If you are considering commercial real estate as career, or find yourself within the industry looking for ways to accelerate your growth, the one piece of advice I will offer is to align yourself with the right mentor.
Your talents and energy are needed more than ever in an industry that is late to adapt to new technologies, innovations and creativity. The commercial real estate industry is in constant fluctuation and is going through a rapid transformation as the industry tries to meet the needs of the next generation.
The Challenge Facing Commercial Real Estate
In my opinion one of the most critical challenges facing the commercial real estate brokerage industry is a major talent shortage. Senior executives are getting older, working later in life and there is a wide age divide between the deal makers (that account for roughly 80% of all real estate transactions) and the younger talent that is still building their track record after surviving the great recession. This talent disparity began as a result of the first dot com bubble in the late 90s when most of the entrepreneurial-minded graduates opted to jump into the new and exciting world of technology, which was fueled by stock market investors seeking to capitalize on the potential of newly created tech companies. This bubble burst in early 2000s, but the trend initiated a shift from traditional financial services companies like commercial real estate toward the creation of Silicon Valley and other international tech sectors that are still growing today.
As a person embarking on a new career in commercial real estate, today’s industry presents a huge amount of opportunity in a wide open field that seeks new energy, innovation, and creativity more so than at any time in history. New demands from millennial consumers are pivoting the entire way that users look at commercial real estate space and transforming investment real estate decisions. At the same time, most major firms have strategically decided to stop costly training programs for young professionals, deciding instead to use those resources toward the (somewhat less risky) practice of poaching existing talent from competitors.
The reality is that most new people coming in to the industry must quickly find their path to success or they will be part of the 90% of new commercial real estate brokers that do not make it past their fifth year in the business. One common denominator that successful people in our industry have is that they attribute part of their success to aligning themselves with the right mentor.
How To Find a Right-Fit Mentor
While exploring career options within commercial real estate, most graduates look for the well-known companies, the right discipline (leasing v. sales), and the desired segment (office, industrial, or retail, etc.) However, to really increase your odds of a successful real estate career nothing compares to finding the right mentor. Whatever field and discipline you decide to follow, make sure you are aligned with the right mentor, and the right mentor can be different for everyone. Mentors are sometimes called “senior agents” or “senior partners.” These are the people who you will learn from and, in exchange, you will alleviate much of their workload. This is why I refer to the individual in this role as the “right-fit” mentor.
Here are two questions you should ask yourself to make sure you are aligning yourself with the right person:
What is your value proposition to your mentor?
Even though your knowledge of real estate may be limited, you should by now understand what unique qualities about you make you different. If you do not know or need clarity, consider asking your parents, teachers, or co-workers. Do not ask your close friends because they may have many similarities to you and may not be able to identify what makes you different.
You should be able to recognize if you are the one that is going to look at spreadsheets and loves to analyze, or if you are you the social one that loves to meet people and talk to everyone. A few questions to ask are:
- Are you the planner who loves to think big picture or are you a task master who thrives on crossing out your daily to-do list?
- Are you the life of the party or are you the one who makes sure no one gets hurt at the party?
There are no wrong answers and everyone brings value to the table – your ability to accurately identify yours will allow you to thrive.
Do I Complement My Mentor?
Once you identify your value proposition, you want to complement your mentor’s talents rather than duplicate them. In other words, if your mentor is a strong business generator then you want to be the one that can help them transact that business. If you are If you’re the analyst you want to find a mentor that loves to meet and talk to people.
I have a colleague who early on aligned herself with a senior agent that refused to respond to marketing inquiries. The Senior excelled at earning business and would get some wonderful assignments. He was horrible at following up with marketing inquiries and opted to “sell” his deals to people he already knew or was seeking business from. Being new in the industry, my colleague took on the task of following up with every marketing inquiry and was able to grow their clientele and create new opportunities from each marketing campaign. Being task oriented and following up on details was her strength and balanced out her Senior who was naturally more reactive to opportunities and had a terrible time sticking to a schedule. She found a way to create value to his business, and years later he is now retired and she has a very successful brokerage business.
