made our business more difficult and challenging. The effects of the pandemic are being felt throughout our Commercial Real Estate industry.

On November 18, 2020 I gave a webinar for the long Island Board of Realtors, “Non-Essential Challenges” The Impact of the Covet-19 Pandemic on Commercial Real Estate. Even though it focused on Long Island and New York City properties, most of what is happening there is also occurring throughout the North East. Below is a link to the 50-minute report. Followed by some of the key findings and some additional updates.

https://youtu.be/QT7rLbFj1Yk

Office 50% Occupancy

Work from home full or part time – some like it, some hate it, but it is here to stay.

Moody’s Analytics has predicted office vacancies in 2021 could reach 20%. Projections are 15-20% of the office workforce will permanently work from home or a company will rotate who is in the office by having employees only come into the building only 1 or 2 days a week. Cushman and Wakefield are predicting a loss of 145 million square feet of office space nationally in 2021. This type of vacancy level creates competition that reduces rents. reduced rental income lowers building values.

Mark Zuckerberg said as many as 50% of Facebook (FB) employees could be working remotely within the next five to 10 years.

With 50% occupancy less space is required, due to less employees in the space at any given time, but this Is currently offset because of more space being required for social distancing.However, some businesses are consolidating locations, and some are closing so we are seeing an increase in vacancy.

Tenants with short term leases are in a good negotiating position because landlords are afraid of vacancy. They may be able to get rent reductions or deferrals now. And negotiate to rent less space in the future with further rent reductions, in exchange for renewing their lease.

People want to socialize!  After the vaccinees are distributed and health situations are under control the social distancing may become relaxed in our office buildings. With the work at home still in play this will create more excess space. Sub-leasing their surplus space or moving to downsize will be options; either way expect more office vacancy.

Office Subleasing Explodes

There is a new report out by Colliers International focusing on the Office sub-leasing markets. Nationally Class-A asking rents in Central Business Districts are down by 2.7%, and sublease space is currently leasing at an average 23.9% discount compared to direct lease space. This is above historical discounts for sublease space which has been around 20% below market rate. 

Jonathan Adelsberg, a partner and chair of the leasing department at law firm Herrick Feinstein LLP, told the New York Time,“Given the plethora of space on the market today, we expect to see discounts greater than that,” he said.

In the second and third quarter, the supply of sublease space increased by 35% to 170 million square feet. In NYC sublease supply reached 3.1 million square feet on the market about 23% of the total availability office space.

On Long Island the LI Business News reported 782,000 SF of office space available for sublease in Q3 2020. This is up by 52% over Q3 2019.

Restaurants Fight to Survive

CBS’s Sunday Morning show gave some frightening new statistics about restaurants. Nationally 1 in 6 restaurants have closed so far: that’s over 100,000 restaurant businesses!

This sector of the industry has seen tremendous turbulence. This is a Nationwide problem.

In NYC for example, a record high 88 percent of restaurants could not pay full October rent, according to the latest survey of more than 400 restaurants, bars and nightlife venues by the New York City Hospitality Alliance. That percentage has gradually increased throughout the pandemic.

Andrew Rigie, executive director of the NYC Hospitality Alliance, said “Going on eight months, more than 24,000 restaurants, bars and clubs citywide that are so critical to New York’s economic and social fabric have been in dire straits,” Of those who could not pay full rent, 30 percent paid nothing at all.

Some restaurants have managed to make new arrangements with their landlords. Forty-one percent have had rent waived, with 68 percent of those seeing half or more of it waived. Thirty-three percent have received deferrals. It is expected that at least 30% of all restaurants in the metropolitan area will permanently close.

The struggling industry is getting creative and NYS City is trying to help. Outdoor dining has been allowed in NYC since the City entered phase 2 in late June. Over 10,700 restaurants have opted-in to the Open Restaurants program. It has proven to be one of the few lifelines for the restaurant industry during this devastating period; because of that,

Mayor Bill de Blasio announced at the end of September that outdoor dining would be made permanent and year-round.  Heat lamps are permitted, as are tents and structures. The NYC building code defines “Outdoor space” as an open-air space designed for the consumption of food and/or beverage, which may have a temporally or fixed cover (e.g. awning or roof) So long as such cover has at least two open sides for airflow. With such outdoor space tables and seats must be at least six feet from any other table, Seat, patron, pedestrian throughfare or corridor…

Another big issue everywhere, especially in cities, are the number of municipal workers who have not returned to work.

With most offices holding at a 50% occupancy level and the large work at home population, all levels of government have slowed down.In a Globe Street report, they tract returning workers in 10 major cities,New York, Washington DC, Chicago, Boston and others, which are averaging only 27.1% of employees returning to work. NYC has the lowest return rate where only 16.9% of City employees have returned to their offices.

So, the process of getting building permits, zoning changes, certificates of occupancy, everything we need for sales and development has slowed down tremendously.

Retail

A prolonged closure due to the Pandemic has forced many small businesses to close. To stay open, negotiating with the landlord about the rent became a necessity. With closures and lease defaults, there is expected to be a lot of retail space to rent. Vacancy is the “kiss of death” for Landlords. It is in their best interest to work things out with existing tenants, even if they must forgo rent for a few months, it may be a better choice than having vacant space. They can add the months the rent that was forgiven for to the end of the lease. Tenants can offer to extend their leases for rent deferment too.Another solution that could help both sides might be to temporally pay a percentage of the store’s monthly gross income in lieu of the rent.

Landlords must also consider; with all this available space it would mean that new tenants will be in a strong position to negotiate favorable terms and lower rent. So, we can expect to see rents decrease. With rent decreases we would expect building values to decline too. However, with interest rates going lower and lower, Landlords who retain their tenants can refinance and lower their debt service costs. 

A report from Jones Lang LaSalle states that the growth of these fulfillment and distribution center will require another billion square feet of industrial space by 2025.

2021 Here We Come

Muhammad Ali famously said: “Don’t count the days, make the days count.” Ali is known for his wit and wisdom, and, as we hit the seven-month mark of the pandemic, this quote has meaning well beyond sports. 

As we get used to the new normal and the pandemic drags on, it is more important than ever to make every day count. We are in the fourth quarter of the year, which means it is time to start thinking about your business plan for 2021. As you plan your strategy to accomplish your next year’s goals always focus on the basics:

Build Relationships

Develop safe ways to connect with your clients, past and new, to continuously strengthen relationships. Set an example by wearing a mask and social distancing.

Be a “value added” agent regularly provide your clients with current information about the market, financing, and more via mail and email. Create a monthly electronic Community Newsletter.

As you build your relationships, your connections will tell their friends and family that you are the one to turn to for anything real estate!

Develop NewOpportunities

Prospect for at least one hour every day, to keep your pipeline of opportunities full. Lead generation must be consistent. Write a personal note to five people from your sphere of influence list each day and follow up the following week with a phone call, chat a bit (you know them) and  ask for referrals, “Do you know of anyone I could help?” Get their email address and add them to you Newsletter distribution list.

Systematically visit two business in town daily, get to know all the tenants and landlords. Catalog their information in your computer and calendar a follow up visit. Periodically stop by some of your past clients, see how their business is doing.

Read the classified ads, call the FSBO’s and make an appointment to see their building or space. Do the same thing with MLS expired listings.

Education Never Ends

The more you know the more professional you appear. Sure, you must take continuing education, but select courses the will teach you something new, consider earning a Certification or Designation. Read the business and trade papers like the New York and New England Real Estate Journals, keep abreast of the transactions in your area and what is going on in our industry. Read books on real estate, finance, negotiating and self-motivation.

Build Your Business and Track the Results

Try something new! Develop as many ways as possible to build your business and most importantly track where every lead you get comes from. Periodically review what is working for you and what is not, until you have 6-8 or more methods that consistently build your business.

Are you regularly doing direct mail using the Post Office’s Carrier Route delivery service, usps.com/business/every-door-direct-mail.htm? Have you established a referral network of agents that only do residential? Are you giving seminars? Do you work the trade shows? Have you started your LEADS group? Are you doing daily telemarketing and cold calls? Are you doing cheap advertising in the form of press releases? Are you keeping your personal website fresh and up to date? Do you review the commercial listing services websites daily for new listings in your area and comparable pricing information? Are you posting all your listings on social media?

Networking

Get active in the organizations that your potential clients are in. Join the local Chamber of Commerce and Service Clubs like Lions, Rotary, Kiwanis, etc. (they are all good). Even if they are temporally meeting virtually.

Many Realtor Boards have Commercial Divisions, get involved. Remember on the commercial side of real estate about 75% of your deals will be a co-broke. You need to make alliances with the commercial agents from other firms in your area; they may have the buyer or tenant for your next listing.

The virus has changed some of the way we do business now, but the basics of annual goal setting and planning continue to be necessities of success.

Focus on Leasing

This is a reprint of an article I did in March 2009 at the height of the Great Recession.

Given the current economy we see a lot of activity in the leasing arena. Business is on the move, some are growing, some are shrinking; leases expire. Landlords are certainly doing all they can to retain or attract new tenants: reducing rents, forgiving escalations, offering concessions. The landlords fear is vacant space, interruption of their cash flow. This gives tenants today an edge in the lease negotiations.

As agents we have to remember it is our job to negotiate all the issues in the lease and almost every issue relates to money in one way or another. We also have to focus on who we are representing and do what is in their best interests.

The leasing process needs to begin with determining the “wish list” of our client. When representing the landlord we need to know the square footage of the available space and the base rent per square foot. But we also need to determine if there is common area in the building that the tenant will be expected to pay for. Are there any “pass through” expenses in addition to the rent, i.e. utilities or CAM charges? Who pays the real estate taxes? How much security will be required? Is signage and parking included? Who pays for repairs? We need to understand the landlord’s position on every detail. We need to get this information when we take the listing.

You don’t want to show the space and have a potential tenant ask a question you cannot answer.

Representing the tenant requires the same information gathering. Remember tenants are not in the real estate business; maybe they do a lease every 5 or 10 years. They need our guidance. Go to their existing operations; help them determine how much space they really need. Observe the number of employees, as this will relate to parking requirements. If office space is desired determine for whom? Analyze how much space a clerical worker uses, look at the size of a manager’s office. How big is the conference room etc.? Helping a retailer determine needs must also include discussion of how goods are delivered to them; will they need a loading dock? Where is their inventory stored (don’t forget that basement space)? Industrial building expansion may just need a building with more ceiling height!

Another set of questions for a tenant concerns their budget. They may just be focused on overall monthly cost. We may have to educate them to “our language” or do the math for them when presenting a building with loss/core factors or pass through expenses. A key question is where do you see your business in 3 years, 5years? The answer can help us place them in a free standing building or a large building with potential for future expansion.

Developing a “wish list” for whoever you are representing is the first step in leasing. Then look at what is most important to your client. Establish priorities for the upcoming building or tenant search and negotiations. Also think creatively.

Helping our client’s starts with communication, it’s a great time to contact landlords and tenants.

Postscript added today:

Many landlords are trying to work creatively with tenants that are in trouble in both the office and retail sectors.

In office sectors landlords are getting requests, especially from tenants with relatively short terms remaining on their lease, for Tenant Improvement Allowances. To provide the tenants with the funds to reconfigure the space to social distancing and safely guidelines. Tenants may also request a rent reduction. Landlords may consider these things to keep the tenant if the tenant will sign a new lease or extend the current one. Concern being in many markets’ vacancy is increasing and as it does rents will come down.

Vacancy increasing is even more prevalent in the retail sector. Here landlords are taking a hard look at the tenant’s probability of survival.

Based on the strength of the tenant a lease modification may be considered. The landlord may defer one to three months base rent to the end of the lease with the requirement that the lease be extended for that period. Most retail leases are Triple Net, so this would be in the form of a Rent Abatement, where the tenant continues to pay the operating expenses and taxes during that time. Language may also include that if the tenant does default on the lease, these monies would be added to the default.

Another concept to help the tenant and to help the landlord to continue to pay their mortgage expense is to temporally convert the lease to a Percentage Lease. The tenant will pay a significant portion of their monthly gross sales to the landlord in lieu of base rent for the remainder of the Covet-19 crises.

Unfortunately, not all landlords and tenants will work out their difficulties defaults and evictions may result. Visit the small businesses in your area, maybe you can help them negotiate with a landlord, of find them new smaller space. Also contact the landlords in your area, see what space they have or will have available. Seek out these post-pandemic opportunities.

The Changing Office Environment

In the “old” day’s office space was figured at 250 SF per employee, with each employee having their own desk and a significant number of private offices. In the 1980’s the firm Ernst and Young realized that most of their work force spent most of their time out in the field rather than in the office. They invented the concept of “hoteling”, reducing the number of desks and private offices, by having employees share them. Employees would schedule an appointment to use desk space as needed. The overall amount of space needed for their offices was dramatically reduced to 100 SF per person.

As time went on some firms followed the model, others modified it by eliminating most of the desks and replacing them with assigned cubicles next to each other. This reduced the overall space requirements to around 150 SF per employee, but they each had their own space.

Today, because of the pandemic, the design of “efficient” office space will be changing again. The work at home, part, or full time, will be continuing in many firms. But social distancing and other requirements ensuring the health and safety of the workers must be incorporated into the workplace. This will certainly increase the necessary square footage per person offsetting the space reduced by the at home workers.

Most States have developed Covit-19 Guidelines and some States are mandating changes. Some of the common directives are:

Rearranging the office space so there is 6-foot distance between employees and to stager the desks or cubicles to avoid sitting opposite another person. In addition, install partitions between workers.

Reduce occupancy to 50% and minimizing visitors.

Where possible create clearly marked one-way traffic flows and install social distance markers to remain 6 feet apart.

Segment the space into work zones and encourage employees to remain within their workspace; discourage non-essential walking around.

Minimize employees using shared equipment, and clean after every use.

Provide hand sanitizer throughout the office

Close or remove non-essential amenities (i.e. coffee station, coat room) where employees would congregate. Close the conference room; use virtual conferencing instead.

Stager working hours, allow work at home, full or part time to reduce the number of employees in the office at any given time.

Post signs and train employees on the expected office protocols for social distancing and using elevators, cleaning and disinfecting, personal protection (use of masks and gloves), and to stay home if they feel ill.

Ventilation is a major area of concern. Where possible increase the amounts of outdoor air coming into the building and increase ventilation rates. Buildings should have or install High Efficiency Particulate Air Filters with a Minimum Efficiency Reporting Value (MERV) rating capable of filtering Covid-19 particles. A MERV rating of 11 or 12 is OK, but a MERV rating of 13 is most desirable.

This has created a problem in New York City which has current laws that all building over 25,000 SF must have their building “Benchmarked” and file an annual report. Benchmarking is measuring how much energy, electricity, and water the building uses and the amount of carbon emissions the building produces.

NYC Local Law 97 a part of the Climate Mobilization Act enacted in May 2019, is focused on reducing buildings carbon emissions. The law established carbon emission limits for every type of building. Starting in 2024 building owners must submit an annual Carbon Intensity Report and if their buildings carbon emissions exceed those limits, they will be subject to sever fines. The problem is the MERV air filters will combat the virus but the more outside air you bring into a building and the higher rated your filter is, the more energy you will use and more carbon emissions are created. This is a new issue that has yet to be resolved. The NY Governor has mandated the use of these MERV filters in Malls in NY.

Who is going to pay for these health and safety capital improvements to buildings? The owners are!

However, under the Coronavirus Aid, Relief and Economic Security (CARES) Act Qualified Improvement Property was made eligible for Bonus Depreciation. 100% of the cost of the Qualified Improvement Property can be taken as Depreciation in the year it was purchased. This is defined as any improvement made by the taxpayer to an interior portion of a building which is nonresidential real property if such property was placed in service after the date the building was originally placed in service. However, improvements related to the enlargement of a building, any elevator or escalator, or the internal structural framework are specifically excluded from the definition of Qualified Improvement Property.

Effective in 2018for nonresidential real estate roofs, heating, ventilation, air conditioning, fire protection and alarms and security systems were added to the Qualified Improvement Property definition. So, all the expenses we have discussed related to making the workplace safe, will qualify for the Bonus Depreciation. As always everyone should discuss any tax matters with their accountant or tax advisor.

Websites must be Americans with Disabilities Act (ADA) compliant

The word “website” does not appear anywhere in the Americans with Disabilities Act. In fact, when the ADA was signed into law, by then President George W. Bush, on July 26, 1990 there was no internet and websites did not exist.

However, over the years the U. S. Courts have ruled that ADA regulations are applicable to websites. This is based on Title III of the law which defines that ADA is applicable to businesses and nonprofit service providers that are public accommodations, privately operated entities offering certain types of courses and examinations, privately operated transportation, and commercial facilities. “Public Accommodations” has been defined as any building open to the public. The U. S. Courts have interpreted “Places of Public Accommodation” to include the internet and specifically websites.

In 1999 Web Content Accessibility Guidelines (WCAG) were developed, expanded in 2008 and again in 2018. Currently WCAG has 38 requirements (many of a technical nature) required for compliance. The goal is to make the content of websites usable for people with vision or hearing impairments and those who have cognitive, learning, or other physical disabilities.

With the coronavirus closings of schools and work places, a work from home and home schooling environment was created. This accented the use of computers and the internet which many folks with disabilities found difficult. It has also created a significant number of lawsuits against website owners for ADA violations.

Follows is an article published by 3 Media Web’s Technical Manager Mike St. Jean.

“7 Steps to Design an ADA Compliant Website”

“So, how can you create an ADA-compliant website? Here are seven steps toward building a more inclusive site and adopting the WCAG.

1. Evaluate Your Current Site
First things first: What is the state of your current site? You can rate your own site using programs like WAVE or Lighthouse and by manually testing the site with screen reader software. To be ADA-compliant a site must meet standards within four categories: Perceivable, Operable, Understandable and Robust. Use the ADA guidelines as a starting point to create a blueprint for your own site.

2. Choose the Right Graphics
Carefully chosen graphics are a big part of accessible websites. When you’re including graphics, they should not flash more than three times per second. Any more flashing, and you could inadvertently induce a seizure in someone who is browsing the page. Graphics should also have a description/caption that can be read aloud to the visually impaired. If you have informative or fun visual content, you want everyone to be able to enjoy and learn from it!

3. Add Alt Text and Readable Fonts
Making your site perceivable for all potential users takes a lot of thoughtful choices. A variety of things fall under the umbrella of perception. To get started, provide alt-text for all images in your code. Alt-text captions allow site readers to describe your images audibly.

Fonts are another crucial component of accessibility. Use fonts that are easy to read, such as Georgia, Open Sans, and Quicksand. Avoid putting a light font color on a light background; a combination like yellow text on a pale background causes people to strain to read it. Equally problematic is a pale font on a stark black background. Stick to light backgrounds with dark for most of your content.

4. Make Website Features Logical
An ADA-compliant website must also be understandable to a wide audience. The site should operate in a predictable way and have helpful labels over blocks of content and media. For example, put a clear “x” in the upper corner of a pop-up to show users how to close the window. The site should be built in a way that avoids user error and has readable instructions on all forms where users are expected to enter information.

5. Code Your Site with Standard HTML Tags
The robust requirement of ADA recommendations is the most technical one. It basically means the code should be readable by an assistive reader. The code on your site must use standard HTML tags. You should also provide documents in a text-based format at all times, even when you also offer a PDF. Complex image documents can’t be understood by software that reads text aloud for visually impaired website users. The good news is that most website platforms, including WordPress, are designed to operate using modern code format.

6. Make the Site Keyboard- and Pause-Friendly
The primary function of the “operable” category of ADA standards is to ensure your site can be navigated using a keyboard alone. Not all users are able to interact with a touchscreen or grip a mouse. This category also relates to the overall navigation. For instance, readers should be able to pause content or slow down automatic scrolling/slideshow movements. Eliminate any videos that auto play and have a time-limit. And, of course, make sure that all video interactions and pausing can be completed using keyboard functions.

7. Remain Up-to-Date on Compliance Changes
Remember that ADA needs are ongoing. As new technologies are made available for people with disabilities, they should be accounted for in your web code. A good start is making sure the text easily readable and the code works with assistive readers, it’s true. But a truly compliant (and usable) ADA-compliant website will adopt new best practices as they emerge.”
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Negotiations Today

As real estate agents we negotiate every day with potential clients to get an exclusive listing and for our commission fee. We then negotiate for our client to get them the best deal possible. If representing a buyer or tenant, we present their offers and work to get them a good deal. We also negotiate with other agents and brokers regarding referrals and co-broke arrangements.

Negotiations require research, preparations, and delivery. Delivery is composed of what we say (the words), how we say it (tone) and body language (facial expressions and physical gestures).

Traditionally real estate transactions begin with a purchase offer or a Letter of Intent (LOI), then the negotiating period occurs, a back and forth modification of positions, often by revising documents, communicated by email, until an agreement is made.  

But in the last several years, leasing has become more personal; potential landlords and potential tenants want to meet each other.

Considering they are entering into a long term business relationship, the face to face meeting makes sense. Agents have always been taught to never put the parties together for fear they would go around the broker.

But today’s consumer thinks trust first, then business, in dealing with both their agent and their choice of landlord or tenant. Sometimes the final terms of a lease are discussed at theses onsite meetings or at a more formal in person conference. Agents are getting used to this idea and are now finding bringing the parties together, with you of course being there, helps get an agreement.

The getting to know each other concept evolves into the negotiations. The biggest advantage of face to face meetings is being able to read everyone’s body language, which may speak differently than what is being said. [Some study of body language is highly recommended.]

Then came the corona virus! For the last three plus months negotiations have gone back to the old fashion way of emailing LOI’s back and forth. It does seem fewer deals are getting concluded. As we move forward with the recovery, we have new rules, no handshaking, social distancing and wearing face masks. Getting to meet, trust and communicate with our clients and between the potential landlords and tenants, in person is a challenge.

The good news most everyone has learned to adapt to video conferencing with programs like zoom meetings. We may not see the other persons full body, but we can see their face, without a mask! With that facial expression talking to us too.

It is projected that the new normal for commercial real estate will have consumers initially viewing less buildings in person. They will now expect to see videos of available commercial properties online. Those meetings, bringing the parties together, will be now done virtually and negotiation sessions will also be done as video conferences.

Is this the end of the current Real Estate Cycle?

Typically, real estate cycles last about 10 year, during which property values go up slowly at first, then rapidly towards the end of the cycle. When values push the market as high as they can, there is usually a crash, often triggered by a negative economic event. In the early 1990’s the bad underwriting of loans by the Savings and Loans Banks caused the collapse of the real estate market. The government ended up closing 747 Banks and created the Resolution Trust Corporation to deal with the bad loans.

The next real estate cycle built itself for almost 15 years; values peaked in 2007. In 2008 the real estate market crashed. Due again to unscrupulous mortgage practices coupled with fraudulent investment portfolios consisting of good and toxic loans. Values in the Northeast tumbled 25% to 30% over the next two years, with even higher percentages in other parts of the country. Some say our current real estate cycle was starting to peak in 2019. The big question is, will the Coronavirus Pandemic be the catalyst to bring an economic downturn, that could result in another market crash? We really don’t have that answer yet.

But we can anticipate several things. Some offices tenants closing or reducing space for safety and the continuance of work-at-home personal. Retail businesses, especially restaurants, going out of business or downsizing. A definite increase in vacancies, which will probably lead to lower rents. Landlords, losing tenants or reducing rents to keep them will see the Net Operating Income of their building shrinking, thus the value of their properties going down. But for the most part, these events will not happen overnight, and the government has made various programs and loans available to help businesses try to survive. We need to get business open again for a while to really judge the economic damage; and establish the new normal. If we have reached the end of this real estate cycle, it probably will not be evident the end of the year or next year. Hopefully, it will not be a major crash, more a decreasing in values gradually over a few years as we go through the next commercial leasing cycles.

Following is an article by Jim Gillespie. About convincing owners that now is the right time to sell, at the peak of the market before the current real estate cycle ends. Jim is in California where their real estate patterns seem to be similar to those in the Northeast. These may be thoughts to share will your clients that are undecided if this is the right time to sell their properties.

“Here’s How to Get Your Commercial Real Estate Owners to Sell Their Property” By Jim Gillespie

“Normally it can be difficult to convince owners to sell their property when they have no real underlying reason to do so, but we’re living in a very unique time right now. We not only have the coronavirus happening, but it also appears that we are now moving into an economic downturn, and asking one simple question of property owners can help you to motivate a certain percentage of them to list their property for sale right now, and put it on the market.

You see, so many owners can get lulled into a state of complacency, and lose sight of the big picture. With this in mind, there will be some owners who will right now be thinking, “We don’t want to sell right now, but we’ll probably be selling at sometime in the next 1-3 years.” But here’s the problem with that kind of thinking: In 1-3 years, if we are in fact heading into an economic downturn right now, their property will probably be worth less, and potentially a lot less, than what it’s worth right now.

In keeping this in mind, when we arrive at the peak in real estate cycles, it will normally take ten or more years for us to return to the next peak in the cycle once again. As an example of this, here in Southern California, here are the approximate years when we’ve reached the last four peaks within our real estate market:1979, 1989, 2007 and 2020.

In my opinion, we’re now in the process of moving past the peak in our market here, and this will become clearer in the rear view mirror when we have statistics for our second, third, and fourth quarters of the year. The coronavirus certainly is jump-starting this downturn quicker than we anticipated, but in looking at the ongoing slowing of property appreciation here, combined with the fact that housing prices have become much less affordable to so many people, it was looking to me like we were getting very close to moving beyond the peak anyway.

The timing in your market for when the peaks have occurred may not follow the pattern of these exact same years, but I believe, when you do your own research, that you will find a similar pattern.

So when you’re dealing with an owner who is thinking that they may want to sell, but they’re not 100% certain of it, or you’re talking to an owner who says that they may want to sell in 1-3 years, ask them the following question: “Are you prepared to hold onto your property, in knowing that we are likely more than 10 years away from reaching the next peak of the market once again?”

Then show them the data proving when the last 3-4 peaks within your own local market have occurred, so that they now know you are coming from total certainty around the history on this. Because so many owners can lull themselves into total complacency in the moment, in thinking that if they wait to sell until 1-3 years down the road, it will be no big deal to them. But it will likely be a really big deal to them when they’re finally 1-3 years down the road! Owners can oftentimes think that when times are good, that there is no danger to the value of their property dropping significantly, but this can be a false assumption, particularly in those areas that have experienced a tremendous amount of appreciation.

In addition to this, I recently asked a real estate market timing expert how long he believes it will be here in Southern California, before we hit the next bottom of the market, when it will then be the ideal time to buy once again, and his response to me was, “At least another 5-6 years.”

So, when you have an owner who believes that they’ll want to sell in 1-3 years down the road, ask them, “Do you want to sell at the peak of the market right now? Or are you now prepared to wait ten or more years until we hit the peak of the market once again?” Because there’s a really good chance that selling their property today will bring them the best price they can get for it, for many years to come.”

Is this the end of the current Residential Real Estate Cycle ?

The pandemic struck both the commercial and residential markets hard, practically bringing sales to a temporary halt. NAR Economic Director Dr. Lawrence Yun predicts that home sales will be down for the remainder of the year but rebound in 2021. Sales in the 2^nd quarter of 2020 are expected to have declined over 30%, with the average decline in sales projected by years end being 15%.

Prior to the coronavirus inventory (houses on the market) was low, as the pandemic grew inventory became even lower. Sellers took their homes off the market with a reluctance to let potential virus carriers in their home. Also, reconsidering where they may be planning to move to, based on that States response to the health crisis.

The Buying market has been affected by the “stay at home” orders, temporary or permanent unemployment, concerns for employment stability when returning to work, and the possibility of a second wave of the pandemic in the fall.

However, with so few houses on the market the values for low- and medium-priced homes have held steady. When a new listing does come on the market, the buyers that are ready, jump on it, in many cases causing a bidding war. The other incentive for buyers are the low interest rate mortgage loans, currently 30 year 3.3% interest, which Dr. Yun expects to be under 3% by years end. But the values of the high price homes are expected to decline due to the difficulty to obtain jumbo mortgages.

So, have we reached the end of the current real estate cycle? Some may consider it so, but it may be more of gradual decline in commercial values and a “pause” for the most part in residential prices.

On the commercial side, it reminds me of the early 1980’s when we had mortgage interest rates over 15%, nothing sold. But the commercial agents were able to focus on leasing and make a living. As we come out of this crisis focus on the opportunities that will be available in commercial leasing.

The New Normal

What can we expect in the future? I do not have a crystal ball but here are some predictions.

Even when we start to reopen business, Social Distancing will continue well into the future, this will radically change how office space is laid out. The space saving office “hoteling” concept is no longer considered safe.  Cushman and Wakefield who manages millions of SF in buildings worldwide has developed “The 6 Foot Office” model. Redesigning office space which includes clear shields between workstations, barriers that control the flow and distancing of office workers, and visually displayed foot traffic routing. Like the one-way aisles we now see in supermarkets.

Even with this expansion of personal space the overall effect on square footage office requirements will be reduced for most companies, with fewer workers on site. Many employees are now working from home, using video conferencing and employers are finding more productivity and lowering costs. This new normal is working well and will be permanently adopted, either full or part time, by companies. Employees are happy to skip the commute. This is also good for the environment; with reduced traffic carbon emissions are down by over 30% currently.

The impact of the pandemic will be felt most by the retail stores and restaurants, many will close or at best need to downsize. The restaurant industry expects 30% of these businesses will permanently close and those remaining open may see their seating reduced by up to 50% due to social distancing.

Retailers prior to the virus were in trouble. The “forced adoption” of shopping on-line and with more consumers doing it and liking it, will put even more of a strain on brick and mortar stores to recapture shoppers.

In a recent interview, Barbara Corcoran said “The only other portion of the real estate market that I think is going to be hit even worse is, of course, the shopping centers, they were half-dead when we came into this whole debacle with them on one leg. The other leg is going to be cut out, so I don’t, I can’t even envision what’s going to happen to the shopping centers. I just can’t imagine.” This is certainly a valid concern. At a recent meeting I attended online, I heard that 46% of retail Landlords collected no rent from 50% of their tenants in April,2020.

Landlords and Tenants will need to work together to find solutions. Tenants whose businesses are “temporally” closed are asking for help with their rent obligations, Landlords understand, but still have to pay their mortgages

Many standard lease clauses are now open to interpretation; is “force majeure” the so-called act of God escape clause valid in this case? Will Business Interruption Insurance pay the claims?  Typically, these policies require physical damage to the property and some specifically exclude viruses. Litigation and evictions will be significantly backed up when the courts reopen. Lease modifications need to be worked out for both sides.

We are getting mixed signals as to future rental rates and what will happen to buildings values.

With closures and lease defaults, there is expected to be a lot of space to rent in all sectors office, retail and industrial. Vacancy is the “kiss of death” for Landlords. It is in their best interest to work thing out with existing tenants, even if they must forgo rent for a few months, it may be a better choice than having vacant space. They can add the months the rent that was forgiven for to the end of the lease. Tenants can offer to extend their leases for rent deferment too. Also, with all this available space it would mean that new Tenants will be in a strong position to negotiate favorable terms and rent. So, we can expect to see rents decrease. With rent decreases we would expect value to decline too.

However, with interest rates going lower and lower, Landlords who retain their Tenants can refinance, and lower their debt service costs Other Landlords will be tired of the problems and be ready to sell their properties. Some say the lower interest rates will effectively drive values up and reduce capitalization rates??

Who is going to buy? With the turbulence in the stock market many investors may wish to move their money to less risky commercial real estate. Stay in touch with your clients, most are only in an activity holding pattern until this is over.

 As commercial agent, the way we do business has changed and will continue to do so. Video conferencing with our offices and directly with our clients is the new normal. Virtual tours of homes are common in residential real estate: this will now become a tool in showing commercial properties too. With office space, realistic renderings base upon social distancing and 3D floor plans are needed. Much of our transactions will be done digitally, subject to a final (first) walkthrough of the building.

The real estate market is “sitting in place” as we are. Many of us have been through market disruptions before, disasters like 9-11, economic recessions in the 80’s, 90’s and 2008. This Pandemic is far worst in many ways, but as far as real estate is concerned, we will recover. How we do business may have a new normal, but when this is over there will be many real estate opportunities.

The Questions We Ask

To service our customers professionally we must gather the information they will want to know in an organized efficient manner. Learning the questions to ask begins with what to say when you first meet someone new.

Meeting People

In our social world we meet people every day, with a typical question being, “What do you do?” Replying “I’m in real estate.” Is often perceived as being in residential sales. Which might be followed by, “How’s the market, what do you think my house is worth?” Continuing our “elevator speech” you might reply by, “I help business people locate commercial properties to buy and lease”; this better defines what we do. However, this is considered a Closed End or Dead-End sentence; the conversation ends here.

A better approach is an Open End response, which continues the conversation. For example, reply to the question “What do you do?’, with a question, “Have you or anyone you know ever bought real estate?” Yes. “How was the experience?”  Or, no. “Why not?” the goal is to create a conversation and start to develop into a relationship.

In person cold calling, to meet business owners in town is essential to build market knowledge and future clients. Walking into a retail store you may introduce yourself to the manager or owner by saying; “I keep passing your store and I’ve been meaning to stop in… how long has you been here?” Eight years. “That’s great, I bet your lease is up in 2022. March, right?” No, its April. You have just guessed the expiration date of their lease; and if you were wrong, they corrected you. (Leases are generally in five-year increments.) This is of course valuable information to catalog and follow. When you speak with a tenant also find out who the landlord is, so you can meet with them. Sometimes the business owner owns the buildings. Prepare for this possibility buy having some investment property flyers with you to discuss with this investor.

Listing Property

When listing a property or space we need to know all about the physical building and/or unit. We focus on Information Gathering and Emotion Inducing questions. Plus, the expectations of the owner regarding a sale or the desired lease terms.

Information Gathering About the Building or Space

Physical layout – size: net/rentable or gross square footage

Price – Includes?

Terms (Sale or lease)

Financing (if sale) availability 

Technology, amenities available

Site information - parking

Information Gathering Questions from Sellers

Why are you selling?

Have you found a new location?

What is your moving date?

Have you considered a 1031 Exchange?

What are you looking to accomplish financially?

What do you think your property is worth?

Emotion Inducing Questions for Owners and Landlords

How long have you been trying to find a buyer/tenant?

Have you had any offers?

Why did they not work out?

What would you consider to be the perfect buyer/tenant?

If selling, have you lined up new space to move to? Any commitment deadlines?

Emotion Inducing Questions

What attracted you to this building?

Which features do you like most about this building?

…about his location?

What is more important to you a quick sale/lease or a higher price?

How long are you willing to wait to get this price?

Leasing Space

If space is to be leased in a building, we need to determine the Landlord’s Position on:

Space Available

Net Useable Square Footage; Rentable Square Footage or Loss Factor in Office Buildings
Gross Square Footage with Retail and Industrial Properties

ADA – Americans with Disabilities Act Compliance?

Use of Space – Define Landlord’s desired business usage

Building Access - Hours Open

Parking Included for Employees? Where?

Building Security Features

Type of Lease: Gross, Net, NNN, Percentage?

Lease Term - Define the initial term (length) of the lease and indicate if renewal    options will be considered

Rent - Indicate monthly rent (also by rent per square foot)
Request how base rent is calculated. What is included in base rent: Heat, air         conditioning, utilities, cleaning?
Additional Rent - Are there any additional charges for: CAM, Insurance, Utilities?
Real Estate Taxes – how handled? Tax Escalation Clause?

Annual Rent Increases: percentage?

Liability Insurance Required

Tenant to provide $______ Insurance and name landlord as additional
insured (Issue is amount)        

Security Deposit Required

Alterations or Tenant Improvements        

            Build out by Landlord; Tenant Improvement Allowance? 

Landlord shall allow tenant to ____________, at tenant’s expense.

Signage Available?
Maintenance and Repair - Landlord to be responsible for…Tenant to be responsible for…

Assignment and Sub-Leasing Permitted?

Purchase Option – if desired

Right of First Refusal – if desired

Concession Period – if requested
Disputes - Mediated or Arbitrated
Possible other issues too
Brokers Commission - Fee to be paid by ?

Buyer or Tenant Questions

Representing the buyer or tenant requires a detailed needs analysis.
These questions get categorized into five groups:

Why Moving - Urgency

•         Why is the company relocating?

•         When does their existing lease expire?

•         Are they buying?

•         Would they consider more space than they need? To rent out.

•         When will they need to take possession?

•         Where do your employees come from?

Physical Requirements – Now and Future

•         Where is the company looking to locate?

•         Why? Would other areas be considered?

•         How much space is needed?

•         How configured?

•         What would be the intended use?

•         What are your future plans? Where do you see your company in two/five years?

Pain and Pleasure

•         Any issues with your current space (roof leaks)?

•         What do you like best about this space?

•         What do you like least about this space?

•         If you could describe the perfect office/store/factory layout what would it look like?

Loyalty and Authority

•         What properties have you looked at?

•         Why did you not consider them?

•         Who should I be in contact with to show you space?

•         Who will make the final decision?

•         Who is authorized to sign my Buyer or Tenant Representation Agreement?

Financial Strength

Tenants:

•         What are you paying for your space now?

•         Additional Rent, Taxes?

•         I would like to review your lease?

Verify current costs

•         How is your business doing?

Landlords will want to see three years of Financial Statements

Buyers:

·         Proof of Funds
 

Negotiations

Questions are critical within the negotiation phases of the transaction. As we learned previously, we do not want to use Closed End questions which are answered with “yes”, “no” or a brief fact. This brings the conversation to a halt. No new information is gained.

Open Endquestions require a full answer using the subject’s knowledge or feelings. The person must pause, think, and reflect to answer. They begin with why, how, what, describe, or tell me about... Or they are information gathering inquiries like, “What do you think?”

In negotiations we also use Probing Questions that ask for clarification – looking for detailed answers. “How did you decide… determine…”

•   “What did you mean by that?”

•   “Could you give me an example?”

•   “What exactly do you propose?”

•   “What criteria did you use to develop your price?”

Also used in negotiation are Speculative Questions which are hypothetical and noncommittal. Exploring an option, they typically begin with “What if”, “Suppose” or “What would happen if…”.

In our business we need to learn what types of questions to ask and when to ask them.

Cold Calling - What do you say when your get the Decision Maker on the phone?

Last month we discussed getting past the “gatekeeper”; now you have. You are being connected to the Decision Maker (DM); what are you going to say?

Know why you are calling; what is your goal? To get a listing from a FSBO, to sell someone another building, or to introduce yourself and your services.; realistically your immediate goal is to get a face to face meeting. When you get through to the owner, what do you say? You have less than a minute to get the DM interested in talking to you. Know what you are going to say, be confident and enthusiastic; they need to hear excitement in your voice.

To get a listing you can take a direct approach, stating the purpose of your call, like your approach to the gatekeeper. “This is Ed from Smith Commercial I wanted to meet with you to discuss your Main Street Office buildings occupancy problems and how to increase your profits.”  Continue with, “Our firm specializes in office leasing…” , provide proof, “…we just leased 5,000 SF of space in the Boulevard office building.” Then close, “I will be in the area this afternoon can we meet at 2:30 or would tomorrow morning be better?”

Let’s sell them an investment property. Recognize an Owner who runs a direct ad for space in their building is an investor who owns that building. Approach them as an investor, a potential buyer. “This is Ed from Smith Commercial; I saw your ad for space in the paper and realize you are an investor. I am representing a great investment property and wondered if we can meet to discuss it?” They may ask you about it now and that’s OK. Close with, “About the space you advertised can I meet you there this afternoon to inspect it?” When you meet have more investment properties to show your new buyer and get the listing for the rental space while you are there too.

True cold calling, to introduce yourself and your services, future business development. “This is Ed Smith from Smith Commercial. Our firm specializes in Commercial Real Estate and I have new market information that may affect the value of your Main Street building.” Or “This is Ed Smith from Smith Commercial; our firm specializes in Commercial Real Estate. I have been meeting with building owners in the area to see how we can increase their NOI and cash flows.” Then close, “I would like to help you increase the revenues in your properties too. I will be in the area this afternoon can we meet at 2:30 or would tomorrow morning be better?”

In each example we get right to the point, establish ourselves as an expert and close with an appointment.

Although the “gatekeeper” is connecting you to the DM you may end up going into voice mail. Prepare for this possibility, write out your script in advance. Know the message you will leave and speak with confidence and excitement in your voice. In the message mention your phone number several times and tell them when you will call back. “This is Ed Smith from Smith Commercial; I can be reached at 123-456-7890.Our firm specializes in Commercial Real Estate. The purpose of my call is to help you fill the vacancies in your office building, restoring your cash flow and increasing your NOI. You can reach me at 123-456-7890, I will try to reach you again tomorrow around 10:00 am to see when we can meet.”

Some say Cold Calling on the phone is “old school”. It is considered rude, intrusive, an interruption of their time. You will be perceived as a telemarketer. Alternative methods today are to text or e-mail the “target”. These methods may also work, but we are in a people business, we need to establish a personal contact.

Now you have your appointment, remember we started out by researching the target firm you are calling on the internet, determining who are the officers, what does the company do, and who you want to talk to. Then you need find out all you can about the “Decision Maker”, they probably are on social medial (LinkedIn, Facebook, etc.). Look for commonality. What do you and him or her have in common? Went to the same college, both members of a Kiwanis Club (or any other service club) similar interests, golfer etc. Ways to establish repour when you do meet.

The cold calling should be directly to the point, when meeting in person we want to establish a relationship beginning with commonality

Getting past the “gatekeeper”

To be continually successful in Commercial Real Estate you need to prospect every day, this includes cold calling. The challenge is to get the Decision Maker on the phone, which often means getting past their secretary. A simple solution that sometimes works is to call before or after regular business hours. At 8:00 am or 5:30 pm the” boss” may pick up the phone themselves; then what do you say? (more on that next month)

There are many schools of thought on how to get past the “gatekeeper” to the Decision Maker. Prepare for your call, expect to speak to the “gatekeeper” first, be nice polite, and cordial. Treat the person with respect, not like an “employee”. It is not uncommon to have to make 3-5 calls before you eventually get through to the property owner or landlord. Use each opportunity to gather information. The job of the receptionist or secretary is to determine who you are, what company you are with and what this call is regarding.

Before you call, target the firm you are calling on the internet, who are the officers, what does the company do, then determine the Decision Maker you want to talk to.

