Those of you on my regular paper mailing list will receive an announcement this week thanking clients for trusting me once again with their lease negotiations this year. The funny thing about the announcement is that the list is the same size that it was last year, the year before that and the year before that. For those of you that know me, the fact that 2009 was as strong as (or stronger than) any of my prior 9 years in this business does not surprise you at all. You know that neither growth nor contraction drives my tenant representation business--change does. You know that, as an entrepreneur, your real estate is a process, not a commodity, and that process enables you to best position your lease and your facility to adjust to changes in your business.
In part due to our success together, next year, I will be switching to a monthly (rather than biweekly) blog format. I will continue to keep you updated on how the credit markets, commercial real estate markets and public policies will impact your lease and facility, as well as offer strategies to help you prepare for our future work together in aligning your real estate to meet your business goals.
Happy New Year,
Mike
Monday, December 28, 2009
Monday, November 23, 2009
Come See Me Speak on How to Protect Your Facility and Lease From a Changing Economy
Friday, December 11th
12:30 to 1:30 pm
Fairfax Innovation Center
Room 106 - The Conference Center
4031 University Drive
Fairfax, VA 22030
This program will cover how the current commercial real estate market can impact your business and how to prepare your facility, whether you have an existing facility or are planning your first facility.
Free event. Lunch will be provided. Registration required. Let me know if you'd like to attend, mnorris@scheerpartners.com
For more information on the Fairfax Innovation Center, please visit: http://www.fairfaxinnovationcenter.org
12:30 to 1:30 pm
Fairfax Innovation Center
Room 106 - The Conference Center
4031 University Drive
Fairfax, VA 22030
This program will cover how the current commercial real estate market can impact your business and how to prepare your facility, whether you have an existing facility or are planning your first facility.
Free event. Lunch will be provided. Registration required. Let me know if you'd like to attend, mnorris@scheerpartners.com
For more information on the Fairfax Innovation Center, please visit: http://www.fairfaxinnovationcenter.org
Saturday, November 7, 2009
How Well Do You Know Your Landlord?
One of the reasons that commercial real estate is a process--not a commodity--for end-users like you is that one of the key steps to the process is: understanding the landlord. Who is the landlord? It could be a single individual that’s owned the property outright for a long time. More likely, it’s an entity, as small as an LLC consisting of local partners or as large as a public real estate investment trust; moreover, the landlord is also its listing agent, asset manager, property manager and lender(s). Each of these individuals has a particular role in protecting the landlord’s interests, and not only is each landlord different, but also each type of landlord has unique pressure upon them that you need to understand.
Here are some basic things to keep in mind regarding a few of the most common landlord types:
Pension Funds:
Many people don’t know that school teachers and other state government employees own much of the commercial real estate in America. Their ownership comes in the form of tax-exempt pension funds administered by each state to pay benefits for retirees. Commercial real estate had long been considered a long-term stable asset for these portfolios to grow and make payments to retirees. You may have heard that many states have had their funds significantly eroded (by about 20% in the cases of Maryland, Virginia and the District). The problem is so severe that the federal Pension Benefit Guaranty Corporation (PBGC) may be compelled to takeover payments. In some cases, funds are “oversubscribed” to real estate; in other words, the value of other investments have collapsed, so while their real estate has actually held up relatively okay, they’re forced to sell off portions of their real estate portfolio to reduce the percentage of investments tied to real estate to comply with their own rules. What does this mean for you as an existing or prospective tenant? Stable cash flow is critical for both fund stability and disposition values of the assets, so you have unprecedented leverage to reduce costs, improve your facility and mitigate risk in your lease.
Real Estate Investment Trusts (REITs):
These public entities have probably received the most attention due to their declines both during the early part of the decade as well as now toward the end of it. REITs have their own requirements, most especially debt-to-equity thresholds and Generally Accepted Accounting Principles (GAAP) rules. The tighter credit market (increased deposit requirements, lower loan-to-value ratios and expiring debt that’s much harder to refinance) has forced some REITs into disposition to raise money and to comply with their own ratios. The GAAP rules have a couple of important implications—willingness to accept a lower base rent and less willingness to agree to rental abatement. REITs report average rental rates (straight-lined over the term of the lease), so accepting a lower initial rental rate doesn’t impact them as much, if they can make it up with the escalation. For the same reason, free rent brings the average rent down, so it’s better for the REIT to wait for the next deal, lower the initial base rent or offer other concessions (such as tenant improvements). Additionally, another requirement is looming for REITs that may reduce the value of their portfolios. The Federal Accounting Standards Board (FASB) is considering changes that would, among other things, more strictly require REITs to mark-to-market their assets. The changes, given the current market, could create more urgency for REITs to secure new leases to avoid having to take write-downs on properties that have technically declined in value, even though the REIT may have no intention of selling in the current down market.