There is a lot of good advice out there on how to succeed in our industry and what I offer is simply one very important component to your development: find your value and use it to complement a senior agent/mentor.
Patrick Toomey and Tom Lagos have joined forces at JLL. While running competing teams in the industry, they found that they shared a deep conviction in a client-first approach to the business. Tom and Patrick also realized that they would have the proper balance of business development and execution to have a high-quality and high-volume team.
With Patrick’s institutional principal-side background, he is able to provide a perspective and level of service to clients that is unequaled in the industry. Tom has a dynamic business development strength and deep client relationships with an outstanding track record that, when combined with the execution side that Patrick provides, will bring outstanding brokerage experience to their clients. Together they have transacted more than 500 individual commercial retail real estate deals valued at more than $4 billion, which provides a depth and experience that is unparalleled in their peer group. Their focus will be on multi-tenant retail center disposition assignments. The JLL platform is an excellent place to bring these skills and experiences together.
Joining Patrick and Tom is Jordan Uttal, who will be spearheading the team’s net lease practice. Jordan has years of experience in this space, as well as a unique background in marketing having been one of the founding members of a Silicon Valley startup specializing in interactive online marketing, which is now publicly traded and valued in the billions. Jordan has brought this background to the commercial real estate industry and has developed numerous innovations for marketing commercial properties. His depth of knowledge and insight on net lease investments will be a tremendous asset to the team and its clients alike.
Heather Boren joins the team from Colliers where she led the Shopping Center Advisers team as the lead analyst and underwriter. Heather has valued and marketed hundreds of properties and her depth of knowledge and experience go well beyond that of underwriting. Heather teaches ARGUS (the industry standard underwriting program for commercial real estate) at Pepperdine University and UCLA, and is a professor of real estate at Pepperdine University. She teaches graduate-level ARGUS and leasing strategies.
Maadhevi Comar also has come from the Shopping Center Advisers team to lead the marketing effort of the group. With a broad experience in positioning commercial properties for sale, plus an advanced degree from University of California Berkeley, Maadhevi produces quality work on the team’s best-in-class marketing products. Maadhevi leads not only property marketing but also all of the team’s outbound marketing materials.
Finally, Alex Salvatierra leads the team’s graphic production effort. With years of experience in graphical production in the commercial real estate field, Alex’s work is known to be the highest quality. He produces all of the team’s visual content. Alex is not only known for his industry-leading work, but also for training top level professionals at Colliers International and Matthews Retail Group – individuals who still benefit from his insights and lessons today.
Together we are excited and honored to be part of the JLL team, and look forward to providing the highest level of execution for our clients!
Every week the newspapers paint a dire picture of the retail industry – one where the retail industry is driving off a cliff, much like the iconic scene in Thelma and Louise. There are countless articles about thousands of store closings, the number of brand name retailers calling it quits, no new shopping centers being developed, and NACREIF advising institutional investors to bet on boring industrial real estate instead of shopping centers. I find myself wondering aloud “what, should I sell warehouses instead of neighborhood centers?” And, what will happen to all the people that I have met during the past 23 years of transacting shopping centers? What will they do for a living? Then, I am awakened from my mid-day dream. I answer my doorbell to find a delivery guy dropping off a package of print cartridges my wife ordered a few hours ago on a Sunday afternoon.
Outlook Not so Bleak?
It is so easy to believe that the convenience of ordering online and having items delivered within days, and sometimes hours, is quickly killing the retail industry. It is easy to believe that online retailers are killing traditional department store retailers such as Sears, K-Mart, JC Penney, and other well-known retailers like Toy’s R Us (a childhood favorite) who recently announced bankruptcy.