Typically, the phone is answered by the receptionist or secretary by saying something like “This is Kathy, at Atlas Industries, how may I direct your call” Make immediate note of the person’s name.One suggestion to “break the ice” with the gatekeeper is by saying “Hi Kathy, my name is Ed; how is your day going so far?” “Fine” Then answer some of expected questions before they are asked. “Wonderful, this is Ed from Smith Commercial is Tom available? This is the casual approach only using my first name and the “targets” first name. You could be more formal, “Wonderful, this is Ed Smith from Smith Commercial may I please speak to Tom Jones.” Either approach may still lead to their asking “What is this in reference to?”

There are several ways to answer this, but your reply must be purposeful giving the secretary a feeling that their “boss” will want to talk to you. Just using commercial jargon and terms may be convincing, “I need to talk to Tom about his Main Street Office buildings occupancy problems and how to increase his NOI.”  Getting more specific is even better. “There is a property that just came on the market near Toms, that could give him an idea of today’s market value of his building, that is what I need to talk to him about.” Or you could be referring to a property recently sold, or investment property; everyone wants news about market conditions and values.

Or you could combine the comments from the last two paragraphs answering all three questions of who you are, what company and why are you calling. “Hi Kathy, this is Ed Smith from Smith Commercial. Please connect me with Tom Jones I have new market information that may affect the value of his Main Street building.”

Sometimes gatekeeper will put you off or contact their boss who is in involved in something else and does not want to be disturbed at this time. “Mr. Jones is not available.” Now gather information. “When would be a good time to call?” “Mr. Jones is usually available after 2:00 o’clock.”

When you call back later you can say, “Hi Kathy, it’s Ed Smith again, is Tom available now.” It may take several calls to get through, but each time you call the chances increase on connecting to the decision maker. Persistence pays.

Another method of getting past the “gatekeeper” is to send a motivational or business book to the building owner with a simple handwritten note, “Thought you might enjoy this” signed by you. Then, 4- or 5-days later call and ask to speak to Joan (the owner). “This is Ed from Smith Commercial, I’m calling to see how Joan liked the book I sent her?” The person you are speaking to probably opened the mail and know about the book.

As said, there are many approaches to get past the gatekeeper, do some internet research for more ideas.

Next month - What to say when you get the Decision Maker on the phone.

1. Meet two building owners or tenants in your town every day.

2. Join and attend Chamber of Commerce meetings and volunteer to serve on committees.

3. Call FSBO’s until you get two appointments for tomorrow.

4. Attend Commercial open houses and meet 25 new agents before you eat!
   
   
5. Catalog everyone you met yesterday (building owners, tenants, agents) into the address groups on your computer.

Multiple address groups; retailers in 1,000 SF – 2,000 SF, office users in 3,000 SF – 4,000 SF, building owners (investors). Blast your new listing to these potential buyers!

6. Stop by and see two prior clients/customers each week.
   
   
7. Daily review of all new commercial listings in your area; arrange to co-broke and add to your “comparable” data base.
   
   
8. Develop and meet with your “leads” group once a month.

9.                    9.  Call MLS commercial expired’ s until you get two appointments for tomorrow.

            10. Join and attend monthly commercial organization’s meetings.

11. Expand your skills – take educational courses; earn a Certification or Designation.
    
    
12. Read business and motivational books.

Knowledge is power.

      Now get out there and make it a great year!

A look at Real Estate activity today by age.

Senior or Silent Generation Born 1925 – 1945 Ages 74+

Mostly now in retirement with 34% living in a home they will not move from. Only 7% of this group moved in the last year with 29% moving to senior housing. Any investment properties they have they will hold onto for the cash flow, and the properties will eventually pass into their estate. If they decide to sell something, they will defer paying Capital Gains taxes by doing a 1031 Exchange. Communicate with them by direct mail, and an in-person presentation as opposed to the internet.

Older Baby Boomers Born 1946 – 1954 Ages 65 - 74

Many are still working having lost considerable money in their 401 accounts during the crash of 2008. However, this group would probably still be working as they like to work. But they are now planning for or figuring out how they can retire. 14% did move last year with 47% making a retirement moves. These “empty nesters” may be looking to downsize their home. If they own investment property, they are a good candidate for a 1031 Exchange.

Younger Baby Boomers Born 1955 – 1964 Ages 55 -64

Still active in their careers. They represent 18% of home buyers; making moves calculated to reduce housing expenses. Thinking about the future and retirement, they will consider buying investment properties.

Both groups of Baby Boomers regularly use the internet, however they still like to talk to people. Communicating with them by e-mail or text is fine but follow up with a personal phone call.

Generation X Born 1965 – 1979 Ages 40 - 54

In the prime of their careers. They are a highly educated group, with 35% of them having college degrees. This group represents 24% of home buyers with 56% of the homes bought being in the suburbs. They are buying large (over 2,000 SF) multi-generational houses because their adult children and/or their parents are moving in with them. 49% searched for properties online. They do not believe social security will be functioning when they are eligible for it. They are looking to buy multiple investment
properties to provide their retirement funds. They did not grow up with the internet but have adapted to it; this is where and how you will reach them.

Older Millennials 1980 – 1989 Ages 30 -39

Building their careers. Very hard working but an employer’s nightmare because they have no job loyalty. If a new opportunity arises, even in a far distant location, they are gone tonight. This is the largest group of home buyers 26%, of which 51% are first time buyers. They have had smart phones almost all their lives, 81% of them found their home using a mobile apt. Many (42%) are still paying off student loans. They too do not believe in social security and will look to invest in real estate as an alternative.

Younger Millennials 1990 – 1994 Ages 25 - 29

They are like the Older Millennials regarding their career and lack of job loyalty. They represent 11% of new home buyers with 81% being first time buyers. In deciding where to live 40% consider commuting costs; 71% based their buying decision on convenience to their job. They want to live close to where they work, literally being able to walk, bike or briefly use mass transit.

Many Millennial are entrepreneurs, having difficulty in finding good jobs they are starting their own businesses. If they are looking for commercial space to buy or rent for their business or investment properties it is important that they be located close to their homes. To this generation e-mail is old all there is, is texting. They are big on social media; this is where they will find you.

I Generation (Innovative) 1995 – 2012  Ages 7 - 24

Called “digital natives” because of their technology skills many in this age group are finding high paying jobs in that industry. Others are pursuing the “trades” becoming plumbers, electricians or carpenters as these skills are highly in demand. They have seen their older brothers and sisters get college degrees but cannot get a good job. Meanwhile no one has been entering the “trades”, which now pay very well. All this generations communication is on their smart phones and social media. It is interesting
to note that over 100,000 I-Gens have already bought a home and they want large homes! They want to own their own business, not be employees. They too will be looking for commercial properties to buy, rent or invest in.

Statistics are from NAR Report on Generational Trends 2019

Cataloging Opportunities

Each day some time should be spent prospecting business for the future. One technique is to systemically go door to door introducing yourself to all tenants and building owners in town. Visit just two business a day, that’s 10 a week, 40 a month. Our business is one of relationships and referrals. Meeting current tenants and owners helps develop your presence in the
community as "the commercial go to person".

Now that you have made initial contact you want to stay in touch. If you meet a business owner who is a tenant determine when their lease is up. To catalog this valuable information, you can buy all sorts of software programs or you can simply use the “word” and calendar programs found on most computers.

You met a tenant and determined their lease is up in 2 years; enter in your calendar program to follow up on this 6 months prior to the lease expiration. However, you also want to now regularly stay in touch, so enter a follow up visit date in 3-4 months; these subsequent visits continue to develop your relationship with the potential client. With each visit, end by asking for a referral "is there anyone else you know, that I may be able to help?"

If when their lease expires, they decide to stay in their location, consider them a source of referrals or a potential buyer (more on that in a moment) until they need to move. Just because someone signs a 5 or 10 year lease does not mean they will
stay there the entire time. Business is booming and they need more space, or things are slow they need less space. We can help them find new space and possibly sub-lease the space they are in. (and get paid for it!). By repeat visits, if they need to make a move, you are top of mind and you get the call.

Each time you catalog a building set up a simple “word document” about the potential client you just met. Include whatever information you have gathered, name, address, owner or tenant, type of business, how much space they occupy, when they expect to move and lease expirations. Include any personal information they shared with you about their family,
etc. You learn they are going on vacation next month. Keep this chronological record of activity for each call or visit. Before you talk to them again consult your log. You may want to begin your conversation with a question like, “How was your vacation? This type of personalization develops relationships.

In your initial visit you learned they lease 2,500 SF of office space. Set up address group files in your computer by size: for example office tenants leasing 2,000 - 3,000 SF. When you list an office building for sale in the area a bit larger, say 4,000 SF email the appropriate address groups the opportunity, they may be ready to buy!

Don’t forget about building owners; in prospecting you meet the building owner, they may have their business in this building or not; either way they are an investor. Your investor files can be cataloged by size, price category or both. Get those new investment listings out to these potential buyers.

Taking the extra time to catalog all you learn leads to future business.

Modes of Communication

In Real Estate being able to communicate with our different clients, all five generations, is essential. Communication starts at the first encounter and quickly leads to negotiations withour potential client and then ends with negotiations for our client.

A study of First Impressions was conducted by Albert Mehrabian, PhD, at UCLA. He researched feelings; investigating “instant” liking or disliking someone and concluded with the 55%-38%-7% theory. A first impression of someone takes minutes or even seconds; this initial, instinctual assessment is based on what we see and feel, more than what the other person is saying. Put in percentage terms first impressions are 7% words, 38% voice, tone, behavior and 55% body movements, facial expressions, gestures with arms, and posture; first impressions are largely based on Body Language.

Body Language expresses feelings and meanings. It may be conscious or unconscious facial expressions or bodily gestures. Often it is instinctive, not intentional, which is why it is so revealing.

But communicating after initial contact the categories of words, voice, tone, and body language become equally important.

Often the first encounter with a potential client is on the phone, all we want to do at that point is set a meeting at their business or property location. Knowing a relationship begins with the first impression we need to: dress for success, show up on time and prepare for a handshake.
 

You expect to eventually collect a big commission, how you dress must show professionalism and a successful attitude; business attire is a must.

Be early for the appointment or don’t bother showing up. Different cultures consider time differently. Being late may be offensive, it could demonstrate you cannot be trusted to keep your word. The person you are meeting may be purposely late, even though expecting you to be on time. Best: Arrive 10-15 minutes early for your appointment and expect to have to wait.

What you do while you are waiting is important. When the client comes out to greet you what will they see? Someone “steaming” because your client is late? You reading a comic book (magazine, same thing) while you wait – how, not busy are you? Or “their agent” making notes on a yellow pad or in a file from your last appointment or next one. Work while you wait – shows you are just as busy as they are!

In American Business the handshake generally starts the meeting. In the United States and some parts of Europe, a firm handshake is appreciated and a limp one not looked upon favorably.

Americans and Southern Europeans tend to be more physical. Men who greet each other with a handshake and a slap on the arm or the back are just being friendly.

Asian countries, especially Japan, would consider such behavior aggressive. Delicate handshakes, accompanied with minimal and brief contact, are acceptable in Asian countries; however, a slight bow is a more common greeting. In some African countries, the limp handshake is the thing to do.

Now the negotiations begin. Communication becomes a blend of the words, facts and proposals, our vocal tones and body language, facial and other gestures help to get a listing or representation assignment. Going forward can we communicate by phone, email and text? Yes, but in those modes body language is missing. Best is meeting face-to-face whenever possible. But remember body language goes both ways. You may be able to see what your client is feeling, but they can read your facial expressions and gestures too.

I saw this interesting comment on the internet,” Texting is a brilliant way to miscommunicate how you feel and misinterpret what other people mean.”

Many of our clients today want to develop “trust” and relationships with the people they do business with. Our role in the real estate transaction is that of the negotiator, a person in the middle. It is now being considered “Old School” in lease negotiations to go back and for the with a series of Letters of Intent (LOI’s). Today’s thinking is to bring the principals together,a meeting between the Landlord and the Tenant, with their representatives, to negotiate final issues, face-to-face. Also, this is being done with buyers and sellers and their representatives. But agents need to balance face-to-face communication and keep control.

One of the discussions at the recement ICSC Recon 2019 meeting was, the advantages of transitioning from email/text communication to face-to-face interaction. Another way to think of interaction is, it promotes solutions!

The Changing Retail Market

In April, CNN Business reported that 6,000 retail stores would be closing in 2019; last week Business Insider increased that closing expectation to 7,000 stores by years end. Some of the retailers include: Payless (2,500 stores), Gymboree (850), Dress Barn (600) Charlotte Russe (520), Family Dollar (390), Shopko (371), Sears (70) and even Jewelry giant Signet Jewelers (Kay, Jared and Zales 159 stores).

A new catch phrase being used by retailors today is to “right size” to individual markets, one size store no longer fits all. Stores that are looking to shrink their existing footprint to save money include: Target, Walmart, Barnes and Noble, Family Dollar, GNC, Walgreens and J.C. Penny. New stores will be smaller. “Digital natives”, (online stores) have recognized the need to also have Brick and Mortar locations and will be opening
small local “outposts”.

Some existing stores will be expanding in 2019 one of the most aggressive is Dollar General planning on opening 975 new stores. Other companies adding stores this year are: Aldi Supermarkets (100), Target, Costco, BJ’s, Marshalls, T.J. Maxx, Aerie, Dollar Tree and Burlington.

Shopping Centers and Malls are still challenged with filling vacant former anchor locations. “Creative reuse” is the thought of today, as one developer said, “Nothing is off the table.” Movie theaters, family entertainment, grocery stores and even multi family or senior housing is being considered. There is a trend among younger people to live and
work within walking distance, which fits this model perfectly and convivence to shopping would certainly appeal to seniors.

Mall tenancy has changed, what hasn’t changed is the human desire to socialize. Other new tenants are casual dining restaurants with bar service, fitness centers, yoga studios, cross fit gyms. The Health and Wellness industry has doubled in the last 10 years. Customers are being lured into these centers with engagement, entertainment, and opportunities for social contact.

Warehousing and flex space are also providing retail “destinations”. In San Francisco, an “Urban Mini Golf Course” opened. It is considered adult fun with a bar (and tables at each tee to hold drinks while you putt) and a dining facility upstairs.

How will the new tariff’s with China affect the retail market? Many goods will now have a 25% tariff: electronics, machinery (washing machines, air conditioners), furniture, bedding, luggage, handbags, raw materials used to make clothing and footwear (fabrics, buttons, leather). China makes 85% of the toys sold in the U. S.! The real affect will be felt during the upcoming fall buying season with all the major retailers agreeing they will have to reduce profits expectations or increase prices. You can bet on increased prices.

This may have a direct impact on commercial real estate. Increase prices may lead to less sales and more store closings which would create more inventory.

Small business growth is rising. The Small Business & Entrepreneurship Council tracks new business creation by the number of Employer Identification Number (EIN) applications filed each year. From 2012 to 2016 the number of annual new businesses rose 100,000 to 750,000. In the two years between 2016 and 2018 this number has steadily and significantly increased to 900,000 applications each year and the SBE Council predicts it will continue to rise.

The Small Business Administration tells us there are 28.8 million small businesses (defined as businesses with less than 500 employees) in the U. S. which account for 99% of all business in the country. A significant increase in start-up businesses are expected. The SBA says 26% of people starting new businesses do not want to be an employee; they want to work for themselves and 23% of new business owners are pursuing their own passion or idea.

Entrepreneurs are capitalizing on and applying new technology to many different industries and launching new successful businesses. As these small businesses grow the demand for space is expected to increase.

Some stores are shrinking, some are closing, and others are expanding. Mall and shopping center tenant mix is dramatically changing, and new small businesses are on the rise. From our perspective, these are all Commercial Real Estate opportunities.

The way, and where we shop may be changing, but we will all continue to shop!

Engaging People

I was on line in a vitamin store waiting to make a purchase and I overheard the sales clerk speaking to the customer in front of me. “Are you with the military?” he asked. The customer replied that he had been and now worked private security. “I could tell” said the clerk, “Your build and the short hair”. The conversation ensued for a couple of moments and now it was my turn to be waited on.

“What a nice watch!” was the clerks opening remark, “My grandfather had one just like it.” As he rang up my purchase the small talk continued. He had immediately established a rapport with both of us customers and effectively distracted us from the expensive price of his products. I’m not sure if that was his goal, but my overall impression was a pleasurable buying experience – I would go back to that store again.

Turns out he was the manager and he demonstrated exemplary sales skills. He recognized the need in sales to immediately establish a relationship with the customer. Sure, the immediate sale is important but he wants the customer to return to the store again.

This concept is so important to becoming a successful commercial real estate agent. We have the opportunity to service our customers over and over again. Someone leases space, will they ever move again? The investor buys a building; will they buy another one or need help in leasing space in the one they bought?

Are you ready for your next encounter?

How often have you been in a social situation where you meet someone new and they ask what you do for a living? Ever say, “I’m in real estate.” And the next question you hear is “Oh, what are houses around here selling for?” Or, “What are the latest mortgage rates; do you know where I could finance a second mortgage on my home?” 

Traditionally we were taught to pre-determine a response to the question that immediately focuses the person on commercial or investment real estate. Without using the words “real estate”? Apparently if we say, “commercial real estate”, all that is subconsciously heard is “real estate” invoking the same questions as above.

Examples of traditional answers are: “I help businesses find space to lease or buy.” “I find and sell properties for investors.”  “I broker commercial buildings and space.”  This is fine but these are considered dead-end sentences, the conversation is going nowhere; it ends with this reply.

Better to start a dialog. When asked what you do, reply with a question or two: “Have you, a friend or relative ever bought real estate?” “Yes.”  “How was the experience?” “No.”  “Why not?” This starts a conversation. You can always close the discussion with, “I help people invest in real estate”. Give them two of your business cards saying, “Here’s two of my business cards one for your records and please pass the other to someone you think I could help.”

Just like the store owner concentrate on building your future business.

Our goal as brokers and agents is to be appropriately compensated for the skills that we bring to the transaction. In simple terms, to be paid a full commission for completing a sale or lease of property. In our quest to be properly paid it is important that the client or customer who is paying us knows the extent of what we will do to deserve our fee. At the point of listing or signing a tenant/buyer representation agreement is when your fee should be stated. If the client then suggests a lower fee, should you concede? No. Think about it, if you reduce your fee at this point what message are you giving about your negotiation skills.

What do you bring to the transaction? Explain why you and your company should be retained. People do not know how qualified you may be unless you tell them. What will you be doing to sell or lease or find the required space? Your focus will vary depending who you are representing (seller/landlord or buyer/tenant) but generally will include material items and your personality skills and convections. A partial list follows:

• Market Research – to determine the proper pricing;
• Marketing Plan including Internet promotion;
• Your resources to find Space for buyers/tenants or to list properties;
• Pre-qualification of customers – guiding them to determine their specific requirements and financial planning;
• Guiding your clientele through the Negotiation Process
• Coordination of all the “players”, inspections and events required to close;
• Talk about your tenacious personality;
• The Training and Courses you have taken;
• Discuss other properties you have handled;
• Promise regular communication.

You need to create a perception in your client/customers mind that differentiates you from other agents. Show the value of your services, to justify your fee. Remind them that you are making a commitment; you are investing your time and only get paid when you close.

Make sure your listing agreement clearly state your firms commission rate. When you make an offer create a separate commission agreement converting the commission percentage to real dollars based on the value of the offer. So, there is no misunderstanding; if they accept this offer this is how much money they will owe your firm for your services.

Sometimes you get a listing and now have an offer to present that is somewhat lower than the asking price. The client says I will accept the offer if you lower your commission by 1% (or more), what do you do? Too often agents just accept the reduction to make the deal. Remember a rule of negotiations is; when someone gives a concession, it is the best time to ask for another concession. Do not be surprised, if you make this concession, when they ask you to reduce your fee even more.

You should just say no and reiterate what you have done to get this offer and why it is fair based on the market conditions. Everyone tries to get the best deal possible and if you justify your “no”, often they will pay your fee. You can also continue to negotiate the price with the buyer or tenant indicating the owner has rejected their offer. But make it clear to the owner you still expect to receive the full commission they agreed to when you took the listing.

There are several other techniques that can be used to reduce the amount of commission you stand to lose. Owners seem to always think in increments of one percent. “I have been authorized by my broker to reduce my fee by 10% to repeat clients.” (That is 10% of the commission rate previously quoted which will be typically be less than one percent.) Or use fractions; I am authorized to reduce our fee by a quarter (or a half) percent.

Try converting the commission percentage to dollars, our fee is $50,000; do you realize you are asking us to give up $10,000? Or put that in percentage terms, you probably don’t realize but by asking us to reduce our fee by one percent; you are really asking us to reduce our commission by 20%! My broker won’t allow that.

We work hard for our commissions. Know you will be challenged on your fee when taking the listing and when presenting offers. When asked to reduce your fee, be prepared to say “no” and justify your commission.

Often a lease will have an option for renewal by the tenant. If the option is exercised the Broker is usually entitled to an additional commission. But what happens if the building is sold before the option becomes due? Is the new owner responsible to pay the Brokers commission? The answer is no, unless the listing agreement or lease addresses the issue.

The original listing agreement (contract) is between the original owner and the Broker. Upon sale of the building (title passing) that relationship ends. The Broker has no agreement (contract) with the new owner. The new owner has no obligation to pay a commission to the Broker. This may also apply to an Exchange or Assignment of a Lease.

Listing agreements should contain a clause to address this contingency. Typically, the clause directs the building owner, if they decide to sell the property, to have the buyer sign an Assumption Agreement (in recordable form). In so doing the new owner accepts the liability for future Brokers’ commissions that may become due if a tenant exercises their option to extend the lease.

Without such a clause in your listing agreement an option commission could be lost upon the sale of the building.

In a large building many tenants may have an option to extend or renew their leases; different Brokers may be eligible for future commissions. The amount of money involved could be significant and require adjustments in closing the transaction.

From a marketing point of view, this sale should not come as a surprise. Once you place a tenant in a building you should communicate regularly with the tenant and the owner to develop future opportunities.

Even though a tenant is in a lease, their business could require more, or less space before the lease term ends. Consistent communication would allow the Broker to become aware of the problem and solve it. Finding and leasing larger or smaller quarters to the tenant, while sub-leasing their current space to a new tenant.

Regular communication with the landlord can lead to an inside track as to when other tenants may be leaving the building creating available space you can rent. Constant communication with the landlord should lead you to having the opportunity to sell the building or sell them another investment property.

Commercial Commissions

All commission rates are negotiable.

What is fair compensation for our services? When we sell a building, we are generally paid a percentage of the selling price, in other words our fee is based on a percentage of the seller’s financial gain. Due and payable on Title passage.

The fee for successfully negotiating a lease agreement should also be based upon consideration of the landlord’s financial gain. If a ten-year lease is signed and the rent is $25,000 per year, our fee should be based upon all the money the landlord will receive in rent during the entire term of the lease. In this case $300,153.00 (compounded to include a 4% rent escalation each year).

There are several different methods of calculating a lease commission:

Split Rate Commission – The fee is based upon one rate X% for the first three years and a different (lower) rate Y% for each year thereafter. The rent to be collected each year by the landlord, including escalations is first calculated, and then these percentages are applied. The commissions for each year of the lease are then totaled; that is the fee due. This method is generally used when the landlord is paying the fee.

Aggregate Rent Method – This is very similar to a sales commission calculation, a percentage for commission is negotiated. The rent to be collected each year of the lease by the landlord, including escalations is calculated and added together. The total rent to be collected is then multiplied by the agreed percentage; this is the commission due. This method is generally used when the broker/agent is exclusively representing the tenant and they are responsible to pay the commission. Most Tenant Representative Agreements have language making the tenant responsible for the commission if it cannot be collected from the landlord.

Declining Scale – In this case a starting percentage for commission is established, which is reduced down to zero over time. This may be a reduction of a “point”, per year or every two years, for as long as agreed upon. This could be a 15 year lease, but the commission calculation is based on 8 years. Also in this method, the rent to be collected each year by the landlord, including escalations is first calculated. Then the declining percentages are applied each year for as long as has been agreed upon.

Fixed Fee – A specific dollar amount is negotiated for completing a lease. This is most common in newer buildings where there may be multiple units to be rented out.

Multiple of Monthly Rent – This is not common in longer leases, however in very short leases (one or two years) a multiple of the monthly rent (one, two, or three month’s rent) may be set as the commission.

The entire commission is usually due and payable upon lease signing. It is reasonable to not receive the entire fee upfront if the landlord is not yet collecting rent due to construction or a concession to the tenant; after which the balance would be paid. Even large fees are due upfront, but sometimes are paid out over a short period of time; six months or even a year. It is generally not acceptable to be paid our commission annually.

Many leases have an option to renew or extend the lease. As stated earlier our fee is based upon all the financial gain of the landlord. If the lease is for five years and there is a five-year option to renew, and the tenant exercises their option to renew; the landlord will receive another five years of rent payments. We are then entitled to another five years of commission for the extension period.

There may also be an option to expand or a First Opportunity Clause (for the tenant to take more space in the building); or a Purchas Option of Option to Buy.  We are entitled to a commission on that money; provided your listing or commission agreement says so.

Generally, the Seller or the Landlord pays our fee, but you may have a Buyer or Tenant Representation Agreement whereby your client is responsible for the commission.

The commission fees to be paid a stated in our Listing Agreements as percentages. It is a good idea to present a Commission Agreement with any offers stating our fee duo in real dollars, so there is no misunderstanding as to what the Client owes us if the offer is accepted.

We work very hard to complete a transaction; you deserve to collect a full commission.

By the way, I have been in this business for over 45 years and our commission rates are the same as when I started. I think we deserve a raise!

The next time a client asks us to reduce our commission rate perhaps we should say: “Oh my mistake! What I just quoted you was our old commission rate; the company just increased our fee to X%.” You could be nice and then say: “But, since I made the mistake, I will honor the rate I quoted you.”

Opportunity Zones

A part of the tax bill that became law at the end of 2017 was the “Investing in Opportunity Act”, which established the Opportunity Zone program. The idea was to creative incentives to revitalize economically distressed communities using private funding not taxpayer dollars.

Governors of all 50 States, U.S. possessions and the District of Columbia were given until April, 2018 to nominate qualifying census tracts in their jurisdiction that met the IRS requirements for designation as low-income distressed communities. Up to 25% of the census tracts in each area that met these requirements could be nominated. In June, 2018 the U.S. Department of the Treasury certified 8,700 tracts as Opportunity Zones, approximately 12% of all census tracts in the United States.

Developers and investors may form partnerships or corporations in the U.S. to invest in these locations by creating an “Opportunity Fund”, which must invest at least 90% of its holdings in one or more Opportunity Zones. Investments are limited to new construction or substantial improvement of existing unused buildings.

Tax Benefits:
A taxpayer can defer or eliminate capital gains taxes by investing in a qualified Opportunity Fund within 180 days of that asset sale. They would defer having to pay the capital gains taxes on that sale until December 31, 2026 or until they sell their Opportunity Fund investment – whichever is earlier.

If the investor holds their Opportunity Fund property for at least 5 years, prior to December 31, 2026, their deferred capital gains tax liability will be reduced by 10%. If the investor holds their Opportunity Fund property for at least 7 years, prior to December 31, 2026, their deferred capital gains tax liability will be reduced by 15%.

If an investor holds their Opportunity Fund property for 10 years the appreciation from this investment is excluded from capital gains taxes.

Example:

In 2019, an individual investor sells a building that results in a capital gain of $1 million dollars. Instead of paying the $200,000 (20%) in federal capital gains tax on this sale, the investor rolls their $1 million gain into a Qualified Opportunity Fund that invests the capital in building project for new housing in an Opportunity Zone, with a plan to liquidate the fund in 2029. The assumed value of this investment when sold in 2029 is $2,200,000.

The benefits include:

1. Being able to invest the full $1 million, (instead of the $800,000 that would be remaining if the capital gains tax were paid on the asset sale in 2019), into an Opportunity Fund.
2. Paying $170,000 in taxes in 2026, (by holding the property for 7 years and having the capital gain reduced by 15%), instead of paying $200,000 in 2019. 
3. By holding the Opportunity Fund property for 10 years there will be no capital gains taxes owed on the appreciation of $1.2 million in capital gains on the Opportunity Fund investment when sold in 2029; saving $240,000 in taxes.

The best part of the Opportunity Zone program is the benefit, that when property is held for 10 years or more and then sold, the appreciation from these investments is excluded from capital gains taxes.

This is also encourages pure investment without selling an asset. Real Estate Investment Trusts (REIT’s) and other qualified entities are being established to raise funds to invest in these Opportunity Zones. For example I In New York City, Sky Bridge-EJF Opportunity Zone REIT was launched on Dec. 1, 2018 to raise capital from “small” and large investors. The minimum investment in this REIT is $100,000. This type of structuring opens opportunities for many people to take advantage of the Opportunity Zones, with the communities where they are located reaping most of the benefits.

There are many approved Opportunity Zones in the tristate area; New York State has 514, New Jersey has 169 and Connecticut has 72. As these areas are revitalized with new housing and commercial businesses, the anticipated value of the new and redeveloped buildings in these areas is likely to increase significantly. This program will also create many jobs and benefit the real estate industry.

Impact of Sears Bankruptcy

Sears is closing 140 stores before the end of 2018.They may also have to liquidate all of their roughly 700 existing stores if it can't pull together enough financing to stay alive.

Simon Property Group, the largest mall owner in North America (175 Malls and Outlet Centers), Washington Property Group (owner of 106 Malls), Kimco Realty (owner of 510 shopping centers) and other major mall owners all agree the demise of Sears is an opportunity.

They may have to pay millions or billions to renovate the empty spaces and suffer temporary loss of rents between tenants, but in the long run malls and centers will be revitalized.

In the future many will effectively become “mixed use” consisting of retail stores, casual restaurants, entertainment and even grocery stores or hotels.

"The mall of the future doesn't need five, six ... department stores," said Simon Property Group CEO David Simon, "The ability to reclaim [those spaces] allows us to diversify our properties. And I think we have that opportunity in a rather large scale."

While outdated department stores are going dark, Simon also said the smaller, specialty shops inside the malls are thriving, and their sales are actually up.

"Simon has diversified the types of tenants it usually courts to fill empty stores, replacing an old Belk department store at Phipps Plaza in Atlanta with a Nobu hotel, office space and a 90,000-square-foot Life Time Athletic center. Landlords are also starting to look at co-working spaces and apartmentsas other fillers.”

Historically when Malls were being developed “anchor” tenants like Sears would be sought after as they would draw the customers to the mall and consequently be charged very low rent. These large stores vacancies would now provide room for several new tenants paying market rents.

“Simon says it will spend more than $1 billion in capital to redevelop the 33 Sears stores it has in its portfolio that either have already shuttered or are expected to close later this year. Washington Prime Group, which has 28 Sears locations in its portfolio slated to go dark, says it's allocating up to $325 million of capital to renovate them for new tenants. The latter also said last week it's now expecting net operating income to decline about 2 percent in fiscal 2018, primarily because of Sears.”

Millennials are 26.9% of all shoppers and the oldest people in the iGen will be 24 in 2019. Shopping mall owners are saying Sears' bankruptcy allows them to bring in new tenants that appeal to these groups: entertainment venues mixed into the retail centers, movies, bowling, fitness centers and casual restaurants. The new descriptive term will be “Blended Retail”.

Kimco CEO Conor Flynn said: "While some legacy retailers have been unable to adapt and compete in the new environment, resulting in reorganization or liquidation, there are many more savvy, well-capitalized and experienced retailers who have successfully adapted their business models and are flourishing," … "We are also seeing many new and creative concepts stepping in and grabbing market share at a rapid clip."

(Above quotes by Simon and Flynn are from a report by Lauren Thomas, Retail Reporter for CNBC)

Traditional stores are expanding product lines to also take advantage of Sears closures; Sears was once the dominate appliance retailer. Bloomingdale's Department Stores, known for its vast selection of handbags, high heels and designer dresses, is now focusing on higher-end appliances. On Nov. 19, 2018 it opened a shop selling LG Electronics appliances within its flagship department store in New York on 59th Street, and will also start selling those items on its website. Bloomingdale's will take the floor where it houses home goods to turn it into an "LG Signature" experience. There, shoppers will find items like LG Signature TVs, counter-depth refrigerators, washer/dryer combos, air purifiers and dishwashers.

To take a goal to reality requires a plan; a consistent course of action. To establish a business plan you must first establish your career goals. Where do you see yourself at the end of next year; someone who has established greater recognition as “the commercial agent” in their area; the “top producer in your company”; someone who has had more time for community service and family; and/or someone who has exceed this year income goals?

A financial goal for a commercial real estate agent may be to make $100,000 in commission next year. The goal needs to be broken down into steps. Each quarter you need to earn $25,000, each month’s production needs to yield $8,333. in commissions. What specifically will be required? What are the average sale and lease commissions in your area? How many sales and leases do you need to close each month to accomplish this? How many Listings do you need? How many presentations do you need to make each week? How many people do you need to meet each year? Answering these questions is the basis for your plan of action.

Daily prospecting is a must and should include “door to door” canvassing. Become “the commercial agent” in your area by systematically visiting each store, office or business in a specific geographic area. Introduce yourself, see if they have any real estate needs now or upcoming in the future. “When did you say your lease was up?”, and always ask for a referral, “By the way is there anyone else who you think I may be of assistance too.”

A reflection of who our customers and clients are reminds us that they are small business owners, professionals and large corporations.

Where can we find many of the business leaders of our community? Consider networking by joining the local Chamber of Commerce or local service organizations: Kiwanis, Lions, or Rotary etc. Become active in these groups and get to know the other members (your future customers).

Why focus on leasing? Tenants that are moving usually need to do so in three to six months. Leases close faster than sales; which is important for your cash flow.

Given the current economy we see a lot of activity in the leasing arena. Businesses are on the move, some are growing, some are shrinking and leases expire. Landlords are certainly doing all they can to retain or attract new tenants. The landlords fear is vacant space, interruption of their cash flow. This gives tenants today an edge in the lease negotiations.

As agents we have to remember it is our job to negotiate all the issues in the lease and almost every issue relates to money in one way or another. We also have to focus on who we are representing and do what is in their best interests.

The leasing process needs to begin with determining the “wish list” of our client. When representing the landlord we need to know the square footage of the available space and the base rent per square foot. But in office space we also need to determine if there is common area in the building that the tenant will be expected to pay for. Are there any “pass through” expenses in addition to the rent, i.e. utilities or CAM charges? Who pays the real estate taxes? How much security will be required? Is signage and parking included? Who pays for repairs? We need to understand the landlord’s position on every detail. We need to get this information when we take the listing.

You don’t want to show the space and have a potential tenant ask a question you cannot answer.

Representing the tenant requires the same information gathering. Remember tenants are not in the real estate business; maybe they do a lease every 5 or 10 years. They need our guidance. Go to their existing operations; help them determine how much space they really need. Observe the number of employees, as this will relate to parking requirements. If office space is desired determine for whom? Analyze how much space a clerical worker uses, look at the size of a manager’s office. How big is the conference room etc.? Helping a retailer determine needs must also include discussion of how goods are delivered to them; will they need a loading dock? Where is their inventory stored (don’t forget that basement space)? Industrial building expansion may just need a building with more ceiling height!

Another set of questions for a tenant concerns their budget. They may just be focused on overall monthly cost. We may have to educate them to “our language” or do the math for them when presenting a building with loss/core factors or pass through expenses. A key question is where do you see your business in 3 years, 5years? The answer can help us place them in a free standing building or a large building with potential for future expansion.

Developing a “wish list” for whoever you are representing is the first step in leasing. Then look at what is most important to your client. Establish priorities for the upcoming building or tenant search and negotiations. Also think creatively.

Helping our client’s starts with communication; today is a great time to contact landlords and tenants.

You receive a call from a local business telling you they need move and want more space. Typically the agent then asks them how much space they need. The business owner pauses, and then says about 5,000 SF. Most business owners are not in the real estate business and they may be guessing about their requirement.

What the agent should have done, when the call came in, is to assure the customer they could help them and set up an appointment with the customer at their existing location to conduct a needs analysis.

The next step before you go there is research. What does this company do? Who are the officers, are you talking to the decision maker, who has the authority to sign your listing agreement? We are in the people business; find out what you can about the person you will be meeting, look for commonality. They may have a bio on social media or google them.

In preparing for your interview there are five key areas of concern: Why Moving; Physical Requirements – Now and Future; Pain and Pleasure Issues; Loyalty and Authority; and Financial Strength. Plan what questions you want to ask, some suggestions follow.

Why Moving

- Why is the company relocating?
- When will they need to take possession?
- When does their existing lease expire?
- Would they buying?
- Desired moving date?
- Do they need to sell another building first?
- Are they doing a 1031 exchange?
- Would they consider leasing/buying more space than they need?   to temporally rent out surplus (for income or future expansion)

Physical Requirements

- Where is the company looking to locate
- Why?
- Would other areas be considered?
- How much space is needed?
- How configured?
- Storage requirements?
- Number of employees?
- Parking - employees, customer spaces?
- What would be the intended use?
- What are your future plans? Where do you see your company in two/five years?

One of the key questions when you start the interview is why do you need more space.

 If its office space and they are expanding, hiring additional employees, talk about job titles. For example we will be hiring two addition sales manages, please show me the office of one of your current sales managers. Now we start to measure, if the sales mangers office measures 10’ x 12’ (120 SF), make a note of this and also list under additional requirement 240 SF for two new sales managers. In the expansion will you be hiring addition clerical assistants; please show me where they sit now. Review all the job positions, talk about expanding or adding additional conference rooms, file storage areas; when done you will know how much space they are currently in and how much more space they will actually need. Similar assessments can be done for retail and industrial businesses.

If they are a growing company will they need more space in two years, five years? This helps focus on what size building to place them in. If leasing one may want to place them in a larger building with a ”First Opportunity” clause in the lease to have the first opportunity to take more space in the building if it becomes available.

What else is important to them?

- Space Plan (layout) – View
- Easy Access
- Public Transportation
- Amenities – Cafeteria, Health Club, Child Care
- Visibility – Signage
- Employment Pool (for future employees)
- Proximity to Customers
- Green – energy efficient building

Pain and Pleasure

     - Any issues with your current space (roof leaks)?
     - Where do your employees come from?
     - Will any employees leave your company due to the move?
     - What do you like least about your current space?
     - What do you like best about your current space?
     - If you could describe the perfect office/store/factory layout what     would it look like?

Ideally these questions help you build a profile of what is important to the customer.

Loyalty and Authority

- What other properties have you looked at?
- Why did you not consider them?
- Who should I be in contact with to show you space?
- Who will make the final decision?
- Who is authorized to sign my Tenant Representation or Buyer Broker Agreement?

Getting as much information as possible is your goal. This last question sets the stage for what you will expect from them, if you decide to take them on as a customer/client.

Financial Strength

- What are you paying for your space now?
 - Any additional rent costs (taxes, CAM charges, utilities, other)?
- What have you budgeted for the new space?
- How is your business doing financially?
- Sellers will want to see proof of funds.
- Landlords will want to see three years financials.

If leasing ask them for a copy of their current lease to breakdown and verify their actual costs.

Be candid regarding how their business is doing, if there are any problems you need to know now.

Landlords, sellers and banks will want to see their financials; they need to know they have or can get the money.

Conclude the interview by asking about their expectations. What are the three most important objectives that you have as pertains to this move? This will give you their perspective of what is most important to them.

Then evaluate, do I want to work with this client? Does the client have a realistic budget and expectations? How much time will you need to devote to completing this assignment? What is the commission potential from this assignment? Be realistic with yourself, sometimes what have to say, no.

Assuming the deal makes sense to you, explain laws of agency, and get your Exclusive Buyer or Tenant Representation agreement signed.
 

Waiting for the phone to ring

You got a good listing and it is priced right, now what? Where do you find the buyer or tenant?

First do some research, check the zoning, what are the permitted uses. You may find the zoning for the warehouse building you listed, also allows manufacturing use. In contrast, you listed a retail store used as a restaurant. Ten years ago they received a variance because they did not have enough on-site parking, problem is the variance ends when they vacate. You have a retail store to lease, future restaurant use would require going through the process of trying to get another variance.

Once you determine all the possible uses for the property prepare really good marketing materials and get signs strategically placed on the building or property.

Next let the world know. Post your listing on every internet site possible this includes local MLS, Commercial Listing sites (some are free but others require a subscription – a necessary investment in your business), your company web site, your personal website, social media, linkedin and facebook. This is all going to take time, but this is where 80% + of buyers and tenants go first.

Print media may be helpful depending on the type and size of the property this could include local papers, regional newspapers, ethnic papers and trade publications like the New York Real Estate Journal (NYREJ) or the New England version (NEREJ).

Now we wait for the phone to ring or an email response. No, now we aggressively seek out our buyer or tenant.

Let’s look at our other “customer base”, clients of other commercial brokers. Another agent may already have your buyer or tenant. Offer to co-broke your listing with all the other commercial firms and agents in your area. Consider having a commercial reception (open house) for the property.

You should belong to any commercial organizations in your area, talk about your listing at their meetings, many groups also
have web sites you can post on or the ability to blast listing to their members.

Next is “target” marketing. Make sure every business owner in the immediate proximity (1-2 mile radius) knows about your listing. A great “tool” is provided by the U. S. Post Office, “Every Door Direct Mail” where a flyer can be delivered by Carrier Route at a discounted cost. (https:www.usps.com/business/every-door-direct-mail.htm). You will probably find that  just a few carrier routes cover all the business areas.

Also target market by the type of use. For example if it were retail space, list all the types of businesses in the area, to determine what business is missing. No Dry Cleaners in the area, that’s your target. In larger industrial buildings, what other businesses currently use 50,000 SF of space, there are your targets.

Search the internet by your “targets”. If you list medical office space in Anytown, CT., search for doctors in Connecticut, what I found was an extensive list of the best doctors by Connecticut Magazine, including contact information. “Card stores on Long Island” was a search to fill retail space; it produced several lists of existing stores, who may want an additional location.

For some properties consider purchasing a Standard Industry Classification (SIC) list or the North America Industry Classification System (NAICS) list. Businesses are grouped by industry; list providers give you the names and contact information of companies within that group for specific geographic areas.

Talk to everyone about your listing. “By the way I just listed a terrific investment property, do you know anyone who might be interested in it?”

Commercial “tools”, organizations and news sites.