Private Equity:
During the real estate boom, real estate had a certain appeal, and “knowing” your landlord was something people actually used to brag about at cocktail parties. Back to reality. Your landlord (or the person managing the asset on behalf of an equity partnership comprising your landlord) is just another investor, and the way in which that landlord has financed the property, structured their equity and managed the asset may expose some weaknesses that, with the right due diligence and experience, you can leverage to not only save money, but also strengthen an otherwise unfavorable lease well into the future.
Whether you’re considering a renewal, renegotiation, relocation, lease liability takeover or expansion, the importance of understanding the landlord, the type of landlord and the people working for the landlord is critical to the success of the project. It takes the right process coupled with experience.
Here are some basic things to keep in mind regarding a few of the most common landlord types:
Pension Funds:
Many people don’t know that school teachers and other state government employees own much of the commercial real estate in America. Their ownership comes in the form of tax-exempt pension funds administered by each state to pay benefits for retirees. Commercial real estate had long been considered a long-term stable asset for these portfolios to grow and make payments to retirees. You may have heard that many states have had their funds significantly eroded (by about 20% in the cases of Maryland, Virginia and the District). The problem is so severe that the federal Pension Benefit Guaranty Corporation (PBGC) may be compelled to takeover payments. In some cases, funds are “oversubscribed” to real estate; in other words, the value of other investments have collapsed, so while their real estate has actually held up relatively okay, they’re forced to sell off portions of their real estate portfolio to reduce the percentage of investments tied to real estate to comply with their own rules. What does this mean for you as an existing or prospective tenant? Stable cash flow is critical for both fund stability and disposition values of the assets, so you have unprecedented leverage to reduce costs, improve your facility and mitigate risk in your lease.
Real Estate Investment Trusts (REITs):
These public entities have probably received the most attention due to their declines both during the early part of the decade as well as now toward the end of it. REITs have their own requirements, most especially debt-to-equity thresholds and Generally Accepted Accounting Principles (GAAP) rules. The tighter credit market (increased deposit requirements, lower loan-to-value ratios and expiring debt that’s much harder to refinance) has forced some REITs into disposition to raise money and to comply with their own ratios. The GAAP rules have a couple of important implications—willingness to accept a lower base rent and less willingness to agree to rental abatement. REITs report average rental rates (straight-lined over the term of the lease), so accepting a lower initial rental rate doesn’t impact them as much, if they can make it up with the escalation. For the same reason, free rent brings the average rent down, so it’s better for the REIT to wait for the next deal, lower the initial base rent or offer other concessions (such as tenant improvements). Additionally, another requirement is looming for REITs that may reduce the value of their portfolios. The Federal Accounting Standards Board (FASB) is considering changes that would, among other things, more strictly require REITs to mark-to-market their assets. The changes, given the current market, could create more urgency for REITs to secure new leases to avoid having to take write-downs on properties that have technically declined in value, even though the REIT may have no intention of selling in the current down market.
Private Equity:
During the real estate boom, real estate had a certain appeal, and “knowing” your landlord was something people actually used to brag about at cocktail parties. Back to reality. Your landlord (or the person managing the asset on behalf of an equity partnership comprising your landlord) is just another investor, and the way in which that landlord has financed the property, structured their equity and managed the asset may expose some weaknesses that, with the right due diligence and experience, you can leverage to not only save money, but also strengthen an otherwise unfavorable lease well into the future.
Whether you’re considering a renewal, renegotiation, relocation, lease liability takeover or expansion, the importance of understanding the landlord, the type of landlord and the people working for the landlord is critical to the success of the project. It takes the right process coupled with experience.
Thursday, October 15, 2009
Mentoring in the 21st Century Economy
On Tuesday, October 27th, I will have the pleasure of speaking on a panel about mentoring in the 21st century economy. Please see the details below and let me know if you have any questions or would like to attend.