However, what if I told you that in 2017, retailers will open 4,000 more stores than it closes, what if I told you that retail sales have increased over $100 Billion over same period the year before, what if I told you that shopping center operators are reporting some of the most historic performances from their tenants? These are all true statements that paint a rosier picture of the retail industry but this reality does not sell newspapers or inspire debate and dialogue. Join us as our team discusses three common and widely publicized misconceptions of today’s retail environment:
1. The Numbers Don’t Lie
There exists a perceived bias that online retailers are causing the downfall of brick-and-mortar stores. However, by taking a closer look at the numbers, the reality becomes more nuanced. Online sales only represent about 8.5% of total retail sales, as an example, only accounts for less than 5% of total U.S. market share. Therefore, there is still a lot of money left on the table.
One of the best examples comes from electronic goods. Once thought to be an example of the end to brick-and-mortar, Best Buy has dug itself out of the trenches and seen an increase in ROA reaching 9% in 2017, which is close to its higher ranges of 9.36-12.64% from 1998-2001.
These shifts in ROA are an indicator that for Best Buy, they were efficient in increasing earnings. Other companies, such as Sears, were unfortunately in the business of a consumer good that had declining sales before the influence of online competition.
2. It’s Customer Service, Not the Internet
With technology constantly arising and evolving, it is easy to blame the internet for the demise of retail. Despite what the media would have you believe, the neglect of the customer service aspect is really what is causing so many retail companies to close up shop. Instead of believing the myth that physical stores are becoming obsolete, brick-and-mortar stores can focus and shift strategies toward tangible realities that can bring more consumers through the door. In order to get customers off of their screens and into a store, that particular store is going to have to offer them something they can not receive online.
Certain types of tenants are surviving by making their expertise, guidance, and assistance indispensable. They cultivate a need to go physically into the store and perhaps even make shopping a desired experience. Keeping with a prior example, Best Buy has successfully executed this notion. Research shows that, despite a steady economic incline, less and less people are buying big ticket items. Instead of caving into defeat, these tenants have restructured their approach. The employees can be seen more as educators rather than salespeople. Executives take the time and money to train employees to better answer and support consumers’ inquiries. Technology can be confusing and expensive for a lot of users. Consumers want to compare and speak with staff who are knowledgeable about what exactly can satisfy their needs. Getting hands on experience and talking to someone who can thoroughly explain a product makes a huge difference in consumers’ eyes as this is something you simply cannot get online. And now, with majority of retailers matching online prices, the instant gratification of having a product becomes an even bigger appeal. This service coupled with the ability to physically try various products at once with no shipping wait or fees, make a very compelling argument as to why shoppers should still purchase in-store.
3. The Psychology of Spending More
The argument for online shopping vs. brick-and-mortar shopping comes down to one factor – convenience. Online shopping is most attractive to those who need something in a hurry or would rather not leave the comfort of home. However, the average buyer doesn’t usually just stick to one or the other. It’s a mix of both online and in-person shopping, and the need for an in-person shopping experience will never go away for two main reasons.
First, social media has practically taken over our society. Instagram, Snapchat, Facebook, and Twitter have all infiltrated everyday life. With the creation of shopping centers that feel more like you’re at a resort or on vacation, people are more inclined to spend more time and therefore more money. The buyer is then encouraged to post pictures on social media as part of the user-experience. One great example is The Village in the San Fernando Valley, where Westfield has strategically placed artwork with captions throughout the center to encourage social media interaction. Second, niche markets and stores are all the rage in today’s shopping world. When going to a shopping center, today’s buyer wants a mix of both large chain stores and smaller, mom-and-pop stores that may satisfy a niche interest. Buying your favorite type of matcha or that one vinyl that you’ve been looking for isn’t as fun online as it is in a small store where you are made to feel like a VIP. To read more about how the trends of today’s dominant group of buyers, click here.
A resort-type shopping experience in today’s world will never be hindered by online shopping. Want a quick getaway? Just hop in your car and indulge in a relaxing and stress-relieving trip to your nearest shopping center.
These are the facts. It is not to say that online retailers aren’t considered a competitor, just that there is so much fight left in the business of retail. As we round out the 3rd and 4th quarter of 2017 and prepare for the ICSC Western Conference and the Fall ULI meetings in Downtown Los Angeles, let’s keep in mind these realities. It is up to us to change the message and deliver the truth.