“Tools”

www.REIS.com
This is a research site focusing on previously sold and leased data. It produces comprehensive quarterly reports broken down to sub-markets.

www.BizStats.comand www.BizMiner.com
These sites analyze business tax returns to determine line item costs by industry. It provides Rent to Revenue Ratios by Industry (RRR-I). This helps us analyze how much rent a client’s business should be paying.

www.NARRPR.com
Realtors Property Resource is a National Association of Realtors benefit for NAR members. To get full benefits the local MLS must join RPR. However, when you enter a commercial address, the site takes you to the commercial section. Even without MLS affiliation you can get Commercial Property Reports which include the owners name and address, Trade Area Reports with expanded demographics, Trade Area Analysis  and Best Businesses (for a location) Reports.

 Organizational Sites

There are many real estate organizations that have Web sites. Some are national, as most of the examples below; but in different states and local areas many commercial real estate groups exist, many with websites. Search the internet for commercial organizations in your area.

www.CCIM.com
An affiliate of the National Association of Realtors is the Certified Commercial Investment Member (CCIM) Institute. This group provides a series of extensive educational courses leading to the CCIM designation.

www.sior.com
The Society of Industrial and Office Realtors (SIOR) is also an affiliate of the National Association of Realtors This organization provides educational programs in their area of specialty leading to the SIOR designation.

www.icsc.org
International Council of Shopping Centers Web site offers information about their organization and retailers. This group has conventions throughout the country during the year. Its largest gathering is in Las Vegas, generally in May each year where tens of thousands of retailers, developers and brokers gather to do business..

www.USGBC.org
The U.S. Green Building Council’s web site leads you to Green Education opportunities, LEED Rating Systems, Resources, News & Events and an opportunity to join local chapters.

There are local Commercial Brokerage Organizations and many Realtor Boards have CID’s Commercial Investment Divisions. Below are a few examples from my area.

www.NYSCAR.com
The New York State Commercial Association of Realtors site gives information about their organization and Chapter Events. They serve as the political “watchdog” for commercial agents in NYS, alerting us of potential laws that may benefit or harm our industry. Members can also “blast” their listings to other members. Another major membership benefit is access to their Exclusive Commercial Listing Forms.

www.NYSCAR-NYCLI.com
NYSCAR has seven Chapters throughout the State. This is the web site for the New York City - Long Island Chapter featuring local activities and events.

www.NYCommercialNetwork.org
Long Island Board of Realtors Commercial Division is now called the Commercial Network (CN). This active group meets monthly for education and networking. The site also contains a data base of member’s listings.

Real Estate News:

Being on top of the real estate news, knowing what is going on in our industry is important to your knowledge as a professional. Subscribe to e-news about Real Estate, in most cases news is free. Some examples follow:

www.globest.com
Globe Street provides daily national and regional real estate news about deals, trends and other industry information. You may sign up for various “Daily Alerts” at no cost.

www.RISMedia.com
Subscribe to “Today’s Real Estate Advisor” for free daily articles on real estate. Although many of the articles are written to the residential side, many of the tips and concepts can be applied to commercial real estate too. They do have other services available for a fee.

www.inman.com
Inman News specializes in real estate information and articles. This national “paper” has a special section just for commercial real estate, but requires a fee for full information.

I did an article 10 years ago on commercial “Web Sites”, looking back many of them are now gone. The latest site to go down was the National Association of Realtors site, “CommercialSearch”. They were being run by Xceligent who went bankruptcy. So here is my current list of Commercial Web Sites.

Certain sites are available to list and search for properties at no charge but may offer additional services on a fee basis. Other sites require membership fees for their use. Almost all sites (even if they are free) require a registration process.

Most sites are searchable by type of property, size, price range and geographically by town or county within states.

COSTAR Group

www.costar.com
CoStar owns Loopnet, Cityfeet  and Showcase. Its own site is focused on researching commercial buildings, with over 1,600 researchers tracking 5 million properties and 1.5 million listings. It provides extensive property details and excellent reports. It is “members only” access; members can post properties and search listings of other members.

www.loopnet.com
Loopnet is one of the largest national commercial listing services. It contains hundreds of thousands of commercial and investment property listings, which may be viewed by the public.  Searching for properties is free, but to post your listings requires a subscription.

www.showcase.com
Searching for properties is free. These properties are seen by the public. Posting is done through CoStar of Loopnet subscriptions.

www.cityfeet.com
This site also has an extensive amount of commercial listings, which are also distributed to many newspapers throughout the United States. Posting is done through CoStar of Loopnet subscriptions.

Other Sites

www.catylist.comAnother large data base of commercial and investment properties. You may search for properties at no cost but you must subscribe to post your listings.

www.commrex.com
Commrex.com is a national commercial property information exchange covering many areas of the country. They have listings in many states that can be searched for without cost. There is an annual fee to put an unlimited amount of listings on the site. They provide broadcast email services and other marketing “tools” to their members for a fee.

Free Basic Services are provided by:

www.realnex.com 
Basic services are without cost, but this site have extensive “tool” for a fee including transaction management, cash flow projections and marketing programs.

www.CIMLS.com
The Commercial Investment MLS was established in 2001 and now has over 320,000 members. This national site allows searching and listing of commercial properties without cost. Additional marketing services are available for a fee.

www.LDCRE.com
Leavitt Digital Commercial Real Estate is a huge global data base of commercial and investment properties. Basic services to search for and list properties are free. Additional services are available

www.CREXi.com  
Commercial Real Estate Exchange Inc. is a relatively new (started 2016) rapidly growing  national listing site; very high tech with interactive map searching. Currently only focuses on properties for sale, but lease listings are expected to be added this year. You may search and list commercial properties at no cost. They do have thousands of registered Investors (buyers) who they will market your properties directly to, for a fee.

In Triple Net (NNN) leases the tenant is responsible to pay all the expenses of the property including taxes, insurance, utilities, repairs and all maintenance. They may or may not also include Tenants responsibility for structural items such as the roof, bearing walls and floors. Triple Net Investments are most commonly occupied by a single retail tenant with excellent credit; that has signed a long term lease. They can also be other types of properties or a complex like a shopping center. Buyers are purchasing the land, the building and most importantly the lease. Due diligence in reading and understanding the lease terms and conditions is essential as the buyer does not have an opportunity to change it.

These triple net deals can offer many benefits:

• A long term lease to a quality tenant
• Typically new or nearly new construction
• Stable cash flow
• Easy to finance
• Tenant pays all or most of the expenses
• No management responsibilities
• Tax advantages of real estate ownership: depreciation and appreciation
• Generally a 5% to 10% Return on Investment (ROI)

The lower returns on investments are typically for the longer leases and are priced higher. When NNN Investments come on the market, where there is a relatively short term remaining on the lease, they pose a greater risk that the lease will not be renewed, consequently they are worth less in value and offer the largest ROI.

However in considering a Triple Net Investment, there are other risks; real estate fundamentals must not be overlooked, especially location and market trends. The tenant may be a household name but what if the unthinkable happens and they close or go bankrupt.

What is the buyer’s worst case scenario strategy? Upon vacancy the rent goes to zero, the property owner now has to pay the taxes, insurance and maintenance. They now have a vacant, certain sized building; zoned for what type of use; that can be rented for how much? This is known as the “dark value”. In determining what one would pay to buy this investment, this must also be considered.

Obviously a building in a declining market area or a secondary location can be difficult to re-rent. The investment property was a casual restaurant. They have gone out of business, who are you going to rent to – another restaurant. But there may be no one interested, as the location or changes in the market are why the initial tenant failed.

The tenants declining business may not be their fault. The NNN investment was a fast food business on the outskirts of a mid-size shopping center anchored by a Sears store, which basically was the draw for people to come to the center and the restaurant. Sears closed their store, with the ripple effect of the NNN investment tenant going out of business.

Many Triple Net Investment buildings are unique structures especially the fast food restaurants, banks and oil change businesses. They present a special risk if they go “dark”; as it can be difficult to adapt them to other uses and may even have to be demolished for redevelopment. To modify the current building for another tenant may be required to make the next deal; the owner may have to bare considerable costs for Tenant Improvements. This construction could be even more challenging if the absentee investor lives far away from the property.

Technology is great and ever changing, but what is “hot” today may not be here tomorrow. Buyers are expecting their NNN tenants businesses to be successful for the next twenty years or more. In the 1990’s and early 2000’s renting video tapes was the rage, BLOCKBUSTER had over 9,000 stores and was considered a good NNN investment. Then the industry changed, they went bankrupt in 2010 and now the company and video store businesses are history.

Let’s take another look at the lease, who is the actual lessee? The business is a Dunkin Donut, Burger King, Exxon gas station or other national chain; but the franchisee is the signer of the lease and there is no corporate guarantee from the parent company. The franchisee may even be a LLC, Limited Liability Company, so if they fail the landlord will virtually have no recourse. Buyers of Triple Net Investments need to carefully examine the tenant’s financials to be sure they have the wherewithal to make all the required rent payments.

Many people think of Triple Net Investments like fixed income, a stress free check arriving every month and it can be! But when purchasing these types of investments consider the worst case scenario. Never buy without visiting the location and understanding the demographics of that market. Plan ahead, if something goes wrong what can you do with the property. Read the lease carefully or have an attorney analyze it for you. Focus on who the tenant really is and their financial strength.

Since the recession of 2008, it has become common for Landlords to require Personal Guarantees from their Tenants. If the Tenant defaults on their lease obligation, even if the Company files for bankruptcy, the owner(s) of the business can be personally responsible for the outstanding rent, for the remainder of the lease term. Meaning their personal property is at risk: their home, bank accounts, investments, wages, etc. The amount of the obligation can be significant. In a 5 year lease, rent is $25,000 a year (without escalations). The Personal Guarantee required of the owner(s) is over $125,000! In a 10 year lease, rent is $50,000 a year (without escalations). The Personal Guarantee required of the owner(s) is over $500,000!

There is no doubt when it comes to Personal Guarantees in a lease the Tenant needs legal representation. The language of a guarantee can be very complex and must cover a variety of issues. In a Corporation, all four of the corporate officers may be responsible for Personal Guarantees of the lease. What is the amount each is responsible for, 25% of the liability? Probably not! What does the language of the Personal Guarantee say?

Most boilerplate lease guarantees impose, “joint and several liability” on the Tenants and the Guarantors. This means that the Landlord has the right to collect all of its damages from any one of the Guarantors. The Guarantor who gets stuck with the bill has the burden of seeking contributions from their fellow Guarantors.

There are many “what if’s”, that need to be addressed, In a corporation or partnership, what if one of the officers or partners retires, leaves the business or are bought out by the others? Is there lease liability released? Assumed by the others? Does the Tenant have the right to substitute another Guarantor at any time? What happens if the building is sold?

Tenant Improvements
Landlords are concerned in recovering the cost of Tenant Improvements (TI) or the cost of removing the improvements in the event the Tenant fails. When a Landlord agrees to do construction or Tenant Improvements the generally amortize the cost over the term of the lease; adding the costs to the base rent. If the Tenant defaults some of this money would not be recovered. This can be addressed with a Personal Guarantee for the construction cost. The amount of the Guarantee should be reduced down with each year that the Tenant fulfills their lease obligations.

When representing a Tenant the Real Estate Agent needs to negotiate alternatives that minimize the liability for their clients. What is the Landlord really trying to do in imposing a Personal Guarantee? Vacancy is the “kiss of death” for Landlords, it interrupts their cash flow, may hamper their ability to pay their mortgages, or refinance their building. It may take a considerable time to replace a Tenant. So as a starting point one needs to assess the local marketplace and determine in the event the Tenant vacates how long will it take to find a new Tenant and have them start paying rent. With that information the Landlord can be approached with alternatives to the Personal Guarantee.

Increase the security depositto reflect the anticipated “down time” not collecting rent. This could be 6 or 12 months. Most States regulate residential security deposit amounts, but not security deposits for commercial properties. This money is coming from the business funds not the owner’s personal monies.

An established business with good financial resources may be able to get a Letter of Credit from their bank to guarantee the lease. This is based on the resources of the business with no additional liability to the business owner(s).

Establish a time limit.Most new businesses, if they fail, do so within the first two years of business. Agree to a personal guarantee but limit it to two years. Perhaps offering the Landlord to review the company’s sales after two years and if the business has increased in sales, remove the guarantee.

Landlords want to see a record of payments that establish credibility. It is a five year lease; ask the Landlord, if we make all our rent payments on time for three years will you remove the guarantee?

Cap the Guarantee. Agree that if the Tenant terminates the lease the Landlord should be able to find a replacement tenant within 6 months. Tenant agrees to pay rent for up to 6 months after lease termination (or until another tenant commences rent payments, which ever period is shorter). This is sometimes referred to as a Liquidated Damages Clause; Tenant agrees to a preset and mutually agreed amount of money to settle any default.

Loss Mitigation
Whenever a Personal Guarantee is required, a Tenant should insist on a Loss Mitigation Clause in the lease. Generally, before a Landlord can go after the Guarantor they must “mitigate” their loss by taking and using all security deposit, actually marketing the space and only after a replacement Tenant is found; determine the amount of loss. The Landlord may include in determining the total loss: the number of months not receiving rent, marketing costs, legal costs, renovation expense and real estate commissions. This process may be regulated by local laws.

Typically in December the U.S. Congress passes a series of bills known as the Omnibus Appropriations Bills, which authorize the funding of the government for the following year. They include a group of items referred to as “extenders”; in this category they look at tax breaks that expired at the end of the previous year. Deciding if they wish to extend them for the current year by making the extension retroactive to January first of that year. Typically they are only extended to December 31 of the current year, leaving everyone in limbo as the upcoming year’s status.

Because the new tax bill was being processed in December of 2017, The Extender Bill for 2017 was not finalized until February, 2018.

EnergyEfficientCommercialBuildings(Section179D):expired on December 31, 2016 it has now been extended to December 31, 2017, retroactive to January 1, 2017.This section allows up to $1.80 per square foot in deductions to those who have upgraded their building’s lighting ($.60 psf), HVAC ($.60 psf), or building envelope ($.60 psf).

Non-Business Energy Property: expired on December 31, 2016, extended to December 31, 2017 retroactive to January 1, 2017. This program allows homeowners to take a 10% Tax Credit up to a lifetime maximize of $500 on the cost of certain energy saving improvements, such as energy efficient windows and doors, roof and HVAC systems.

The future fate of both these programs will not be known until the 2018 Extender Bill in December 2018 is announced.

The Investment Tax Credit (“ITC”)  was originally a 30 percent federal tax credit for solar and geothermal systems on residential and commercial properties through December 31, 2019, then a 26% tax credit in 2020, a 22% credit in 2021 with the residential property credit ending on December 31, 2021. Made permanent as of January 1, 2022 is a 10% tax credit for commercial properties.

However, as of December 31, 2016 the geothermal portion of this tax credit was eliminated. In the 2017 Extender Bill the geothermal tax credit was reinstated for both residential and commercial properties, retroactive to January 1, 2017. It remains as a 30% tax creditthrough December 31, 2019, then a 26% tax credit in 2020, a 22% credit in 2021 and expires on December 31, 2021.

There were many other provisions to the bill; these are the real estate related items.

When a landlord gives a tenant an Option, they make a commitment to honor that option if it is exercised by the tenant. The tenant has a choice to exercise the option or not.                                                                                                                  

Option to Extend or Renew

A lease may be written for a specific term and have an option for the tenant to extend the lease term for an additional period, or periods of time  (i.e. the term of the lease is five years with a five year options to renew). If the tenant does not exercise the option to extend the lease, the lease ends at the end of the initial term. The rent may be pre-defined for any option period, or determined by a formula, or negotiated at the time each option is exercised. Another method for calculating option rents is the dual appraisal. This takes into consideration current market conditions and values. The landlord and the tenant each obtain an appraisal of rental value and use this to negotiate a rate.

Expansion Option

A tenant may anticipate that their business will grow and they will need more space in the future. They may negotiate an Expansion Option or a First Opportunity Clause in their lease. If more space becomes available in the building, the landlord must give this tenant the first opportunity to rent that space.

Option to Buy

In a lease a tenant may have an “Option to Buy” the property. This is usually for a specific time period and may be for a pre-determined price. A tenant may want to lease the space first, before making a commitment to buy; to be sure their business will do well in this location.

Purchase Option

When a tenant is given a long period of time or the entire lease term to consider buying the building, this is called a Purchase Option. The price in not predetermined; rather if the tenant exercises their option to buy a dual appraisal method would be used to determine the sale price. The landlord and the tenant each obtain an appraisal of market value and use this to negotiate a rate.

Right of First Refusal

Another form of an option to purchase is known as a Right of First Refusal. In this case if the owner decides to sell the property, a tenant with a Right of First Refusal would have the opportunity to match a purchase offer from a third party and buy the property. Brokers must be careful that their listing agreements cover all these possibilities. With the Right of First Refusal, your agreement must state that if a tenant in the building buys the property based upon an offer from your customer, that you are entitled to a full commission. You must also disclose to your customers if someone has a Right of First Refusal to the property.

Sales Option

When a property is on the market for sale a potential buyer may obtain a Sales Option from the owner. Effectively the buyer is buying the right to purchase the property within a specific period of time. The owner is being compensated for taking the property off the market and not selling it to anyone else during this time period.

For example a sales option could be used when a property is desired for a use that will require a change of zoning. In some areas the procedure could take a long time. An owner may not want to sell their property “subject to” zoning approval and have to wait to close on it. A Sales Option would compensate the seller for taking the property off the market and give the buyer time to obtain their approvals. The monies paid for the sales option are fully earned by the owner. At the end of the option period the buyer must close on the property or the agreement  ends. Frequently if the buyer goes forward with the purchase the monies paid for the sales option will be credited towards the sale price.

Getting Paid

Agents need to have all of these possibilities defined in their listing agreements to receive commission if any of these options are exercised.

We find reference to Emotional Support Animals (ESA) in the Americans with Disabilities Act (ADA) and in the Fair Housing Laws.

Under the ADA they define “Service Animals” and in that definition exclude Emotional Support Animals. “Service animals are defined as dogs that are individually trained to do work or perform tasks for people with disabilities.Examples of such work or tasks include guiding people who are blind, alerting people who are deaf, pulling a wheelchair, alerting and protecting a person who is having a seizure, reminding a person with mental illness to take prescribed medications, calming a person with Post Traumatic Stress Disorder (PTSD) during an anxiety attack, or performing other duties. Service animals are working animals, not pets. The work or task a dog has been trained to provide must be directly related to the person’s disability. Dogs whose sole function is to provide comfort or emotional support do not qualify as service animals under the ADA.”

In addition to the provisions about service dogs, the Department’s revised ADA regulations have a new, separate provision about miniature horses that have been individually trained to do work or perform tasks for people with disabilities.(Miniature horses generally range in height from 24 inches to 34 inches measured to the shoulders and generally weigh between 70 and 100 pounds.) Entities covered by the ADA must modify their policies to permit miniature horses where reasonable.

Service animals are required to be permitted in all places open to the public.This is federal law, even if the local building department prohibits animals in a building. Service animals are defined as dogs and miniature horses only; that are specifically trained to assist the person with their handicap. Under ADA emotional support animals are not service animals.

The Fair Housing Act requires owners of housing facilities to make “reasonable accommodations”, exceptions in their policies and operations to afford people with disabilities equal housing opportunities. For example, a landlord with a "no pets" policy is expected to grant an exception to this rule and allow an individual who is blind to keep a service animal in the residence.

I had a student in one of my classes, who owned a ten unit apartment house, tell this story. They had a blind person with a Seeing Eye Dog apply to rent one of their apartments. They were about to make an exception to their “no pets” policy when one of their existing tenants found out about the potential new renter. They came to the owner and voiced their concern, saying that the reason they rented in this building was because of the “no pets” policy. Explaining, they have terrible allergies to animals. Consequently the owner denied renting to the blind person. If challenged, this would be a legitimate excuse for not complying with the ADA Act.

The Fair Housing guidelines now includes giving “reasonable accommodations” to people with Emotional Support Animals (ESA), an animal that provides the owner with companionship or comfort. The need for an Emotional Support Animal must be documented with a certification letter from a Doctor or Mental Health Provider.

An emotional support animal is an animal (typically a dog or cat though this can include other species) that provides a therapeutic benefit to its owner through companionship. The animal provides emotional support and comfort to individuals with psychiatric disabilities and other mental impairments. The animal is notspecifically trained to perform tasks for a person who suffers from emotional disabilities. Unlike a service animal, an emotional support animal is not granted access to places of public accommodation. Under the federal Fair Housing Act (FHA), an emotional support animal is viewed as a "reasonable accommodation" in a housing unit that has a "no pets" rule for its residents.

The United States Department of Housing and Urban Development (HUD) uses the term "assistance animal" to cover any animal that works, provides assistance, or performs tasks for the benefit of a person with a disability, or provides emotional support that alleviates one or more identified symptoms or effects of a person's disability.  An emotional support animal is one type of assistance animal allowed as a “reasonable accommodation” to a residence with a "no pets" rule.

At issue still and undefined are the types of animals that may be considered emotional support or assistance animals. Recently a woman wanted to take her ESA Peacock on a plane with her. The airline denied her request do the size of the bird.

Retail stores and other places can choose to allow Emotional Support Animals into their businesses; but what about the people with allergies to animals. The dilemma continues.

You market your listed properties; but what are you doing to promote yourself? Self-promotion is essential if you want to build your business. You need to tell people you are in the Commercial Real Estate Business; that you are a professional and an expert.

Create a template for an ongoing Public Relations Campaign and make a list of the local and regional newspapers and trade papers to send to. Publicize everything you do: education taken, certifications earned, designations or awards you receive, representation agreements and deals you close.

Create your own Real Estate Column for your local paper. Information about market conditions, financing, taxes, local zoning. Be creative. I had an agent who started a weekly column, each week he interviewed one of the businesses in town. Asking the same questions; why did you open your business here? What do you do/sell? What other business would you like to see move into the community? Everyone was interested in learning about other businesses, and at the end of each article he posted information about available real estate.

Did you give out 500 business cards last month? Give two business cards to every person you meet. Saying, here are a couple of my cards, one for your records and please pass the other onto someone you think I may be able to help.

In addition to that referral system you should be recruiting residential agents, who do not do commercial work, to refer their buyers to you after they close on the house?

Does everyone you pay money to; know you do Commercial Real Estate? If you’re Barber, Hair Salon, Doctor, Lawyer, Accountant, Gas Station Owner, Dry Cleaner, Deli, etc. need more space or want to buy a building are they coming to you? Make sure they all know what you do. One of my agents made up a “mini” advertisement of her services and placed her ads in every bill she paid. The President of her local oil company saw the ad, and called her to find his company a 30,000 office building to buy.

Service clubs, chambers of commerce and other organizations are constantly looking for speakers; volunteer to talk about market conditions, show you are the expert. Host a seminar; maybe get some mortgage providers to sponsor it. Invite business owners from town, speak yourself and/or bring in an Accountant to speak on the new tax laws, a 1031 Exchange Intermediary or a Management Company.

Get involved in the community, volunteer for local charities, serve on organizations committees. Is there a local talk radio station? If so, let them interview you or make a regular Commercial Real Estate Market report.

Contact five people a day form you sphere of influence list, get their email addresses. Start a quarterly of monthly electronic Newsletter. It does not have to be long, just community information. Did you know that vacant store on Main Street has been lease; a new Bakery is coming to town! A few bits of news, then close with “Buy the way did you think of anyone I may be of service too?

Most folks spend 1-3 days a week in the local grocery store, typically for 45 minutes; would you like to have a commercial that lasts that long? Consider “Cartvertisng”. Many supermarkets have advertising spots available on their shopping carts. Talk about “Branding” opportunities!

Get active on social media, Facebook and LinkedIn, in addition to posting your listing, think Public Relations. When you do any of the things suggested in this article send out your press releases and post your activities on social media. If you don’t promote yourself who will?

Tax Deductions for Real Estate Agents 2017 - 2018

This article will cover a lot of possible tax deductions which you may or may not be able to take. Your individual situation needs to be discussed with your accountant or tax advisor. Generally if you are an independent contractor you can deduct most expenses related to your business activities. But, be sure to keep a daily log of your business activities and expenses, as well as receipts for everything; so in the event of an IRS audit you have documentation. Significant changes will be occurring for the 2018 tax year (which you will file for in April, 2019).

The new tax law, effective January 1, 2018 provides Sole Practitioners (Independent Contractors), LLC’s, Partnerships and S Corporations a 20% deduction of business income. Excluded are “Personal Service Businesses”. Defined as “Any business where the main asset of the business is the reputation or skill of one or more of its employees or owners.” Real estate agents and brokers are in this category. However, NAR secured an exception for single owners with taxable income under $157,500 and for couples filing jointly with taxable income under $315,000. The deduction is phased out for income above this and eliminated on single income over $207,000 and couples filing jointly income over $415,000.

In our field we do a lot of driving, car expenses (leased or owned) are tax deductible with the exception of “commuting miles” to and from your home to your office. This can be deducted by 53.5¢ a mile in 2017 and is raised to 54.5¢ a mile in 2018; or by specific expenses for fuel, repairs, car washing, depreciation, etc. Tolls and parking expense are also deductible. Interest on a car loan, based on business use percentage is also deductible. Other business travel by rail, air, ferry’s, taxicabs may also be deductible.

Advertising is deductible and takes many forms: print media, signs, banners, business cards, postal expense of mailings, flyers, promotional materials, web site development and fees and online advertising.

Deductible Professional Fees include: MLS fees, costs of other listing services, licenses, E&O insurance, subscriptions to trade publications, fees to attorneys, accountants and consultants. Business and trade organizations dues are deductible.

Equipment used in your business may be deductible for example: Cellular phones, pagers, an answering service, iPad, cameras, calculators, computers, laptops, software programs, copy machines, desk fees if you have them at your office, GPS subscriptions, office furniture, file cabinets and office supplies.

Education: The costs of Continuing Education courses are deductible, as are expenses to attend other seminars or business conferences to maintain and increase your skills. Also deductible are the costs of travel and lodging to attend these events. Books, tapes, CDs, DVDs related to real estate, sales, leases, negotiations and online courses are deductible.

Sales expenses that may be deducted include: client gifts, clerical support, wages paid to a sales assistant, commissions and referral fees you paid out, bank fees (you should have a separate bank account for your business), open house or broker reception costs, locksmith and keys, lockboxes.

Self-employed people may deduct 100% of their health insurance premiums.

Entertainment of clients expenses (50% of costs) were deductible for 2017; but are no longer deductible in 2018.

The 50% deduction for food and drink associated with business or work travel still remains deductible. Be careful, this is often reviewed by the IRS. Be sure to document the business discussion that occurred before, during or after meeting or event.

Home Office Deduction is possible if you exclusively use a portion of your home for business; this deduction is also often looked at by the IRS. If you rent or own a home a percentage of the expense may be deducted; this could include the rent, utilities, repairs, maintenance, mortgage interest, real estate taxes, depreciation, and condo association fees.

Retirement plan contributions to IRA’s, and similar plans can help shelter your business profits. Discuss these opportunities with your advisor.

Tax preparation fees paid in 2017 are deductible, but in 2018 they will no longer be a deduction.

Two key reminders, every persons situation is different you need to review these possible deductions with your accountant or tax advisor. Keep good records, a daily log and all receipts.

Historically Mall developers seek “anchor” tenants; major retailers who draw people to their stores though their advertisements and merchandise mix. To entice them to open in their location landlords offered “sweetheart” leases with very low rents; the tenants do pay their share of the taxes and Common Area Maintenance charges. Smaller size merchants (inline tenants) seek to open their business near these anchor stores to get the benefit of the customer traffic; and pay high rent to do so. With one or more anchors and 25 -100+ smaller stores you have a regional shopping center with the largest ones, often enclosed, called Malls.

But what happens when anchor stores like Sears, Macy’s, Kmart, JC Penny, Sports Authority close, “go dark”? This can be devastating to the landlord because in most cases the inline tenants have Co-Tenancy clauses in their leases.

Co-Tenancy clauses can take many forms, generally they allow the tenant, when the anchor store goes dark, to reduce their rent payment to a predetermined amount or convert their rent obligation to a predetermined percentage of their sales. They may also allow the tenant to terminate their lease if the anchor store is not rented within a certain time frame. This however can create another issue, what if the replacement anchors business causes the shoppers demographics to change and no longer “feeds” the tenants business; their lease may allow termination in this case.

Landlords lose their anchor store, rent revenue decreases and then small stores start leaving; is this the death of that shopping center or mall? We currently have 1,200 major shopping malls in the United States; experts predict 25% (roughly 300) will close within the next five years.

Mall owners have other alternatives; with many of the anchor leases started 10-20 + years ago they may be able to rent the anchor space today for more money. With many retailers also doing business online the demand for large stores has changed to downsizing; they may put 5, 10 or more new tenants into that space.

With a shift to Millennial aged consumers the definition of who is an “Anchor store” is changing. Owners are rethinking and repurposing their malls with the new consumer draws being dining, entertainment and grocery stores, and these new anchors pay real rent too.  In the King of Prussia mall in Philadelphia Outback and Yard House restaurants now occupy the old Sears location; Fig and Olive restaurant will be occupying part of the formers Saks Fifth Avenue store. Food courts still exist but there is considerable demand for casual dining restaurants with bars and a social atmosphere.

Entertainment is another new anchor; movie theaters, bowling alleys, fitness centers, indoor kid’s theme parks. The biggest shift is to add grocery stores to the mall environment. Wegman’s Food Markets (supermarket) has leased the 194,000 SF former JC Penny store in the Natick Mall in Boston. They will occupy 125,000 SF themselves and sub-lease the remainder of the space to smaller stores.

Some retailers are doing exceptionally well and expect significant new growth in 2018. Just to name a few: Discounters, Dollar General and Dollar Tree; Grocery stores, ALDI’s and LIDL; Clothing, American Eagle, TJ Maxx, and Burlington; Pets, Petco and Pet Smart; Phones T Mobile and Sprint:  Specialty, Dicks Sporting Goods, Harbor Freight, and Advanced Auto Parts. Don’t be surprised to find some of these typically standalone stores now in your mall. Giants like Wallmart and Cosco are also planning expansion this year.

Retail is not dying it is just ever changing. We have learned that considerable business may be done over the internet but people still want to be able to visit “brick and mortar” stores. Going shopping at “the mall” is a fun and social experience.

New Year’s Resolutions for Commercial Real Estate Agents

1.    Meet two building owners or tenants in your town every day.

Systematically meet every business owner in your town. Two a day, ten a week, forty prospective clients/customers a month; you will become “The Commercial Agent” in town.

2.    Join and attend Chamber of Commerce meetings and volunteer to serve on committees.

Who belongs to the Chamber or Service Clubs? Your future clients; get active in the group to become known.

3.    Call FSBO’s until you get two appointments for tomorrow.

The only reason an owner runs their own ad is because the vacancy is costing them money. Find then a tenant, restore their cash flow and they will be happy to pay you.

4.    Attend Commercial open houses and meet 25 new agents before you eat!

Networking contains the word “work”. At these events work at building up your list of other agent contacts, who may have the buyer or tenant for your next listing.

5.    Catalog everyone you met yesterday (building owners, tenants, agents) into the address groups on your computer.

Multiple address groups; retailers in 1,000 SF – 2,000 SF, office users in 3,000 SF – 4,000 SF, building owners (investors). Blast your new listing to these potential buyers!

6.    Stop by and see two prior clients/customers each week.

Just because they signed a 5 years lease does not mean they will stay there that long. Their business is booming after two years, they need more space. Can you find them more space and sublet the space they are in, and collect two more commissions?

7.    Daily review of all new commercial listings in your area; arrange to co-broke and add to you “comparable” data base.

You need to know every available property in your market area. Your customer asks: “On the way here I passed a building for sale on Main Street, do you know the size and asking price?”

8.    Develop and meet with your  “leads” group once a month.

A” leads” group consists of up to 10 people, but only one person from any industry (one architect, one accountant, one from a moving company, etc.) meeting regularly to exchange information about potential customers.

9.    Call MLS commercial expired’ s until you get two appointments for tomorrow.

Expired listings are gold. The owner is frustrated, maybe the agent was not trained in commercial and the property was not marketed properly, time for a change.

10.Join and attend monthly commercial organization’s meetings.

Meet and add other commercial agents to your distribution list; be added to their lists. Great for those new in the business, “pick the brains” of the experienced agents.

These resolutions need to be part of your daily prospecting, which is required for success in our business.

Consider two more resolutions to be the best at what you do.

11.Expand your skills – take educational courses; earn a Certification or Designation.

There is a lot to learn in this ever changing business, stay current and expand your knowledge and services offered.

12.Read business and motivational books.

Knowledge is power. You need to be a “10” every time you make a presentation or meet someone new. Do what it takes to be there.

            Now get out there and make it a great year!

To be successful in real estate you need to have the right attitude, understand the numbers, have a goal and follow a plan. Attitude is everything; you must meet every client and customer with enthusiasm, confidence, demonstrate your market knowledge and be the winner they want to hire.

What do you expect to achieve in 2018; what are your business financial goals and your personal life goals? Goals must be thought about and then written down: when you write something down it enters your sub-conscious mind, creating a constant reminder of what you want to achieve. Once a goal is set, a plan must be developed to accomplish it.

In real estate, the plan to achieve your monetary goal focuses on how many listings do I need, how many sales and leases do I need to close? To begin these analyses first determine how much money you want to make next year? Next examine your market, what is the average sales price of commercial buildings and size and terms of typical leases. Figure out what would be your typical net commission after co-brokes and splits with your firm. Now translate that to the number of sale and leases you need to do next year to accomplish your goal.

If you want to close 12 transactions how many listings do you need to get? What is your closing ratio; do half of your listing sell or lease? If so you need 24 listings next year, plan on obtaining two a month. How many listing presentations do you need to go on to get an exclusive listing; one out of two a 50% listing ratio? So to get our 24 listings we need to go on 48 listing presentations, four a month, or one a week.

These numbers nowbecome the basis for your production planning. Work backwards from your total transactions required for the year; break it down by what you have to do each month, each week and each day to reach your goal.

Of all of ways you used to build your business this past year what marketing techniques worked best? (You are tracking where every lead comes from, right.) Are you working these programs: announcement letters with phone follow up calls; newsletters (print or email); target mailings; referrals from residential agents and past clients; networking at commercial organizations, Chamber of Commerce and Service Club meetings; working trade shows; cold calls; telemarketing; leads groups; advertising; website marketing or social media? If you joined an organization and are getting no business from the members try a different group. Not every marketing technique works in every market, if a program does not work for you do something else. Albert Einstein defined Insanity as “Doing the same thing over and over again and expecting a different result.”

Real estate has always been a people business. To succeed in 2018 we must focus our skills on people. Finding new “people” is the first step but then we must convert them to clients and customers. This is done by demonstrating our superior market knowledge and communication skills.

Market knowledge – assume your client knows every listing that is posted on the various web sites; what can you tell them they cannot find out for themselves? Do they know local zoning rules or proposed changes, mortgage requirements, or about Capital Gains Taxes or 1031 Exchanges? County or State economic growth programs, available tax credits, energy rebate programs, what can you tell them about GREEN building concepts or GREEN leases?

Communication – assume everyone is high tech and wants the answer NOW! When you’re listing property, interview the owner, get the answer to every possible question the buyer or tenant may ask. Be sure you are ready to communicate at every level. How are your texting skills, how many times a day are you checking your e-mail?

More than ever we need to get out into the community speaking with business and building owners. We must devote some time each day to prospecting, expanding our own knowledge base. We must be excellent communicators, having the knowledge and getting back to our consumers as fast as possible. That’s what it will take to be successful. Good luck!

Natural Disasters, like hurricanes disrupt people’s lives; their homes may be lost or uninhabitable, their business or job lost. The immediate repercussion of such storms creates needs for shelter, food, water, sanitation. After the storms are the buildings repairable, where will the displaced people move to, will they still have jobs?

What happens to the local real estate market after natural disasters occur has become predictable.

Hurricane Katrina, in 2005 destroyed New Orleans, Louisiana. The major flooding forced an evacuation of the city; 750,000 households were displaced.  Rental unit’s activity and pricing immediately increased, as many households needed temporary housing, as did the influx of construction workers needed to do the repairs.

Many people have to, or want to, move to dry, safer surrounding areas. The aftermath of the storm, left thousands of destroyed and damaged homes, and a temporary halt to new construction, created an inventory shortage causing market values of homes in surrounding areas to increase by 17%.

However, the value of damaged homes seriously declined with the reduced prices becoming a target of aggressive buyers and investors. The New Orleans Metropolitan Association of Realtors reported the year after the disaster home sales were up 60% over the prior year.

In 2012 “Superstorm” Hurricane Sandy attacked eight States, in New Jersey the shore was swept away; in Queens New York, the homes in Breezy Point were leveled. New York City was flooded and lost power; in lower Manhattan one third of the office space was not fit for occupancy. Employers struggled to keep employees working; businesses needed short term rental space and rental costs escalated. Some businesses made permanent moves to more weather secure locations.

After hurricane Sandy, the same pattern as the Katrina disaster emerged, rental needs and prices exploded. With homes destroyed, damaged ones off the market, and new construction delayed, home prices increased.

The 2017 Hurricane season has been one of the worst ever, with five major storms, making landfall and wreaking havoc in the Gulf States and the Caribbean Islands.

In Houston Texas, Hurricane Harvey dumped over 51 inches of rain causing major flooding. It is now estimated that 40,000 homes were completely destroyed, 196,000 single family homes and 105,000 apartment units were damaged. Landlords of damaged apartment buildings had to evict tenants as the buildings would not be safe until they were repaired. CoStar estimates 27% of all leasable space, including apartments was flooded, 600 million square feet, including 72 million square feet of office space.

The impact on real estate followed the same pattern as the other storms; an immediate increase in housing requirements for apartments and condos. REIS issued an analysis of the market after the storm, anticipating the pricing of these residential rental units would increase 10% - 15%. Demand for temporary office space increased with the rental rates expected to increase 5% -10%. Overall 5% of all commercial buildings were damaged. The retail sector had extensive damage where many of the small businesses are not expected to survive.

The largest category affected was housing. The Houston real estate market was considered “hot” before the hurricane and it still is. Home sales and residential rental activity in the areas not affected by flooding increased, as did the pricing. In flooded areas there is also activity, with cash investors seeking to buy the damaged homes at discounted prices.

The Caribbean Islands were recently devastated by two hurricanes. Unlike the storms that hit parts of the mainland, which had unaffected surrounding areas, the entire area of the islands were damaged.  Hurricane Irma, a huge Category 5 storm struck the Caribbean and Florida. In the Florida Keys 90% of the homes were damaged and 25% destroyed. Most of the Caribbean Islands suffered tremendous damage, with power outages compounding issues of survival. The infrastructure on many of the islands needs to be cleared and replaced; transportation problems and gas shortages contributed to emergency water and food distribution issues.

Puerto Rico, hit by both Hurricanes Irma and Maria, was decimated. Weeks later still no power for most of the island. The power grid on the island was virtually destroyed and many feel it does not make sense to rebuild an above ground electric system. Governor Ricardo Rossello had been in conversation with Tesla’s CEO Elon Musk to use Tesla solar technology to re-build Puerto Rico’s electric grid. But the contract to rebuild the Islands electrical system was awarded to Whitefish Energy.

None-the-less Tesla’s CEO Elon Musk is following through on a pledge to contribute to rebuilding the power grid devastated by Hurricane Maria; they are installing solar and power storage at Hospital del Nino. Musk has also donated $250,000 to relief efforts in Puerto Rico.

The real estate in the Caribbean Islands is largely driven by recreation and tourism, which has been temporally halted. They do not fit the pattern of the storms hitting the mainland because the people have nowhere else to go. They will require major rebuilding of roads, power supplies, commercial buildings, homes and schools to regain normalcy; the challenges are huge. The real estate industry on these islands is virtually suspended until reconstruction can be accomplished. 

Residential Agents thinking about doing commercial transactions…

You Don’t Know What You Don’t Know!

You can’t just dabble in commercial and investment properties; you need to know what you are doing. Unfortunately, we see some residential agents trying to service a commercial real estate opportunity without being properly trained. Sometimes agents don’t realize how different commercial transactions are; without the right education they may end up unable to help their client, or exposing themselves and their firm to liability.

In most states the “Laws of Agency” are basically the same. It must be made clear to the consumer who you are working for and you have fiduciary duties including Disclosure and Reasonable Care. What do you have to disclose? Everything! This means you need to know what is going on in your market area. Put another way, “You should have known.”

An agent listed a 2,000 SF building on an acre of land. The buyer asks, “Can I expand the building?” Agent looks at all this land and says “Sure.” The agent never checked the zoning for; buffer zone, setbacks, variances, does not know the FAR (Floor Area Ratio) or parking requirements etc. If you don’t know what some of these things are, that’s the point.

Reasonable Care includes performing financial analysis and valuation; basically you must know your market area. That means knowing what other commercial properties are on the market and what has sold or leased. From a practical point of view, an agent lists one commercial property, a buyer is meeting him or her to view it and upon arrival says, “On my way here I noted a vacancy on Main Street, what can you tell me about that building?” You need to know what is going on in your market. A new shopping center has just been approved, and construction will start soon. Does this make your clients property more or less valuable?

How do you measure commercial buildings; landlords expect to be paid for every square inch of their buildings. In office buildings the thickness of the exterior walls are considered structural and are excluded from measurements. Tenants will exclusively occupy a part of the building, with space being measured from the inside of the walls, called Usable, a/k/a Net or Net Usable square footage (SF). However they will pay rent based on the Rentable, a/k/a Billable or Gross square footage, which includes their Usable SF plus their proportionate share of the common areas (atriums, foyers, corridors, including the thickness of the corridor walls, public rest rooms and other areas). Retail and Industrial space is measured from the exterior of the building and includes the thickness of the exterior walls. If adjoining another unit half the thickness of the dividing wall is allocated to each tenant. This is referred to as the Gross square footage and this is what the tenants rent is based upon.

Working in the commercial market requires knowing the terms and the formulas. What is a Loss Factor or Core Factor? How do you convert usable square footage to Rentable SF? From a financing perspective, what is Loan to Value or Debt Service Ratio and how do you calculate them.

Investment properties require additional skills: Operating Statements, Financial Analysis, Cash Flows and Spreadsheets; how to determine Net Operating Income, Value, Internal Rate of Return, Net Present Value. What do you know about Capital Gains Taxes and 1031 Exchanges?

Learning about the different types of leases, the key lease clauses and what needs to be negotiated by the agents before the attorneys can draft a lease are essential. “Green” has many perspectives from greenhouse gases, climate changes carbon emissions, to the impact of energy efficiency on the operating costs and value of buildings; plus now we have Green Leases.

