Real Estate Agent's Café

Funny Real Estate Sign #6

The Tenant Went Bad. And It's Your Fault!

 

About five years ago I was the leasing agent for a building owner and leased his building to a transportation company through a co-broker. I don't know how it works in your neck of the woods, but here in New Jersey if the tenant renews their lease we're paid a commission on the renewal. Close to time of the tenant's renewal the co-broker contacted me and asked me to follow up with the property owner regarding collecting the renewal commission. He thought the tenant was in the process of renewing the lease. So, I emailed the property owner saying that I understood the tenant was staying and asked him for a copy of the new lease terms so I could prepare an invoice.

I was taken aback when I received his reply:

"The man is into us for $120K in back rent. I think that you and the co-broker should make good for getting us this stiff. How about those apples. When can I expect the co-broker's  and your first checks to compensate our losses?"

Geez, what a crybaby! This person wasn't what I would consider a professional landlord, but he was a prominent businessman and, I thought, sophisticated.

Shaking my head I politely responded with that although I was sorry he felt that way I successfully provided a service, and made no guarantees as to the tenant's ability to pay the rent. I also asked him that if he had invested in AIG or Lehman would he call his stockbroker and ask him to return his commission. I also said that owning real estate was just like any other investment meaning that there's risk. To make a long story short, I ended my message by inviting him to read my post  I'm Not Your Partner.

But what really irked me about this whole thing was how did he come to this conclusion in the first place? That somehow it's the broker's responsibility as to the tenant's ability to pay the rent.

If you think it through rationally, how does the broker have any control over the way the tenant conducts business? Is the broker suppose to pay a monthly visit to the tenant's office to manage his books, making sure that there's enough cash in the account and that the rent gets paid first? If the tenant's business starts to slip is the broker suppose to insert themself into a management position and effect a turnaround? Get real!

I'll tell you how he and a lot of other landlords came to this conclusion. The brokers have allowed them to come to it! The "Village Idiots", part timers, dabblers and the ones that don't know what business their in. If your reading this and don't know what I'm talking about then maybe your one of them.

Allow me to clue you in. We're in the service business! We provide a service by finding a tenant and negotiating the business terms of the lease. It's the landlord's choice to accept the tenant and if he does, he assumes the leasing risk that's associated with the tenant. The broker is not a partner with the landlord in the downside risk.

Now that you understand your role, some of you still won't be able to help yourselves. You'll go out tomorrow and in desperation to "get that listing", let the landlord bully or intimidate you into accepting some ridiculous commission payout and terms. Guess what? Your being set-up not to receive your full compensation just in case the tenant stops paying the rent. Nice hedge for the landlord if you allow it. 

So the next time you're confronted with your commission being tied to the tenant's performance, ask the landlord how does he expect you to enforce it?

I never did hear back from that property owner, and I doubt that he took the time to visit this blog to read the post I referred him to. After all it wasn't what he wanted to hear.

I did take a ride by his property and saw a broker's sign on the front lawn. One of those aforementioned brokers . I could only imagine what listing terms the broker had to agree to, but hey, they "got the listing". 

Commercial Real Estate Going **BOOM BOOM**

Real Estate Babel (Part 2)

  King Nimrod

In my Post Real Estate Babel (Part 1) I put forth the theory that commercial property owners may be direct descendants of the peoples of Babylon and perhaps of King Nimrod himself.

Trying to find out what charges are in addition to the rent from most property owners that I've dealt with are, at times, excruciatingly and unnecessarily difficult. And I suspect it's this way everywhere.

It usually goes something like this:

What additional charges is my client expected to pay? 

Utilities.

That's it?

Yes.

Is the cleaning included?  

No.

OK. Is there anything else?

No.

Oh, by-the-way, what about property management?

Uh, that's extra too. Note: And this is only a partial list.

Then I'll ask for a  breakdown of the cost so my client knows exactly what his occupancy cost will be. No problem! I'll email it to you today. They rarely do. After a dozen calls and badgering I'll finally get something in writing. It still may be incomplete. Something invariably will be forgotten. I call it selective amnesia. Strickens the most lucid minds. Poor things.

I don't get it! What's the big secret? Do they think that these unmentioned expenses aren't going to come up later when the prospect gets the lease? And oh boy, the sparks really start to fly. Can't say as I blame them. Who likes surprises? Especially when you've done your planning and budgeting based upon a set of assumptions that you believe to be credible.