Contrary to popular belief, internet retailers are not the sole drivers behind the closures of some of the most iconic retail brands of the last 50 years. Brand names such as Sears, K-Mart, JCPenney, Macy’s and Sport Chalet are shuttering their doors because they are struggling to transition from how the Baby Boomers shopped to how the Millennials seek to experience shopping.
Plain and simple – I’m tired of hearing how this is the end of retail. I don’t believe that power centers will become distribution hubs and that “bricks and mortar” retail will continue to die a slow death. Instead, what I see is a paradigm shift from the way we looked at the lost art of retail to how the next generation is transforming the way we experience shopping altogether. In order to understand how shopping centers are retailing we should look at how the Baby Boomer generation once influenced retail and how the Millennials will now transform the retail industry.
8,000 new shopping centers were built throughout the 1960’s and 1970’s in response to the tremendous demand from the Baby Boomer generation (born in between 1946 to 1964). It is no coincidence that K-mart, Walmart, Kohl’s, Rite-Aid and Target were all born in 1962, followed closely by Best Buy, Crate & Barrel, Gap, Petco and Pier 1 Imports. The Baby Boomer consumers were largely white, middle class children from a two-parent single income home and, broadly speaking, liked the same stuff. This made it extremely easy for retailers to cater, predict and deliver on consumer demands.
In fact, the demand was so great that creativity gave way to production to satisfy the consumer and nobody complained. As the Boomer joined the workforce and started to have families in the suburbs, developers and retailers responded by building large format or “power center” shopping centers. These power centers attracted “Category Killer” tenants such as Walmart, and Home Depot, that could deliver products cheaper and at a massive scale. This tremendously affected the traditional mom & pop retailer that could no longer compete with prices. In Doug Stephens’, book The Retail Revival; he calls this period the Industrial Devolution; a period where retailing ceased to be a craft and became an occupation. The new era would bear witness to the displacement of personal service, unique products and artful merchandise by stack-outs, blowouts and rollbacks. Quality would take a back seat to availability, and abundance would triumph over substance.”
Between the years of 1980 to 2005, when the Baby Boomers were at their earning prime, the US economy grew 100%. This growth concluded with the great recession of 2008.
Now, almost 10 years after the great recession and 55 years after the last Boomers were born, most Baby Boomers are past their earning primes but are still holding on to executive level positions while shifting their disposable income from retail consumption to travel and health care. Retailers are still slowly recovering from the recession but must now adapt to new consumer demands generated from the largest generation since the Baby Boomer: the complex and diverse Millennials (born between 1981-1997).
Millennial consumer demands are a 180-degree turn from the Baby Boomers. Unlike the vanilla Boomer, Millennials come from various cultures, ethnicities, educations and socio-economic status. This dramatic shift in consumer tastes is proving problematic to the various retailers that have not adapted to the new wave of demand led by the Millennial consumer.
Why should every person involved in the shopping industry care about Millennials?
Because they are the largest generation in U.S. History and have a higher net worth than any previous generation according to a Forbes Magazine article written by the CEO of ICSC (International Shopping Center Council), Tom McGee. Forbes Magazine states that 14% of them already have a net worth above $2,000,000 and they have not yet reached their prime working and spending years. They are spending more money on entertainment and dining than any other generation. And as a whole will allocate a lot more of their disposable income towards “experiences.”
“It’s not that we are lazy,” states Marisa, our 22-year-old marketing intern, “we just take pride in figuring out how to make things work for us quickly. It’s called “Life-Hacking”. Marisa is the ideal millennial to provide me with insights into their purchasing rituals. She just completed all the courses for her bachelor’s degree at the University of Southern California but instead of heading into the workforce, she is opting to stay an extra year at USC to complete her Master’s Degree.
Most of her time is spent online and it bleeds into her shopping habits because she follows bloggers who demonstrate or try-on purchases in picture or video format. If she decides it looks good on them and she wants to try it on, she buys it. The bloggers will link where to buy the product, making it convenient for her to click on the link and make the purchase.