Yes, there is a lot to learn to prepare an agent to do commercial and investment property transactions. If you company does not have an in-house commercial training program, seek out training courses at local Boards of Realtors or Colleges or find an experience commercial agent willing to mentor you. Now you have some idea of what you need to know.

I have voted in many Presidential elections. Up to Election Day I strongly advocate my chosen candidate; but after the election I supported whoever won. Each day now in the news and social media, the latest election seems to be continuing with strong feelings and rhetoric being expressed by so many people. Congress seems more divided than ever.

Clients are still continuously asking their agents “Who did you vote for?”, “What’s your position on…?” This creates a new communication challenge to those of us in real estate. We know we must develop trust with our clients which means being transparent and honest, but will the answer to those types of questions rub the client the wrong way. If we answer, “I don’t talk politics or religion” they may not like that answer either.

I recently read an article in the Realtor Magazine, “How divisive public discourse is affecting business relationships—and what you can do about it.” by Graham Woods, which addresses these issues.

Part of the article was basically a caution to agents not to personally participate in social media positions that could affect their image. I quote:

“Real estate pros are public ambassadors for their communities, so they should remember that they are representing their business and neighborhoods at all times and on all forums—even if their intent is to “switch” to their personal persona, says Marki Lemons-Rhyal, a Chicago-based real estate coach who teaches social media ethics. “You shouldn’t be a practitioner and shouldn’t have a license if you think, ‘I’ll say whatever I want to say,’” she says. “You don’t get to take your real estate hat off. If you get online and rant and rave, that sends the message that you won’t work with a certain type of client.” “

You may be thinking, this is America and we all have a right to free speech, which we do. But in our business what we say, especially on public media, can have consequences.

That last sentence of the quote, I find most concerning, “…that sends the message that you won’t work with a certain type of client.” At best, you’re losing potential business, but could this also be considered a form of discrimination?

Discrimination is defined as making a distinction in favor of or against, a person or thing based on the group, class, or category to which that person or thing belongs rather than on individual merit.

I won’t work with you because you’re a Republican, or a Democrat, or because you support President Trump or you don’t. Sounds like that could be considered discrimination to me. Should “political views” be the next protected class?

Real estate practitioners sometimes have to walk away from potential business. In our business some potential clients are prejudice; they want to sell their building or house, but tell us “I won’t sell to ______.” (People from a certain country, color or religion) We cannot list their property under those circumstances.

Politics is being discussed everywhere today, on the media, in your office and with clients and customers. You are entitled to your views and opinions, but you must decide if you wish to share them. What messages are your actions delivering?

Letter of Intent (LOI)

Our role as agents in a real estate lease transaction is to negotiate all the terms and conditions. The resulting agreed points are listed in a “Letter of Intent” which is sent to the attorney who will be creating the lease. The Letter of Intent is not a binding agreement, only the lease is.

When we take a listing we have to determine the Landlords “wish list”; the same holds true if we are representing the tenant. What is important to them? When representing a tenant, the landlord’s desired lease terms are known and the LOI serves as an offer. This creates the basis for the negotiations until a final “terms agreed” LOI is documented.

Leases must be comprehensive and clearly state the facts about the space, who will be responsible for what, and who pays for what. Details are important; a good lease will cover all possible issues.

Follows is a list of items that need to be initially discussed with whichever side you are representing, Landlord or Tenant. Think of this as a “check list” for determining their position and level of importance on each issue. After the negotiations and agreements are reached these items become the basis for the LOI.

Space: If Office Space, Net Useable Square Footage, Loss Factor or Add- On Factor,

Rentable (Billable) Square Footage. If Retail or Industrial Gross Square Footage.

Use of Space: Business usage, Certificate of Occupancy, Permits or Licenses

Lease Term: Define the initial term (length) of the lease and Renewal, Extension or Expansion Options

Rent: Base monthly rent or Rent per Square Foot (SF). What is included in Base Rent?

Base rent to include? (i.e. Heat, air conditioning, utilities, cleaning)           

Additional Rent: Are there any additional charges to the tenant? (i.e. Common Area  Maintenance (CAM), Insurance, Utilities, Taxes or Tax escalations?

Utilities: Who pays?

Taxes: Who pays?

Rent Escalations (Increases)

Condition of Space: as is, broom clean

Alterations or Tenant Improvements:

Landlord shall allow tenant to ____________, at tenant’s expense. Or construction requested to be paid for by Landlord, work letter. (Attach details)

Concession Period:  if requested

Occupancy Date

Commence of Rent Payments Date

Security Deposit

Guarantees: Personal, Corporate, “Good Guy”

Sign Requirements

Parking Requirements for Employees

Building Access: Hours Open, Overtime Use of Services

Maintenance and Repair: Who is responsible for what?

Environmental

Assignment and Sub-Leasing           

Liability Insurance

Termination Options

Defaults: Late Payment of Rent           

Disputes: Mediated or arbitrated

Purchase Option: if desired

Right of First Refusal: if desired

ADA – Americans with Disabilities Act Compliance

Building Regulations: “Green” Buildings

Brokers Commission: Fee to be paid, typically by the Landlord

Other issues unique to this situation

The Letter of Intent is a tool to help the attorney draw the lease. Remember, in most cases the attorney has not been privy to these negotiations, so the LOI must cover everything. If some of these issues are not applicable to this situation, indicate so on the LOI so the attorney will know they have been discussed.

Once the lease has been drafted the real estate agent should review it to be sure all the terms agreed are included, nothing missed or added. Both parties to a lease need legal advice, so in addition to the agents review, the client needs an attorney to review the lease agreements content and the “legalese” parts of the document.

Leases are contracts, in many cases for long periods of time, great care must be taken in their construction and in the review process; and it all begins with the Letter of Intent.

Finding Leads is an important part of prospecting and building your commercial real estate business. Knowing what companies are planning to move into or leave your area creates sale and leasing opportunities for us.

Most areas have a local BNI (Business Networking International) Chapter, joining the group can be very beneficial, but starting your own Leads Group may even be better.

Both basically work the same way. The group is composed of only one person from an industry to avoid competition. At each meeting members must bring 2-3 leads of businesses that are moving; with complete contact information. (A standard form should be developed for information about each lead.) The leads are discussed and shared with all the members, who can each follow up by contacting these businesses and offering their services.

Set the meeting for a specific time, perhaps the third Tuesday of each month. What works well is an early breakfast meeting at a local diner. Rules need to be established and enforced. Or this could end up as a nice social event but with no one making any money.

Sample rules should include, if a member show up for two meetings with no leads to share, they are out! Someone else from that industry will be recruited to replace them. Or if a member misses two consecutive meetings they are out. Eight to ten people is a good size for the group; meeting should be short to the point and last less than an hour.

To get started, discuss the concept with someone you know from another field such as an : Accountant, Office Designer, Moving Company, Architect, Insurance Agent, Property Manager, Office Furniture, Janitorial Company, IT Provider, Telecommunications, Attorney or other. Create your rules. The two of you pick a third person and have your first meeting. At that meeting the group picks another business representative to join in. Build your group each month but, expect some turnover in the beginning, stick to your rules.

Within a short time you will have plenty of leads and be making money as a result of this investment of your time.

Another way to find leads is through trade shows. You can have a booth there, which can be effective but also may be expensive. Or attend armed with plenty of business cards. Introduce yourself to each business that has a booth, talk about their company’s future real estate needs. Find out who the owner is or who is in charge of their real estate etc. This is a very productive use of your time; any trade show that I have attended and “worked the floor” has resulted in business opportunities.

They say that 80%+ of real estate buyers go to the internet first. Certainly the residential seller’s perception is that in order to sell their home they have to get it online. A local MLS may have commercial listings, but the majority of commercial properties that are listed, are on “national” web sites like Loopnet, CoStar and NAR’s CommercialSearch. Commercial buyers and tenants look on the internet too, but depending on the market 25% or more of the opportunities are not listed online.

Agents must develop relationships with the other commercial brokerage firms that service their market. Many firms circulate a monthly Exclusive List to other brokerages. Meet as many other commercial agents as possible and add them to a mailing list in your computer; contact their firms and request to be added to their distribution list. You will start receiving “inventory” and be able to share your listings. When you have a requirement call these other agents, they may have an “open” listing that fits your client’s needs. Go to commercial “open houses” to meet more agents. Join any commercial organizations in your area; add the roster of members to your distribution list.

In order to be a successful commercial agent you need be able to find unlisted available properties. Agents may be specialists in a certain type of property (office, retail, industrial, or other categories) or in a specific geographic area. You need to systematically meet all the building owners and tenants in your chosen market. A good starting point is to join the local Chamber of Commerce or a Service Club (Rotary, Lions, Kiwanis or others) where business people mingle. To get known, volunteer; become active in any organization your join.

As part of your daily prospecting visit two buildings or businesses a day. Meet the tenant or owner, introduce yourself and gather information. Do they own or rent (what is the expiration date of their lease); what is the size of the unit or building; how is their business doing (will they need more or less space in the future) and any personal information they may share with you. Get their email address.

Enter this data in your computer several ways. Create a list of building owners email addresses (consider them investors) and a list of tenants emails by size (i.e Retailers in 1,000 to 2,000 SF, Office users in 4,000 to 5,000 SF). A 5,000 SF office building for sale could interest an investor or a tenant who wants to buy. Space for lease (larger or smaller) may interest existing tenants. Blast your new listings out to the appropriate groups.

Create a chronological page for every potential client that you meet: type of building or business, size, lease expiration date, family information, vacation plans, whatever you learn. Add them to your calendar for a revisit in 3 months to continue developing your relationship, and then update their profile.

Also consider developing a newsletter of community news, mortgage and tax information, what businesses are moving in or out, properties that have sold or leased etc. This can be a short email or longer template, quarterly or monthly. These repetitive actions start to brand you as “The Commercial Agent”. Remember visit two potential clients every day, that’s ten a week, 40 a month and 440 owners or tenants you will personally meet each year (based on eleven months – take a week off each quarter to rejuvenate).

Who you know is so important when you have a customer requirement. Contact the owners you have met, their property may not be on the market, but maybe they would consider selling.

New agents to commercial brokerage often ask me, “How do I get started?”

First recognize you cannot do it yourself; you need training. Join a firm that provides education, or take classes or find an experienced commercial agent to mentor you.

Let us next define what the goal really is. A successful career in commercial real estate brokerage requires sufficient compensation to make a living. At issue is how long it takes to market and close commercial properties. For the agent this requires a focus on cash flow and developing future business.

In analyzing commercial brokerage we can make some assumptions. Generally lease transactions are more time sensitive, certainly for the tenant that needs to move. Marketing properties for sale can take considerable time to actually sell, and then to close (subject to financing, environmental reports, engineering reports, and other due diligence items). Smaller spaces have a tendency to move quicker than large ones.

Most new agents need to focus on activities that will produce cash flow (commissions) in a relatively short period – basically smaller lease opportunities. However, they must also learn to balance their time between pursuing all of the opportunities in their market. Small lease focus can create a consistent cash flow, but the larger commissions will generally come from the sales and longer term or larger space leases. Initially spend half your day working on the “meat and potatoes” (leases) deals and half your day pursuing the “pie in the sky” (sales) deals.

Begin developing your future business by making a list of literally every person you know: friends, neighbors, business associates. Get a roster of members of any organization that you belong to, include these names on your list. Include the names of any former customers of yours, whatever your background.

Send out an announcement letter to five people from your list every day. The letter should be brief, telling them that you are now in the commercial and investment real estate brokerage business, the firm you work for and your contact information. Then ask for a referral. “Is there anyone you can think of, who I could be of service to?” Reiterate the action you are hoping for by adding “I am enclosing two business cards, one for your records and please pass the other to someone you think I could help.” Close with a hand written personal note. P.S. How are the kids? How’s your golf game? See you at the next meeting!

The secret is the follow up. If you send your five letters out on Monday, on the next Monday call these five people. “Did you get my letter? Did you think of anyone I could help?” Ask for the referral. When ending your conversation, ask for their e-mail address. Periodically send an e-mail newsletter to the group. It can just be a short note; Commercial Community News, XYZ Sneaker Store is coming to town or something more elaborate. Newsletter templates are available online. The key with this follow up mailing is to again ask for the referral. “By the way have you thought of anyone I could be of service to?”

This system is the first step in developing your future business and should take 30 minutes a day; 10 minutes to send out five letters and 20 minutes for the five follow up calls to the recipients of the letters that you sent out a week ago. The quarterly or monthly electronic newsletter keeps branding you to this ever increasing group (and it’s free). The key to success is regular, repetitive communication.

More tips on getting started next month.

Like commission rates, all co-broke splits and referral fees are negotiable. Typically in commercial co-broke agreements today, one brokerage firm represents the listing side and another firm represents the buying or tenant side and the commission amount is divided equally between the firms. The basis for this split should be based upon supply and demand. I remember a time when there was a lack of inventory in the market, and splits changed for a while, to 60% for the listing side and 40% for the buying side.

On occasion an agent becomes aware of a potential match between another broker’s listing and another broker’s customer (client) requirement. This agent “broker in the middle” known as the “Coordinating Broker” can bring the two parties together and a transaction may happen as a result of that introduction to each other. How should the agent in the middle (Coordinating Broker) be compensated if a deal occurs? What is fair? Should each of the three brokerage firms get a third of the commission?

Whenever I look at commission splits, I ask the question who is doing the work? In this case we will assume the majority of the work is being done equally between the listing broker and the broker representing the buyer or tenant. However, if it were not for the introduction by the agent in the middle they would not have this opportunity to do a deal. Fair compensation for the “Coordinating Broker” may be agreed at X% of the gross commission; with the other firms splitting the remaining fee. For example if 10% was the “Coordinating Brokers” referral fee, each brokerage firm would pay the “broker in the middle” 10% of the monies they receive and retain 90% of their side of the commission.

When it comes to referrals, again who is doing the work?  Also consider in a referral, the broker receiving the lead may need to co-broke with another broker to make a deal; so only one side of the transaction may be available to be divided. A residential agent gives a lead to a commercial agent what’s it worth? For a name and a phone number, one might consider that worth 5%-10% of the side. If the residential agent actually introduces you to the potential client in person, that may be worth 25% of the side as their referral fee. Remember you will be doing all the work!

A similar circumstance arises when an agent needs to refer a commercial lead to an experienced commercial agent, either because they do not do know one or the requirement is out of their area. This could be to list property or a customer requirement. They ask another agent “broker in the middle” to recommend someone to them. What should the “Coordinating Broker” be paid for introducing the two other agents (brokerage’s) to each other?

Again the question is who is doing the work? In this case the majority of the work will be performed by the agent getting these referrals. A typical referral fee is 25% of the side. But if it were not for the “Coordinating Broker” introducing them, they would not have met each other. For example, if a deal occurs as a result of this introduction, fair compensation to the “Coordinating Broker” may be agreed at 5% of the gross commission received by each of the agent’s brokerage firms. The referral brokerage would pay the “broker in the middle” 5% of the 25% they receive, retaining 23.75% of the fee. The firm of the agent doing the work would pay the “broker in the middle” 5% of the 75% of the commission they receive, retaining 71.25%. Everyone involved gets a fair split of the fees with the agent doing the work receiving the majority of the commission.

This could also develop into a long term referral relationship between these agents (brokerage firms). If these two agents do additional deals together in the future, should the “Coordinating Broker”, who originally introduced them, be further compensated? Perhaps this is an area for discussion and negotiation.

A number of years ago I developed a simple “Coordinating Broker Agreement” for these circumstances. The “Coordinating Broker” being the agent “broker in the middle”.

Sample “Coordinating Broker Agreement” Language

This is an agreement to establish a mutually agreed fee to the “Coordinating Broker”, for introducing the agents (Brokers) together; due upon the successful closing of a transaction for the subject property or customer requirement. The fee is paid by both the listing side and selling side representative brokerage firms, based upon the gross commission received by each firm.

If as a result of the introduction by __(Agent)__ of ___ (Firm)__, herein referred to as the “Coordinating Broker”, to each other: the Listing Broker or Listing Side Representative and Buyer’s Broker or Buyer’s Side Representative; you are successful in closing a transaction based upon either the subject property or the customer requirement, it is mutually agreed that the “Coordinating Broker” shall be paid ____ percent (X%) of the gross commission received by each of your firms, at closing. This agreement shall stay in effect for one year (1) from the date below.

(Landlord and Tenant Representation may be substituted.)

This would be followed by complete contact information about each agent and their brokerage firm. Indication to be made if this is a property listing or customer requirement referral.

Authorized signatures from all three brokerage firms and date are required.

When it comes to referral fees, think long term, be fair; you want to do more business with these agents in the future.

Need Help: I offer Coordinating Brokerage Services.

Your client has been leasing space for their business. Now they are asking you, should they buy a building or land lease property and build.

There is another underlining question here. Should your client be buying or building at this time? Should they perhaps continue to lease space?

Timing is everything! Where is the market? Real estate values go up and down in cycles. You do not want to buy at the height of the market. Someone who purchased real estate in 2007-2008, bought it at the wrong time. We saw values crash 25%-30% or more shortly thereafter. Now is a good time to buy, as we are at the beginning of the next cycle.

Typically when rents go up so does the value of the building. Real estate tends to appreciate in value over time, meanwhile ones mortgage is being paid down increasing equity. Eventually the property could be sold at a profit. But market trends need to be projected into the future, where will prices be five or ten years from now?

Your client’s business plan needs to be considered, will their space requirements increase in the future? Are they looking to buy a building now, but sell it in the future when the business grows, in order to buy an even bigger building? Is there a financial constraint as to how large a building they can purchase now? What is their financial capability?

The land lease alternative   Some facts about land leases, they are written for a long term, typically 49-99 years. It is the tenant’s responsibility to pay for the construction of any improvements – to construct a building. At the end of the lease any improvements to the property revert to the land owner. Land leases are typically Triple Net (NNN), meaning all expenses are paid by the tenant.

Sometimes tenants have no choice; an owner of very desirable, well located property will not sell it, it is only available as a land lease.

Advantages of the land lease include less upfront acquisition costs; land can be very expensive; the rent for the land is tax deductible. It affords more latitude in the design of the building and may offer the ability to construct more space than is needed for one’s business, creating rental cash flow from other tenants. A new building can take advantage of the latest technology, energy and environmental efficiencies. 

The building on a land lease could be sold in the future, but would always have the land lease ending date encumbering it.

In buying an existing building you are paying for the value of the land and building. If financed today you would need 30%-40% down based on the package price. The age and condition of the building are critical, what will need to be done to maintain the property in the next one to five years?

Whether your client buys an existing building or builds new, they will have the same tax deductions for operating costs, real estate taxes and depreciation. Land is not depreciable.

Another major consideration, will this be your client’s only location or do they see multiple locations in their future? Plans for expansion can be expedited by removing the cost of buying land; using their funds only for building construction. If property cost $500,000 and construction costs $500,000, by land leasing they could open two facilities for the same$1,000,000. For this reason national retailers and franchises, which open many stores each year, prefer to land lease.

Client’s considering a land lease and building their own building generally are committing to have their business at this location for a very long time.

McDonald’s The Master of Leasing

When we think of McDonald’s we think of hamburgers: they sell billions of them each year through their 35,000+ worldwide locations. Franchisees have to buy all their products from the parent corporation creating tremendous profit for McDonald’s.

But they make more money through their real estate. McDonald’s is one of the largest commercial real estate owners in the world with approximately $25 Billion in real estate holdings.

From the real estate perspective, McDonald’s original growth was a cash flow challenge. The company would purchase land, build a building and then lease it to a franchisee. This required financing one location at a time, seriously slowing expansion.

In 1956 the company hired Harry Sonneborn, who envisioned real estate, rather than fast food as the key to profit.

The company created the Franchise Realty Corp. to find landowners who would lease their land to McDonald’s for a 20 year term with options. McDonald’s built the building and sub-leased the land and building to the franchisee marking up the franchisees rent cost by 20%, then eventually 40%. Franchisees are responsible for insurance and taxes. The rent due to McDonald’s could even be more; 5% of monthly gross sales, whichever was higher. In the McDonald’s land leases they would have an option to buy; and they would eventually purchase the land.

The similar model is used for existing buildings, especially shopping centers. A long term lease is entered with the shopping center owner, for example space is rented for $9,000 per month. The franchisee’s agreement requires them to pay 8.5% of monthly gross sales to McDonald’s. Typically store sales are $200,000 a month, 8.5% of this is $17,000; this covers the lease expense and creates a significant profit for McDonald’s. Additionally the franchisee must purchase all the food, packaging, and everything else from the Company.

Considering 82% of their stores are franchised, we can see where the “sub-leasing” of their properties to their franchisees is the real success story of McDonald’s.

According to McDonald’s 2015 annual report they claim rent liability worldwide to be $1.06 Billion, while they collect $8.9 Billion in revenue fees from franchisees. That’s about an 800% Return on Investment!

Land – To Sell or Land Lease

The value of land generally increases over the long term. Your client, who purchased an acre of commercial land 20 years ago for $25,000, wants to sell it. What advise should you give them?

Over the years the location may have built up and today the property is worth several hundred thousand dollars. But under today’s tax laws, if they sell it they will most likely have to pay considerable Capitals Gains taxes. (The amount will vary based on their income bracket.) Let’s say the land sold for $350,000, with a net to the owner, after commissions, legal fees etc., of $325,000. The combined Federal and State Capital Gaines Taxes could be $60,000 or more.

Let’s say the seller sold the property, paid the Capital Gains taxes and now has $265,000 left to invest. One option would be to put the money into a bank account or mutual funds, which may yield them a 1-2% annual return.

Or they could use the money to finance the purchase of an office building, retail center or multifamily investment, which would require 30-40% down, 5 % for closing costs and a small reserve for repair. The Return on Investment (ROI) would be based on market conditions, the buildings cash flows and debt service costs. Initial ROI may be low but over time it would be expected to increase, the buildings value would appreciate, and ownership has significant tax advantages (deductions for building expenses, real estate taxes, depreciation and mortgage interest).

Another opportunity would be to do a 1031 Exchange. The property is sold and another property is purchased to replace it; typically of higher

value. In an exchange the Capital Gains Tax is deferred to the newly purchased property. Many rules apply. In this case your client would need the advice of a 1031 Exchange Specialist: a Qualified Intermediary.

Buying a building with the net cash after taxes or in a 1031 Exchange has advantages and risks. Generally Real Estate is a good investment in the long run. You may achieve a 7-8% or even higher annual ROI, while the equity increases and the building appreciates in value. Challenges include vacancy, maintenance and repair issues; plus time to manage the property.

Another tax strategy would be to sell the property and the seller finances the purchase, holds a mortgage note; creating an “installment sale”. This defers some of the Capital Gains taxes; as they would only be due on the principal collected each year. But the interest on the mortgage loan is also taxable as income.

 The other alternative is to land lease the property. With a land lease they do not have to pay Capital Gains taxes. As a “rule of thumb” a land lease generates 10% of the market value of the property in rent each year. A property worth $350,000 to sell would land lease for $35,000 per year in rent. It is important to note land leases are usually “Triple Net”; meaning the tenant pays all of the expenses of the property. The tenant is also responsible for the cost of constructing a building on the site. Land leases today are typically 49 years long, with increases in the rent every five years. Other benefits include stability, easy management and at the end of the lease or upon default, the improvements to the property are belong to the land owner.

Which is the best situation for your client? Present all the options and let them decide. The real comparison is to look at the Cash Flow that remains after the annual income taxes are paid. Recommend to your client that they consult with their accountant or tax advisor.

I found this on the internet by Coach Michelle Kadushin; I thought I would share it, with a few thoughts on my own.

Do you ever get to the end of the day and wonder how you managed to get so little done? You’re not alone. And while you shouldn’t be too hard on yourself for your time management shortcomings, here are 10 ways you can get more done.

1. Make appointments with yourself

If a task or project is important enough to do, it’s important enough to add to your calendar. Get in the habit of calendaring everything, and sticking to those appointments.

You should place as much importance on your appointments with yourself as your doctor places on his or her time. Miss a doctor appointment and you’ll be charged the full fee anyway, and your time is just as valuable, so don’t let yourself get away with broken appointments!

2. Set a timer.

No matter what task you’re working on, set a timer—preferably one that makes an audible ticking sound, to remind yourself of your next appointment. The idea here is that the ticking sound helps keep you on task. It’s a subtle reminder that you’re supposed to be working, so when you’re tempted to wander off to check Facebook, your subconscious will help keep you focused.

3. Take a day off

Have you ever noticed how much more you get done in the last days before vacation? Suddenly you’re super motivated to:

• Return all those phone calls you’ve been putting off
• Clean out your email inbox
• Finish your bookkeeping for the month
• Get the rest of the month’s blog posts written

And anything else that represents an “open loop” in your life or business.

You can create that same sense of urgency to get things done simply by scheduling a day off. In fact, you may even decide to take this strategy one step further, and take an extra day off each week!

4. Give yourself permission to say no

You’re not responsible for everything, but all too often we feel that we simply cannot say no…to anything. If you try to accommodate everyone, you’ll wind up stressed out, overworked, and your time management skills will suffer. Instead, learn to say no. Say no to the client you don’t want to work with or the client with unreasonable expectations. Say no to the volunteer position you don’t have time for. Say no to another year as treasurer for the PTA. You can (and should) even say no to household chores that don’t have to be done. After all, no one will be harmed if your living room doesn’t get dusted today.

Wouldn’t you rather spend your time working on something that really matters?

5. Take a break

Too much time spent at work can be decidedly un-productive. When it begins to feel like you’ll never get all your work done, it’s the perfect time to step away from your desk for a quick break. Go for a walk in the park. Nature has a wonderful way of recharging our batteries. Play with your kids. They’ll remind you why you do what you do every day. Read a novel. Paint a picture. Knit a scarf. Just do something other than work. It will improve your perspective and give you more energy to face the rest of your day.

6. Give up control

A leading cause of overwork—especially for “type A” personalities—is the feeling that you must have control over everything. When you mistakenly believe that no one can do your job as well as you can, you’ll take on too much work and ultimately fail to get everything done. A far better choice is to give up some control and allow others to help. Also, learn to recognize when good enough really is good enough, and let go of your need to have everything “perfect.” You’ll save hours of time that can better be used on other projects.

7. Practice focusing

How many browser tabs do you normally have open while you’re working? Ever listen to a webinar while responding to emails? How about browsing Facebook while writing a blog post? All these multi-tasking habits (and many others) are massive time-wasters that can turn a 30-minute task into an afternoon of accomplishing next to nothing. While we all like to think we’re good at multi-tasking, the truth is, multi-tasking is really “task switching,” and every time you stop to quickly do something else, you lose your focus. That lost momentum costs you added minutes every time you turn your attention back to the task at hand. So close all those browser tabs, turn off your webinar, put a block on Facebook, and regain your focus. You’ll be amazed at how much more productive you’ll be.

8. Schedule shorter meetings

No other workday task manages to feel so important while being such a waste of time. Nip these time-sucks in the bud by scheduling only those meetings that must happen, and keeping them to a minimum.

• Skip the small talk
• Create an agenda—and stick to it
• Use email to discuss non-urgent topics

The obvious exception to this rule is your client meetings, but even those can be more productive and maybe even shorter by applying the rules above.

9. Reduce interruptions

Text messages, Skype conversations, email notifications and other “urgent” interruptions will take you out of the moment and add up to hours of lost time over a week. Make it a habit to turn off your phone, Skype, email and other instant message applications while you’re working. Between tasks, schedule a quick check in if necessary, but don’t allow these interruptions to dictate the course of your day.

10. Work remotely

Always working at your desk or home office can put you firmly in a work rut. Want to get more done? Change it up a bit. You became an entrepreneur to have more freedom, so enjoy it—and get more done in the process.

• Take your laptop to the library or coffee shop for an afternoon of phone free work.
• Head to the park on a nice day and let the beauty of nature inspire your product or content creation.
• If you work-at-home avoid the pitfalls from distractions such as kids, television noise and other household “emergencies”. Get out at least one day a week.

My favorite tip: Plan tomorrow’s activities the night before.

At the end of each day make a list of what you need and want to do tomorrow. Then number the tasks in priority order. Expect interruptions or delays; so get the “need to do’s” done first. Also, if you do not prioritize, the easy tasks tend to get done first and the one’s we don’t like to do end up being put off to the next day. “Overbook” yourself, so when an appointment cancels you can just move on to the next task.

As you head towards the end of the year it’s time to reflect on how you did with our business goals for 2016. Did you fulfill your business plan and accomplish your goals? If your answer is yes, you had a great year.

Or if no, a new question, why not? Self-assessment is not easy, but is necessary to success. Analyze your strengths and weaknesses and what you need to do to improve.

Where do you see yourself on December 31, 2017? How much commissions will you have earned? How will you accomplish that?

Some say real estate is a numbers game. Let’s look at the fundamentals; we need to close deals to get paid. Generally a significant amount of our commission goes to our brokerage firm, and we probably do 60%-70% of our business co-broking, splitting our fee with another firm. Examine your market, what are the average sales price, average rent and terms on leases, and project the gross commissions for each. Now figure out the splits and project your net average commission on a typical sale or lease. Based upon how much money you want to earn next year, calculate how many sales and leases you need to do.

If you want to close 12 transactions how many listings do you need to get? What is your closing ratio; do half of your listing sell or lease? If so you need 24 listings next year, plan on obtaining 2 a month. How many listing presentations do you need to go on to get an exclusive listing; one out of two a 50% listing ratio? So to get our 24 listings we need to go on 48 listing presentations, 4 a month, 1 a week.

How many people do we need to meet each year? Statistics tell us that 1 out of 10 people who tell us they want to buy or lease real estate actually do so. If we want to do 12 transactions that means we need to find 120 qualified buyers or tenants. Statistics also tell us that if we meet 15 new people; one of them will be interested in doing a real estate transaction this year. So to find 120 qualified clients we need to contact 1,800 people. Wow! This sounds staggering; but if we break this number down it’s 150 a month, 37.5 a week, 7or 8 people a day.

Our business plan is starting to take shape, (based on closing 12 deals) each week we need to do at least one presentation and meet 37 people. We now know our financial goal for the year, the number of required transactions, and what needs to be done to accomplish that each month. Write out your plan so you can follow your weekly progress.

Let’s look at some ways to meet people. Send out five letters a day, reminding folks from your sphere of influence list, current customer and prior customer lists that you are in the commercial and investment real estate business.  Ask them if they know anyone else that you could help.

Follow this up with a phone call a week later, asking for referrals. Also advise them you will be sending out an email “newsletter” with community news and obtain their email address. That’s 1,200 people contacted a year (5 letters with 5 follow up calls each day, 25 a week, 100 a month). Plus the redundancy of contacting them each month thereafter with your e-newsletter; which will end with: “Did you think of anyone I can be of service to?”

Visit two buildings a day in “your” town, speak with the owner or tenant. (10 a week, 40 a month, 480 contacts a year. Call 2 FSBO’s a day, that 10 a week, 40 a month, 480 a year. With just these three techniques you are already contacting over 2,000 people a year.

Prospect at least an hour a day to build your commercial business and to accomplish your business plan and your goals.

A UCLA research study on feelings: investigating “instantly” liking or disliking someone, found first impressions were based on 55% body movements (face, arms…), 38% voice, tone, modulation, and pauses, and 7% words.

Words become much more important as relationships grow, but body language and voice are still major parts of communication.

The non-verbal signals given off by facial expressions and bodily gestures may be conscious or unconscious; it is often instinctive, not intentional, which is why it is so revealing.

Often a handshake begins a conversation or relationship; is it weak, too strong or appropriately firm and professional?

It is said the “eyes” speak for themselves. Western societies consider eye contact to imply empathy and an emotional connection. However, in Asia and the Middle East, keeping eye contact with someone of authority is considered rude; often eye contact is avoided as a sigh of respect.

In western culture eye contact is considered the most powerful communication tool. It shows confidence, interest in the conversation taking place, and indicates involvement and attention to what is being said. Also it suggests truth, truthfulness and builds trust. Eye aversion, however, may indicate shame, deceiving, being untruthful or lying.

Eye contact balance is required, do not overdo it. Staring, makes people uncomfortable and could be interrupted that you are deceiving, being untruthful or lying. You do not have to maintain eye contact at all times, 30% to 60% of the time is good. Looking away when thinking or considering a problem is acceptable.

Crossing arms or legs while standing or sitting may indicate the other person is not open to what you are saying; or they may just be cold. We need to be careful in reading the “signals”.

Psychologically when arms or legs are crossed the person is mentally, emotionally, or physically blocked off from what is in front of them. Remember: this is instinctive, not intentional, which is why it may be revealing.

When hands are clasped in front of a person, sitting at a table or desk, the person may feel insecure; have doubts or a negative feeling. It could also show stress about what they are hearing, or frustration, perhaps as the result of failing to convince another person their point of view. This is often misread as that person is being casual or in control.

Steepling the hands, is when the palms of the hands face each other with just the fingertips touching (the fingers resemble a steeple). This conveys confidence, wisdom and could indicate positive agreement. It is also a gesture made when thinking or problem solving. Sometimes it indicates someone knows something that you do not.

A few other tips: keep your hands away from your face, rubbing your face or head is perceived as anxiety or being anxious. Fidgeting shows you are nervous, worried, tense and not confident. Hair play or hand wringing shows a lack of understanding of lack of confidence. Looking over ones glasses intimidates everyone.

Signs of deceit, hiding something or lying may include: covering ones mouth or eyes with their hand; touching or scratching their nose; rubbing the eyes; scratching the head, neck or face. People touch their face 10 times more when uncomfortable or lying.

Understanding body language requires study, education and observation. One sign is not always conclusive, look for a combination of signals, or repetitive gestures and expressions before making conclusions.

Remember these concepts go both ways. What body language are you projecting?

We negotiate every day in our real estate business: to get a listing or representation agreement signed; what the commission rate and terms will be; with referrals and co-broke fees; constantly throughout the entire sales contract or lease process. It is our fiduciary duty, our job, to get our client the best deal possible. Considering we only get paid when the sale closes or lease is executed, our livelihood depends on our ability to negotiate successfully.

Negotiations only have three outcomes: Lose – Lose, here both sides reach impasse and the deal dies. Lose – Win, one side prevails in the negotiations, but will the loser continue with the deal?  If one or both sides are adversarial and feel they must win this will be a tough negotiation. Win – Win a negotiation goal that is for each side to feel that they have obtained a fair deal; this usually is a result of compromise by both sides.

The beauty of commercial real estate is the opportunity to do business with the same clients over and over again. Can we help the tenant we put in a building again when their lease is up? The owner when they have their next vacancy? Will your investor buy another building in the future, or have vacancies that need filling in the building you sold them? You will have these opportunities when you demonstrate that you are collaborative negotiator, working for the win-win deal, which is fair to all.

Preparing for successful negotiations requires a proper attitude, as agents we sometimes need to coach our clients and customers “as to how the game is played”, that compromise is required. Meet ahead of time, create a strategy, determine what issues are most important, prioritize them and determine what can be compromised.

You and your client must present a united front; act on the wishes of your client even if you don’t agree. In private you may try to change their mind. In the negotiations there should only be one spokesperson.

Set the “stage” to avoid distractions. Try not to hold the negotiations in either of the principal’s private offices. Seek a conference room or better; meet in a neutral location, perhaps the real estate agents office. Ask everyone to turn off phones until the negotiations are completed.

Before starting the discussions make sure all the facts are available and have been verified. Postponements, due to incorrect or a lack of information, may cause the talks to bog down. Delays provide time for additional parties to make offers that may be better than your deal!

Are the decision makers present? This is paramount; one negotiation tactic, The Higher Authority, is to negotiate the deal and then the opponent indicates this must now be approved by _____. You can be sure it will not be approved without additional concessions being requested.

Listen more, talk less! Gather information from the other side. What is most important to them? What points do they repeat? Take written notes of what has been agreed upon, what concessions the other side made, and what concessions you make. Observe the opponents body language and facial expressions; be aware of your own gestures and expressions.

Deadlines help create decisive actions. Set a deadline for the meeting. Begin by saying I must leave in an hour. If the negotiations slow down remind them of your deadline.

Resolve the main issues first, smaller issues can be set aside until later. Never let a negotiation bog down over a minor point. Concentrate on getting agreement on the major points such as price and terms.

Set an insoluble problem aside. Make a note of the disagreement and come back to it at the end of the negotiations. If you’re very close to a deal, both parties will be motivated to find a solution to this last piece of the puzzle. Break these insoluble problems into several parts. Attach and solve each component separately.

If an impasse is reached take a break. This allows both sides to discuss the issue with their clients. When returning from a break recap (from your notes) what has been agreed upon so far; this “progress report” helps encourage the resolve of the remaining issues.

There is a wealth of information available online, in books and courses, educate yourself on negotiation skills and tactics.

All commission rates are negotiable.

What is fair compensation for our services? When we sell a building we are generally paid a percentage of the selling price, in other words our fee is based on a percentage of the sellers financial gain.

The fee for successfully negotiating a lease agreement should also be based upon consideration of the landlord’s financial gain. If a ten year lease is signed and the rent is $25,000 per year, our fee should be based upon all the money the landlord will receive in rent during the entire term of the lease. In this case $300,153.00 (compounded by including a 4% rent escalation each year).

There are several different methods of calculating a lease commission:

Split Rate Commission – The fee is based upon one rate X% for the first three years and a different (lower) rate Y% for each year thereafter. The rent to be collected each year by the landlord, including escalations is first calculated, and then these percentages are applied. The commissions for each year of the lease are then totaled; that is the fee due. This method is generally used when the landlord is paying the fee.

Aggregate Rent Method – This is very similar to a sales commission calculation, a percentage for commission is negotiated. The rent to be collected each year of the lease by the landlord, including escalations is calculated and added together. The total rent to be collected is them multiplied by the agreed percentage; this is the commission due. This method is generally used when the broker/agent is exclusively representing the tenant and they are responsible to pay the commission. Some Tenant Representative Agreements have language making the tenant responsible for the commission if it cannot be collected from the landlord.

Declining Scale – In this case a starting percentage for commission is established, which is reduced down to zero over time. This may be a reduction of a point, per year or every two years, for as long as agreed upon. This could be a 15 year lease, but the commission calculation is based on 8 years. Also in this method, the rent to be collected each year by the landlord, including escalations is first calculated. Then the declining percentages are applied each year for as long as has been agreed upon.

Fixed Fee – A specific dollar amount is negotiated for completing a lease. This is most common in newer buildings where there may be multiple units to be rented out.

Multiple of Monthly Rent – This is not common in longer leases, however in very short leases (one or two years) a multiple of the monthly rent (one, two, or three month’s rent) may be set as the commission.

The entire commission is usually due and payable upon lease signing. It is reasonable to not receive the entire fee upfront if the landlord is not yet collecting rent due to construction or a concession to the tenant; after which the balance would be paid. Even large fees are due upfront, but sometimes are paid out over a short period of time; six months or even a year. It is generally not acceptable to be paid our commission annually.

Many leases have an option to renew or extend the lease. As stated earlier our fee is based upon all the financial gain of the landlord. If the lease is for five years and has a five year option to renew, and the tenant exercises their option to renew; the landlord will receive another five years of rent payments. We are entitled to a commission on that money; provided your listing or commission agreement says so.

Generally the Seller or the Landlord pays our fee, but you may have a Buyer or Tenant Representation Agreement whereby your client is responsible for the commission.

We work very hard to complete a transaction; you deserve to collect a full commission.

Protected Classes

Discrimination is making a distinction in favor of or against, a person based on the group, class, or category (referred to as a protected class) to which that person belongs rather than on individual merit. Discrimination is against the law.

There are seven federally protected classes: Race, Color, National Origin, Religion, Sex, Familial Status and Handicapped.

New York State now has eight additional protected classes: Age, Creed, Sexual Orientation, Military Status, Marital Status, Disability, Domestic Violence Victim Status and added in May, 2016 Gender Identity. “Gender Identity is defined as having or being perceived as having a gender identity, self-image, appearance, behavior or expression, whether or not, that is different from that traditionally associated with the sex assigned to that person at birth. Included in the definition is “Transgender” and “Gender Dysphoria” (a medical condition).”

In addition the amended regulations gave the NYS DOS the right to discipline a licensee that was found to have participated in a discriminatory practice. Penalties may include fines and the suspension or revocation of the agents or broker’s license.

Some cities have additional groups that you may not discriminate against. In New York City the following are protected classes: Partnership Status (Domestic Partners), Alienage or Citizenship Status (one’s citizenship or immigration status), Lawful Source of Income (Social Security, Public Assistance including Section 8) [This is also a protected class in Nassau, Suffolk and Westchester Counties], and Gender Identity (Appearance, Behavior “Different from that traditionally associated with the legal sex assigned to that person at birth.”)

In Connecticut the protected classes are: Age, Mental Disability, Physical Disability, Learning Disability, Marital Status, Ancestry,Gender, Lawful Source of Income, Sexual Orientation, Service Animal Access and Criminal Record (in employment and licensing by the State).                

The State of New Jersey protects the following classes: Race, Creed (Religion), Color, National Origin, Age, Ancestry, Nationality, Marital or Domestic Partner, Civil Union Status, Sex (including Pregnancy), Gender Identity or Expression, Disability, Military Service, Affectional or Sexual Orientation, Atypical Cellular or Blood Trait, Genetic Information, Family Status, and Source of Lawful Income or Source of Rent Payments.

As agents we must be careful that we do not inadvertently discriminate by asking questions of individuals about what groups (protected classes) they belong to or assuming a person is a member of a specific group, class or category. Treat all people individually and fairly.

In the real estate industry we sometimes can get caught up with what I will call inadvertent discrimination. Since the tragedies of 9/11 and subsequent terrorist attacks throughout the world there has been an added sensitivity regarding discriminating against ones culture or religion. A culturally diverse customer (or any customer) may consider you discriminating (and possibly sue you) if you do not present to them all the listing you have that fit their requirement. “Why did you not let me bid on that building?” “Why didn’t you show me that building, because I’m ________”. Don’t make decisions for your clients; show them ever property in your market area that fits their criteria of size and budget. Let the customer decide.

Don’t let the customer steer you in the wrong direction. “I only want to locate my business in ____ (that part of town)”; perhaps a specific religious or cultural area. This could be construed as Steering, the illegal funneling of real estate buyers to a particular area based on the desire to keep the makeup of that neighborhood the same or intentionally change it. Steering refers to the illegal practice of real estate agents only showing certain ethnic groups properties located in specific ethnic areas. An example would be showing an Asian businessperson store sites that are only located in Asian communities. Show the customer all properties available in your market area based on their size and budget requirements. Let the customer decide. Also remember customers do sometimes change or expand their criteria.