Host:
ALPFA-DC
Location:
Sheraton Premier at Tysons Corner
8661 Leesburg Pike
Vienna, VA 22182
When:
Tuesday, October 27, 6:00PM to 8:30PM
Phone:
703-448-1234
Is having a mentor still important in a "digital economy?" Yes!
Learn how successful people are now using mentors (and working with mentees) while navigating the new realities of the 21st Century. We have requested professionals from various backgrounds to join us.
We now request that you RSVP early as seats are limited.
Distinguished Panelists include:
Yelinne Megally, Manager, Beers & Cutler
Everett Vance, Director, PricewaterhouseCoopers
Mike Norris, VP, Scheer Partners
Amar Greene, Business Developer, Accountants International
Chip Jordan, SVP and Head of Corp. Tax @ Marriott International, Inc.
Networking: 6:00 to 6:30
Presentation: 6:30 - 7:30
Q&A/Networking: 7:30 - 8:30
Sponsored by Beers & Cutler and brought to you jointly by the National Association of Black Accountants and ALPFA.
Host:
ALPFA-DC
Location:
Sheraton Premier at Tysons Corner
8661 Leesburg Pike
Vienna, VA 22182
When:
Tuesday, October 27, 6:00PM to 8:30PM
Phone:
703-448-1234
Is having a mentor still important in a "digital economy?" Yes!
Learn how successful people are now using mentors (and working with mentees) while navigating the new realities of the 21st Century. We have requested professionals from various backgrounds to join us.
We now request that you RSVP early as seats are limited.
Distinguished Panelists include:
Yelinne Megally, Manager, Beers & Cutler
Everett Vance, Director, PricewaterhouseCoopers
Mike Norris, VP, Scheer Partners
Amar Greene, Business Developer, Accountants International
Chip Jordan, SVP and Head of Corp. Tax @ Marriott International, Inc.
Networking: 6:00 to 6:30
Presentation: 6:30 - 7:30
Q&A/Networking: 7:30 - 8:30
Sponsored by Beers & Cutler and brought to you jointly by the National Association of Black Accountants and ALPFA.
Sunday, October 4, 2009
What Makes a Good Referral?
“I’ll let you know when I hear of someone looking for space.”
I hear that now and then from people I first meet, and while it’s nice and can be helpful, I usually have to explain to the person that real estate—as I practice it—is a process, not a commodity. As many of you know, physical property tours (a.k.a. looking for space) is the 4th step to the process; therefore, if I meet someone shopping around, we usually need to take a step back before we take a step forward, which is fine, but some people aren’t willing. Seeing spaces (or shopping) is the fun part; going back to actually make sure that your program is accurate, your timeline is feasible and your facility requirement aligns well with your business plan is akin to setting aside the chocolate cake to eat your broccoli.
So what are the other less obvious but just as important signs that someone should be talking with me? After all, saying you know a great guy in real estate probably won’t resonate, since they may have cold callers and listing agents pushing spaces on them daily. Here are a few signs:
Pending merger:
Whether the business owner wants to eat or be eaten, the facility and lease is often overlooked, but it’s very important to consider how each could be impacted, including:
-program change
-Default risk
-lease rights forfeiture
-assignment procedures
Government contracting:
What are the real costs and timeline involved in securing a facility to meet the obligations of a contract, whether it be a SCIF, data center or general office space? Will those costs be properly illustrated in the RFP response when you bid on the contract? Consulting companies on proper project estimating is an important role that I play for contract bidders.
Hiring/laying off:
These are more obvious, but not always to companies because, when there’s any type of business change, they think about funding/revenue first, their people second and their facility third. Hiring doesn’t always mean expanding space, and laying off doesn’t always mean subleasing part of it. It can mean reconfigurations, lease liability takeovers and renegotiations, each of which are outcomes derived from the process.
Going green:
Whether by choice or by force, more renovations are adhering to LEED standards. Some for marketing purposes, employee retention or personal desires. Most because LEED being incorporated into the building code or the tenant is being required by government contracts. Either way, they’ll need a LEED AP involved throughout the process including their negotiation and commissioning process.