But in the property owner's mind the more time he can burn, the less options the prospect will have. Then he'll have em over a barrel. Or, if he tells them too much, the'll scurry away never to be seen again.

What a way to start a business relationship.

I propose that we get rid of all of this jargon and just spell it out. Think of all the extra time we'll have to focus on getting new business. But, I know the mentality. That would be too scary. Or perhaps it's that genetic connection to ancient times.

Real Estate Babel (Part 1)

You probably heard the story in the Bible about King Nimrod, who fancied himself as a real estate developer, deciding to build a tower to reach Heaven. Kind of like the mid-rise suburban office buildings that you see all over the place.

Well, it seems that God wasn’t in a humorous mood that day and sent all of the workers scattering speaking in different tongues, which is why we have communication problems to this day.

I suspect that this problem in communication has carried down through the millennia to today's commercial property owners.

Ask most Landlords (or real estate brokers for that matter) what the lease rate is, and you'll get a response that it’s “X “dollars per square foot net, modified gross, net net net, double net, or some other term that gives no information at all. 

Heck, even Tenant Electric isn't clear anymore. It used to mean lights and electrical outlets. Now, it could include heat (if electric) and air conditioning.

Between "gross" rent which includes everything with the base rent and "triple net" which includes nothing but the base rent, here are no universal terms to describe what charges are included or not included in the base rental rate.

More on this subject in my next post.

Real Estate Knuckleheads

They have to be commercial brokers.

Watch it when you have the time. Runs 7 1/2 minutes.

My First Deal

 

Do you remember your first deal as a real estate agent? I do. Still after all of these years.

I was in the business for about six months. At the company I worked, every Monday night the entire sales force filed into a stadium size conference room, where on the wall, for the world to see, hung an enormous blackboard with everyone's name and production for the week written on it. Each sales person had to stand and verbally give their production report in front of the entire group and be praised or berated accordingly by the company's president. I've also talked about these infamous sales meetings in my Post The Sales Contest.

Of course, with only six months in the biz, my stats looked pretty sad save for one pending lease deal. When it was my turn to speak, I announced my one saving grace and delivered to me from the President with a cold icy stare were the words; "You're due!" Which really translated into; You better have that deal closed by the next Monday's meeting!

All that week with, panicked single-mindedness, I pushed for the lease to be finalized and signed. The training method at this company was basically Baptism by Fire. So as far a the process was concerned, I was clueless. Just like going from one dark room into the next.

Finally, by Friday the lease was signed by the tenant and I arranged to go to their Headquarters in Manhattan that Monday to pick up the lease. (no email in those days) With any luck I thought, I'll be able to announce my first closed deal to the  group at that Monday night's sales meeting.

On Monday I headed into the City and picked up the signed lease. Then headed over to the Landlord's office in New Jersey to get this puppy wrapped up.  I'm sitting nervously in front of the Landlord watching him go through the lease page-by-page when all of a sudden he bursts out with  "I'm not signing this lease!", "They didn't affix their corporate seal!". (What the hell is a corporate seal? I'm thinking.)

In a panic, I call the guys in New York and arrange to go back into the City to get the seal affixed. I managed to get back to the Landlord's office late that afternoon and delivered the lease with the corporate seal properly affixed. He signed the lease and handed me my commission check.

I made it to the Monday night sales meeting, where I proudly announced my first closed deal. I received my applause, and no sooner than I sat down a sinking feeling came over me, and a little voice in my head said "Now what?" My triumph was already ancient history.

A footnote to this story: Yes, it was raining (pouring) that day. There's nothing more miserable than having to travel the NJ Turnpike into Manhattan in a downpour. And the total commission? $1,000.

 

 

 

Priceless

I'm Not Your Partner

 

Commentary:

Before I begin, I just want to let you know that this topic is directed towards the commercial leasing brokers. I'm giving the selling brokers with no interest in leasing a chance to click out before they go any further. However,  If you're curious about one of the many special issues leasing brokers face continue reading.   

In my post Observations I listed "Somehow the broker is magically transformed into the landlord's partner when the landlord asks what happens if the tenant stops paying the rent, as it relates to paying the broker's commission".

It amazes me how often I'm asked by the landlord; What happens if the tenant goes bad? We all have choices in life including on how we conduct business. As leasing professionals we have the choice to work with good tenants or crappy tenants.