Occasionally we find that our client is prejudice. “Don’t bring any ______!” “I won’t lease to_______!” The word prejudice refers to prejudgment: unreasonable feelings, opinions, or attitudes, especially of a hostile nature, regarding a racial, religious, or national group. You may have to walk away from this situation. Do not put your reputation and license in jeopardy.

Be aware of Omission Prejudice, “Your Company represented the _____ building, why didn’t you show it to me?” Agents sometimes make decisions for their customers, that property is no good for them, it’s too big, too small, or too expensive, it’s in the wrong area. Show the client everything available in your market area: I like to use the 10/20 rule in showing property. Search all properties that at 10% smaller to 20% larger than the target size. Let the customer decide.

You have a property that recently closed or is currently in contract with a sign on it. A new customer calls on the sign. You must disclose the facts, so you do not appear to be misleading with your advertising. Remember if the property is in contract, unless the owner has directed you, in writing, to stop showing the property, you must show it until it closes. If the new customer decides to make an offer, you need to caution the owner to consult with their attorney because they are in contract, and accepting another offer could have legal consequences.

Communicate with your customers. A lack of communication, even if you have nothing that fits their criteria now, may be misunderstood and taken that you are discriminating against them.  Avoid even the appearance of impropriety.

A Place for Commercial Scripts

When call calling, what do you say when you connect? Begin by stating your name and that you are a commercial property specialist with (your firm). Followed by a question; you want to create a dialog as opposed to sounding like you are reading a script. Prepare by doing some advanced research on the company. What do they do and who are the decision makers? It is best when speaking with owners and landlords to be yourself; be brief, get right to the point with the purpose of your call. For example, “Would you like to fill your vacancy tomorrow?” Remember your goal of the call is to get a face to face appointment.

Scripts can be effectively used when calling FSBO’s and expired listings. In the case of commercial FSBO’s the ad signals an immediate need by the owner to fill that vacant space. But when you call,“Turn the table on them”. Don’t start by asking about the space for lease rather… they own the building; treat them like an investment customer! “I see from your ad you are an investor, I represent a great investment building…”

Talk to them about another investment property. If they are not interested in a purchase at this time, ask if they would consider selling their building. Be sure to get their email address to send them future opportunities.

Conclude by asking them if you can meet them at the space that was in the ad, to inspect it. Do not ask questions about the space over the phone, your goal is to meet with them (you can’t get an exclusive listing signed over the phone). When you meet to list the space, also bring several other investment opportunities with you.

Another approach to FSBO’s, introduced yourself then share some relevant information. “Our firm just sold/leased the __ (office, store, warehouse, etc.) __ at __ (address) __, are you familiar with that property?” “We can also help you find a buyer/tenant. I would like to see your building/space; could we meet at your property this afternoon at 4:00 pm or would tomorrow morning at 10:00 am be better for you?”

When attempting to set an appointment be specific and give choices.

This approach also works by discussing their competition. “I am interested in helping you sell/lease your building/space. Are you aware there are __ (three) __ properties similar to yours on the market?” “I would like to meet with you to discuss your competition and what we can do to help you. Could we meet…”.

Expired MLS listings are gold. Another agent (probably a residential specialist) listed a commercial building and was not able to sell or lease it. The owner is frustrated, six months or more with no deal! This is a great time to approach the owner and explain your commercial value proposition and marketing plan. Also note they are used to giving an exclusive listing.

Sometimes owners don’t even realize the listing expired. Introduce yourself then ask, “I noticed this morning your building is no longer on the market. Have you sold/leased it?” If not, “I specialize in selling/leasing commercial properties that other agents failed to do. I would like to meet with you, to show you the techniques I use to market __ (office, retail, industrial or investment) __ properties.”

When having phone conversations, respect the owner’s time, keep the calls short and to the point. When the owner replies to any of your questions, show your enthusiasm with words like: Terrific! Fantastic! or Excellent!; before your next comment. Now, start dialing!

Anyone ever ask you what you do for a living? When you say you are in real estate, the perception is you sell houses. What is the next question you usually hear? Can you give me an idea what my house is worth or what are the current mortgage rates?

Prepare for the “what do you do” question in advance. This is sometimes referred to as your “30 second elevator speech”. Your answer needs to connote you are in the commercial side of real estate and it does not need to be 30 seconds long. A well prepared sentence or two should suffice. Some examples follow: “I help business people relocate or find new stores or office space.” “I help commercial property owners find tenants.” “I find properties for investors” “I’m in the business of helping business people.”

The best scripts are the ones you develop yourself. Prepare them in  advance and practice.

National Association of Realtors Legislative Meetings

Each May NAR holds meetings in Washington, D.C.; this year there was extensive discussion of pending Commercial concerns. For this month’s issue of my Newsletter I am reprinting an article about those issues from NAR’s “Commercial Connection” digital Magazine. As commercial practitioners we must be aware of these items that could affect our livelihood. Be sure to visit www.realtor.org/commercial.com regularly, and if you receive a call to action on our issues please respond.

Advocacy: A Look at Several of the Issues Important to Your Business

May 17, 2016

NAR is actively engaged on issues affecting all aspects of the commercial real estate industry, supported by thousands of staff hours working tirelessly on your behalf to ensure you and your clients can conduct business.

1031 Like Kind Exchanges

Under both House and Senate tax reform proposals released in the 113th Congress, Section 1031 is repealed, and further, the President’s budget for Fiscal Year 2015 proposed limits on the deferral provisions of Section 1031. Although none of these proposals progressed in the 113th Congress, if tax reform plans are introduced in the 114th Congress it is likely that they will borrow heavily from the previous ones, so Section 1031 is still at risk.

What does this mean for my business?

The exchange rules often provide a real estate professional with an opportunity to facilitate two transactions: the sale of the relinquished property and the purchase of the replacement property. Any curtailment of the exchange rules will make both pieces of exchange transactions more difficult to conclude and would mean many transactions would not take place. The like kind exchange technique is among the most important of all tax provisions for real estate investors and commercial real estate professionals.

Commercial Lead-Based Paint

The Environmental Protection Agency (EPA) continues to consider federal rules that would regulate the renovation and remodeling activities in public and commercial buildings to address possible lead-based paint hazards. The EPA is collecting data about the hazards presented by lead based paint and how renovation and remodeling activities in commercial and public buildings would potentially increase the harm to building occupants.

What does this mean for my business?

Residential property managers must spend more on staff that now must be EPA certified in lead-safe renovation procedures. The Agency may impose the same regulatory burden on commercial building owners and managers if data show their RRP activities pose a child lead hazard. In addition, contractors must be certified and comply with the lead-safe renovation procedures, which drives up the cost of these renovation activities, which drives up the cost of owning and managing both residential and commercial properties.

Credit Union Lending

The National Credit Union Administration (NCUA) proposed a rule which would eliminate restrictions on credit unions making member business loans (MBL). The proposal would give credit unions more autonomy in creating commercial lending policies unique to each credit union. The proposal would also create a new treatment for construction and development loans.

What does this mean for my business?

What has worked in the past may not work now in terms of accessing credit. Increased banking regulations, particularly in community and regional banks, mean banks are spending more of their capital on regulatory compliance.

Energy Deduction 179D

The Section 179D deduction in the Internal Revenue Code encourages greater energy efficiency in our nation’s commercial and larger multifamily buildings, by allowing for cost recovery of energy efficient windows, roofs, lighting, and heating and cooling systems meeting certain energy savings performance targets. Without section 179D, the same energy efficient property would be depreciated over 39 years (nonresidential) or 27.5 years (residential). In the Omnibus Appropriation bill passed on December 18, 2015, Section 179-D was extended retroactively to include the 2015 tax year and through 2016.

What does this mean for my business?

In addition to reducing energy consumption and saving owners and tenants’ money, these improvements can also increase the property’s attractiveness to new tenants and help them retain value as they age. Short-term extensions of 179D and allowing it to expire, even for short periods that are covered retroactively, can undermine its purpose, as building owners may be unsure as to whether it will apply to improvements they hope to make and opt not to take the risk.

Energy Efficiency

The federal government is moving forward with voluntary energy efficiency policies and programs, as well as regulations to limit the U.S. atmospheric contribution of carbon dioxide (CO2) and other greenhouse gases. Some of these policies, programs and regulations may impact the built environment, including commercial properties.

What does this mean for my business?

If energy efficiency were federally mandated, property owners’ ability to sell their home or building could be at risk without first having to conduct energy audits and improve its heating and cooling system, windows, insulation and/or lighting.

Lease Accounting

As part of a larger effort to converge accounting standards, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) have been working since 2005 to develop a standardized approach to lease accounting. The latest reports from FASB indicate it will replace the current dual model approach with a new one: though leases currently categorized as “operating leases” will be brought onto balance sheets under the new rule, “Type A” leases are treated as capital leases and “Type B” leases continue to be recorded as straight-line rent expenses. Most real estate leases will fall into the “Type B” category. The updated standards were
released in February 2016 and will go into effect for public companies in 2019 and private companies in 2020.

What does this mean for my business?

The new standards could harm businesses of all sizes, especially lessees and lessors of commercial real estate. With more bloated balance sheets, some companies may see their debt-to-equity ratios increase and find it more difficult to obtain credit, especially those with heavy debt loads or still recovering from the recession. The new standard could also complicate compliance with debt covenants or agreements between the bank and borrower, which usually prohibit companies from borrowing more than they are worth. By capitalizing new and/or existing leases, some businesses could show more debt than allowed in their agreement with the lender, and therefore be in default of their loan. This could force some firms to put up more capital for existing loans or even have their credit lines revoked.

Additionally, the elimination of off-balance-sheet financing could be detrimental to commercial property owners. More frugal lessees will want less space and shorter-term leases without renewal options or contingent rents, which will decrease cash flow for property owners.

Shorter-term rents will likely reduce the borrowing capacity of many commercial real estate lessors, who rely on leases and the value of the property as collateral in order to obtain financing. Ultimately, property owners would be forced to increase rent rates due to market uncertainty and reduce tenant improvements due to shorter recovery periods. Conversely, this change could encourage some firms to consider buying instead of leasing commercial real estate.

Leasehold Improvements

The 15-year straight-line cost recovery for qualified leasehold improvements on commercial properties provision expired at the end of 2013; in December 2015, Congress passed and the President signed into law an Omnibus Appropriations bill which makes the provision permanent. Thus, it is now available for all improvements to property placed in service.

What does this mean for my business?

Property owners are required to amortize the costs of improvements made on behalf of tenants over a recovery period that has no relation to the economic life of the assets. This artificially depresses rates of return. Providing a shorter and more realistic depreciation period for tenant improvements allows upgrades for technology and modernization to be more economically feasible. These types of improvements help assure that nonresidential buildings will be adequately maintained and remain technologically current.

National Flood Insurance Program (NFIP)

The National Flood Insurance Program (NFIP) was extended for five years in 2012 by the Biggert-Waters Act, but Congress must reauthorize it again to continue providing flood insurance after 2017. Biggert-Waters also phased out subsidized flood insurance rates for many commercial properties but severe implementation problems threatened to undermine real estate transactions where flood insurance is required to obtain a mortgage. In March 2014 Congress responded to these issues by amending Biggert-Waters with the “Homeowner Flood Insurance Affordability Act.” The new law, among other things, restores the grandfathering of properties under lower risk rates upon remapping, reduces the increased rates of non-grandfathered properties, and repeals rate premium increases at the sale of properties (including refunding increases to those who have already paid them). In June 2015 Reps. Dennis Ross (R-FL) and Patrick Murphy (D-FL) introduced H.R. 2901, the “Flood Insurance Market Parity and Modernization Act,” which clarifies that property owners may satisfy federal flood insurance requirements with either NFIP or private coverage. The bill was approved by the House Financial Services Committee on March 2, 2016.

What does this mean for my business?

Without the NFIP, millions of home and small business owners in more than 20,000 communities nationwide would not be able to obtain a mortgage or insurance to protect their property against the most expensive and common natural disaster in the U.S.: flooding. The NFIP was created because of the lack of access to affordable flood insurance coverage in the private market. It also reduced the number of uninsured properties that otherwise would rebuild with taxpayer funded disaster relief after major floods.

Waters of the U.S. Definition

In April 2014 the EPA and the Army Corps of Engineers jointly proposed a rule to “clarify” which bodies of water are “waters of the U.S.,” and thus able to be regulated under the Clean Water Act (CWA). In support of this, the agencies released a draft science report on “connectivity” of various bodies of water in the U.S. Depending on how the definition is finalized, compliance with the CWA under it may require expensive, time-consuming federal permits to develop private property near most water bodies, not just those which are navigable (as under the current regulatory scheme). The final definition was released in May 2015, and several states sued the government. In October 2015, an appellate court ruled to stay the implementation of the rule, effectively halting the rule from going forward.

What does this mean for my business?

Depending on the “U.S. water” definition, the Act will require expensive, time consuming federal permits to develop private property near most water bodies -- not just those which are navigable. In addition, property owners may experience a taking under the regulation without adequate compensation, as prescribed under the 5th Amendment of the Constitution.

For More Information

Need to know what the current NAR position is on any issue, or what action has been taken? Bookmark this resource and access the specific Issues Brief, along with the contact information for the NAR staff member(s) focused on the issue. www.realtor.org/political-advocacy

I am too busy to prospect; I have all the business I can handle. Really!

At times we are busier than other times. Sometimes we are so busy we feel overwhelmed. But, good management of our business requires we build for the future, every day!

You may be exceedingly busy and go on to sell every listing you have, lease each space you have. Then what? You are kind of back to start, prospecting full time and a business gap develops; your cash flow (or rather lack of it) is a problem. Your business is in jeopardy.

A successful real estate brokerage career requires balance of activities. Yes, we must service current clients and customers, finding, selling or leasing them property, but we must also develop new opportunities. You need to prospect each and every day to insure a steady stream of new business.

How do I prospect for commercial property? The easiest way is to systematically ask your previous clients and customers for assistance. Take a few moments each day and write a small number of these folks a letter (5-6) letters a day. Remind them you are in the commercial and investment real estate business and ask them if they know any one you may be of service to.

The key to this program is to then call these folks a week later and ask them if they thought of anyone you could help. While you are on the phone make sure you get their e-mail address.

Start an electronic newsletter; this does not have to be very fancy. A simple quarterly or monthly publication can just be an e-mail with community business news “Did you know a new shoe store will be opening in town…” At the end of your “newsletter” add, “By the way did you think of anyone I may be able to assist with there real estate needs?”

The best prospecting is person-to-person. Get out in your community, “knock on some doors”. Stop by local businesses and introduce yourself. Be honest and proud of what you do. Complement their business; find out how long they have been located there. Determine if the business owner owns or rents, when is their lease up? If they own, are they interested in other investment property. Give them a couple of your business cards, “one is for your records and please pass the other to someone you think I may be able to help”.

Join the local Chamber of Commerce and/or Service club. This is where you will meet the same business owners or managers you met canvassing. But, don’t just be a member, go to the meetings, volunteer to serve on committees and events. Become a part of your local business community and you are prospecting!

Personal Guarantees

A guarantee on a business loan requires a borrower to promise to make good on the loan, even if the business cannot repay it. Leases are treated in a similar manor; the landlord may require the tenant, the business owner(s) to sign a Personal Guarantee to pay the required rent for the entire term of the lease. It may be secured by the tenants’ personal assets, like the owners home equity.

When a business enters into a lease it is usually signed by any officer on behalf of the corporation, LLC or other business entity. With a personal guarantee, if the business fails the burden of paying their rent fall on the business owner(s) to personally pay the rent. Today landlords require personal guarantees by all the corporate officers or partners, plus a complete financial check on the business owner(s) assets to ensure the owner(s) have the finances to back up the guarantee.

Complications arise with multiple owners and corporations, most boilerplate lease guarantees impose “joint and several” liability on the guarantors. This means that the landlord has the right to collect all its damages from any one of the guarantors. The guarantor with ”deep pockets” may get stuck with the bill and have the burden of seeking contributions from their fellow guarantors.

Another issue arises if one of the officers or partners wants to leave the business or is bought out by the others. Is there a release of liability? Liability assumed by the others? A new person replaces the one leaving? These issues need to be addressed. “Tenant retains the right to substitute a guarantor at any time.” “Landlord must approve (financially) any substitute guarantor.”

The building is being sold. The guarantee is between the tenant(s) and current owner.  Tenants may want to negotiate that the personal guarantees end if the building or their lease is sold.

The liability can be tremendous! It’s a five year lease; rent is $25,000 a year (without escalations). The personal guarantee required of the owner(s) is over $125,000. A ten year lease, rent is $50,000 a year (without escalations). The personal guarantee required of the owner(s) may be over $500,000. In a lease buyout this outstanding obligation will be negotiated, typically discounted by “time value of money”. Even so this buyout will be a tremendous amount of money; perhaps affordable by large corporations, but not by the failing business on ”Main Street”.

It is in the Tenants best interest to negotiate in the lease that a Landlord “mitigate” any loss (local laws must be checked). Generally in Loss Mitigation before a landlord can go after the guarantor they must: actually market the space and only after a replacement tenant is found, determine the amount of the loss. The landlord would calculate: the number on months not receiving rent, marketing costs, legal costs, renovation expenses, commissions paid, and any other expenses to determine the total loss owed by the tenant.

Landlords often assume when a National Franchise is suggested as a tenant the National Company will sign the lease, or at least guarantee the lease. In fact, typically the Franchisee signs the lease and the parent company will not guarantee it. What is the financial strength of the franchisee?

This is a very complicated area; both sides need legal representation in determining the lease language of personal guarantees.

Negotiating Personal Guarantees

Landlords require Tenants, the business owner(s), to sign personal guarantees, obligating them personally to pay all rent due during the term of the lease. If the business fails their personal assets (like the equity in their home) are at risk. In Corporations, Partnerships, LLC’s etc. all the officers will share the risk.

The real goal of the landlord is not to have the loss and expenses of a tenant whose business fails.

Here are some alternatives when negotiating for the Tenant(s):

Security Deposit
In lieu of a guarantee increase the security deposit. (Check local laws for possible restrictions.) Perhaps six months’ rent would give the landlord time to find a replacement tenant without loss. These funds come from the business without additional risk to the business owners.

Letter of Credit
An established business with good financial resources may be able to get a Letter of Credit from their bank to guarantee the lease. This is based on the financial worth of the business with no additional liability to the business owners.

New Business
Most business, if they fail, do so within the first two years of opening the business. Agree to a personal guarantee, but limit it to two years. Agree to a review of the business activity after two years and if the business sales have increased remove the guarantee.

Establish a Time Limit
Landlords want to see a record of rent payments that establish credibility. It is a five year lease; ask the landlord, if we make all our rent payments on time for three years will you remove the guarantee?

Cap the Guarantee
Agree that if the tenant terminates the lease the landlord should be able to find a replacement tenant within ____ months. Tenant agrees to pay rent up to _____ months after lease termination (or until another tenant commences rent payments, which ever period is shorter).

Tenant Improvements
Landlords are concerned in recovering the cost of tenant improvements or the cost of removing those improvements in the event the tenant fails. Equate the tenant improvements to the cost of the guarantee, perhaps with a reducing scale over a number of years.

Early Termination Guarantee
Tenant agrees if they terminate the lease early, they guarantee the payment of an additional 6-12 months’ rent.

Liquated Damages Clause
Tenant agrees to a preset and mutually agreed amount of money to settle any default.

Representing the tenant, you may negotiate some of these alternatives but the tenant’s lawyer must draft and/or review all Personal Guarantee language in their lease.

“Selling” Today’s Customer

Today’s commercial real estate customer knows more about real estate than ever before. First time commercial buyers and investors go online for their education. For tenants the internet provides information about market conditions and available space. This requires us as agents and brokers to re-examine our role in the “selling” process.

Unfortunately, some agents look at the sale process as consisting of first approaching and qualifying the consumer with a strong accent on “show me the money”. Then various properties are presented with the agent using all their skills to convince the customer which property is best for them. Then almost half of their “presentation” time is spent doing the hard sell, to overcoming objections in an effort to close. This pressure selling has created an image of some agents being “just one step above a used car dealer”.

Customers today are exposed to inaccuracies, incomplete data and unfortunately some agents who are not properly trained in commercial brokerage and relationship building. In today’s selling process the consumer first seeks to build a trusting relationship with an agent.

They like the confidentiality of shopping on the internet; being able to gather facts without being pressed for a decision by a salesperson.  Only when they find something of interest, will they e-mail, text or call the agent. Here is where the relationship begins or ends. Internet consumers expect a quick response to their inquiries. CRT Communication Response Time is the “first impression” that is critical to building a relationship. Responding promptly with accurate information starts to build trust and confidence in the agent. Truthful answers, “the good, the bad and the ugly” are essential. It may take several communications to build a rapport and get to the next step.

The agent’s next job in the selling process is to guide the customer in determining their requirements. A trip to their existing location and a candid discussion of their need for space, personnel placement, location, desired building features or amenities is necessary. The agent needs to educate the customer about current market conditions and costs, and in this process financially qualify the customer.

In many cases we need to avoid “real estate talk”. “Space in this area goes for $19 per square foot.” Can the customer relate that figure to their budget? Based on the agent’s market knowledge a better approach may be, “To rent another store about this size will cost approximately $2,500 per month. With security deposits and initial rent payments you will need about $10,000 to proceed. Are you prepared for this expense?” Guidance and qualification demonstrates the agent’s market knowledge and builds customer confidence.

When guiding the customer be sure to ask, “Other than price, what is most important to you about the space you will be moving to?” This large part of the “selling” process clearly defines the need of the customer.

The previous two steps, building relationships and guidance account for the majority of time in the new model of selling. Armed with a clear definition of need and financial capabilities the agent may now search out appropriate properties to present to the customer.

If these steps are followed a “soft” close should be all that is now required. “Is this what you had in mind?” “Can you visualize your company working here?” Our final step is then to negotiate the best deal we can for our customer.

Guiding today’s customer to understand their requirements and capabilities largely eliminates the old “hard sell” approaches of convincing them this is the right space and then overcoming objections.

There is another change we need to be aware of, today’s buyer or tenant is also concerned with trusting the seller or landlord; they want to be comfortable with who they are doing business with. In the old model of selling we tried to keep the parties apart, today many of the principals want to talk, get to know each other. If we block that they may feel we are hiding something and not trust us.

These are the communication, guidance and negotiation skills that today’s consumer expects from us.

What do Commercial Real Estate Brokers/Agents do?

(Agents share this with your clients.)

Whether you are buying, leasing or selling commercial property you need a real estate agent who has been specifically trained in commercial and investment brokerage.

Agents are constantly monitoring local marketing conditions and activity. Values are based on the market, requiring examination of comparable (prior) property transactions and your current competition (what is on the market) to determine the correct price for your property. For investment property they will need to do a complete financial analysis. Remember, the market determines the price, not the agent.

Most agents and Brokers regularly attend educational courses and seminars to continually increase their skills and industry knowledge.

As part of the listing process agents will need to inspect the space and have an extensive interview with you to discuss your desires and the property features. Once your property is listed agents do extensive marketing by, creating flyers, brochures, and/or videos; which must then be distributed. Sending mailings, emails, and texts to their existing customers, the surrounding businesses in the area, and other commercial Brokerages firms in the area offering to co-broke with them. Internet marketing today is essential, which requires them to subscribe to various Commercial Listing services. Sometimes print advertising may also be appropriate.

As interest builds for your property, they need to qualify potential buyers and tenants, do they have the money? An ongoing relationship with local banks is essential in order to guide potential buyers, as to typical mortgage terms, required down payments and the latest loan-to-value and debt service ratios being used.  Potential tenants often need to be guided through the process of “wanting the space” to creating a Letter of Intent (LOI), requiring agents to have knowledge of lease terms and issues.

Showings are next, which lead to offers to buy or lease your property. The negotiation phase follows where your agent will work for you, to get you the best deal possible. In a sale, the contract is only the beginning; brokers will be there for the property inspection, environmental testing, and the bank appraiser, doing what they can to assist in moving the deal forward. With leases they will work through all the issues to get an acceptable Letter of Intent; which should be sent to your attorney to draft a lease. When the lease is drawn, your Broker will review it, to be sure all agreed issues are in it, nothing more or less. (This extra set of “eyes” can be very helpful to be sure nothing is missed or was misunderstood.)

These are the areas of knowledge, expertise and skills that commercial Brokers/agents have. Brokers do all of this work upfront and only get paid when your property is sold or a lease is signed. 

Commission fees may seem like a lot of money, but your agent has been working for you long before you hired them, by developing their market knowledge and brokerage skills. There is an old adage: “You get what you pay for.” Beware of discount brokers.

Your Broker/agent will look forward to working with you again in the future or even now; perhaps helping you find and buy another building, especially if you are doing a 1031 exchange. They will also be ready to assist you find a new tenant when you have a vacancy in your building.

Real estate agents and Brokers may also be exclusively retained to assist buyers and tenants to find properties.

Updated Tax Breaks for Commercial Property Owners

Each December the U.S. Congress passes a series of bills known as the Omnibus Appropriations Bills, which authorize the funding of the government for the following year. They include a group of items referred to as “extenders”; in this category they look at tax breaks that expired at the end of the previous year, Deciding if they wish to extend them and making the extension retroactive to January first of the current year. Typically they are only extended to December 31 of the current year, leaving everyone in limbo as the upcoming year’s status.

Things were very different in this year’s extender bills, some tax benefits were made permanent and some were extended for multiple years. All of these benefits have rules, be sure to direct your clients to speak to their accountants or tax advisors.

2016 Commercial Real Estate Tax Benefits Changes
Signed into law December 18, 2015

LeaseholdImprovementDepreciation:The15-yeardepreciationperiodforqualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvementsismade retroactive to January 1, 2015 and extendedpermanently.

ImmediateExpensingofBusinessEquipmentandCertainRealEstate:Theexpensingprovisionforequipmentandcertainrealestateusedbysmall-andmid-sizedbusinessesis made retroactive to January 1, 2015 and madepermanent(section179).Therealestateincludesleaseholdimprovements,certainrestaurantimprovements,andcertainretailimprovements.The provisionrestores the limitation of $500,000 deduction and $2 million phase-out amount, plus this will beindexedfor inflation beginning in 2016. Added to qualified equipment are air conditioning and heating units placed in service in tax years beginning after 2015, theyare now eligible for expensing.

Moreover,the$250Kcaponqualifiedrealestateisbeingremovedstartingin2016,soallbusinessassets(realandpersonal)willhavethesame$500Klimiteachyear,andbe indexedforfutureinflation.

BonusDepreciation:Extendsbonusdepreciationtreatmentforfiveyears, retroactive to January 1, 2015.Moreover,theprovisionnowincludesanewcategorycalled“QualifiedImprovementProperty,”whichisdefinedasanimprovement tothe interiorportion ofan existingnon-residential commercial building (exceptforelevators, escalators,orenlargements).The Bonus Depreciation percentage is 50% for 2015, 2016, and 2017; it phases down to 40% for property placed in service in 2018 and to 30% for property placed in service in 2019.

Thus, mostleaseholdimprovementswillnowgenerallybeeligibleforimmediateexpensing(section 179) forthesmallerandmid-sizebusinessesandforbonusdepreciation(50%expensing)forthebiggercompanies.

EnergyEfficientCommercialBuildings(Section179D):Thebenefit  extendsfortwoyears(2015&2016)theenergy-efficientcommercialbuildingsdeduction. This section allows up to $1.80 per square foot in deductions to those who have upgraded their building’s lighting ($.60 psf), HVAC ($.60 psf), or building envelope ($.60 psf).

Reminder: the Investment Tax Credit (“ITC”), which is a 30 percent federal tax credit for solar and geothermal systems on residential and commercial properties, remains in effect through December 31, 2016.

The ITC for solar will continue at 30 percent levels for both commercial and residential systems through 2018, then taper off in yearly increments to settle at10 percent in 2022.

Generational Selling

Today people’s ages categorizes them into one of five different generations. Each with its own characterizes and most important their own buying styles. Below are six    categories; the largest group, The Baby Boomers has now be divided into two classifications

 Ages Today:

Senior Generation                           70 +

Older Baby Boomers                       61 - 69

Young Baby Boomers                     50 – 60

Generation X                                   35 – 49

Millennial’s (Generation Y)              21 – 34

Generation Z                                    20 and under

In the real estate business this gives us six different Client and Customers to interact with. The generation we were born into effects the way we think, react, evaluate and buy. You may get older and technically graduate to a new group, buy you will always follow the traits of the group you were born into.

Generation Profile, Attitudes and Trends

Mature (Senior or Veterans) Generation

Born 1925 – 1945, 70 and older, many of their parents were immigrants; they were guided by and obeyed their parents. They lived through tough and frightening times. Many experience the Great Depression and its aftermath, as their parents did. Lived through and many served in the World Wars.

Considered to be team players; they trust the government, authority and are community active.

They were brought up to appreciate discipline, hard work and self- denial. When they took a job they expected to work there for the next 30 years, reaping the reward for their hard work in their retirement years. They saved their money, being social and financial conservatives. They are high achievers, but not reckless.

They value stability and prefer the status quo.

Current Focus: Downsizing and affording retirement. Many are now on fixed incomes dealing with the rising costs of health care, taxes on their home and generally everything else. Ready to downsize their home and frustrated with trying to sell the “big” house in a down market.

Baby Boomer Generation

Born 1946 – 1965, 50 to 69 years old, this is a very large and powerful generation. The older boomers were the “me” generation, who feel entitled to the “good life”. They came of age in the 60’s. The younger boomers embraced a more conservative behavior, but both want to do things by themselves as individuals. If they want to sell their home they will try to market it themselves, when they fail, they will then hire a Realtor.

They grew up watching major cultural events on TV; TV was their learning media, news, world events, space exploration and the civil rights movements. Their parents, who had saved their money, wanted their children to have a better life than they had, so they paid for or subsidized their education. This generation had unprecedented opportunities for education and employment (the post war boom years). But they also experienced or served in the Vietnam War.

Those in college were considered social-cause oriented; many joined protests on campus over various causes. Many also experimented with “sex, drugs and rock& roll.”

The generation has been labeled as being self-absorbed. They are known to seek instant gratification.

Baby Boomer’s like to work, they “Live to Work”. When doing their job, if they have to stay “after 5:00” to finish a task they will gladly do so. They are considered to be workaholics, sacrificing a home life for career. Many have said they are to “cool” to retire. However as a result of the 2008 economic crashes, now many can’t afford to retire.

Current Focus: Older Baby Boomers Born 1946 – 1954 Ages 61 – 69

They desire to be near family; and to be able to afford retirement. Many lost sizable amount of their retirement savings in the 2008 crashes.

Current Focus: Younger Baby Boomers Born 1955 –1965 Ages 49 – 60

Family members moving back in with them (children and parents). Their children went to college but have not been able to get good jobs after they graduated and are saddled with high student loan debt; now moving back in with their parents. Their aging parents are moving in too, not wanting too or unable to afford assisted living or nursing home care.

Generation X

Born 1966 – 1980, 35 to 49 years old, practical, self-reliant, Independent – They do things there way, reject “rules”. This group came of age in the 80’s and 90’s witnessing the fall of the Berlin Wall, Persian Gulf War and economic recessions.

Typically both of their parents worked, they became “Latch key kids”. “When you get home from school, lock the doors and don’t let anyone in. Do your homework”. Instead of homework they played with computers; as kids to them “life was a video game”. They were trained “not to trust anyone”. With their parents working and not available for “consultation” they became very independent, but to make decisions they consulted with their friends.

They grew up with a mistrust of institutions and traditional values. This generation lives for today, they don’t expect to collect Social Security.

In contrast to the Baby Boomers they“Work to Live”: thatis their attitude. They work very hard but what is most important to them is family time. At work at 5:00 they are out the door, even if the task is not completed, to be at their children’s ball game. Many are entrepreneurial having developed their own businesses.

Not believing in social security being there for them, they look to investing in real estate as a retirement source. They still retain their childhood friendships and call upon them to help make decisions.

Current Focus: Neighborhood and Schools. Family is their focus, getting the best and most for their children; getting their children through college and caring for grandchildren and aging parents.

Millennials a/k/a Generation Y (Why?)

Born 1981 – 1994, 21 to 34 years old. Children of the Baby Boomers, their parents indulged them and gave them lots of attention, providing a busy schedule of education and activities, which has caused them to be very self –confident and driven by accomplishment. This generation grew up in good times and spent more time in full time education than any other group; they have only known economic prosperity. They grew up on the internet and have had a smart phone since childhood

By 2016 nearly half the U.S. work force will be Millennial aged. They are optimistic, assertive and positive. Everything is questioned by them, hence Generation Why. In the work force they do not hesitate to question, challenge managers. They are team players and like group activities to develop solutions. Hard working, they do their job well.

But they see work only as a means to an end. They want flexible hours, be able to work from home, and be able to take time off to travel. They want it all and are not embarrassed to ask for it. However they are considered an employer’s nightmare, as they have no job loyalty and will leave tomorrow for a better opportunity.

Their greatest advantage was being born into a technological society. Constantly they are multi-tasking. Friends are important to them and they have large networks. They are the most racially and ethnically diverse group.

Current Focus: Living and working close to home. Minimize commuting, be able to walk or bike to work, stores, and restaurants; trending back to living in the cities or in “Smart Growth” communities.

Generation Z

Born 1995 or later, 20 or under in years. Living in a society where everything is possible, but in a volatile environment of terror threats, possible nuclear or biological attacks, all undermine stability. Technology and the internet have influenced them greatly.

Family values and support are important to them giving them a heightened sense of self-confidence.  They have an educational focus on developing practical skills and enriching creativity. They have seen Generation X become super educated in college, many with Master’s Degrees, graduate and not be able to find good jobs. They also see the lack of skilled tradespeople, electricians, plumbers, carpenters and consequent increasing costs of those services. Many are considering alternative career paths.

As time goes on we will be better able to define this group.

Cross Generation Selling – How to approach each Generation

In traditional selling we were taught to “mirror” the other person. If they feel you are “just like me” you immediately establish a comfort zone.  If they have their arms folded or hands in their pockets, you do the same thing. If they talk slowly, you talk at the same pace. This gives the impression that he/she understands me. These are still valid concepts today. But, you must also communicate based on the age of your client/customer.

How do you communicate – educate with different generations? To educate you must know how each group learns and communicates.

Mature Generations

Slow to accept change or technology. They have worked hard all their life to be rewarded in retirement. How will this sale or purchase effect their retirement? Explain about Capital Gains Taxes (directing them to their accountant). Discuss 1031 Exchanges.

Many owners of commercial buildings are in this generation.

When this generation went to school, they learned by reading, memorizing testing and repetition. They still learn best by written word, research, and study.

We need conservative approach step-by-step, face-to-face. Make your presentation in a large type report format or a flip-book style. Do not use a computer or laptop for your presentation they may find it intimidating (and difficult to see). You could do your flip chart materials in PowerPoint, but then print them out to form your flip-book. Ask the client how they would like you to communicate with them, phone, fax or email? Younger agents note – e-mail or text’s won’t be read!

Baby Boomers

Like to do things themselves but also desires to be professionally serviced.  They will try to buy or sell on their own, get frustrated and then hire a professional Realtor to help them. Time is precious to them, they seek instant gratification.

This generation is our primary market of property sellers and often they will be buying at the same time. Increasing their status and their image of success are important to them; how will this transaction do that? They need to be educated how to acquire more.

They require a full listing presentation; you need to show the value you bring to the transaction. What can you do for them; that they cannot do for themselves? This is the “show me” generation.

They have technical skills and are comfortable with computer presentations or flip-books. They split communication between e-mail, texting and phone; they like the personal touch of a phone call follow up. But they need a quick reply, they are impatient.

In school they learned by discussion of topics and the ability to ask questions. Deliver a face-to-face full listing presentation. Show them the comparable properties you used for pricing, your detailed marketing plan, exactly what you will be doing for them – Show your value! Have the answer to any question they may ask you.

Generation X

These are our primary buyers and tenants today. We learned that they have trust issues, so you must build trust with them first through education and guidance. They are on information overload, but want instantaneous facts (answers), statistics and proof.

Concise visual presentations, with plenty of property pictures all delivered via e-mail.

They will be making decisions communally consulting with their circle of friends.  Not believing in Social Security they will hold on to properties whenever possible as a basis for their retirement. They become repeat investors and when you help one of these clients they will refer you to all their friends.

They consider education a necessary evil, preferring only to learn what will be of use to them. They do not want to be told what to do. They also have a short attention span – get to the point!

Older agents, this person has no patience for 30 slides of an hour CMA. Make your presentations short ant to the point; six “slides” top. Consider doing a face-to-face, using a PowerPoint Placemat (like you see in a diner).

How - Open PowerPoint and resize to a placemat size, 11” X17”. Cut and paste 6-8 slides, put on flash drive, have printed in a stationary store on glossy stock and your all set. Deliver your message over a cup of coffee of right on their desk.

Millennial’s

You need a good web site, because that’s where they will find you. They will not come to you, they will find property they are interested in online and only then contact a Realtor (listing agent). Does your web site contain good, ever changing information?

These are hardworking people trying to forge ahead but many are struggling with high student debt and entry grade job positions. This generation is goal orientated – they have a future plan. They need to be taken seriously – made to feel special and important.

The internet is their source of information and advanced education. They prefer online classes; they can take when they want, as opposed to classroom or live presentations. They are technologically astute – everything is on line, to them e-mail is old – they don’t use voice mail, texting is how they communicate. When meeting them in person consider doing the placemat presentation. Or just talk and give them a very brief summary “bullet points” report.

Multi-tasking is second nature to them. Expect them to be on the phone while you are showing them property, they are evaluating the property and doing something else at the same time.

Generation Z

Some of these folks may start becoming real estate customers within the next five to ten years. What technology we will have then and how will we communicate will be very interesting.

Communication Summary

Mature – Written word; face to face, full “non-tech” presentations

Baby Boomers – E-mail and phone follow up; full presentations

Generation X – E-mail; pictures; concise information, brief presentations

Millennials – Text messaging; social networking, very brief presentations

With all Clients and Customers today we must be the Consultant.

Educate, explain the process of selling, leasing, or buying; explain your role. Show the facts, build trust!

We need a different way of doing business based upon that particular client or customer’s generation. Remember ages change but the generation one was born into does not.

Meet two building owners or tenants in your town every day.

Systematically meet every business owner in your town. Two a day, ten a week, forty prospective clients/customers a month; you will become “The Commercial Agent” in town.
 

Join and attend Chamber of Commerce meetings and volunteer to serve on committees.

Who belongs to the Chamber or Service Clubs? Your future clients; get active in the group to become known.
 

Call FSBO’s until you get two appointments for tomorrow.

The only reason an owner runs their own ad is because the vacancy is costing them money. Find then a tenant, restore their cash flow and they will be happy to pay you.
 

Attend Commercial open houses and meet 25 new agents before you eat!

Networking contains the word “work”. At these events work at building up your list of other agent contacts, who may have the buyer or tenant for your next listing.
 

Catalog everyone you met yesterday (building owners, tenants, agents) into the address groups on your computer.

Multiple address groups; retailers in 1,000 SF – 2,000 SF, office users in 3,000 SF – 4,000 SF, building owners (investors). Blast your new listing to these potential buyers!
 

Stop by and see two prior clients/customers each week.

Just because they signed a 5 years lease does not mean they will stay there that long. Their business is booming after two years, they need more space. Can you find them more space and sublet the space they are in, and collect two more commissions?
 

Daily review of all new commercial listings in your area; arrange to co-broke and add to you “comparable” data base.

You need to know every available property in your market area. Your customer asks: “On the way here I passed a building for sale on Main Street, do you know the size and asking price?”
 

Develop and meet with your “leads” group once a month.

A” leads” group consists of up to 10 people, but only one person from any industry (one architect, one accountant, one from a moving company, etc.) meeting regularly to exchange information about potential customers.
 

Call MLS commercial expired’ s until you get two appointments for tomorrow.

Expired listings are gold. The owner is frustrated, maybe the agent was not trained in commercial and the property was not marketed properly, time for a change.
 

Join and attend monthly commercial organization’s meetings.

Meet and add other commercial agents to your distribution list; be added to their lists. Great for those new in the business, “pick the brains” of the experienced agents.
 

These resolutions need to be part of your daily prospecting, which is required for success in our business.
 

Consider two more resolutions to be the best at what you do.
 

Expand your skills – take educational courses; earn a Certification or Designation.

There is a lot to learn in this ever changing business, stay current and expand your knowledge and services offered.
 

Read business and motivational books.

Knowledge is power. You need to be a “10” every time you make a presentation or meet someone new. Do what it takes to be there.
 

Now get out there and make it a great year!

2015 Extender Bill Passed

Each December the U.S. Congress passes a series of bills known as the Omnibus Appropriations Bills, which authorize the funding of the government for the following year. They include a group of items referred to as “extenders”; in this category they look at tax breaks that expired at the end of the previous year, Deciding if they wish to extend them and making the extension retroactive to January first of the current year. Typically they are only extended to December 31 of the current year, leaving everyone in limbo as the upcoming year’s status.

Confuse yet? For example, on December 31, 2013 the 15 year depreciation recovery for leasehold improvements expired. During the year 2014 leasehold improvement depreciation reverted back to 27.5 or 39 years depending on the type of property. However, in December of 2014, as part of that year’s extender bill, 15 year depreciation recovery for leasehold improvements was extended to December 31, 2014, retroactive to January 1, 2014.

Things were very different in this year’s extender bills, some tax benefits were made permanent and some were extended for multiple years.

2016 Commercial Real Estate Tax Benefits Changes
Signed into law December 18, 2015

Leasehold Improvement Depreciation: The15-year depreciation period for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements is made retroactive to January 1, 2015 and extended permanently.

Immediate Expensing of Business Equipmen tand Certain Real Estate: The expensing provision for equipment and certain real estate use by small and mid-sized businesse i s made retroactive to January 1, 2015 and made permanent (section179).

The real estate includes leasehold improvements, certain restaurant improvements, and certain retai limprovements.The provision restores the limitation of $500,000 deduction and $2 million phase-out amount, plus this will be indexed for inflation beginning in 2016. Added to qualified equipment are air conditioning and heating units placed in service in tax years beginning after 2015, theyare now eligible for expensing.

Moreover, the $250K cap on qualified real estate is being removed starting in 2016, so all business assets (real and personal) will have the same $500K limit each year, and be indexed forf uture inflation.