I hear that now and then from people I first meet, and while it’s nice and can be helpful, I usually have to explain to the person that real estate—as I practice it—is a process, not a commodity. As many of you know, physical property tours (a.k.a. looking for space) is the 4th step to the process; therefore, if I meet someone shopping around, we usually need to take a step back before we take a step forward, which is fine, but some people aren’t willing. Seeing spaces (or shopping) is the fun part; going back to actually make sure that your program is accurate, your timeline is feasible and your facility requirement aligns well with your business plan is akin to setting aside the chocolate cake to eat your broccoli.
So what are the other less obvious but just as important signs that someone should be talking with me? After all, saying you know a great guy in real estate probably won’t resonate, since they may have cold callers and listing agents pushing spaces on them daily. Here are a few signs:
Pending merger:
Whether the business owner wants to eat or be eaten, the facility and lease is often overlooked, but it’s very important to consider how each could be impacted, including:
-program change
-Default risk
-lease rights forfeiture
-assignment procedures
Government contracting:
What are the real costs and timeline involved in securing a facility to meet the obligations of a contract, whether it be a SCIF, data center or general office space? Will those costs be properly illustrated in the RFP response when you bid on the contract? Consulting companies on proper project estimating is an important role that I play for contract bidders.
Hiring/laying off:
These are more obvious, but not always to companies because, when there’s any type of business change, they think about funding/revenue first, their people second and their facility third. Hiring doesn’t always mean expanding space, and laying off doesn’t always mean subleasing part of it. It can mean reconfigurations, lease liability takeovers and renegotiations, each of which are outcomes derived from the process.
Going green:
Whether by choice or by force, more renovations are adhering to LEED standards. Some for marketing purposes, employee retention or personal desires. Most because LEED being incorporated into the building code or the tenant is being required by government contracts. Either way, they’ll need a LEED AP involved throughout the process including their negotiation and commissioning process.
Thursday, September 17, 2009
A process, not a commodity
Commercial real estate is a process--one that business owners need to understand in order to avoid undue risks and excessive costs. On September 15th, I presented to the Mason Enterprise Center at George Mason University's Prince William campus on how to properly execute the process for a first facility, renewal, renegotiation, sublease, lease liability takeover or relocation. The video below is broken up into segments, so you can watch the presentation in its entirety or just the portions in which you're interested on my CRE4Entrepreneurs channel on YouTube.
Introduction to the Process (3 min): http://www.youtube.com/watch?v=CsE1tmoCI0w
Phase 1 – Identification (9 min): http://www.youtube.com/watch?v=sjKuzMbk7vY&feature=channel
Phase 2 – Evaluation (7 min): http://www.youtube.com/watch?v=75gZ21E9ZDg&feature=channel
Phase 3 – Implementation (4 min): http://www.youtube.com/watch?v=z6DouctEP_w&feature=channel
Q&A:
Tenant Representation (2 min): http://www.youtube.com/watch?v=KcoLl4i2twg&feature=channel
Compensation (3 min): http://www.youtube.com/watch?v=lPXxA_Y5xx0&feature=channel
Evaluation (2 min): http://www.youtube.com/watch?v=a7UxWCyg1uo&feature=channel
Timeline (6 min): http://www.youtube.com/watch?v=g_txsyAwKtc&feature=channel
Moving Costs (3 min): http://www.youtube.com/watch?v=UmLwsF-Pm9I&feature=channel
How’s Business? (3 min): http://www.youtube.com/watch?v=WBLtDt-3eek&feature=channel
Introduction to the Process (3 min): http://www.youtube.com/watch?v=CsE1tmoCI0w
Phase 1 – Identification (9 min): http://www.youtube.com/watch?v=sjKuzMbk7vY&feature=channel
Phase 2 – Evaluation (7 min): http://www.youtube.com/watch?v=75gZ21E9ZDg&feature=channel
Phase 3 – Implementation (4 min): http://www.youtube.com/watch?v=z6DouctEP_w&feature=channel
Q&A:
Tenant Representation (2 min): http://www.youtube.com/watch?v=KcoLl4i2twg&feature=channel
Compensation (3 min): http://www.youtube.com/watch?v=lPXxA_Y5xx0&feature=channel
Evaluation (2 min): http://www.youtube.com/watch?v=a7UxWCyg1uo&feature=channel
Timeline (6 min): http://www.youtube.com/watch?v=g_txsyAwKtc&feature=channel
Moving Costs (3 min): http://www.youtube.com/watch?v=UmLwsF-Pm9I&feature=channel
How’s Business? (3 min): http://www.youtube.com/watch?v=WBLtDt-3eek&feature=channel
Saturday, August 22, 2009
A Strategic Decision To Do Nothing
If you currently have a lease, chances are (unless your facility was very expensive to build), it expires within the next few years.