For a long time the biggest fad was trying to discover the next fad; however, she has recently noticed a decline in materialism and a large emphasis on ethical buying. Her peers are more engaged in politics and cultural issues, which means that they are less likely to buy something from stores whose values are not aligned with theirs.
With limited disposable income, she will choose to spend $20 towards trying a new restaurant over buying a new top. She will pick the restaurant for the following reasons: a) she can post about it on social media, b) she can discuss her experience with her friends and c) it allows her to have social interaction. Since she spends most of her time on online, she cherishes the opportunity to spend time socially with friends. She will admit that the majority of her disposable income is spent on eating, drinking, Ubers and gasoline.
When it comes to actually going shopping, she only goes if they accept credit cards over cash- since it is very rare she has cash. She will rarely visit a shopping center but when she goes, it is because of one of three things; a) it is for a very specific item, b) there is a coupon involved or c) the EXPERIENCE. She enjoys going to Target because it is therapeutic. She will venture into stores to try clothes or make-up if time allows for it but will rarely purchase an item.
The difference in retail habits between Baby Boomers and Millennials provides a perfect case study for the premise that retailing is not dying a slow death, it is simply evolving to meet the needs of the new generation. Those retailers that understand and capture this new customer will thrive.
The Baby Boomers led the way in consumerism and retailers responded with big boxes, mass quantities and “low” prices. Millennials are bringing back the lost art of retail, by demanding an experience, convenience, quality and purpose. We will see over the next few years which retailers will meet these demands and which ones will fail to catch up with today’s main consumer.
As a commercial real estate broker specializing in the sale of shopping centers, I value the relationships that I have built with retail leasing agents over the years. In fact, my early mentors were mostly leasing agents and I have shaped much of the style I use in selling shopping centers with what I have learned from retail leasing professionals. This is why it bothers me when I witness missed opportunities, such as when a property owner decides to sell a shopping center and the leasing agent does not get included in the sales process.
Leasing Professionals; The Unsung Hero
Leasing professionals are at forefront of value creation, from assembling the right mix of major tenants for the shopping center to persistently finding the right tenant for that last, hard to lease, space. The leasing agent is the unsung hero that grinds out the lease negotiations to stabilize the property’s income stream however, when the landlord decides to sell the Property the unsung hero often gets overlooked from participating in the sale. This prohibits leasing professionals from earning a well-deserved fee from the sales commissions.
In most instances, property owners value the leasing professional for a reason, and it is tough to be an effective leasing person and handle sales transactions. This is where collaboration with Investment Professionals, like myself, will yield leasing agents well-deserved dividends from their labor. If this sounds self-serving, it is! I want to team up with leasing agents to help them earn a commission from the projects they leased. I am an investment sale professional with a 23-year record of selling shopping centers. That is all I do! I have an experienced team and collectively we underwrite position, distribute and effectively negotiate a shopping center sale, but I always need the local trade area knowledge and first-hand experience with the subject shopping center and its leases. This is where teaming up to drive value to the overall transaction will be the most effective.
Partnering on RFPs
In one of my most successful partnering scenarios, I collaborated with a leasing professional from another large brokerage company. They wanted to collaborate on a response to a request for a proposal to sell two shopping centers across from one another. The ownership was a New York-based institutional fund adviser whose clients had owned the property for close to 20 years. My partner, on the transaction, had been leasing the property for close to 10 years. He chose to reach out to me because he did not have anyone at his company with the proper experience to sell a shopping center. Even though it is unconventional to collaborate with different companies in the sale of a project, there was a compelling reason why it made sense for us to team up for this assignment.
Our team had recently completed the sale of similar projects and the leasing agent had a long history of leasing the property with a strong familiarity in the trade area. He had already completed leasing the remaining available spaces to stabilize the income stream, and felt that there was still more value when some of the short-term leases expired and the spaces were either r-leased or renewed. This presented a valuable story to potential investors in order to maximize value for the property.