BonusDepreciation: Extends bonus depreciation treatment for five years, retroactive to January 1, 2015 .Moreover, the provision now includes a new category called “Qualified Improvement Property,” which is defined as an improvement tothe interior portion of an existing non-residential commercial building (except for elevators, escalators,or enlargements).The Bonus Depreciation percentage is 50% for 2015, 2016, and 2017; it phases down to 40% for property placed in service in 2018 and to 30% for property placed in service in 2019.

Thus, most leasehold improvements will now generally be eligible for immediate expensing (section 179) for the smaller and mid-size businesses and for bonus depreciation (50% expensing) for the bigger companies.

Energy Efficient Commercial Buildings(Section179D): The benefit  extends for two years (2015 & 2016) the energy-efficient commercial buildings deduction. This section allows up to $1.80 per square foot in deductions to those who have upgraded their building’s lighting ($.60 psf), HVAC ($.60 psf), or building envelope ($.60 psf).

Reminder: the Investment Tax Credit (“ITC”), which is a 30 percent federal tax credit for solar and geothermal systems on residential and commercial properties, remains in effect through December 31, 2016.

The ITC for solar will continue at 30 percent levels for both commercial and residential systems through 2018, then taper off in yearly increments to settle at10 percent in 2022.

Other Extensions:

EB-5 Program Extended: A clean extension (no reforms) until Sept.30, 2016.

Internet Access Taxes: The Internet Tax  Freedom Act (ITFA), which bans state and local governments from imposing taxes on Internet access, expiredOctober 1, 2015.The Omnibus extends the ban through October 1, 2016.

It’s time of year to review your past year’s performance. Like most people you probably accomplish many things – but perhaps not all your business goals. Why not? As an independent contractor you are accountable to yourself! What are your goals for 2016, and what is your strategy to achieve them?

Goals need to be attainable but also a challenge: set your standards higher than your previous achievements. Results must be visible but may take many forms; self-improvement, accomplishment, recognition or tangible, such as a new home, a boat, a car or just more money. Once goals are determined they need to be written down. The action of writing something down etches it into our sub-conscious mind. It is our sub-conscious that reminds us of what we want to accomplish.  We need the constant reinforcement of seeing our goals; a storyboard may be used for this purpose. Create a poster with a collage of pictures representing your goals or surround your office with pictures of what you are striving for.

I like to think of the goal setting process as a time for assessment and evaluation. Looking at what we have done and failed to do is the beginning of that process. Goals need to be set for our lives, our family, ourselves and our profession. All of our actions need to interact in harmony.

To take a goal to reality requires a plan; a consistent course of action. To establish a business plan you must first establish your career goals. Where do you see yourself at the end of December, 2016; someone who has established greater recognition as “the commercial agent” in their area; the “top producer in your company”; someone who has had more time for community service and family; and/or someone who has exceed this year income goals?

A financial goal for a commercial real estate agent may be to make $100,000 in commission next year. The goal needs to be broken down into steps. Each quarter you need to earn $25,000, each month’s production needs to yield $8,333. in commissions. What specifically will be required? What are the average sale and lease commissions in your area? How many sales and leases do you need to close each month to accomplish this? How many Listings do you need? How many presentations do you need to make each week How many people do you need to meet each year? Answering these questions is the basis for your plan of action.

Next you need a strategy. Daily prospecting should include “door to door” canvassing. Become “the commercial agent” in your area by systematically visiting each store, office or business in a specific geographic area. Introduce yourself, see if they have any real estate needs now or upcoming in the future (“when did you say your lease was up”), and always ask for a referral. “by the way is there anyone else who you think I may be of assistance too.”

A reflection of who our customers and clients are reminds us that they are small business owners, professionals and large corporations. Where can we find many of the business leaders of our community? Consider networking by joining the local Chamber of Commerce or local service organizations: Kiwanis, Lions, or Rotary etc. Become active in these groups and get to know the other members (your future customers).

Contacts result from reading the papers. Classified ads by owners, see if you can help them sell or lease their property. Read the trade papers in your area and the NY Real Estate Journal. They tell us which companies are on the move. Note the space availabilities advertised by other brokers.

Developing relationships, turning our contacts into clients requires regular follow up. E-mail and texting is fine but personal contact is best; calling people on the phone and seeing people face to face. To be successful in this business is a numbers game. Plan your days to meet more people!

Use of IRR to Compare Leases

Landlords renting space may have several interested potential tenants – who’s offering the best financial terms? Do the calculation to assist the Landlord in their decision.

Let’s look at two examples, which is the better deal?

Offer A: five year lease, 1,500 SF at $30 PSF no increases or

Offer B: five year lease, 1,500 SF starting at $27 PSF with 4% increases

We can chart this out to get a definitive answer:

Now the landlord has the facts to work with.

Often a tenant will want the space modified; construction to be done (Tenant Improvements or TI). Now, which offer would be the better deal?

Offer A: five year lease, 1,500 SF at $30 PSF no increases with TI $75,000 or

Offer B: five year lease, 1,500 SF starting at $27 PSF with 4% increases with TI $65,000

This comparison would require an IRR calculation; similar to an annuity. The TI would start the calculation as a negative number followed by the cash flows as positive numbers to solve for the IRR. This is not just a plus and minus calculation, as the IRR is calculated based upon the time value of money. The expense of the tenant buildout occurs before rents start at time period 0.

However in choosing the better tenant the financial consideration is only one part of the decision. Which tenant has a stronger financials, who has been in business longer, which business is more stable?

Uses of IRR and NPV in Commercial Real Estate

The Internal Rate of Return (IRR) may be used: to measure of the total performance of an investment property over time and to compare investment properties, even different types of properties. Which is the better deal: this office building or that retail center? In leasing IRR is used to compare tenant offers and to determine should one buy or lease a property (we will cover these topics in the next month’s articles).

IRR and Net Present Value (NPV) are based upon performance projections of a building using time value of money concepts. In measuring the performance of an investment property the IRR calculation takes into consideration the acquisition price, annual cash flows and the sale proceeds (also called disposition or reversion proceeds). The IRR evaluates all facets of the investment during the holding period (the entire time the investment is owned), and is stated as a percentage that reflects the annual performance of the property. Realistically the IRR is a true measure of the performance of a property because it considers both cash flows (annual performance) and the appreciation in value (purchase price vs. sales price) of the property over time (the holding period). An internal rate of return may be used to track the historical performance or project future income and values for a building.

To do so a “spreadsheet” is developed projecting the annual income and expenses of the property over the length of anticipated ownership. Using the actual lease escalations and typically cost of living rates for expense acceleration; each year’s potential Net Operating Income (NOI) [cash flow] is determined. The purchase price is known and the sales price is projected by applying a conservative CAP Rate to the final year of the holding period.

This provides the necessary figures to do the calculation. Calculating IRR is time sensitive and each year’s results must be included, even there are negative cash flows or zero activity. The acquisition price is time period zero, and the final year in the holding period reflects both that year’s cash flow and the disposition proceeds. This is typically used for mid to large size properties, but could be applied to any building.

This also allows for the financial comparison of different size or types of properties; for example, comparing a shopping center to an office building investment. This may also be applied to properties that are or will be financed.

Some customers, especially institutional investors, will set a specific return on investment percentage (ROI) as a requirement or goal for their purchases. They will project future value of a property based on existing leases or market trends. Using the desired ROI as the IRR they calculate Net Present Value. How much they can pay for the property (acquisition price) to accomplish their ROI/ IRR goal. The same “spreadsheet” analysis will be used, the cash flows and ultimate future sales price are calculated but in this case we will be solving for the acceptable purchase price.

Calculating IRR or NPV is not simple math, because it involves time value of money concepts which discount future values; specific programs or calculators must be used for these calculations.

History has shown that real estate has cycles; values increase to a market saturation point and then sharply decline. The latest cycle peaked in 2007 and it took to 2013 for commercial real estate to start heading upward again. So timing to enter this exciting field is perfect.

There are four major requirements to become a successful commercial agent: Financial, Training, Prospecting and Networking.

When starting out in commercial you need to be financially prepared to pay your household expenses for at least six months, sometimes more. Deals take time to close and you need to cover you expenses until commissions start coming in. In the beginning focus on leasing as most business moves are time sensitive and prone to close faster than sales.

You will also need to invest into your business. If you are a residential agent evolving to commercial, you are used to placing your listings on your MLS. You should place your commercial listings there too, but your MLS only reaches your local market. Everyone needs to get additional exposure of your exclusive listings to customers and other commercial agents by subscribing to some of the national listing services.  This is essential and expensive; you may also need to pay for some training.

Commercial Real Estate is very different from residential real estate. Agents need to be properly trained to avoid liability issues and loss of potential profits. It is also a violation of the National Association of Realtors (NAR) Code of Ethics to do commercial or investment transactions without proper training. "Realtors® shall not undertake to provide specialized professional services concerning a type of property or service that is outside their field of competence..." Whether you are a Realtor or not this is sound advice.

Training may be provided in Commercial and Investment Real Estate by the brokerage firm you decide to work for. Education must be an ongoing process as the industry and markets are constantly changing. Commercial course are given by Boards of Real Estate and Colleges. There are Commercial and Investment Real Estate Certification (CIREC) Programs available, and NAR offers extensive courses to earn the Certified Commercial Investment Member (CCIM) designation.

Success requires patience and tenacity. A daily habit of prospecting is required. Pick a geographic area to begin, with the goal of meeting every building owner and tenant in the area, and catalog this information on your computer. Remember we are in the “people” business and contacts lead to information and referrals. You need to become known as “the commercial expert” in your markert and you can only do this by visiting business and building owners in the field every day.

Network, meet business people by joining the organizations where you “target” clients and customers are; Chamber of Commerce, service clubs i.e. Lions, Rotary, Kiwanis, or any other business organizations in your area.

Not all commercial listing get posted on the internet. Meet as many other agents doing commercial work as possible and set up address groups of them in your computer. Blast your new listings out to these contacts and also your client requirements; they may have the property you need. If there are Commercial Agents organizations in your area join them, network as often as you can.

Comparing Tenants-in-Common and Delaware Statutory Trusts

After last month’s article on the History of 1031 Exchanges, I received several questions regarding Tenants-in-Common and Delaware Statutory Trusts. In this issue we will explore both. They are similar in that either may be used in a 1031 Exchange and both give the investor an opportunity for participation in a larger project; but they are also quite different.

One of the most difficult parts of doing a 1031 Tax Deferred Exchange is finding the right replacement property to purchase within the required 45 day identification period, and successfully closing the purchase within 180 days. Additional exchange opportunities of large investment grade buildings are offered by many firms as Tenant-in-Common (TIC) or Delaware Statutory Trusts (DST).

With Tenants-in-Common you own a pro-rate share of a building. In this structure each investor forms a single member limited liability company and the lender is financing individually with each investor. Each investor reaps their proportionate share of cash flows and eventual sale proceeds. But this structure can become convoluted as investors in the TIC must vote unanimously on all major investment decisions. It may become difficult to get all the co-investors to agree on an important decision.

One of the TIC rules is there can be no more than 35 co-investors. Practically speaking this limits the amount of funds available; say each investor contributes $100,000 and  loans are secured for 50% of the value; the available funds to purchase are $7,000,000.

The Delaware Statutory Trust is governed by the Security and Exchange Commission (SEC) regulation D of the 1933 Securities Act and later defined in 2010 by the Dodd-Frank Act. This requires each investor to be an “Accredited Investor”. These are individuals whose net worth is in excess of $1 million and/or earned annual income of $200,000 for two or more years, with expectation that this income level will continue. Typical DST’s will have a 100 (sometimes more) investors, allowing then to raise significantly more capital and buy much larger buildings than with a TIC.

With the DST there are property sponsors who serve as Trustees of the Trust; they purchase the property and structure it as a securities DST, with written detailed offering documents. Mortgage banking and property management are pre-arranged by the property sponsor. The investor owns an individual “Beneficial Interest” in the DST; there is no need to form individual LLC’s. The Trust owns 100% of the real estate so unlike the TIC there is only one loan and one borrower.

The property sponsor administers the Trust and operations of the property. Management is less complicated as individual co-investors or beneficiaries in a Delaware Statutory Trust are not permitted to vote. There are numerous other rules and regulations regarding the DST operations.

Both TIC’s and DST’s can be set up as income producing properties; other offerings may have the strategy of directing all the income to pay down the loan, thereby increasing each taxpayer’s equity over the course of the holding period. Upon disposition of the asset the taxpayer can potentially use another 1031 exchange, and do this all over again!

This is just a brief outline of these types of investments; be sure you or your client discusses these opportunities with your accountant and an expert in either Tenants-in-Common or Delaware Statutory Trusts.

The future history of 1031 Exchanges is at risk as the US Congress evaluates our current tax structure. Last year, included under both the House and Senate tax reform proposals was repeal of 1031 Exchanges. President Obama’s 2015 budget proposes a limit of $1,000,000 per year of deferrable capital gains in a 1031 Exchange.

Congress, in an effort to pay for the American Civil War imposed the first income tax in 1861. The Revenue Act of 1861 collected a tax of 3% of all incomes over $800 a year.

As time went on, issues of tax policies, rates and “fairness” plus how to stimulate the economy were continually discussed in Congress. When someone sold a property how could they be incentivized to buy another property rather than hoard the money (that was left after paying taxes on the sale)? After all, if the money from the sale were reinvested into a replacement property there was no economic gain or cash to pay the taxes.  Thus in the Revenue Act of 1921 the first tax deferred like kind exchange was authorized. In 1928 this was formally titled Section 112(b)(1) of the tax code. In 1935

The concept of using a Qualified Intermediary (Accommodator) to conduct the exchange was added. The Federal Tax Code was amended in 1954 to change the section number from 112(b)(1) to Section 1031.

Prior to 1979 exchanges were accomplished in a one day long closing; the relinquished property being sold followed by the replacement property being purchased.

T.J. Starker and his son sold timberland to Crown Zellerback, Inc. in exchange for a contract to acquire certain properties within 5 years. The IRS disallowed this “delayed” exchange. In 1979 the Starker Family sued the IRS and won the case setting precedent for today’s non-simultaneous, delayed tax deferred exchanges. In 1984 Congress adopted the 45 calendar day identification Period and the 180 calendar day Exchange Period; imposing a limit on the length of the exchange opportunity.

The Tax Reform Act of 1986 restricted tax benefits of owning real estate and really catapulted 1031 exchanges into the forefront. The act eliminated preferred capital gains treatment, taxing them as ordinary income; eliminated accelerated depreciation in favor of straight line over 27.5 years for residential property and 39 years for commercial property.

In 1990 the IRS issued comprehensive Tax-Deferred Exchange Regulations which for the most part are today’s guidelines. Two additional advances have occurred since, in 2002 fractional or co-ownership of real estate known as Tenant-In-Common ownership was authorized to be used in an exchange. In 2004 Delaware Statutory Trusts were ruled as being real estate and therefore as a replacement property solution for 1031 exchanges.

1031 Tax Deferred Exchanges have a long history of benefits to real estate investors and to our economy; these statutes must be preserved. Make you voices and concerns known to your representatives in Congress. 

 Independence Day

Independence Day, July 4^th – Freedom!

Then after the Declaration of Independence, came the battle to defend and keep our freedom. Freedom has a price. 

We are Independent Contractors – free to work at our own pace. With this freedom, and desire for success, comes responsibility and accountability to ourselves. The cost of our freedom is hard work, determination and perseverance. We must work on building our business every day to remain Independent and free! 

As we approach the July 4^th Holiday, let us reflect upon some of the history of our young Independent Country starting in 1776.

Facts about the Holiday:

The major objection to being ruled by Britain was taxation without representation. The colonists had no say in the decisions of English Parliament.

In May, 1776, after nearly a year of trying to resolve their differences with England, the colonies sent delegates to the Second Continental Congress. Finally, in June, admitting that their efforts were hopeless; a committee was formed to compose the formal Declaration of Independence. Headed by Thomas Jefferson, the committee also included John Adams, Benjamin Franklin, Philip Livingston and

Roger Sherman. On June 28, 1776, Thomas Jefferson presented the first draft of the declaration to Congress.

Betsy Ross, according to legend, sewed the first American flag in May or June 1776, as commissioned by the Congressional Committee.

The 56 signers of the Declaration of Independence did not sign at the same time, nor did they sign on July 4, 1776. The official event occurred on August 2, 1776, when 50 men signed it.

The names of the signers of the Declaration of Independence were withheld from the public for more than six months to protect the signers. If independence had not been achieved, the treasonable act of the signers would have, by law, resulted in their deaths.

 Thomas McKean was the last to sign in January, 1777.

 In America, during the pre-Revolutionary years, colonists would hold annual celebration in honor of the king’s birthday.  In contrast, after 1776, colonist would celebrate independence by holding mock funerals for King George III, to symbolize the end of the monarchy’s hold on America’s liberty. Early Independence day festivities also included: concerts, bonfire, parades, and firing of cannons.

Independence Day was first celebrated in Philadelphia on July 8, 1776 while Congress was still occupied with the ongoing war.
 
The Liberty Bell sounded from the tower of Independence Hall on July 8, 1776, summoning citizens to gather for the first public reading of the Declaration of Independence by Colonel John Nixon.
 
June 14, 1777, the Continental Congress, looking to promote national pride and unity, adopted the national flag. “Resolved: that the flag of the United States be thirteen stripes, alternate red and white; that the union be thirteen stars, white in a blue field, representing a new constellation.”

George Washington issued double rations of rum to all his soldiers to mark the anniversary of independence in 1778.

In 1781, several months before the key American victory at Yorktown, Massachusetts became the first state to make July 4th an official state holiday.

The word patriotism comes from the Latin patria, which means  homeland or fatherland.

The first public Fourth of July event at the White House occurred in 1804.

Before cars ruled the roadway, the Fourth of July was traditionally the most miserable day of the year for horses, tormented by all the noise and by the boys and girls who threw firecrackers at them.

The first Independence Day celebration west of the Mississippi occurred at Independence Creek and was celebrated by Lewis and Clark in 1805.

The origin of Uncle Sam probably began in 1812, when Samuel Wilson was a meat packer who provided meat to the US Army. The meat shipments were stamped with the initials U.S. Someone joked that the initials stood for “Uncle Sam”. This joke eventually led to the idea of Uncle Sam symbolizing the United States government.

On June 24, 1826, Thomas Jefferson sent a letter to Roger C. Weightman, declining an invitation to come to Washington, D.C. to help celebrate the 50th anniversary of the Declaration of Independence. It was the last letter that Jefferson, who was gravely ill, ever wrote.

Three Presidents died on Independence Day, both Thomas Jefferson and John Adams died on July 4, 1826. President James Monroe died on July 4^th, 1831.

Independence Day acquired its unofficial theme song on July 4, 1897, at the Manhattan Beach Music Hall on the eastern end of Coney Island. On that Sunday afternoon, sometime after 4 p.m., John Philip Sousa lifted his baton and cued his band to launch into their latest hit, “The Stars and Stripes Forever.” Sousa had not composed it specifically for the holiday, but it has been a marching-band staple on every Fourth of July since 1897.

In 1941, Congress declared 4th of July a federal legal holiday. It is one of the few federal holidays that have not been moved to the nearest Friday or Monday.

Why fireworks on the Fourth of July? Fireworks have been used to celebrate special occasions for sometime, even before the American Revolution. Our founding father’s even believed in celebrating our independence with fireworks. In a famous letter John Adams wrote to his wife, he states how the holiday deserves to be celebrated with “illuminations” or fireworks. “The day will be most memorable in the history of America. I am apt to believe that it will be celebrated by succeeding generations as the great anniversary festival. It ought to be solemnized with pomp and parade, bonfires and illuminations (fireworks) from one end of this continent to the other, from this time forward forever more.”

Today, there are over 155 million Hot Dogs consumed on July 4^th ; it is the largest day of the year for beer consumption (68 million cases) and over $600 million is spent on fireworks.
 
Enjoy your summer!

Co-Brokerage Agreements

Considerable real estate brokerage business is done with one firm representing the selling or landlord side of the transaction and another firm representing the buyer or tenant side. This necessitates a written co-brokerage agreement between the brokers involved. The agreement identifies the property and the “rules” under which the listing is shared: including commission rates, commission splits, registration of customers and other conditions.

The listing broker is cooperating with another broker who has a customer for the property. In this case the other broker may be acting as a sub-agent of the listing broker, both working on behalf of the property owner. Or the other broker may be representing the buyer/tenant, having a written Buyer or Tenant Representation Agreement with their client; and bound to do what is in their client’s best interest.

At the start of this relationship between the brokers, the respective relationships with clients or customers must be clearly defined. State laws vary regarding agency disclosure, be sure to check your State regulations.

Generally the listing broker creates the co-brokerage agreement. Some brokers have it signed before releasing any information to the buyer/tenants broker. Other firms do not execute the agreement until an offer is presented. Some firms do not use a written co-broke agreement, which is actually not in the best interest of either brokerage.

A very important point when co-broking is contained in the National Association of Realtors (NAR) Code of Ethics: Article 3-1: “REALTORS®, acting as exclusive agents or brokers of sellers/ landlords, establish the terms and conditions of offers to cooperate. Unless expressly indicated in offers to cooperate, cooperating brokers may not assume that the offer of cooperation includes an offer of compensation. Terms of compensation, if any, shall be ascertained by cooperating brokers before beginning efforts to accept the offer of cooperation.“ Dealing with a “Realtor” or not, this is an issue – do not assume the listing broker will pay you.

What if… no compensation is offered? The compensation offered is ridiculously low or unacceptable. You may need to act as a Buyer Broker or Tenant Representative for your client on this property; with the client agreeing to pay you your fee. Remember all commission rates are negotiable.

When you belong to a Multiple Listing Service (MLS) often the cooperating brokerage rules are established and compensation to other MLS brokers is disclosed. But many commercial firms are not Realtors and do not belong to a MLS. If a non MLS broker has the listing, you need to determine what your compensation for cooperation will be and get it in writing. This may be easy if they provide a co-broke agreement with fee splitting information.

If the listing broker does not provide an immediate agreement or does not use any agreement, determine your fee and create a simple Co-Broke Acknowledgement letter. Stating, you agree to cooperate with _____ Brokerage, on their exclusive listing at _____. With the understanding that your firm, ______ will be paid a fee of ____, if you bring forth a ready, willing and able buyer or tenant. Ask the listing broker to sign the document acknowledging the agreement.

However be aware, some Co-Brokerage agreements can be convoluted and may contain a lot of conditions. Before you sign any forms or even create the referenced simple acknowledgement letter, check with your broker; such forms may also need legal review.

Never introduce a client or customer to a property until a brokerage agreement or acknowledgement is signed.

We measure space in square footage. Then the rent is calculated either on an annual or a monthly basis depending on your market. I am in the Northeast and generally the rental cost is quoted as the annual cost per square foot. But, it is not that simple. Office buildings are measured in one manor and retail and industrial building space is calculated another way.

In a small “Main Street” building a landlord may simply measure the interior square footage of the space and base their rent upon that.

Office Buildings

In office buildings with multiple tenants landlords desire to be paid for “every square inch” of their building. In these properties tenants get to exclusively occupy and use a certain amount of space but they also share “common areas” with all the other tenants in the building. So a tenant ends up occupying Net or Usable Square Footage but paying for this space plus their proportionate share of the common area, known as the Rentable or Gross or Billable Square Footage. For this article we will just refer to this as the Rentable Square Footage. Different terms are used in different areas and by various landlords. The important concept is that tenants often have to pay for more space than they occupy.

The common areas of a building may consist of lobbies and atriums (at floor level), public corridors (and include the thickness of the corridor walls), elevators, staircases, public restrooms, janitor, electric and phone closets, mechanical rooms, and loading docks. Such measurements will include the “common areas” on all floors.

When a building is constructed an architect or engineer will measure all the space in the building and determine the overall amount of usable square footage and the amount of common area square footage. For Example: a building is 100,000 SF in total space, of that 15,000 SF of that space is common area (shared by all the tenants).

Landlords are entitled to get paid for all the space in their buildings including the “common areas”. There are two different methods used to do this calculation, the Add-On Factor and the Loss Factor method (also referred to as Load or Core Factor in different geographic areas).

The Add-On Factor is generally found in use in areas where there is high vacancy and low absorption rates. The Loss Factor method of calculating Rentable Square Footage is used in areas of generally low vacancy and relatively high absorption rates. The calculations of how much space the tenant will have to pay for are done differently with each method. but the result of using the Loss Factor method is more money to the landlord.

Retail and Industrial Buildings

When there is a free standing building, with a single tenant, in either of these categories, the gross space of the buildings is used to determine how much square footage the tenant must pay for. The gross space will include the interior square footage plus the thickness of the exterior walls.

Retail or Industrial buildings that contain multiple tenants will add to the interior square footage the thickness of any exterior walls of the unit. Plus, if there are common or demising walls shared with another tenant 50% of the thickness of those walls will be added. That total square footage is what they will pay for.

Where are you buying products online or in stores? Traditional retail purchasing has changed dramatically. The Retail Customer Experience surveys and ranks retailers in four categories: customer service, online experience, value for price and overall customer experience. The 2015 merchant ranked #1 in all four categories was Amazon!

The millennial generation (born since 1982) now controls 70% of the spending power in the U.S. These 80 million people were raised “online” and have had smart phones since childhood. How does a retailer get them into their stores?

The internet has changed the way retailers market, now they sell both online and in their stores. The increasing percentages of online sales have created a decline in store traffic. As a result they don’t need such a big store anymore; we see a trend in downsizing of retail stores.

How they attract buyers is also changing, a sale is not enough. Stores now need to be interactive. Many offer apps for smartphones; combined with the latest Beacon technology the in-store experience is now personalized and marketed in real time. A beacon uses a Bluetooth signal to send special offers to nearby smartphones equipped with the store’s app. App users will receive targeted messages and deals while moving throughout the store. Arriving at the store you phone rings with a store wide special sale. Enter the sporting goods section and you phone rings again with a special deal on certain equipment or brands.

“Experience Retail” is the new catch phrase. It started with the concept of “Try it before you buy it”, creating areas in the store to use products; stores like Apple, Samsung, ATT and other phone companies are good examples. Now we also see an expansion of this to make the shopping experience convenient, interesting and fun. Many book stores have added Cafes and areas to sit and read; even supermarkets now have sandwiches, pizza, sushi and other foods ready for instant consumption in their “restaurant” areas.

Large retailers are adding entertainment right in there stores. Bass Pro Shops are a mammoth 150,000 SF store which has large indoor aquariums, museum quality displays, an archery range to try a new bow, Uncle Bucks Fishbowl and Grill restaurant and in one of the latest stores a bowling alley with an underwater theme.

Retail malls have fast food courts and increasing numbers of quick and casual sit down restaurants. Today shopping malls are trying to incorporate movie theaters into their centers as statistics show 52% of people who go to the movie there, also shop in some of the stores. Theaters also promote more return visits to the mall. Other family entertainment, attractions and even amusement rides are an increasing part of the mall experience.

A representative from a Mercedes Benz dealership recently commented that “this is the only place they should be coming” for service. They enhanced the waiting experience; customers can use a loaner i-pad, have a free manicure in the nail spa or enjoy using the putting green!

Retailers need to draw customers to them with innovation!

This article will cover a lot of possible tax deductions which you may or may not be able to take. Your individual situation needs to be discussed with your accountant or tax advisor. Generally if you are an independent contractor you can deduct most expenses related to your business activities. But, be sure to keep a daily log of your business activities and expenses, as well as receipts for everything; so in the event of an IRS audit you have documentation. 

In our field we do a lot of driving, car expenses (leased or owned) are tax deductible with the exception of “commuting miles” to and from your home to your office. This can be deducted by $.56 a mile (in 2014) or by specific expenses for fuel, repairs, car washing, depreciation, etc. Tolls and parking expense are also deductible. Other business travel by rail, air, ferry’s, taxicabs may also be deductible. 

Advertising is deductible and takes many forms: print media, signs, banners, business cards, postal expense of mailings, flyers, promotional materials, web site development and fees and online advertising. 

Deductible Professional Fees include: Realtor dues, MLS fees, costs of other listing services, licenses, E&O insurance, business and trade organizations dues, subscriptions to trade publications, fees to attorneys, accountants and consultants. 

Equipment used in your business may be deductible for example: Cellular phones, pagers, an answering service, iPad, cameras, calculators, computers, laptops, software programs, copy machines, desk fees if you have them at your office, GPS subscriptions, office furniture, file cabinets and office supplies. 

Education: The costs of Continuing Education courses are deductible, as are expenses to attend other seminars or business conferences to maintain and increase your skills. Also deductible are the costs of travel and lodging to attend these events. Books, tapes, CDs, DVDs related to real estate, sales, leases, negotiations and online courses are deductible. 

Sales expenses that may be deducted include: client gifts, clerical support, wages paid to a sales assistant, commissions and referral fees you paid out, bank fees (you should have a separate bank account for your business), open house or broker reception costs, locksmith and keys, lockboxes. 

Self-employed people may deduct 100% of their health insurance premiums. 

Meals and Entertainment are deductible up to 50% of the cost. Be careful, this is often reviewed by the IRS. Be sure to document the business discussion that occurred before, during or after meeting or event. 

Home Office Deduction is possible if you exclusively use a portion of your home for business; this deduction is also often looked at by the IRS. If you rent or own a home a percentage of the expense may be deducted; this could include the rent, utilities, repairs, maintenance, mortgage interest, real estate taxes, depreciation, and condo association fees. 

Retirement plan contributions to IRA’s, and similar plans can help shelter your business profits. Discuss these opportunities with your advisor. 

Two key reminders, every persons situation is different you need to review these possible deductions with your accountant or tax advisor. Keep good records, a daily log and all receipts. 

To maximize success a commercial real estate agent must build a referral network of clients and other agents.

Satisfied clients and customers are a great source of new business opportunities, but you have to ask for the referrals. Often this is done at the closing or lease signing and then is forgotten about. Periodic reminders may be required to encourage this “word of mouth” advertising. Consider visiting your clients after the deal has closed on a regular basis or send out a monthly newsletter; always closing by asking if they know of anyone else you may be of assistance too.

A residential agent who sells their buyer a home knows a lot about that persons business or employment. Many residential agents and firms specialize in that area and do not do commercial brokerage. Build a referral “army” of these agents! We do not want to interfere with their transaction process, but after the home sale closes encourage them to introduce you to their clients. Offer to pay them a referral fee if the customer uses your services now or in the future to buy or lease commercial property.

To make everyone feel comfortable you probably want to have a simple agreement between your firm and the referral agents firm. You may also want to add, that if the customer wants to buy another home that opportunity would go back to the residential agent.

When it comes to referrals or co-broking the question of what is an appropriate fee must be determined. To answer this, I usually reflect on who is doing the work. (There are no rules here, all commission rates and splits are subject to negotiations between the parties.) Sometimes there is a perception issue with the referring agent, that they want half the commission because it’s their customer. But they are not going to be doing half the work! They probably do not have the commercial resources necessary to really service the customer and forget that half the commission may be going to a listing broker.

To me an ideal referral is an actual face-to-face meeting and introduction, here I consider a referral fee of 25% of the side warranted. If all I am getting from the agent is a customer name and contact information, and I am going to do all the work; 10% of the side is all I would pay as a referral fee.

We run into another situation when an agent knows of another agent who has listed a property, and also knows of a third agent who has a buyer or tenant looking for that type of property. This agent is really serving as the “Coordinating Broker”- bringing other agents together for a common goal.

 A three way split of the commission is too often proposed; again I go back to the question of who is doing the work. The agent in the middle may feel there would be no deal without their putting these two together, but beyond that what will this agent do to bring about a meeting of the minds? Perhaps a fee for the agent in the middle of 10% of the gross commission (5% from each side) would be fair and reasonable.

In developing your referral network, think long term relationships with these agents. Reasonable fees will promote additional referrals.

 As we enter year seven of the recovery after the crash of 2008, there are many forces that have me optimistic that it will be a good year for Commercial Real Estate. 

2014 was the best year for the US economy since the downturn and this will continue into 2015. NAR economist Lawrence Yun said, “Job growth is the catalyst to improve demand for commercial real estate leasing and new construction projects.” We ended 2014 with unemployment nationally now below 6%. 

New jobs are being created and construction is on the rise as the United States has a continuing increase in population. It is now predicated by 2050 the US population will reach 400 million people. This will require more housing, office, retail, industrial and infrastructure improvements; all adding to escalating job growth. 

The U.S. is now the largest producer of oil in the world and we have natural gas resources that will be available for 100’s of years; we have seen oil and gas prices drop over 40%; increasing household spendable income for most families. The stock market Dow Jones Industrial Average just set a new record at over 18,000 points. 

The older millennials (24-34) are moving from renting housing to buying homes because it is now cheaper to own than to rent. This age group represents 65% of the first time homeowners.  These are all positives sighs of a robust 2015 economy. 

NAR also predicts the multi-family market will have very low vacancy rates and rents will increase 4% in 2015. The office market will see a slight reduction in vacancy and rents will increase 2.4%. Retail will see a drop in vacancy and rent increases of 2%. Industrial markets will have a slight increase in vacancy but will increase rents by 2.4%. Overall this will improve the demand for commercial real estate leasing and new construction projects. 

The U.S. economy is strong. Europe and Asian economies are unpredictable, the Middle East is in turmoil and Russia is facing a major recession. For the wealthy in these areas investing in U.S. properties is much safer. In 2014 there was a flood of money coming in to this country; Chinese investors accounted for the purchase of many of the trophy building in New York and other major cities. In October, 2014 Beijing, China’s,  Anbang Insurance Group bought the 1,232 room Waldorf Astoria hotel on Park Avenue, NYC for $1.95 Billion dollars. In 2014 Chinese investors purchase over $2.7 Billion dollars of New York City real estate. This trend of foreign buyers investing in the U.S. will continue in 2015. 

The commercial property values, especially in our major cities like New York, are unbelievable. The latest sale announced is the Crown building at 730 Fifth Ave. (at 57^thStreet), in New York City; it just sold for a record price of $1.75 Billion dollars ($4,490 PSF). This 390,000 SF office building includes 50,000 SF of prime retail property. The current owner bought the property in 1991 for $93.6 million dollars, when the property was half empty. 

We expect to see a continuing easing up of the credit conditions from Washington stimulating local buying and investment activity. Mortgage originations on Multi-Family properties have already increased 60% from 2011 through 2014. However, the interest rate is expected to increase in 2015. That in itself will motivate some investor to act – buy now. 

Get ready, 2015 will be a great year for Commercial and Investment Real Estate.

 Today’s sales agents have really become consultants or educators of our consumers. We need to guide them through the process of buying or leasing, but we must also remember they are moving their business.

I just moved my home. I had not done so in a number of years and forgot the” joy”, when the movers finished, of looking at 70 some odd boxes to be unpacked! We don’t focus on the fact that our client is moving equipment, furnishing, files and employees, when their lease is up or when they buy a building. For them the lease signing or purchase contract is only the beginning of the moving challenges.

It is our duty to assist them in evaluating all the options in their relocation decisions; not just which property is the best price or value. We need to point out the features and benefits of each location.

Buildings have definitive features, this property is closer to the highways or mass transit; this one has more parking; more image, better visibility. Some building have cafeterias, some do not. How important is that to your client? How long a lunch period are the employees given? Do they have time to drive 10 minutes to a deli, or do a lot of food providers deliver to the building?

When comparing buildings, which property is configured closest to the clients need, if office, does it have the correct number of private offices, conference rooms etc.; retail or industrial: layout, storage space, ceiling height, truck access etc. Which buildings will require extensive tenant improvements? This is a financial point that can be negotiated.

But when will the construction be done? If the space is currently occupied and our client is moving in when the current tenant moves out, they may have the “inconvenience” of having the construction done after they move in. If the space is currently vacant the landlord could do the work before they move in, but what if the work is not completed by moving day?

Or worse what if the space the existing tenant is moving into is not ready and they cannot move out in time. Where is your client going to go? Do they have to move into temporary quarters –move twice! These particular contingencies need to be addressed in the lease. Speaking of leases, many have what is known as a “hold over” clause; where the tenant may be allowed to remain in the space after the lease terminates on a month-to-month basis. But the rent is doubled or tripled during this period.

A company may get a major rent reduction benefit by moving out of the “city” into the suburbs. But will the move create a situation where some employees would now have a tremendous commute, and consequently choose to leave the company. How is the employment pool where they are moving to?

Does the building have a health club? Or perhaps there is one in the adjacent building? Is child care in the building or in the immediate proximity of it? These benefits could affect retention or future recruitment of employees.

Be sure to investigate all the features and benefits (or lack thereof) of each location and discuss with your clients as you compare properties. 

 Commercial clients and customers may be serviced over and over again. Leases expire, needs for more or less space occur and investors are usually always ready to talk about a new venture. The key to repeat and referral business is communication. All it takes to not miss the “after” sale (or lease) opportunity is regular communication with those previously serviced. Developing relationships with every one we work with is how we build our business. 

Contact someone you serviced 3 or 4 months later and ask them how their business is going. Perhaps 2 years into a 5 year lease, when you call, you may be pleasantly surprised when they say, “Business is great; I need more space. But, I’m stuck in this lease”. Can you help find them new space and sub-lease the space they are in? Of course you can. Contact the landlords too. How is the tenant I placed in your building doing? Are any of your other tenants not renewing their lease? Repeat these calls regularly and  one day when you call and the owner, she says, “I’m glad you called I am thinking about selling the building, can you give me an idea what it is worth?” 

How do we stay in touch? Computers have made communication easy. Design a newsletter or even a one-page e-mail with commercial community news and send it out on a regular basis. Better, use the telephone and make a personal call to past customers. Even if they leased from the competition, follow up as if you serviced them and next move you probably will. 

Timing with communication is essential. We are a hi-tech e-mail industry. Folks use e-mail and texts to communicate faster. Most of our client/customers are business owners, presidents or CEO’s of companies. Their focus is “Time is Money”. Check your e-mail several times a day. A stale message (over 6 hours old) is history; the sender may no longer even remember what they sent. 

How many phone calls do we make a day that end up on someone’s voice mail? You make a call, you get a message system, and what do you say? How many of us prepare for that eventuality? Plan ahead, your message should be interesting, brief, informative and indicate your available call back times. Telephone tag is frustrating and counter-productive. 

Cell phones are a convenience but may also be a distraction. When with a client or customer give them your undivided attention – shut the cell phone off. A technique many agents are now using is to have a voice message that states: I return all phone calls between 11:30 and noon and between 4:00 and 5:00 pm. 

How do we get someone’s attention? Occasionally we call and/or e-mail someone and they are not getting back to us. Is this discourteous or is this the message? For example you send a low purchase offer to an owner and get no reply. Could this be a statement that the offer is insulting, too low or they don’t want to counter (negotiate with themselves)? They may be legitimately busy, or they may be considering/anticipating other offers. 

Sometimes doing something different can get attention. Leave a diverting message on another topic, i.e. “need to talk to you about an investment opportunity I just listed”. When contact is made present the new opportunity, then discuss the current issue. Send a telegram, hand deliver materials or show up and try to see the person. Even if they are not there your message of importance will have been delivered. 

Consider that some clients are not hi-tech. Back up your communication by sending a copy via US Mail or via Fax. A busy executive’s secretary or assistant can be an asset in delivering your messages. Get to know that person. Think attention getting: deliver your message with balloons or flowers. 

Cell phones help us communicate faster, but texting while driving is dangerous and against the law. Even talking hands free is a distraction from the road. You may not realize it but you may drive through a “dead zone” with no cell reception and miss a communication. Consider shutting off your phone when you get in the car and checking voice mail, email and texts when you arrive at your destination.

Buying real estate investments today must conform with the new underwriting guidelines established since what is now being referred to as the ”Great Recession”.

Generally speaking you need 30% - 40% as a down payment to finance and have a Debt Service Ratio of at least 1.25. Basically, 25% more cash flow (NOI) than is necessary to repay the annual mortgage debt.

Owners with little or no debt, who wish to sell could “hold paper”; offering to provide a mortgage loan themselves. This gives them several advantages. They may require a smaller down payment that the banks do, perhaps 20% down, in so doing they increase their pool of potential buyers. If the buyer defaults on the loan, they get the property back to sell again. Their capital gains taxes on the sale are spread out over the term of the loan; only paying the tax on the principal collected each year.

Clients who will use the building for their own use (at least 51% owner occupied) may qualify for a Small Business Administration (SBA) loan with as little as 10% down.

Fractional Ownership

Consider Fractional Ownership. Multiple investors pool their funds to make one large purchase. For example your client gathers four associates and they each contribute $100,000 to buy a building; each then owns a 20% interest in a cash flow property.

There are also investment companies that buy large parcels of real estate and sell fractional shares. Imagine owning 5% of a $10,000,000 shopping center or office building. These shares are usually in the form of Tenants-in- Common (TIC) or Delaware Statuary Trust (DST), which also makes them eligible for 1031 Exchanges.

Fractional ownership may be relatively simple or quite complicated, depending upon how and who is managing the property. Often these “ownership shares” are considered to be securities sales requiring a securities license to sell them. Make sure your clients check with their attorney and tax advisor if they are considering this.

Self-Directed IRA’s

Many people have money in IRA accounts which may be used to buy real estate. There are different types of IRA accounts some restrict ones investments to stocks, bonds and mutual funds. But a Self-Directed IRA is designed to hold alternative assets; primarily real estate. The first step is for your client to speak to the company that services their IRA and find out if they permit a Self- Directed IRA.

When opening a Self-Directed IRA you do not have to close your current IRA. You can transfer as much or as little as you choose to your new account. If you do roll over the entire IRA to start a Self-Directed IRA you can still invest in all the traditional assets you wish. A self-directed IRA has all of the features of a traditional IRA with the added ability to hold alternative assets. Just like a traditional IRA, all appreciation and cash flow are tax deferred. Owning cash flow producing real estate in an IRA, offers a great stream of revenue which generally exceeds what you could achieve investing in annuities or stocks. Today many income properties are generating 7% - 8% or more in annual cash return, plus the long term appreciation in value. What a great way to build up your retirement account.

Another advantage of this type of IRA is that the IRA can borrow money. In other words you provide the down payment from your IRA to buy real estate and get a mortgage for the balance of the purchase price.

Self-directed does not mean you do everything yourself you need to work with a firm that does this, they will provide services as the custodian of your account.

There is quite a bit of technical information in this article, we hope it gets you thinking about creative ideas to share with your clients. Be sure to direct them to the appropriate professional for complete information. 

 I went to my local office supply store yesterday, I forgot this is the last week of August and for most kids school starts next week. The store was mobbed with parents and children buying notebooks, binders, pens, and other school supplies. I was reminded how hi tech education has gotten when I saw the display of flash drives sold out. 