So why are you even bothering to read this article if you have years left? Hopefully, it’s because you realize that, even though the economy and market have changed dramatically, you haven’t analyzed the impact those changes may have on your lease. In short, you’ve done nothing. It’s certainly logical not to look at your lease when you’re at least a couple of years from having to decide whether to renew or relocate, but in this changing environment, it’s neither safe nor cost effective.
In many cases, your landlord (whether it’s a REIT, pension fund or private investor) has lost most if not all of its equity and is trying to figure out how to hold onto the building. In the short term, the landlord has probably exceeded its loan-to-value threshold or fell short of its debt coverage ratio; in other words, it’s in default with its lender. The lender doesn’t want to recognize the loss, so the lender isn’t enforcing the terms of the loan, as long as the landlord continues to make its payments. But another problem is coming; the loan is expiring soon. Commercial real estate loans are generally for short terms (2-7 years), and landlord will probably be unable to renew or replace the loan at the current level. If that happens, the landlord will need to infuse more equity or add expensive mezzanine debt, but a more likely scenario is the landlord deciding to stop putting good money after bad and allowing the bank to take back the building. Why should you care? Because your lease is subordinate to the lien of the mortgagee. What does that mean? It means you have no lease, unless you have the right protections.
There are two things you should do soon.
1. Have a trained and experienced broker analyze your current lease and existing landlord
2. Have the same broker benchmark your current facility with the market
As I’ve written in prior articles (How To Protect Against Your Landlord’s Default and What the Commercial Real Estate Bailout Means For Entrepreneurs), all of the changes you’re hearing and reading about can and will impact you as a tenant. We may come to the conclusion, after the analysis and benchmarking, that your current situation is optimal and no renegotiation, relocation or lease liability takeover is necessary. But at least that’s a well-informed, strategic decision to do nothing as opposed to doing nothing because it seems easier. At a minimum, the process will be worth the peace of mind, but it could also mean a lot of cost savings and risk mitigation.
For a free initial analysis, contact Mike Norris at mnorris@scheerpartners.com or (703) 714-9568.
So why are you even bothering to read this article if you have years left? Hopefully, it’s because you realize that, even though the economy and market have changed dramatically, you haven’t analyzed the impact those changes may have on your lease. In short, you’ve done nothing. It’s certainly logical not to look at your lease when you’re at least a couple of years from having to decide whether to renew or relocate, but in this changing environment, it’s neither safe nor cost effective.
In many cases, your landlord (whether it’s a REIT, pension fund or private investor) has lost most if not all of its equity and is trying to figure out how to hold onto the building. In the short term, the landlord has probably exceeded its loan-to-value threshold or fell short of its debt coverage ratio; in other words, it’s in default with its lender. The lender doesn’t want to recognize the loss, so the lender isn’t enforcing the terms of the loan, as long as the landlord continues to make its payments. But another problem is coming; the loan is expiring soon. Commercial real estate loans are generally for short terms (2-7 years), and landlord will probably be unable to renew or replace the loan at the current level. If that happens, the landlord will need to infuse more equity or add expensive mezzanine debt, but a more likely scenario is the landlord deciding to stop putting good money after bad and allowing the bank to take back the building. Why should you care? Because your lease is subordinate to the lien of the mortgagee. What does that mean? It means you have no lease, unless you have the right protections.
There are two things you should do soon.
1. Have a trained and experienced broker analyze your current lease and existing landlord
2. Have the same broker benchmark your current facility with the market
As I’ve written in prior articles (How To Protect Against Your Landlord’s Default and What the Commercial Real Estate Bailout Means For Entrepreneurs), all of the changes you’re hearing and reading about can and will impact you as a tenant. We may come to the conclusion, after the analysis and benchmarking, that your current situation is optimal and no renegotiation, relocation or lease liability takeover is necessary. But at least that’s a well-informed, strategic decision to do nothing as opposed to doing nothing because it seems easier. At a minimum, the process will be worth the peace of mind, but it could also mean a lot of cost savings and risk mitigation.
For a free initial analysis, contact Mike Norris at mnorris@scheerpartners.com or (703) 714-9568.
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