Me, I choose to work with good tenants. I highly value my reputation and I don't want to be known in the market as the broker that only cares about "making a commission". The, I'm here to jam this tenant down your throat, now pay me mentality my sub-par competitors practice. The ones whom I affectionately refer to as "The Village Idiots".

Now on-the-other-hand, the landlord has made his choice to accept all of the problems, risks and benefits that are associated with owning income producing properties. This also includes the leasing risk. When the landlord starts suggesting that somehow my commission is tied in with the stability of the tenant, he's looking to lay some of that risk off onto me. 

This presents itself in a couple of ways. Occasionally, the landlord just blatantly says that he wants to be reimbursed for the un-amortized commission from the time the tenant defaults, but most of the time they choose to use the more subtle approach of wanting to pay my commission out over the lease term either monthly or annually, setting me up not to be paid should the tenant skip in the middle of the night.

By accepting these terms I've, in essence, become a partner in the downside with no upside benefits.

When I'm confronted by the landlord with this question, my answer is always; "I'm not your partner". And I'm blunt about it. I go on to say that you as the landlord have a choice to accept this tenant, or if you're not comfortable, don't go forward leasing them the space. No hard feelings. I understand.

But once you've accepted them as a tenant I've "provided a service" and as the owner of the property, the risk is yours. I also go on to say that I expect to be compensated in a timely manner for that service. At this point I usually hear some blah, blah, blah whining, crying and complaining about how some broker stuck him with a crappy tenant. I sit and listen patiently, but the truth is that it's not my problem. He's the one who chose to be a landlord.

If I'm not getting through I'll say something like; I'll tell you what, go to your lawyer, your architect and to your contractors and suppliers that will be involved in this transaction and constructing the space for the tenant, and get them all to agree to take their fees on a monthly basis too. Who, buy-the-way are receiving those fees directly brought about through my efforts.

The reply is usually; Uh, I can't do that. (No shit Sherlock! They'll all tell you to go F... yourself! So why then should I agree to it?).

Another response I use if things start getting testy is; Ok, but I want a percentage of the building's cash flow. A percentage of any tax deferred cash you pull out when you refinance, and a percentage of the gain should you sell the building. After all, you're inviting me to be your partner. Shouldn't I have a share of the benefits too? (with a smile) Oh, I almost forgot, I want to be a limited partner so I don't have the lay out any cash for repairs or improvements. (Hey, what's good for the goose and all of that.) Then I sit back and watch him pop his eyeballs back into their sockets and pick his jaw up off of the floor as the vein in his neck pulsates.

Believe me, if the conversation has deteriorated to this point the meeting has gone sideways anyway, and I'm just having some fun or maybe inflicting just a little sadistic torture.

I love this business.

 

 

 

 

 

Something's Better Than Nothing

I've lost count of how many times I've come across the wise guy that listens to all of the real estate market gloom and doom that the media spews out and expects to "steal" a deal.

Case-in-point; I'm speaking with a lawyer (of course) who is looking to relocate his office. In the market he's considering, space is ranging between $21-$23 per sq. ft. As we go through the candidate buildings, he, naturally, zeros in on the most expensive building in the market. He then instructs me to submit a proposal to the Landlord for $12.00 per sq. ft.

I explained to him that the offer is too low to be taken seriously and I didn't think $12.00 would even cover the landlord's mortgage payment. He snapped back saying that he didn't care and that the "Landlord should go to his lender and renegotiate his loan". "The market's in the tank". "Something's better than nothing".

Yeah right! Go through all of that brain damage just for the honor of having this wise-ass as a tenant. Or run the building at a loss just to accommodate (subsidize) his business.

If a rational person thought it through, a landlord willing to take a steeply discounted deal would, in my mind at least, be suspicious. I'd wonder if he was already planning to let the building go into default and pocket the rent money for as long as he can.

What's it mean for the tenant? Services to the building get cut.

• Landscaping goes to pot.
• The building starts to look tired.
• Cut back on cleaning service.
• The parking lot isn't maintained.

• Heat and air conditioning doesn't function properly, and on-and-on it goes.

But, the tenant got what he wished for: Cheap space in what used to be a class building.

I think on the flip side of this is when you meet a property owner who says that he's interested in selling his building, and when you ask him what price he has in mind, he says "bring me an offer".