When was the last time you went back to real estate school because you wanted to, not because you had to take continuing education? Has our industry changed – you bet! 

Now we have smart phones with hundreds of apps that can help us get where we want to go, display listings and just about do anything else. IPhone’s that we can do a presentation on; the HP10BII calculator designed to do our real estate math. Have you learned how to use all these “tools”. 

Did you know that almost half of our work force today is from the millennial generation? Did you know that we now have six different generation categories? All with different characteristics, different information gathering techniques and buying habits. Do you know the best way to communicate with each age group? 

How well can you read body language? Would it help your business to take a course in negotiating skills? 

As a commercial agent what is your level of “Green” knowledge. Are you familiar with the concepts of energy efficiency, the rating requirements for LEED, what buildings in your market are Green? Are you ready for the customer who says they want to lease space in a Green building? Have you experienced your first green lease yet? 

When it comes to education, there are many resources to help make you a more knowledgeable professional. You can take technical courses on commercial real estate at many local Realtor Boards, and the CCIM (CCIM.com) and SIOR (SIOR.com) institutes offer excellent courses. Other training programs are available from “Top Dogs” Commercial Real Estate Training (tdogs.com) and the Mike Lipsey School (lipseyco.com). 

The National Association of Realtors has a three day GREEN certification program given by local Realtor Boards. The United States Green Building Council (USGBC) offers two designation programs, LEED GA and LEED AP. 

Today courses are offered live, online, by webinar or videos. Though the internet you can find resources and courses on any topic. 

Maybe it’s a good time for you to go back to school and learn more about investment property analysis, lease verses buy, 1031 Exchanges, todays financing or just how to use todays “tools”. Consider improving your skills take a course on understanding today’s generations, creating better listing presentations, body language, or negotiations. 

Education is a good investment of your time, so go back to school!

 The commercial market has been difficult over the last five years; fortunately it is starting to pick up. Underwriting standards for commercial mortgages have gotten tougher, obtaining financing is more difficult; closings are delayed, at best. The commercial agent’s income is delayed. We now find ourselves working harder to make deals happen. 

This morning I paid $3.85 per gallon to fill my car with gas. Traveling last week I paid over $4.00 per gallon. The good news is I have a mid-size car. The person at the next pump was mumbling something about $64 to fill their SUV.

 I used to have a simple cell phone, which was relatively inexpensive. Now I need instant access to my e-mail, I must be able to respond immediately to it or to text messages. Today’s business “communication requirements” dictate that I must have a state of the art phone. My new phone cost me $450 and my new plan costs $87 a month.

 The dues to my realtor board went up, as did other “required” commercial organizations that I need to be a member of. The commercial listing services (web sites); guess what – they have gone up too! The costs of doing our business have skyrocketed!

Landlords lose money when they have vacant space. Not our fault; in fact we help solve their problem by fining them a tenant. Unfortunately some landlords thank us by asking us to reduce our fee! We educate a seller by compiling market information, helping them evaluate market conditions to set a realistic price, find a buyer, negotiate a deal, attend property and environmental inspections, attend a closing and then be asked to cut our commission!#?!#?

What is wrong with this picture?

 Our ongoing investment in our business has increased dramatically, while the opportunities to do business are still challenging. Market conditions continue to improve, but the higher costs are here to stay. In the forty years I have been in this business I have not seen any raise in our fees. (Granted all commission fees are negotiable between the client/customer and the brokerage firm.) Being paid based upon the value we bring to the transaction is fine but, our fee has to include our expenses too!

 Should we raise our commission fee? The next time a client asks us to reduce our commission rate perhaps we should say: “Oh my mistake! What I just quoted you was our old commission rate, the company just increased our fee to X%.” You could be nice and then say: “But, since I made the mistake I will honor the rate I quoted you.” Some agents when challenged by a request to reduce their fee just say: “No!”

 Most owners don’t realize that if we reduce our fee by only one percent, in most cases, the real dollars are being reduced by 15% or more. “You want me to reduce my income by 15%; would you like to reduce your sales price by 15%?”

 We are professionals and work hard for our money. Current market conditions are challenging for owners and agents alike. When we perform our services we deserve a full fee!

 Listing presentations are a process composed of preparation, research, introduction, needs analysis, delivery, overcoming objections, and getting the exclusive listing.

Preparation is ongoing, knowing your market, every available property, pricing trends and vacancy statistics. Opportunities begin with your potential client; research the company, its products and corporate officers. Introduce yourself and your company before the initial meeting by dropping off or email a “pre-framing” kit. Include your bio, information about your company, basic market facts and some testimonials; brief to the point. Meet and establish rapport, conduct an in depth analysis with the client of the assignment; physical space involved, timing issues, financial goals, if a lease terms and conditions, and their motivation.

Conduct specific market research; prepare a written proposal and listing presentation using whatever format is appropriate for the client’s generation and company size (slides, flip book, placemat). There are three things the client wants to know: what value do you bring to the transaction (what can you do for them that they cannot do themselves), what is your marketing plan and you’re pricing recommendations.

Your written proposal acts as your presentation guideline. It should include an Executive Summary, complete information on the building (with pictures), market statistics – pricing recommendations, your marketing plan, your compensation and information about you and your company.

Remember this interview is all about the client. Explain the process, which is your value statement. What you bring to the transaction: market knowledge, evaluation skills, financial analysis, existing customers, prospect generation, internet platform, and a marketing plan. You will be: qualifying customers, showing the property, communicating regularly, assisting with contract or lease negotiations and transaction management.

Your marketing plan needs to be written out as a separate exhibit, to be handed to the client as you discuss the points. Sample follows:

Sample Marketing Plan

For 126 Main Street, Anytown, USA

• Immediate creation of flyers and promotional materials. 
• Mailing to my existing customers and clients. 
• Electronic blast of your listing to other Commercial agents in your company, who in turn will forward to their existing customers. 
• Electronic blast of your listing to all the other commercial real estate firms in the area offering to Co-Broke with them. 
• Signage will be placed on your property. 
• Your property will be posted on our company web site www.yourcompany.com
• Internet marketing blitz, your property will be posted on the following web sites:

My website www.CommercialEd.com   Local MLS commercial section

www.CoStar.com                                   www.Loopnet.com

www.commercialsearch.com                 www.realup.com

www.CIMLS.com                                   www.Commrex.com

www.properyline.com                            www.dealmaker.net

• “Target” mailings to specific industries. 
• Direct mailings to the surrounding geographic areas. 
• Telemarketing to specific industries and businesses. 
• Print media promotion. 
• Show them a sample Marketing Proposal that you will send out to interested customers.
• Promotion through Word of Mouth at networking and commercial organizational marketing sessions; I am a member of the New York State Commercial Association of Realtors (NYSCAR) and the Long Island Commercial Network (LICN).

• Think about what else you can add to your marketing plan. 

Explaining the marketing should be a “show me”; when talking about posting on websites, show them what their property will look like on each of the various sites, show what your direct mail flyers look like, give them a copy of a Marketing Proposal from another of your listings.

Setting the price requires comps of prior sales, comparable properties (similar building on the market now – the competition), compare price per square foot, and for investment properties a financial analysis with CAP rate valuation. Show the client the flyers of the other buildings being referred to and all your research to support your price recommendation. Agree on the price. Advise your commission. Be prepared for any objections, overcome them, and get your exclusive signed.

 This needs to be done at their existing location so you may observe their current operations. There are five key areas of concern: Why Moving; Physical Requirements – Now and Future; Pain and Pleasure Issues; Loyalty and Authority; and Financial Strength. Some examples of questions follow. 

Why Moving

• Why is the company relocating?
• When will they need to take possession?
• When does their existing lease expire?
• Are they buying? Desired moving date? Do you need to sell another building first? Are they doing a 1031 exchange?
• Would they consider leasing/buying more space than they need? To rent out surplus. 

Physical Requirements

• Where is the company looking to locate?
• Why?
• Would other areas be considered?
• How much space is needed?
• How configured?
• Storage requirements?
• Number of employees?
• Parking - employees, customer spaces?
• What would be the intended use?
• What are your future plans? Where do you see your company in two/five years? 

What else is important to you?

• Space Plan (layout) – View
• Easy Access
• Public Transportation
• Amenities – Cafeteria, Health Club, Child Care
• Visibility - Signage
• Employment Pool (for future employees)
• Proximity to Customers
• Green – energy efficient building 

Pain and Pleasure

• Any issues with your current space (roof leaks)?
• Where do your employees come from? Will any employees leave your company due to the move?
• What do you like least about this space?
• What do you like best about this space?
• If you could describe the perfect office/store/factory layout what would it look like? 

Loyalty and Authority

• What other properties have you looked at?
• Why did you not consider them?
• Who should I be in contact with to show you space?
• Who will make the final decision?
• Who is authorized to sign my Tenant Representation or Buyer Broker Agreement? 

Financial Strength

• What are you paying for your space now?
• Any additional rent costs (taxes, CAM charges, utilities, other)?
• What have you budgeted for the new space?
• How is your business doing financially?
• Sellers will want to see proof of funds.
• Landlords will want to see three years financials. 

Gather as much information as possible. Conclude the interview by asking about their expectations. What are the three most important objectives that you have as pertains to this move?

Then evaluate, do I want to work with this client? Does the client have a realistic budget and expectations? How much time will you need to devote to completing this assignment? What is the commission potential from this assignment?

Be prepared to demonstrate why they should hire you as their Exclusive Representative (Tenant or Buyer).

It is difficult to comparing lease values. Space is offered at $20 PSF to rent, but what does this include? Are there any other expenses to the tenant? What is the real cost of that space to the customer. 

When lease listings are taken ask the owner what the quoted price includes and if there are any additional pass-thru’ s to the tenant. You may find the base rent is $19.00 PSF but the tenant also has to pay $2.00 towards utilities and contribute $3.00 PSF to Common Area Maintenance charges. The tenants real cost is $24.00. Most customers are not familiar with real estate terms. The best way to help them is to do the calculations for them; multiply the actual cost per foot by the rentable square footage, this give you the total annual rent, dividing this by 12 months gives you the monthly cost of the space. Quote the tenant the total monthly cost of the space; but be sure to disclose, in writing, the detailed costs. 

When pricing leasing space we need to have “comps”, but in this category our “comps” are really comparables; what is the current competition, what else is on the market now that the tenant can choose from. In developing your comparables make sure you get all the facts; determine what the real cost of each space is including any pass-thru’s. 

Another factor in this comparison is the condition of the space and possible tenant improvement costs. Does work (construction or cosmetic improvement) need to be done to make the space suitable for this tenants business. What will it cost and who is going to pay for it? Perhaps the tenant can pay less rent if they do the work? Perhaps the landlord can charge more rent if they do the improvements? 

How long is the proposed lease; how long would it take to amortize the tenant improvement costs? Maybe the tenant will sign a longer lease so the landlord can recover their improvement costs? All things must be considered. One building may be “ready for occupancy” and it is being compared to a building that needs work. Which is really the better deal? When all is settled what is the real cost per month? 

“Pricing” is an ongoing research job. You must be an expert in your market area, which means constantly updating your personal data base of “comps”. (If you don’t have one, start a series of files today by sale and lease and property type.) Know what is on the market and what has closed. Read the trade papers to find out what closed, talk to other agents to find out what things really sold/leased for. Have your facts ready for any listing opportunity.

What is the correct price of a building or space? The academic answer is whatever the buyer (tenant) is willing to pay; whatever the market will bear. But as real estate agents we are looked upon to guide our clients as to a realistic price. Sale pricing is determined by several methods, the Income Approach, Gross Rent Multiplier, Comparable Method, and the Cost Approach. Historically, the Income Approach has been predominately used, but today all methods will be considered in determining sale value. Comparing values for leasing space is less defined and more difficult.

The Income Approach to valuation considers the building potential income, calculated with an adjustment for possible vacancy. The owners operating expenses are then subtracted, including a contingent fund for possible unexpected repairs and maintenance. Expenses do not include Debt Service – the buyer could pay all cash. What remains is the Net Operating Income. Based on a local Capitalization Rate, which can be thought of as a desired profit percentage of local investors at this time, a value can be determined.

                                     ___NOI__          =        Market Value
                                      CAP Rate

At issue with this method today is the fact that the rental income may have declined. Tenants are now paying rents base on leases created 5-10 years ago; but when vacated the landlord may have to rent for lower rates. To adjust for this projections have to be made on expected lower future NOI, which reduces current  value.

The Gross Rent Multiplier compares the Gross Rent buildings produce to the sale prices of those buildings. A building with a price of $1,000,000 with a gross rent of $100,000 would be selling for 10 times the rent roll. If we then has a similar building with a gross rent roll of $80,000, by multiplying that by the GRM 10 X; the value would be estimated at $800,000. The danger in using the Gross Rent Multiplier is that the condition, expenses and vacancies of the buildings are not considered.

Buyers who wish to occupy a building for their own business are more likely to be focused on what other similar building recently sold for, known as the Comparable Method of valuation. But all building are not always the “same”, and adjustments to compare them may be required. Regarding size alone, the buyer may want an office building and recent sales are of different size buildings. To compare, values must be calculated to a cost per square foot. (Price divided by the size of the building.) The average cost per square foot value can then be multiplied by the size of the subject property to determine market value.

Recent Sales

$1,000,000 ¸7,800 SF = $128 PSF

$785,999 ¸6,390 SF = $123 PSF

$625,000 ¸5,000 SF = $125 PSF

Subject Property: Comparable Average PSF $125

Market Value: 7,000 SF Building    7,000 X $125 = $875,000

With a lack of commercial sales over recent years, comparisons are also made based upon the competition currently on the market, also using the cost per foot.

For certain properties a buyer will compare the cost of buying land and constructing a new building to the cost of buying an existing building.

Agents today must be familiar with financial analysis and the inventory (sold and available) in their market area to advise and guide their clients in proper pricing of their buildings.

Canvasing - Meeting new people every day is essential to building your business. Set a goal to meet every building owner and tenant in your marketing area. As a minimum visit two buildings/businesses a day. In a month you will have talked to 40 business people – be sure to catalog the results.

 Leads Group – Create a group of 8-10 people, but only one from an industry (i.e. architect, accountant, moving company, office supplies etc.) meet once a month, each person provides two leads to the group, that all can follow up on. Everyone must bring in leads or replace that person with someone else from that industry.

 Direct Mail –has a small return percentage, but target mailing does make sense. If you are trying to rent medical space, mail to doctors. Bulk mailing does have another benefit of “branding”. Repetitive mailing to the same area brands you as the local commercial real estate expert.

 Telemarketing – Systematically calling different industries or areas requires developing successful scripts to accomplish your goal, of getting an appointment. Develop your own scripts, practice until you are comfortable so you are not reading it. Track your results and change the text until you perfect it.

 Referrals – Every time you speak with a customer of client conclude by asking, “Is there anyone else you know who I may be of help to?”. Establish a referral network of residential agents. Their buyers obviously have a good enough job to be able to purchase a house. After the deal closes ask them to refer the customer to you. Agree to pay them a referral fee if you can help the customer with their business of investment needs.

 Join Business Organizations –Chambers of Commerce and Service Clubs. Attend the meetings and volunteer to serve on some of the committees. When you become active in the group, everyone gets to know who you are.

 Be the Speaker – Organizations usually have a speaker at each meeting. Be the expert; give a seminar at your organization and at other groups. General market information, local values (sales prices per square foot), rental rates, vacancy figures; statistics made into a speech.

 Networking – opportunities occur at meetings, social events and open houses. Take maximum advantage by meeting as many people as possible. Before you attend take 20 of your business cards; exchange cards with 20 people before you enjoy the meeting or meal. Remember “work” is the key to networking. Be sure to catalog all the people you meet.

 Real Estate Organizations – Join local real estate groups; do not think of other agents as competition. Remember that agent may represent your next buyer or tenant. Catalog the other agent you meet and blast your new listings t them.

 Personal Web Site – Sites do not have to be expensive; there are many providers of “template” based sites at reasonable costs. Choose you background and page designs from hundreds of alternatives and just add your copy. Your site must be interesting, educational and informative so people come back to it over and over again. Update it regularly and offer free materials or services.

Bonus Tip #11 – Write a monthly column for your local paper. Market information and statistics are good but one of my agents had a better idea. Each month he interviewed one of the local business owners, why they located here, what they would like to see as far a new businesses coming to town, their business history. Everyone loved his column; and of course at the end of each column he added “New on the Market”.

Each day some time should be spent prospecting business for the future. One technique is to systemically go door to door introducing yourself to all tenants and building owners in town. Visit just two business a day, that’s 10 a week, 40 a month.Our business is one of relationships and referrals. Meeting current tenants and owners helps develop your presence in the community as "the commercial go to person".

 Now that you have made initial contact you want to stay in touch. If you meet a business owner who is a tenant determine when their lease is up. To catalog this valuable information you can buy all sorts of software programs or you can simply use the “word” and calendar programs found on most computers.

You determined their lease is up in 2 years; enter in your calendar program to follow up on this 6 months prior to the lease expiration. However, you also want to now regularly stay in touch, so enter a follow up visit date in 3-4 months; these subsequent visits continue to develop your relationship with the potential client. With each visit end by asking for a referral "is there anyone else you know, that I may be able to help?"

 If when their lease expires they decide to stay in their location, consider them a source of referrals or a potential buyer (more on that in a moment) until they need to move.

 Just because someone signs a 5 or 10 year lease does not mean they will stay there the entire time. Business is booming and they need more space, thing are slow they need less space. We can help them find new space and possibly sub-lease the space they are in. (and get paid for it!). By repeat visits if they need to make a move, you are top of mind and you get the call.

 Each time you catalog a building set up a simple “word document” about the potential client you just met. Include whatever information you have gathered, name, address, owner or tenant, type of business, how much space they occupy, when they expect to move and lease expirations. Include any personal information they shared with you about their family, etc. You learn they are going on vacation next month. Keep this chronological record of activity for each call or visit. Before you talk to them again consult your log. You may want to begin your conversation with a question like, “How was your vacation? This type of personalization develops relationships.

In your initial visit you learned they lease 2,500 SF of office space. Set up files in your computer by size: for example office tenants leasing 2.000 - 3,000 SF. When you list an office building for sale in the area a bit larger, say 4,000 SF email them the opportunity, they may be ready to buy!

 Don’t forget about building owners; in prospecting you meet the building owner, they may have their business in this building or not; either way they are an investor. Your investor files can be cataloged by size, price category or both. Get those new investment listings out to these buyers.

 Taking the extra time to really catalog all you learn leads to future business.

Should you client lease space or buy a building? To answer this requires several considerations, status of their business, market conditions and financial cost and benefits.

Are their business space requirements stable; or will they need more or less space in the future? This may be solved by leasing more space than they need now and sub-letting out the surplus. Buying a larger building and renting excess space until they need it may be another solution.

Owning eliminates the possibility of landlord issues, eliminates rules, hours open restrictions, you may modify the space as you choose. With ownership however, comes responsibility for repairs and maintenance, concerns for the condition of the roof, the heating and air conditioning systems, the parking lot etc. In a lease generally the Landlord is responsible for these structural type expenses.

Buying a building gives you a fairly predictable cash flow, the mortgage costs and operating expenses are known. Leases typically escalate each year and at the end of the lease, a large rent increase from the landlord could cause the tenant to move, creating an interruption in their business and significant moving expenses.

Where is the market? Typically when rents go up so does the value of a building. Real estate tends to appreciate in value over time, meanwhile ones mortgage is being paid down increasing equity. Eventually the property could be sold at a profit. But in this comparison market trends need to be projected into the future, where will prices be five or ten years from now?

Which makes more financial sense to rent or buy? Today buying could require a down payment of 30% of the sales price, what kind of return does one get on that investment? Leasing requires no major down payment.

From a tax perspective when leasing one can deduct the cost of rent and operating expenses. Ownership deductions include: real estate taxes, operating expenses, depreciation and mortgage interest. But when the building is sold there will be Capital Gains Taxes on Appreciation of Value and Depreciation Recapture.

There are several methods to compare each situation. Generally the lease term is compared to owning the building for the same length of time. The clients tax bracket also needs to be considered. The two most common methods of comparison are the Present Value method or Internal Rate of Return (IRR). In the Present Value method we look to compare the net cost after taxes, the opportunity with the lowest net cost is most favorable. The IRR is a similar analysis showing the Net Present Value using a discount rate.

As agents we can speak about the pros and cons of both situation, but your client should be referred to their accountant or tax advisor to have a complete financial comparison done.

New NYS Advertising Regulations - Effective January 2, 2014

The New York Department of State has updated and revised their advertising regulations for Real Estate Licensees. The complete regulations can be found at: www.dos.ny.gov/info/regulatory_activity/final_adopted/Final_175_25.doc
Below are the highlights of the changes.

Definition of Advertising: Promotion and solicitation related to real estate activity, including but not limited to advertising activity via: Business Cards, Flyers, Signs, Billboards, mail, telephone, e-mail, web sites, social media, video, electronic billboards.

Placement of Advertisements and general content: Only the Real Estate Broker is permitted to place or cause to be placed advertisements. Advertisements must contain the name of the Broker or Brokerage firm and the full address or telephone number of the Broker or Brokerage.

The name of the agent and agent’s phone number may also appear in the advertisement provided:

1. The full name of the agent (as on your license) is required; nicknames may be included provided the full name of the agent is clear. For example: Edward "Ed" Smith
2. If multiple phone numbers appear in the ad they must specify location: Office, Direct Line, or Cell.
3. All advertisements must include the license type of the agent: they are (only) Real Estate Broker, Associate Real Estate Broker or Real Estate Salesperson. The word “Licensed” is not required but may be used before the title; as in “Licensed Real Estate Salesperson”.

The uses of other titles are prohibited. Examples of prohibited titles would include: “sales associate”, ”Licensed salesperson”,  “Licenses Sales Agent”, “Broker”, “Vice-President”, “Managing Director”, or “Sales Director”.

No property shall be advertised unless the Real Estate Broker has obtained authorization for such advertisement from the owner of the property. Real Estate Brokers shall not advertise property that is subject to an exclusive listing held by another Real Estate Broker without the permission of the listing broker.

Multi Property and Classified Advertisements must include the name of the Broker or Brokerage firm. If the advertisement contains the name of an Associate Real Estate Broker or Real Estate Salesperson the agent’s type of license may be omitted.

For Sale or For Lease Signs: Such signs only require the name of the Brokerage Firm,
additional information may be added. 

Business Cards: Must contain the name of the Brokerage and the business address of the licensee, and the office telephone number, the name of the agent and their license type: (only) Real Estate Broker, Associate Real Estate Broker or Real Estate Salesperson. You may also add other phone numbers, provided they specify location: Direct Line, Cell, e-mail addresses, web site addresses and earned designations.

E-Mail: An initial e-mail from a Real Estate Broker, Associate Real Estate Broker or Real Estate Salesperson must include the same required information as on the Business Card. Such information may be omitted from subsequent e-mails to the same recipient. This includes your e-mail Signatures.

Teams: Teams have special regulations, check the statute for details.

Web Sites: All agent web sites promoting or soliciting real estate activity are subject to the approval of the Real Estate Broker. Each page in the web site must contain the name of the Brokerage Firm, and the full address and office telephone number.  In addition a link to the Brokerage web site is required on the home page of the Associate Real Estate Broker or Real Estate Salesperson’s web site.

Social Media: Face book, LinkedIn, or any other social medial websites where the agent is offering real estate listings or services must have, on the agent’s home page, the Brokerage Name, full address and office phone number.

Penalties: Violations of these regulations could be considered by NYS DOS as misleading advertisement and may subject the licensee to having their license revoked or suspended or be subject to a fine of up to $1,000.

Be sure to update your promotional materials before the effective date of these new regulations. 

Are you ready? What’s your plan: what’s your strategy? The market is ready. Commercial real estate bottomed out in 2012. We have seen a lot of viewing activity in 2013; the market has been busy, it seems everyone is ready to move, but still a bit cautious. It is like, our clients and customers are in a temporary holding pattern. There is still uncertainty with the economy and politics, but that will settle down. There are positive signs too; financing is available, clients are pricing more realistically and the stock market is currently reaching new heights!  The time has come for commercial real estate to explode again, and 2014 will be the year.

It is time to prepare for the next “boom”; time to set your business goals for 2014.

The easiest way to create a business plan for next year is to reflect on the past years activity? How did you do in 2013; did you exceed your goals? If not, why not? What activities did you participate in last year to build your business, what worked for you, what did not? Change anything that was not productive. Try something new!

 Where will/did your business come from? How much of your income was from listing? From sales? From buyer broker or tenant representation? You have been keeping good records –right?

 Everyone needs a good business plan. Start with your income goal for 2014, what will it take to accomplish that? If you have been in the business and have good records of last year’s activity; you can see which months were most productive for you. What percentage of your listing sold? How many new customers did you find property for? What are you conversion percentages? If you had 87 new customers and you sold or leased property to 29; you converted 33% of your customers. If you want to double your income from sales/leases you need to double your number of leads (new customers) to 174 or increase your conversion ratio. Analysis your listing production the same way.

 If you are new to the business (or don’t have last year’s statistics), start tracking all your activities each week. How many appointments did I go on? How many resulted in a listing or a real customer? Track your monthly progress; how many sales or leases closed. What am I doing to generate new business? At the end of each quarter evaluate your progress.

 Experienced or new in the business, setting goals for 2014 is important; you should set business and personal directions for yourself. Someone came up with an acronym for goal setting (I can’t take credit, but I do not know the source), that really makes sense. Goal setting should be S. M. A. R. T.

Specific         Clearly see what you want to achieve. Specifically indicate how you intend to accomplish it. Most importantly, write the goal down.

Measurable  Measure your progress. Establish targets. Feel the progress.

Attainable     Set realistic paths for achievement. Goals should be ambitious, and reachable. Challenge yourself!

Rewarding   Have a clear picture of why you want to attain this goal. What is your reward for this accomplishment?      Create a “storyboard” (Visual pictures of your reward).

Timely            Specific time limits. Time is the price you pay for the reward of achieving your goal.

Develop a written plan of your goals, how you are going to accomplish them and what you need/will to do each month, each week and each day to get there. Track your progress and adjust your plan as needed. 

Plan SMART to take advantage of all the opportunities 2014 will provide 

 Our goal as brokers and agents is to be appropriately compensated for the skills that we bring to the transaction. In simple terms, to be paid a full commission for completing a sale or lease of property. In our quest to be properly paid it is important that the client or customer who is paying us knows the extent of what we will do to deserve our fee. At the point of listing or signing a tenant/buyer representation agreement is when your fee should be stated. If the client then suggests a lower fee, should you concede? No. Think about it, if you reduce your fee at this point, what message you are giving about your negotiation skills.

 What do you bring to the transaction? Explain why you and your company should be retained. People do not know how qualified you may be unless you tell them. What will you be doing to sell or lease or find the required space? Your focus will vary depending who you are representing (seller/landlord or buyer/tenant) but generally will include material items and your personality skills and convections. A partial list follows:

• Market Intelligence – your local market knowledge
• Market Research – to help determine the proper pricing
• Financial Analysis skills
• Marketing Plan including Internet promotion
• Pre-qualification of customers – guiding them to determine their specific requirements and financial planning
• Negotiating Skills – to help your client through the Negotiation Process
• Coordination of all the “players”, inspections and events required to close; 

Talk about your tenacious personality; discuss other properties you have handled; promise regular communication. 

You need to create a perception in your client/customers mind that differentiates you from other agents. Show the value of your services to justify your fee. Remind them that you are making a commitment; you are investing your time and only get paid when you close.

 In a sale or representing the buyer the commission is a negotiated percentage of the sales price.

In a lease or tenant representation we are entitled to a commission fee based upon all the financial benefit that the tenant brings to the landlord. This may include a fee for the initial term, another fee if an option to renew, expand or buy is exercised. (all of this must be clearly stated in your listing agreement)

 The commission fee is usually calculated in one of four different ways: a split rate commission, an aggregate rate commission, a graduated commission or a fixed fee.

 For illustrative purposes I will use some numbers in the following examples but ALL COMMISSION RATES ARE NEGOTABLE.

 A Split Rate Commission is a certain percentage of the rent each year for a certain time period (usually the first three years of a lease) then another lower percentage rate for the balance of the lease term. For example, a commission fee may be calculated based on 7% of the gross rent each year for the first three years and 3% of the gross rent each year for each year thereafter. Due and payable upon lease signing.

 If a five-year lease for 1,000 SF were negotiated to begin at $20 PSF and escalate at 3% per year over the five-year period the landlord would collect $106,183 in rent. Using the Split Rate Formula based, based in this example, upon 6% for the first three years and 3% thereafter, the commission would be $5,040.

 An Aggregate Rate Commission is a single rate of commission applied to all the money the landlord will receive in rent during the term of the lease. The rent is calculated for each year of the lease including escalations, added together and the negotiate commission rate is applied.

 Using the same example with a 5% Aggregate Rate commission: a five-year lease for 1,000 SF, negotiated to begin at $20 PSF and escalate at 3% per year, over the five-year period the landlord would collect $106,183 in rent. The commission fee would be $5,309

($106,183 X 5% = $5,309).

A Graduated Commission would begin with a certain percentage of the rent as a fee for an initial period and then as time went on the percentage rate would be consistently reduced. For example, a ten year lease, the fee to be calculated as 5% of the rent to be collected for years 1 and 2; 4% of the rent to be collected for years 3 and 4; 3% of the rent to be collected for years 5 and 6; 2% of the rent to be collected for year 7 and 8; and 1% of the rent to be collected for years 9 and 10. All due and payable upon lease signing.

 Some commissions are based on a multiple of a months rent. A three year lease may have the commission based on three months rent. Sometimes we are representing multiple spaces in a building and a Fixed Fee per transaction can also be agreed to.

 Remember we are entitled to be paid based upon all the money the landlord will receive during the entire term of the lease and for any options, if exercised. All commission rates are negotiable.

When was the last time you reviewed your listing presentation(s)? Presentations need to be well prepared – you can’t just “play it by ear”.

Some clients will expect a high-tech lap top PowerPoint presentation; others would appreciate the presentation printed out in booklet format. You should you have both formats ready to go and a set for sale, lease or buyer/tenant representation.

 Our clients are busy business people, your listing presentation must be brief and to the point (15-20 minutes).

 Do you have a “streamlined” version? Create a “placemat” (11 x17 size) composite of 6-8 of your slides , images or messages, and just use this to guide your client through your listing (presentation) discussion.

 The key point for the agent today is to demonstrate what makes them unique and specifically what they will do for the client. It is OK to talk about your Company history and your past deals. But, make it short or better; disseminate that information in printed format. It is a good idea to drop off a “pre-framing kit” – information about you, your company and general market conditions in advance of your meeting.

Today’s consumer wants to know your action plan – how will you market their property? This needs to be the primary focus of your presentation. Think “show me” have samples of marketing and promotional pieces you have produced for others. Don’t just say I will post your property on the internet ask “Are you familiar with these web sites?”  Use another of your listings as an example to show them what their property will look like on the various sites.

 The listing process must be interactive. This is a communication, a discussion, not a lecture. A common error with agents is we talk too much and are not listening enough. As you go through your presentation ask questions based upon what you said, to be sure your client understands and agrees.

 During the listing process you have an opportunity to set the stage for pricing. Include discussion of “comps” and “comparables”. Today’s competition; what is on the market? What properties will this property be competing with for that buyer or tenant customer? Show them the competitions flyers. “Were you aware this space was available?” “Do you recognize this building on Main Street, it is currently for sale”. Show trends in pricing to substantiate your pricing recommendations. Note on the overpriced properties how long they have been on the market, indicate that is why they are not selling or leasing. Remember it is the market that sets the price not the agent.

 Quote your commission fees, immediately followed by a call to action.

“Now in order to proceed we need to fill out this agreement.” It’s human nature to want to get the best deal possible so expect a probe; “would you consider reducing your fee?” Simply say, no, and get back to the paperwork. But be prepared to justify your fee if they continue.

 The good news is most of your presentation can be prepare in advance and be ready to go when opportunity knocks.

Cell Phones – Can’t live with them – Can’t live without them

Cell phone definition - A hand held devise that can interrupt us at any time! Of course there are tremendous benefits to today’s technology; making emergency calls from anywhere (where there is a cell tower) and many phones are computers with e-mail and internet access. In our business this instant communication can be a big help. 

But how and when these phones are used must be thought about. There is the safety issue, talking or texting while driving can be a serious distraction. Even the cars with phones built in; what are you thinking about while you are talking, the conversation or the road? 

Sometimes, being anxious to answer every call, may give another person that your with, a sense that the person on the phone is more important than them. Not a good impression for a client or customer. 

One of my agents told me the following story. He was showing property that he had listed for lease. Another agent brought a potential tenant; the owner met them to open the building and meet the tenant. As soon as they began a dialog, the owner’s cell phone started ringing; he excused himself and took the call. After, he started to talk about the building, and his cell phone rang again. The tenant patiently waited to ask a few questions. His agent’s phone rang too, and the agent took the call. To really top things off the owner had a second cell phone, which of course went off; he was now talking on two phones! My agent assisted the tenant as best he could, but the potential tenant was obviously turned off by the lack of courtesy displayed by the owner and even his own agent. The owner’s actions delivered the message; I have more important things to deal with than you. 

Agents, when you are with a client or customer shut your cell phone off, give them your undivided attention. At showings ask all parties to put their phones on mute during the tour. 

When we answer the phone our attitude can be heard at the other end of the phone. The tone of our voice, the speed at which we talk, the language we use all deliver a message. Receiving a call interrupts whatever else we were doing. Are we ready to project our best image to the caller? Are we ready to stop what we were doing, to give the caller our undivided attention? Or are we trying to do two things at once showing a property and talking to a new customer, as quickly as possible, to get back to the showing? 

Don’t take the call, finish your showing, retrieve your voice mail and call back with a great attitude and full attention, which gives the right first impression. Hint: before you answer or dial the phone take a deep breath and smile. That smile will be heard! Prepare for your important communication opportunity. 

How often do we get voice mail when we call someone? Prepare for this too, it happens so often that we should assume we are going to have to leave a message. Clearly state who you are, why you are calling, and how to reach you. If you start playing “telephone tag” with someone leave a definitive time and place they can reach you or advise them you will respond by e-mail. 

People have a tendency to regularly check there e-mails and texts on their phones. But retrieving your voice mail requires the extra steps of dialing out and entering a code; sometimes this is not checked often enough. When driving thru a “dead Zone” the phone may not ring but a voice mail may have been recorded, which would appear when you get service again. 

Our cell phones make communication easier, but how and when we use them communicates other messages. The customer or client you are out with, or the calls you are talking deserve your uninterrupted attention.  

The Americans with Disabilities Act (ADA) is a Federal Civil Rights Law that was established in 1990. It is designed to assist people with disabilities and to prevent them from being discriminated against because of their disability. A disability is defined as condition the limits one or more life activities, generally affecting mobility, vision, hearing or mental awareness. Approximately twenty percent of our Nations population, and over half of people over age 65 have disabilities in one form or another. 

There are many parts to the ADA laws regarding employers, communication, transportation but this article will focus on the laws pertaining to commercial buildings and “public accommodations” – buildings open to the public. Virtually every commercial building, office, retail or industrial is required to be ADA compliant. The law does exempt, where such modifications would be structurally impossible. However on new construction ADA compliance is expected. 

The law requires that both the landlord who owns the building and the tenant who owns or operates the place of public accommodation are subject to compliance. Throughout the sections of the law many different types of commercial buildings are specified. “Private entities who own, lease, lease to, or operate facilities such as restaurants, retail stores, hotels, movie theaters, private schools, convention centers, doctors' offices, homeless shelters, transportation depots, zoos, funeral homes, day care centers, and recreation facilities including sports stadiums and fitness clubs.”  Another section of the law specifies that building housing 15 or more employees must be ADA compliant including commercial facilities, office and industrial buildings. 

What are we talking about doing?  The idea is to modifying buildings to make them more accessible to people in wheelchairs; by installing ramps, creating accessible parking spaces, installing curb cuts, and installing handicapped bathrooms. Improvements for other disabilities could include having hearing amplification devises in movie theaters. Some things don’t even cost money; they are just common sense, like in a restaurant having a waiter read the menu to a blind person. 

Another common concern is, do I have to put in an elevator? If the building is less than three stories or has less than 3,000 square feet per story an elevator is not required, unless the building is a shopping center, a shopping mall, or the professional office of a health care provider.  Provided that such modification is possible; but in the event of discrimination case the burden is on the owner to prove why such modification was not possible. 

 There is another common misconception that older buildings are exempt from ADA compliance. This is not true; there is no grandfathering regarding ADA laws. This is Civil Rights Law.  

A discrimination suit could arise due to a failure to install an access ramp to a building presently only accessible by stairs. An example of discrimination, as illustrated on the ADA web site, is “a failure to remove architectural barriers…that are structural in nature, in existing facilities ...where such removal is readily achievable”. 

In 2010 the ADA added Recreational Facilities to the list of building and properties that must be ADA Compliant. This includes amusement rides, boating facilities, fishing piers, golf facilities, shooting facilities and swimming pools. This specifically included Aquatic Access, which provision took effect January 31, 2013. All pools must now have chair lifts or slopes to accommodate disabled persons: pools open to the public, in country clubs, hotels, spas, gyms, health clubs, in condominiums, condos, apartment buildings etc. Properties we may be selling! 

This is federal law; enforced by the U. S. Department of Justice, there can be severe penalties for non-compliance or discrimination. A first offense could result in a fine up to $50,000 plus court costs and the requirement to remedy the situation. On the positive side, efforts to comply can result in tax credits of up to $5,000 per year and tax deductions of up to $15,000 per year. 

Agents need to be familiar with the ADA statutes to help educate and guide their clients and customers. There is a web site www.ADA.govthat is very helpful and includes some excellent video tutorials and printable handouts. 

One of my agents had bought a list of 250 building owners’ names and phone numbers. He called each one and in most cases could not even get past the secretaries. I asked him, when did you make these calls? Last week, he replied. I said, what have you done since? Not much, I’m just so frustrated. To succeed in our business takes a multi faced daily prospecting effort.

Just doing one repetitive task without success can be discouraging. We need to do a variety of things each day to promote our business. 

Telemarketing is one way to build your business but we must have realistic expectations. It is just like direct mail, you’re lucky if you get a 1% return. But, there are some things we can do to help improve our results. Consider making the calls off hours, before 9:00 am of after 5:00 pm, when the secretaries are not in; owners may pick up the phone themselves. Plan your approach; know what you are going to say if you do get the owner on the phone. A better idea is to do a little homework, before making the calls. Use the internet to find out something about the company or the individual you are calling. 

Sometimes using real estate jargon with the secretaries may help you get through. “I need to speak with Mr. Jeffries to discuss stopping his cash flow loss at 121 Main Street and increasing his NOI.” Another technique I use to get past the secretary is to mail a book to the owner. Then call a few days later, “I would like to discuss with Ms. Brown the book I sent her.” Not every effort will get you lead, but you must be tenacious in building your business. 

Do several things each day to develop new business. Call your past customers, how is their business doing; can they think of anyone else you could help.  Call the commercial FSBO’s in local papers, if you belong to an MLS call the expired listings every day. Join and get active in the local Chamber of Commerce and/or Service clubs. Join the Brokers Networking groups in your area, don’t think of other brokers as competition, rather they may have the customer for your next listing. Build your own network of other commercial agents. Join Business Networking groups or start your own. Cold call without the phone! Start to catalog all the buildings in your town; visit two business owners every day, (that’s 10 businesses a week, 40 a month, 480 a year); now everybody knows you! 

Do you know all the available stores, offices, etc. in your town; get the details of the offerings and boost your market knowledge? Check all the internet sites for new listing in your town. Become the market expert in your town!      

 How much is my land worth? To answer this question requires an analysis of what is the “highest and best” use of the property – what use will produce the most revenue. Then the question becomes will this use be permitted by the local municipality and if so, is this project economically feasible? 

To begin we look at the topography of the site, any wetlands, hills, or trees to be removed? How much of the site is developable? An environmental assessment will be required to be sure there are no contamination issues. 

Assuming the property is zoned commercial does any of the property abut residential property? In that case a “buffer zone” may be required; land between the commercial and residential use left in its natural state. This could reduce the amount of buildable land considerably. 

Marketing land requires definition; “two acres of land for sale” is not enough information to make a buying decision. The type of building the zoning will permit must be determined. “Two acres of commercial land that a 25,000 SF office building may be constructed on” shows potential and can now start to be evaluated economically. Given the asking price for the land, construction costs and income potential, the project’s feasibility can be evaluated. 

Looking up the “permitted uses” under the local zoning code is important. But many municipalities codes have been written many years ago; it is a good idea to talk with local officials and see how they feel about the proposed project. What would the town or village like to see there? In many cases a new building project will require approval by a local zoning or planning board. 

Figuring out “how big” a building may be constructed on a site requires a detailed examination of the zoning regulations. What is the “FAR” – Floor Area Ratio (a/k/a Land Coverage Ratio)? This is the bulk area of building that may be built in proportion to the overall land mass. For example if the property size was 40,000 SF and the FAR was 25%, the total building size could not exceed 10,000 SF. (40,000 X .25 = 10,000).  The principal here is to have sufficient land mass to contain all the parked cars of the tenants on the site. In some city areas the FAR may be expressed as a multiple, i.e. a lot of 10,000 SF is located in an area with a FAR of 6.0, therefore a 6 story, 60,000 SF building may be erected. (10,000 X 6.0 = 60,000). Such areas are usually serviced by mass transit with no need for parking. Other factors that may affect “how big” are permitted height, setbacks, and parking requirements. 

Often the most difficult problem is satisfying the parking requirements, which vary with different municipalities. Parking may be based upon a ratio 3:1 would mean 3 spaces are required for every 1,000 SF of buildings; 5:1 meaning 5 spaces per 1,000 SF. Parking may also be expressed as “per 200 SF” or “per 250 SF” meaning one car for ever 200 or 250 SF of building. Next the local zoning code will define the size of a parking space and how much “back up” area is needed per space. After the number of required spaces is determined, the topography of the site, road access and traffic safety must be considered. 

Once a potential building type, size and parking layout are determined to comply with all the zoning requirements, the financial feasibility of the project must be evaluated. What will all the expenses be: land clearing, grading, construction of the building, site work, parking lot, utility connections, cost of the construction loan, permanent loan, cost of time, cost to rent (brokers’ commissions) etc. What will the market bear in rent – how much can be charged? What is competitive? What are the potential rental income, projected operating expenses and the Net Operating Income and how long will it take to achieve? Based upon this analysis one can determine how much money can be spent to purchase the land, to make the project economically feasible. 

Site development requires considerable knowledge of local zoning, construction costs, market conditions and financial analysis. 

Appearing Professional 

In our business you get one opportunity for a first impression. When meeting a client or customer for the first time you need to be prepared, have a positive attitude and dress like you deserve a big commission! 

Preparing for your first interview requires research. What do you know about the person and company you are about to meet? The internet gives us the ability to do such research. Look for commonality with the person you will be meeting; perhaps you both belong to the Chamber of Commerce, a local service club or attended the same schools. Find out what their company is all about; what do they do? 

Is your market knowledge up to date? Are you familiar with all the properties that are on the market in your area? How much are typical office buildings selling for per square foot? How much a month will a typical 1,000 SF store rent for? This is essential information in setting a listing price or guiding a customer what to expect. What kind of impression would you make if the client asks you about a building, on the market in your area, and you know nothing about it? 

Demonstrating a positive attitude is important. We are dealing with successful people who run business; very busy people. Expect that you will be asked to wait when you arrive for your appointment. Do not let that frustrate you or change your attitude. 

What will the client see when they come out to greet you? Are you sitting there reading a comic book, or a magazine, same difference? You do not appear to be busy! Making notes from your last appointment or planning the rest of your day shows you are just as busy as your client. Being on the phone is acceptable, provided you immediately get off the phone when your client arrives. 

Avoid casualness; the professional will always appear in appropriate business attire. I hate ties, but I wear a suit and tie because it is a part of my first impression and business “uniform”. 

Your professionalism must continue throughout your relationship with your client or customer. My greatest concern today is the changes in our language. When did words like “pissed off” and “sucks” become part of acceptable language? They did not! This is crude and rude language that unfortunately, I am hearing all the time from salespersons. These words and worse also appear in e-mails and text messages; which can be posted or forwarded to anyone. Using this street slang may turn off a client, end a relationship and cause a deal to collapse. 

Text messages and e-mails are loaded with chat acronyms and text message shorthand. But not everyone is versed in what these abbreviations mean, for example: CYE – check your e-mail, IMO – in my opinion, or PCM – please call me. You need to be clear in what you want to communicate and use proper sentences and punctuation. Be aware of your choice of wording, be profession in what you say and transmit. 

To build your business focus on appearing professional in all you do.  

Inadvertent Discrimination 

Discrimination is against the law and could also lead to a discrimination lawsuit against you and your Broker. By definition discrimination is making a distinction in favor of or against, a person based on the group, class, or category to which that person belongs rather than on individual merit. There are seven federally protected classes: Race, Color, National Origin, Religion, Sex, Familial Status and Handicapped. New York State has four additional protected groups: Age, Sexual Orientation, Military Status and Marital Status. And some cities have additional groups that you may not discriminate against. 

In the real estate industry we sometimes can get caught up with what I will call inadvertent discrimination. Since the tragedies of 9/11 and subsequent terrorist attacks throughout the world there has been an added sensitivity regarding discriminating against ones culture or religion. A culturally diverse customer (or any customer) may consider you discriminating (and possibly sue you) if you do not present to them all the listing you have that fit their requirement. “Why did you not let me bid on that building?” “Why didn’t you show me that building, because I’m ________”. Don’t make decisions for your clients. Let the customer decide. 

Don’t let the customer steer you in the wrong direction. “I only want to locate my business in ____ (that part of town)”; perhaps a specific religious or cultural area. This could be construed as Steering, the illegal funneling of real estate buyers to a particular area based on the desire to keep the makeup of that neighborhood the same or intentionally change it. Steering refers to the illegal practice of real estate agents only showing certain ethnic groups properties located in specific ethnic areas. An example would be showing an Asian businessperson store sites that are only located in Asian communities. Show the customer all properties available in your market area based on their size and budget requirements. Let the customer decide. Also remember customers do sometimes change or expand their criteria. 

Occasionally we find that our client is prejudice. “Don’t bring any ______!” “I won’t lease to_______!” The word prejudice refers to prejudgment: unreasonable feelings, opinions, or attitudes, especially of a hostile nature, regarding a racial, religious, or national group. You may have to walk away from this situation. Do not put your reputation and license in jeopardy. 

Be aware of Omission Prejudice, “Your Company represented the _____ building, why didn’t you show it to me?” Agents some times make decisions for their customers, that property is no good for them, it’s too big, too small, or too expensive, it’s in the wrong area. Show the client everything available in your market area: I like to use the 10/20 rule in showing property. Search all properties that at 10% smaller to 20% larger than the target size. Let the customer decide. 

You have a property that recently closed or is currently in contract with a sign on it. A new customer calls on the sign. You must disclose the facts, so you do not appear to be misleading with your advertising. Remember if the property is in contract, unless the owner has directed you, in writing, to stop showing the property, you must show it until it closes. If the new customer decides to make an offer, you need to caution the owner to consult with their attorney because they are in contract, and accepting another offer could have legal consequences. 

Communicate with your customers. A lack of communication, even if you have nothing that fits their criteria now, may be misunderstood and taken that you are discriminating against them.  Avoid even the appearance of impropriety.  

What should a tenant pay in rent?

Representing the tenant requires doing what is in the best interest of your client the tenant; sometimes this means educating them. How much rent can they afford to pay? Do they know? We ask our client what is your budget for rent, they reply but where did they get that number? 

Today we have the ability to compare our client’s rental expenses to the industry standards for their type of business. This data can be found on the free site Bizstats.com and more detailed information can be found on the proprietary site, Bizminer.com. The information is gathered from tax returns of thousands of companies. They break down the allocation percentages for many categories including rent. Below are a few examples of industry standards, percentage of rent expense to gross sales income (known as the Industry Rent to Revenue Ratio, I - RRR):

Offices of Doctors                                         4.97%

Offices of Dentists                                        5.44%

Clothing Stores                                             7.53%

Wine and Liquor Stores                               3.34%

Manufactures of Wood Products                 1.55%

Manufacturers of Computers                      0.80% 

This can now be applied to the gross revenues of the business to determine what the tenant should be paying in rent. However, this must be modified based upon the type of lease, and if the tenant has “additional rent” pass troughs an adjustment must be made.  Local market conditions must also be considered. This will determine the Dollars to Occupy Ratio (DOR).

I –RRR + Other Expenses + Market Conditions = DOR 

Using the clothing store as an example; it is in a retail strip that requires the tenants to pay their own gas and electric and CAM charges. These expenses equate to approximately 20% of their base rent, so an additional 1.5% will be added to their

I – RRR. The location is not the greatest so a negative adjustment of .05% will be factored for market conditions. Thus the Dollars to Occupy Ratio for this store is 8.53%.

(7.53% I- RRR + 1.5% Other Expenses - .05% Market Conditions = 8.53% DOR) 

If the store had $3,000,000 in sales revenue, the base rent should not exceed $225,900. (3,000,000 X .0753 = 225,900). Their overall Dollars to Occupy should not exceed $255,900. (3,000,000 x .0853 = 255,900) Use these numbers to guide your tenant in their rent negotiations. 

This adjusted percentage of what rent should be, may also be compared to what the tenant is paying currently. Add together their annual base current rent and any additional rent items; divide this total by their annual revenue to determine their Current Rent to Revenue Ratio. Compare this to the industry standards. 

If your client is not making enough profit, maybe they are paying too much rent! Suggest another less expensive location or renegotiate their lease for them. 

Tomorrows Value

            Determining what a property is worth is a major challenge today.

            With investment property, historically the income approach is used. Basically the properties rental income, less the owners operating expenses provides the Net Operating Income (NOI). Dividing the NOI by the prevailing Capitalization Rate (CAP Rate) gives a Market Value.

            Leases were written five years ago or longer (before the economic crash) at high rental rates. With these tenants still in the building the current year’s financial analysis looks pretty good. BUT, going into the next two years some of these leases may expire.

In most areas of the Northeast rental values over the last five years have declined 25% to 30%. If the tenants renew the lease or new tenants replace them, today’s rental rates are considerably lower.

            If we project an income analysis for the next year or two, due to the anticipated lower rental income, the NOI is less; as would be the market value. Owners must understand a buyer will look at this before making an offer. We as, real estate professionals, need to do a five year projection (or longer), a spreadsheet of the properties future financial performance to show the real future value. We may see a projected reduction in value over the next two years, but then toward the end of the cycle we may be able to show a gain in value.

            Another basis of comparison that is used today is comparing costs per square foot. Historically, this compares the subject property to the recent similar sales. But we literally had no sales in 2009 and 2010, as financing was not available. Since 2011 we have seen increasing (but slow) sales activity. Comparisons of sales are now looking at what is the competition on the market. To equalize different sizes of similar buildings the asking price is broken down to a cost per square foot. Trends become apparent, if there are three other office building for sale in the area averaging a cost of $100 PSF, the probabilities of a buyer paying much more is slight.

            With the cost of rental space being lower, the focus on rental value is now largely also based on the local competition. If the competitions property is averaging an asking price of $15 PSF, it would be difficult to rent space for $25 PSF.

            Owners may not like the current value realities, but buyers and tenants will not pay more. In listing presentations it is essential to prove to the owners the current values. Go into the presentation armed with future value projections, know the competition and their asking cost per square foot or in the case of rentals what the competition is asking. 

Green Leases

Energy consciousness in this country only really started in the 1990’s, first with Energy Star ratings and then the LEED (Leadership in Energy and Environmental Design) Certification system. Development of actual “Green Leases” has only recently begun.  In the beginning traditional leases would contain agreements between the landlord and tenants about ‘green’ concepts and procedures, mostly on a best efforts basis. Today the benefits of “green” are well known, operating cost savings and healthier work environments. A new concern also has evolved, after a landlord or tenant has achieved a LEED rating they need to maintain it. 

Landlord and tenants increased knowledge of green has caused traditional relationships between them to change. Tenants want landlords to perform their operations and maintenance duties in specific ways. Landlords are dictating types of materials and equipment tenants can use in its office space and requiring compliance with recycling and conservation programs. 

Actual “Green Leases” that address building performance, building materials and supplies and sustainability have been developed. The Building Owners and Managers Association (BOMA) published in 2008 “Guide to writing a Commercial Real Estate Lease, including Green Lease Language”. It gives alternative wording if the lease is Triple Net or a Gross Lease. In 2009 the Real Property Association of Canada issued “National Standard Green Office Lease for Single Building Projects”. An actual model lease, designed as a net lease. Also in 2009 the “Model Green Lease” was created by the Corporate Realty, Design and Management Institute based in Portland, Oregon. This form is basically a modified gross lease. 

Each type of lease has certain pluses and minuses. Gross Leases encourage landlords to reduce their operating expenses from energy improvements and increase their return on investment. But, this gives no incentive to the tenant as their rent is fixed. 

The modified gross lease, as used in the Green Leases is more like an Expense Stop Lease. The tenant pays base rent plus their pro-rata share of operating expenses and taxes over a base year, or pay operating expenses in excess of an expense stop. It is to every ones advantage to lower the operating expenses. 

In the triple net lease the Landlord pays for the capital improvements and the tenant receives the benefits of the energy savings when they pay their utility bills. Lower operating costs may help keep the building rented, or landlords may charge more rent as a result on those savings. But the landlord is not recovering the cost of those improvements.  

Traditional lease clauses are being modified. For example, “Assignment and Subleasing” may be worded as: The landlord may insist that its consent to a proposed assignment or sublease can reasonably be denied in the event the proposed assignee or subtenant will or could cause part or all of the building not to conform in accordance with green aspects of the lease, including the third-party certification system. 

Next challenge how do we enforce compliance with green practices and policies, especially if non-compliance by a tenant could cause the landlord to lose their green rating? 

Do I make my building “green”? A real concern of developers/ landlords is economics. If I do improvements how or when do I get a “payback” of those expenses? In the long run reducing energy costs make sense but what about the initial outlay? Payback can be simply measured; cost divided by the annual savings equals the payback in years. If I put in high efficient lighting fixtures and bulbs in my building it will cost me $10,000, but I will save $3,000 in annual electric expenses. $10,000 divided by $3,000 is a payback time of 3.3 years. 

New York City’s first “Green Lease”, developed by the NYC Mayor’s Office of Long Term Planning and Sustainability, contained language to address this issue utilizing the “split incentive” scenario. Basically this is a triple net lease; Landlord pays for capital improvements but does not benefit from any reductions in operating expenses because the tenant pays the operating expenses per the lease. But, in this lease form, the Landlord will recover the costs of those improvements from the tenants based on “simple payback”. 

Here is how it works: Landlord may include in the operating expenses (to be paid by the tenant) the aggregate costs of such Capital Improvements not to exceed 80% of the Projected Annual Savings. The aggregate costs of such Capital Improvements will be fully amortized over 125% of the simple payback period. For example, the Capital Improvement cost is $2,000,000, projected annual savings are $500,000, and the payback period is 48 months. The tenant pays additional rent of $400,000, (80% of savings) in operating expenses, for 60 months (125%) of payback period. 

During the first five years of the lease: The tenant has their operating expenses reduced by $100,000 a year. The landlord is reimbursed by the tenant for the full cost of the capital improvement. In the following years of the lease the tenant has their operating expenses reduced by $500,000 a year. 

Green Leases are and will continue to be a hybrid. Just like there is no standard lease, there will be no standard green lease. There are now good models available, that attorneys will use to create new green leases. What is apparent is the new green leases will specifically address the issues and concerns of landlords and tenants and consequently be more transparent. We will see things in the lease like requirements for Annual Environmental Performance Reports, requirements for exchange of information about operating hours, energy usage, renewable energy, water usage and recycling efforts. A tenant may require the landlord to monitor Indoor Air Quality (carbon dioxide and ventilation) on a regular basis. 

We will see lease clauses creating tenants (environmental) rules like: Tenant shall turn off all interior lights and equipment when not in the premises; Tenant shall comply with Landlord’s recycling program. This will require a section “Violation of Environmental Rules”. How to enforce the rules; fines? But when do repeated violations become a lease default? What if these occurrences become interference with third party certification of the building? This is an area that needs to be carefully worded by the attorneys drawing the lease. 

As Green Buildings continue to increase in number, we will see more of these “Green Leases”. 

Lease Buy Outs

The tenant no longer wants the space. What is the possibility of buying out of the lease obligation?  Why should the landlord even consider letting the tenant out of their lease? 

First, let’s look at a couple of examples of how this might work. A tenant is paying $5,500 a month rent and had 16 months to go on their lease; the remaining lease obligation is $88,000. If a landlord agreed to the buyout, they may consider discounting the obligation based on the present value of money. In this case, if a discount rate of 10% were applied, the present value of the obligation would be reduced to $82,066. (To do this calculation, you need a calculator that is programmed to do discounting.) Not a big difference to a tenant in trouble. 

Another example, a tenant with a long time left on the lease. This tenant is paying rent of $70,000 a year. They signed a ten year lease three years ago. Their business is failing and they want to get out of their lease obligation. 

Just to keep it simple, with no escalations, the overall obligation to the landlord for the next seven years is $490,000 (7years X $70,000 annual rent). If this landlord agreed to the buy out, and discounted the obligation using a discount rate of 8%, the present value of the obligation would be reduced to $364,446. This is a significant discount, but still a lot of money. In reality the negotiations for a buy out start this way and usually end up with 50% to 75% of the obligation being required for the buy out. 

Several major questions remain, can the tenant afford to do this? Perhaps major corporations can, but I don’t see our Main Street tenants being able to do so. 

Why should the landlord discount the obligation?  The real question is, how is the market today? Will the landlord be able to rent the space for the same rent, more rent or lower rent? When the market is good the Lease Buy Out gives the landlord more than sufficient money to lease the space without cash flow interruption. The dilemma is when we are in a declining market and the new rent would be less rent than the current tenant is paying. 

Are there any alternatives? Perhaps the landlord could renegotiate the tenant’s lease with lower rent. But how bad is the tenant’s business situation? This may only be a temporary solution. The landlord could make the tenant fulfill their obligation by sub-leasing and having to subsidize the rent. (Can the tenant even afford that?) But what if the landlord does not work out a release and the tenant goes bankrupt? Also many tenants today have signed personal guarantees for their leases. 

The request for a lease buy out creates serious considerations all around.

 Having a “stack” of testimonial letters could be impressive, but will they get read? They may also all say basically the same thing; you are a “great”, “super”, “wonderful”, “excellent” salesperson.

 The residential listing appointment often goes 45 minutes to an hour or more and the owner may have time to read several of these letters. But on the commercial side our appointment may only be 15 minutes! There is great value in testimonials but they will need to be consolidated for our presentations. One page with perhaps 8-10 quotes from satisfied customers can be sufficiently impressive.

 I have always found it uncomfortable to be sitting at a closing table and to ask my customer, would you write me a letter telling me how “great” I am! Of course this could be worded more subtly, but the result is a stack of similar sounding letters. I have even heard of some agents writing the testimonial letter for their clients and just asking them to sign it!

 I get my testimonials anytime and anyplace. I may be showing a building or on the phone with a client and they say something nice about me. “May I quote you on that?” is my reply, and nobody ever says no. This gives you the ability to get many different comments that can tell a story.

 “We should have listed with you sooner; you sold our building in record time.”

“What a great job leasing our store. We never expected to get a National Tenant.”

 The key with effective testimonials is to use them to demonstrate the benefits of working with you. From the above, a retail client realizes you have contacts with National Companies.

 “Thanks for the tip on 1031 exchanges, you saved me a fortune.”

 “Saved me a fortune” will get anyone’s attention. If the seller never heard of a 1031 exchange, you get to educate them, if they have heard of it they know you are a professional based on the quote.

Testimonials are generally used in listing presentations; however they also may be used when seeking buyer or tenant representations. In your page of quotes include some for this group too.

 “We have been looking for space for months; I can’t believe you found us the right spot in weeks.”

“You located a great building for us and it was not even on the market yet!”

 One of the benefits of using a real estate agent is our existing relationships. The ability to call a building owner we worked with before and determining if they will have space available soon or if they, or someone they know, may be considering selling a building. This last comment implies that ability.

 Listen to your clients and customers and remember you are always looking for testimonials. Your goal is eight or ten different quotes that tell a story. Update them regularly. 

 Lease Termination Clauses

 A lease is a contract between a landlord and tenant that defines which party is responsible for what and who pays for what in a building. The “term” indicates the length of the lease. But what if the tenant wants to end the lease before the end of the term? Leases may or may not have clauses to allow the tenant to do so.

 The most common release clause is the right to sub-lease. This clause allows the tenant to rent out part or all of their space. It requires the landlords consent and approval. Language in the lease generally states,”…such approval cannot be unreasonably withheld.”

 When this is done a second lease is constructed between the Tenant, now referred to as the Master Tenant, and the Sub-Tenant. There is no direct contractual relationship between the Sub-Tenant and the Landlord. The Sub-Tenant pays their rent to the Master Tenant who in turn pays the Landlord.

 The original Tenant is liable under the lease for all rent due. If the amount of money collected from the sub-tenant is not sufficient to pay the obligation to the landlord, the original tenant must pay the difference.

 Sub-leasing space in a down market can be a real challenge. A 10 year lease was signed five years ago with annual rent that is now $70,000. Presently rents are down 25%; competitive space today is being rented for $54,000 a year. The tenant may be able to find a sub-tenant but may have to subsidize the rent by $16,000 a year to meet their leasehold obligation.

 But what if a profit can be made from the sub-tenancy? Often the lease will indicate that if a profit is made the profit goes to the landlord or is split between the landlord and the original tenant.

 Assignment Clause   A lease may allow the tenant to assign the lease to another party, subject to landlord approval. Here the Assignee takes over the lease and has a direct relationship with the landlord. They must abide by all the terms and conditions of the lease. However the original tenant continues to have a liability for the leasehold obligation. If the assignee does not pay the rent or in any other way breaches the lease the original tenant is responsible.

 Assignments of leases often result from the sale of a tenants business and consequent desire by the tenant to be completely removed from the lease responsibilities. The tenant who is assigning a lease generally desires to be released from any further liability; typically accompanying the assignment clause will be a Release of Liability clause. This requires the original tenant to pay a substantial penalty (perhaps six months’ rent or more) to be released from the lease.

No one has a crystal ball but I consider the planets, stars, whatever in perfect alignment for a very good “brokerage” year. Why am I so optimistic? 

I think the pricing bottom for commercial properties was reached in 2011. Prices are stabilized and by the end of 2012 we will see a gradual increase in values. Since 2007, throughout most of the Northeast, we have seen a decline in property values of 25% to 30%. Buildings are at their lowest prices in five years! Who can resist a bargain? Many investors have been sitting on the sidelines (with plenty of money) just waiting for these conditions. 

Owners are now realistic about values; they are ready to sell. Some may have lost value in the last few years. But many bought their properties 15 or 20 years ago, and even at today’s prices they are still making a considerable profit. 

The Capital Gains Taxes are currently at 15% on appreciation for most taxpayers and at 25% for the depreciation recapture tax. What is important is these rates are scheduled to expire on December 31, 2012. There is a strong possibility they will be higher in future years. (Remember to talk to all sellers about the possibility of doing a 1031 Exchange and deferring their Capital Gains Taxes.) This may also influence some sellers to sell this year. 

Buyers are ready to take advantage of “bargain” prices. Money is now available again, regional banks are lending and credit unions have become serious commercial lenders. For those buying buildings to house their own business the Small Business Administration (SBA) loan program is available with typically only 10% down required. 

High CAP Rates are attracting investors back to the market now. Owner occupiers, if they occupy at lease 51% of their building, can lease out the rest and qualify for the SBA loans. Financing is again available to investors too! 

In the recent years of difficult financing many companies renewed their leases or moved to new rental spaces. The leasing market has been strong and will continue to be so as we come out of this economic cycle. Here too landlords are now realistic about current rents and know they must be competitive to keep their building filled. Representing tenants is fun again, because they have many choices and as agents we can truly assist them in getting very good deals.

 Washington, D.C.  So many things pending… What is congress going to do about taxes; the “Super Committee” what actions will they take to reduce the national debt and balance the budget. The Dodd-Frank Commission, creating regulations to regulate the regulators! Where will we end up with the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) proposed lease accounting issues? Although I have concerns for all of these things that could affect our livelihood, I think when the smoke clears we will see positive steps to stabilize our economy and get our real estate industry back on track. 

The good news is, it is an election year? The President and much of Congress are up for re-election. One would think the politicians would act carefully and do positive things for business and the public. Let us optimistically hope so. 

Historically, real estate has cycles, values rise, then fall, and then the cycle starts all over again. We are at the start of the next cycle; 2012 will create many opportunities for those of us in real estate brokerage! 

It was certainly not business as usual, but we have seen plenty of deals being done in 2011. The regional banks are lending as are the credit unions. Underwriting is still tough with typically a 30% down payment required and a debt service ratio buffer of at least 25%. 2011 did see an increase in the loan amounts for SBA loans, which are readily available for owner operators or investors provided they will occupy at least 51% of the building themselves. 

How did you do in 2011? Some of my agents have had their best year ever; others are singing the blues, blaming the economy for their lack of production. At this time of year be critical of yourself, what did you do well, and what can you do better?  

Analyze your 2011 business, where did it come from: referral fees, listing sides, and sale or lease sides? Track your success rate. How many listing presentations did you make, how many became exclusives, of those how many of the properties were sold or leased? If you’re not happy with your success percentage maybe you need to rework or update your listing presentations. 

How many new customers did you service in 2011, how many showings did you go on, how many of your customers actually bought or leased from you? If this is a challenging statistic to you, consider, do I always interview my new customer at their existing location so I can see, touch and feel their operation and real needs. Do you show them everything that is available in your market area and let the customer decide? 

Of all of ways you build your business what worked best this year: target mailings, referrals, networking, trade shows, cold calls, leads groups, advertising, or website marketing? Albert Einstein defined Insanity as “Doing the same thing over and over again and expecting a different result.” You must track your business to see what is working and what is not. 

To be successful in 2012 you need to have the right attitude, understand the numbers have a plan and follow your plan. Attitude is everything; you must meet every client and customer with enthusiasm, confidence, demonstrate your market knowledge and be the winner they want to hire. 

How much money do you want to make in 2012? Figure out what you net on a typical sale and lease in your market and determine how many sales and leases you need to close to accomplish your monetary goal. If you need to sell or lease 12 of your listings, recognize that perhaps half your listing will not be sold or leased; so you need 24 listings for 12 to close. Not every listing presentation you go on will end up an exclusive, again maybe half will; so in order to have 24 exclusive listing you may need to go on 48 listing presentations (say one a week). This becomes the basis for your production planning. Plan what you have to do each month, each week and each day to reach your goal. 

In most of our area we have reached the pricing bottom in 2011, growth will be slow but positive. Banks are lending, buyers and investors are ready, prices are the lowest in 5 years. 2012 is going to be a great year for commercial real estate brokerage. Get ready! Create a plan for success today. 

CBMS Basics:

A bank makes a $10 Million dollar loan with Commercial Real Estate as collateral. If the loan remains on the banks books they have a risk exposure of $10 million if the loan defaults. To minimize the risk the bank packages this loan with other commercial loans and creates a Commercial Backed Mortgage Security (CBMS) Trust. The Trust then creates bonds, these are rated and then sold to investors. By reducing their loan risk the bank can loan more money. 

Commercial Backed Mortgage Securities are historically bought by Insurance Companies and Pension Plans. They have been considered safe, conservative investments. These types of investments began being issued in the late 1990’s. By 2007 over $230 Billion CBMS were being issued annually. 

Their counterpart Residential Backed Mortgage Securities led to the “mortgage meltdown” in 2007-2008. In 2008 we saw the issuance of CBMS decline 94% to only $12 Billion issued that year. In 2009 there were virtually no CBMS issued. 

In 2010 we saw a slight return to issuance of CBMS with $11.5 Billion being issued.

2011 has, so far, been a very interesting year for these investments. In the spring of 2011, there was $22 Billion of CBMS issued. But as we headed into the summer we had the economic conflicts in Washington, DC coupled with the European Financial Crises; turbulence in the market reigned. 

In July, 2011 the delinquencies on CBMS reached a historical high of 9.88%. That same month Standard and Poor refused to rate a $1.5 Billion CBMS being underwritten by Goldman & Sachs and Citibank. In August, this package was rewritten providing less risk and was sold off. 

On the optimistic side there was an announcement in late August that Wall Street would be issuing a $5 Billion CBMS in October. Everyone has a different opinion as to how this year will end. We have seen estimates for $25 to $40 Billion CBMS being issued. 

A lot has to do with how the economy evolves. This category of investment, CBMS is very important as it directly affects banks ability to make loans. 

Today 1,300 banks are having loan problems; 884 banks are on the FDIC watch list. 350 banks have closed since 2008. It is estimated the nationally 50% of the commercial loans are “under water”. Meaning the current value of the property does not justify the outstanding loan balance on it. When the loan becomes due, the reduced value creates a gap between what is due and what can be refinanced under today’s underwriting standards. The borrower must either come up with more cash to fill the gap and refinance, or the bank must decide to foreclose on the loan or extend it. Plus the bank must also consider the bank regulators…difficult times for everyone. Ironically, even in these circumstances the monthly payments of many of these loans are being made; they are performing loans!   

Real estate works in cycles, I feel we are bottomed out and now we head up again.

It is a great time to buy real estate!

How do you build your business in a challenging market? It is not much different than in a robust market; it is always a people business. The more people you can meet the more opportunities will present themselves. However, with today’s market competition is fierce. How can you differentiate yourself from your competitors? Know your competition, how do they market properties, what do they do or not do? What unique value do you bring to a transaction? Be different. 

Be the expert and tell people you are! Know every listing and real estate event in your market area. When properties are sold or leased find out what was the closing price, create and maintain your own comparables. Read the business and trade newspapers. When you list, sell or lease send out “announcement” cards and press releases. Very often business groups or service clubs have speakers at their meeting. Become the speaker, talk about general market conditions and pricing in your area. Or give a brief talk on investments, financial analysis basics. Write a column for your local paper! 

Get back to back to basics, cold call and canvas. Set a goal to meet every business owner in town. Systematically visit every store, office or industrial building. Introduce yourself and see if you can be of any service to them or anyone they know (ask for a referral before you leave, “Is there anyone else you think I may be of service to?”)

Create a “data” file in your computer including whatever information you learn. Lease expiration dates, other properties owned, personal stuff like kids/spouses names, birthdates and hobbies. Add their e-mail address to your mailing lists which should be sorted by business type and size (i.e. retailers 2000-3000SF stores) 

Over communicate! When you find a listing for a small retail building for sale, send it to your mailing lists of retailers leasing small stores. If it is another brokers listing, arrange to co-broke and get permission to market it. Create a monthly Newsletter. It can be fancy or just an expanded e-mail with community news and a featured property of the month. 

Also create lists by birthdates and hobbies. If your client is a golfer and you see a great article about golf, copy it attach your business card or a brief note, “Thought you might find the attached article interesting”. Or scan and e-mail it. How about sending out Holiday Cards? Not just the usual, be different: Happy Forth of July, Happy Groundhogs Day.

Get out there, be seen, be heard, and build your business with personal contacts. 

A student of mine asked me how to choose what real estate firm to affiliate with? It is best to interview with a number of different types of companies to see what the best fit is for you.

 There are certainly a number of things to consider. Some firms ask each agent to specialize, become an expert in a particular segment of the market, office leasing or industrial sales or perhaps retail site selection. Other firms cross-train the agents to handle whatever opportunities they may encounter. In these offices often the specialization is geographic, becoming an expert in that particular market area.

 Do you want to be a full time commercial agent or a dual-practitioner doing both commercial and residential work? Some companies are strictly commercial, some do both disciplines. In some of the firms that do both there may be a “commercial division”. There can be advantages to both situations. In a purely commercial company there may be a mentoring program, perhaps working with an experienced agent for a period of time to gain experience. This could occur in a dual office too, but the other advantage of this type of office is the commercial agents can get referrals from the residential agents in their office.

 Should you work with a small firm or large firm? Another key consideration is what kind of training and support will be provided. In a smaller firm the Broker may be very busy and have little time to train new agents. They may also have their own clients and be in competition with their sales agents for new business. Other firms, especially the larger companies may have corporate training programs and educational staff just for this purpose.

 Ask about the company’s websites and marketing tools. Who makes your listing flyers you or staff?  Is there staff? How are your listings advertised? Who pays for what?

 The compensation issue – how much of the fee do I get?  This varies considerably, some firms start out with a 50-50 split of the commission and as the agents production increases they get a higher percentage of the fee. Other firms offer 70%, 80%, 90% or more of the commission to the agent. But usually in these cases there are monthly costs to the agent for operating expense or marketing funds. These monthly fees can be considerable and must be carefully evaluated.

 Your market – where do I have the best opportunity? What Brokerage firm(s) is/are dominating your area? If you join them will you be able to shine or are they loaded with agents now?

 When considering joining a firm, interview with the Broker and also speak with some of the other agents there. How are they really doing? Interview with several companies determine their structure, training, splits and your opportunity for success. 

 Our listing agreement basically indicates that the building owner has agreed to pay us a fee if we lease space in, or sell their building. In leasing we may be entitled to collect multiple commissions. If, for example there were an option to renew, extend or expand a lease or an option to buy the building.

 We may have been paid our fee due on lease signing, but now, five years later, our tenant is extending their lease for another five years. Are we entitled to another commission? What does your listing agreement say? Your agreement should clearly state that if the tenant renews or extends their lease you are due another fee at that time.

 What happens if the building is sold before the option becomes due? Is the new owner responsible to pay the Brokers commission? The answer is no, unless the listing agreement or lease addresses the issue.

The listing agreement is between the original owner and the Broker. Upon sale of the building that relationship ends. The Broker has no agreement with the new owner. The new owner has no obligation to pay a commission to the Broker. (This may also apply to an Exchange or Assignment of a Lease).

Listing agreements should contain a clause to address this contingency. Typically the clause directs the building owner, if they decide to sell the property, to have the buyer sign an “Assumption Agreement” (in recordable form). In so doing the new owner accepts the liability for future Brokers commissions that may become due if a tenant exercises their option to extend the lease. Without such a clause in your listing agreement an option commission could be lost upon the sale of the building.

What if the tenant takes more space in the building? Your agreement should also address if the tenant “expands” or leases more space in the building. Are you entitled to a further fee – what does your agreement say? This contingency should be addressed within the lease negotiations. When working with your customer; ask them where they see their business in the next two or three years, are they growing? If that is a possibility, negotiate a “First Opportunity” clause in their lease, whereby if a vacancy occurs in the building in the future, they are given the first opportunity to lease the additional space. Also address the rent for the additional space, “at the rent the tenant will be paying at that time” or a method to determine fair market value.

If there is an option to buy the building be sure your agreement specifies your fee if that is exercised. But, what if there is no option to buy in the lease and your tenant decides they want to buy the building. Are you entitled to a fee – what does your agreement say?

A “Purchase by Tenant” clause in the listing agreement covers this contingency. It generally states in that event:  the lease ends, any options to renew, extend or expand are cancelled, and an adjustment is made for any “unearned commission”. This is sometimes referred to as the “Fairness Clause”. You were paid on lease signing a fee based upon a ten year lease, it is the end of year six and the tenant is buying the building. The part of the commission you were paid representing years seven through ten is unearned commission; this dollar amount should be credited (deducted) from the sale commission due you.

Listing agreements need to cover many contingencies, review your agreements with your Broker and an attorney to be sure you are protected for all possibilities. 

Listings are controlled by the listing Broker who may choose to share the listing with other Brokers or not. Some firms belong to MLS systems which may require all listings to be shared with the other MLS members. Consumers generally expect their Exclusive Broker to market their property direct to customers and also to circulate the availability to the brokerage community.

 Typically the listing Broker will create a Co-Brokerage agreement; this will specify any showing “rules” for the property and indicate the commission splits involved. In commercial, the commission split between the brokers is usually equal, but this, as is the commission rate, is negotiable. It would seem logical to get the co-brokerage agreement signed prior to offering the property, but, some brokers wait until after an offer is made.

 Co-broke agreements can take many forms but typically they included a declaration of the property involved, a requirement that all offers be submitted in writing, the listing broker to present all offers and the fee distribution split between the brokers. When the agreement is presented after the offer is made the document will be specific as to the amount of commission dollars and the payment schedule.

 Some firms do not use co-broke agreements. To me this is dangerous as misunderstandings or commission disputes between the brokers could arise later. If the listing firm does not have a co-brokerage form a simple letter of understanding can outline the agreed terms. It is important to both firms that whatever co-broke terms are agreed be in writing.

What if the listing Broker has an “open” listing? I don’t mind working with someone who has an open listing, provided that their listing agreement is in writing. In such cases the co-broke agreement should indicate that status.

 If the listing broker does not have a listing agreement (Exclusive or Open) in writing, co-broke agreement or not, getting paid could be in jeopardy. The key to getting paid is always to establish a paper trail direct to the owner, especially when co-broking! 

Depending upon the market (and the agent’s skills), open listings may have to be taken.

I would like to have a “handshake” agreement with every owner; I will sell or lease your property and you will pay me an agreed fee. Unfortunately in a small number of transactions commission disputes arise or an owner tries to renege on an agreed fee. Our “handshake” or oral agreement will not help us win if we have to go to court to collect our commission, a written listing agreement and other evidence will be required.

 First we need to define listing agreements. The Exclusive Right Agreements make the owner responsible to pay the  broker a defined commission if the property is sold or leased by the broker, or in cooperation with another broker or by the owner themselves during the term of the agreement. Exclusive Agency is basically the same except if the owner sells or leases the property themselves the broker does not get a fee. Then we have the “open listing”, basically this is a written agreement that states if the broker sells or leases the property the owner will pay them a specified fee, however the owner may also “hire” other brokers to market the property or sell it themselves, in which case the “open listing” broker does not get paid.

In the event of a commission dispute does the court care if the listing is Exclusive or Open? No, what the court cares about is: is the agreement in writing and if it contains the basic seven elements of a listing agreement:

• Property address
• owner information
• broker information
• offering price and terms
• agreed commission fee and when payable
• the term (length) of this agreement
• the legal jurisdiction

In the eyes of the court the only thing that counts, is a written agreement,  exclusives only affect the agents ability to market the listing. Most commercial listing services require exclusives for inclusion.

When in a situation necessitating an “open” agreement, the easiest way to deal with it is to take your regular Exclusive form  and cross our the words “Exclusive”  and insert the word “open” and have both parties initial the document changes. This preserves all of the important clauses in the agreement.

If that does not satisfy the customer I recommend you have your firm develop a “Listing Authorization Form”. This document authorizes the agent to market the property on a non-exclusive basis and should contain the seven key points indicated above. By requiring such an authorization we have a written document indicating our fee if we bring about a sale or lease.

Can we co-broke “open listings”? I get nervous when I ask another agent if they have an Exclusive and they “dance around” the question. Probably they did have an exclusive, but it may have expired. Are our fees protected? No! If your exclusive runs out and the owner is not giving the listing to another Broker, at least get a Listing Authorization signed. You must have a written fee agreement to protect your commission if you have to go to court to collect it.

 Commonly we think of an RFP (Request for Proposal) coming from a municipality when they want to hire a company for specific services i.e. snow removal, or from a company seeking bids for their purchasing of certain materials or supplies. The purpose of an RFP is to create a competitive situation.

 The RFP technique can be successfully used by real estate agents when representing a tenant. Landlords need to keep their buildings fully rented; vacancy affects their cash flow. Given today’s economy landlords have to be aggressive to keep and get new tenants. Properties are shown and the tenant narrows there interest to four or five buildings. They know exactly what each landlord is asking for. The tenant, or the agent for the tenant, can create a Request for Proposal and send it to these owners creating a competitive situation. The landlords then respond with their best “offer” to lease space to this tenant.

 Generally we begin by establishing a brief window of opportunity and brief synopsis of the tenant, for example:

 On behalf of our client, ABC Corp., we have been authorized to solicit Requests for Proposals for the leasing of space. We invite your firm to submit a proposal to us by April 30, 20__. (within 10 business days of issue)They have inspected your property as well as others and are in the final decision stage. A description of their business, the services needed and other pertinent information follow: 

 ABC Corp. (background and why moving)

ABC Corp. is an Insurance Agency that has been in business for over 5 years. Their annual revenues are between are between $10 million to $12 Million per year and they employ 35 people in one location. Their current lease is expiring in 90 days and they are now seeking larger space for growth.

Follows is a very detailed list of what the tenant would like to see in the lease and what the tenant is willing to pay to rent space in a building. Think of it as the tenants “wish list”. It lists key elements in leases; how much space is required, the amount of rent they can pay (the tenants budget); or the price per square foot they are willing to pay, they may also be willing to pay additional rent for items like utilities or common area charges. It addresses all issues: i.e.  security; desired terms of the lease; any options to renew or purchase; concession periods; sign requirements; parking; insurance; build out, construction or tenant improvements required. A complete picture of what the tenant needs, what they expect, and what they are willing to do. The proposal will also have a time line; landlords must respond by a certain date.

The tenant‘s credibility must also be shown to the prospective landlords by attaching financial information to the proposal.

The landlords who receive the proposal can now respond item by item to the proposal. They are willing to do this, but not this, or suggest compromises. Based upon the initial responses the tenant can now decide which building they wish to pursue. The stage for the final negotiations is set, using this technique usually results in initial agreement on many of the issues; those remaining may now be negotiated to the successful conclusion of a lease.

The competitive situation the landlords are placed in, knowing what is important to and the capabilities of the proposed tenant, allows them to decide if they want this tenant for their building. It also encourages them to present their best deal to the tenant. The RFP says to the landlord that this tenant is serious and will shortly by moving into new space in your building or another owners building.

In representing a tenant I can’t think of a better way to get them the best deal possible. 

The New Tax Laws 2011

In December of 2010 the “Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010” was passed into law. In this article we will examine the key elements pertaining to Commercial Real Estate and Business

 Tax Brackets

The 25%, 28%, 33%, and 35% individual income tax brackets were due to expire at the end of 2010, they have been extended for an additional two years, through 2012.

If this occurred the rates would have reverted to 28%, 31%, 36%, and 39.6% respectively.

 Capital Gains and Dividends

The capital gains and dividend rates for taxpayers below the 25% bracket is now zero percent. For those in the 25% bracket and above, the capital gains and dividend rates are currently 15%. These rates were scheduled to expire at the end of 2010, and would have reverted to10% and 20%, respectively, and dividends would be subject to the ordinary income rates. The bill extended the current capital gains and dividends rates for all taxpayers for an additional two years, through 2012.

 Cost Recovery

The bill extends for two years the special 15-year cost recovery period for certain leasehold improvements, restaurant buildings and improvements, and retail improvements. Note, the 15-year accelerated depreciation schedule expired on December 31, 2009. This bill made the effective date of this retroactive to January 1, 2010 and is therefore now scheduled to expire on December 31, 2011. Prior to establishing this special 15-year cost recovery for these categories of properties the cost recovery for these items was 39-years.

Bonus Depreciation

Under current law, businesses are allowed to recover the cost of capital expenditures over time according to a depreciation schedule. Congress allowed businesses, beginning January 1, 2008 through December 31, 2009, to take an additional depreciation deduction allowance equal to 50 percent of the cost of the depreciable property placed in service in those years. Under the Small Business Jobs Act of 2010, this temporary increase in the depreciation deduction allowance was extended through December 31, 2010. The bill extends and temporarily increases this bonus depreciation provision for investments in new business equipment. For investments placed in service after September 8, 2010 and through December 31, 2011, the bill provides for 100 percent bonus depreciation. For investments placed in service after December 31, 2011 and through December 31, 2012, the bill provides for 50 percent bonus depreciation.

Section 179 DeductionsReduced in 2012

Under current law a taxpayer may elect to deduct the cost of certain property placed in service for the year rather than depreciate those costs over time. Over the years the thresholds and phase-outs amounts for this have been increased and extended several times, including most recently as part of the Small Business Jobs Act which increased the thresholds to $500,000 and $2,000,000 for the taxable years beginning in 2010 and 2011. This bill reduces these amounts; it reverts to the 2007 maximum amount and phase-out thresholds for taxable years beginning in 2012, of $125,000 and $500,000 respectively. This is effective for taxable years beginning after December 31, 2011.

 For specific application of these statutes be sure to consult your accountant or tax advisor.

 Issues Ahead

Most of the provisions discussed here expire at the end of 2011 or 2012. We must be very aware of the changes that could occur at that time.