Our team collaborated on the proposal presentation and beat out two other sales teams for the business, the combined team of leasing and investment experts was the difference maker.
During the marketing process our collective team was able to handle several objections from investors who questioned our leasing assumptions. We were able to demonstrate intimate familiarity with the trade area and highlight appropriate comparable lease transactions. We also proved strong tenant demand by producing LOI’s from perspective tenants.
We ended up completing two transactions, one tailored for a strategic ownership of the remaining shop spaces to the main grocer tenant that already owned their parcel and the second to a value seeking syndicator who had investors in an exchange. If the leasing agent who had worked for almost 10 years to add value to the property would not have reached out to our team they would have missed the opportunity for a sale and the ownership would not have yielded such positive results.
Opportunities to form partnerships between investment and leasing agents come in many shapes and forms. They may not always be appropriate but if you are an investment agent and the project requires the hands-on knowledge of the leasing agent or if you are a leasing agent and the project requires the technical experience of an investment agent, the combination of experiences will produce outstanding results.
If you’d like to learn how we can help you, contact us here:
Growing your commercial real estate business can seem overwhelming within the dynamic and entrepreneurial environment. Many young brokers come into the business with the dream of making their dent, often never realizing that the cornerstone to progress is surrounding yourself with the proper support and team.
I learned that in order to multiply my results as an individual broker, I had to team up with people that complemented my skill set. I researched various resources and found the most success with the Strategic Coaching program, Kolbe Index, and Market Force.
This trifecta not only exposed my strengths, but also my weaknesses. It showed me where I needed the most help and helped me find people that would be able to fill those weaknesses with their individual strengths.
In this article, I will walk you through how I surround myself with complementary team members and the results of a strength-focused team. I will expand on how the aforementioned trifecta helped me identify potential team members, how I help my team, and how working with a team is the only way to truly progress in commercial brokerage.
To access this article, please fill out the form below.
Caveat emptor (let the buyer beware) is the contract law principle that controls the sale of shopping centers. Buyers must conduct their own due diligence, and in many times these investigations lead to the discovery of discrepancies from what they thought they were buying. When this happens, the buyer will come back to the seller and seek a “re-trade” which is slang for a price or term adjustment to the contracted price to make up for the discovered discrepancies.
In 22 years of transacting shopping centers, I deal with re-trades almost on a daily basis, some are justified, but many are not, and others are un-avoidable. However, the majority should have been prevented altogether.
Much like watching a crash between two vehicles on a highway, I often find myself being witness to an avoidable collision course between a buyer and seller that ends up in a dead deal. Shopping center owners can be attentive operators of their property but can be careless sellers.
#1 Order your third party reports now.
Buyers, during their diligence period, order and pay for third party reports that include, but may not be limited to, environmental reports, physical inspection reports, roof reports, and ALTA Surveys. These reports never come back clean and it sets the basis for a classic re-trade. Let’s face it, the roof and HVAC systems only have a certain life, the property condition is never without capital improvements, and if your shopping center has been around a while, there probably was a dry cleaner tenant that contaminated the ground. Experienced operators of shopping centers are well aware of these potential issues, but more often than not, they choose to blindly enter into a transaction without investigating these matters. I always recommend that seller’s get a jump-start and order all of the pertinent third party reports from reputable companies so that they can deal with any potential issues ahead of time.
A few years ago, I was hired by a pension fund adviser to sell a two 1970’s built shopping centers that were relatively close to one another. This particular fund adviser inherited the property from a re-assigned portfolio from another adviser. While we were putting together our marketing materials, the Disposition Officer decided that it was better to forego ordering the Phase I environmental report. The seller felt that a buyer and their lender would want to hire their own environmental company and didn’t want to duplicate efforts. As I listened to the conclusion, I could hear the tires screeching and I knew what was coming. I could not convince them otherwise. 75 days later we had a buyer and they began their due diligence of the property.
Within a few weeks the buyer’s Phase I environmental report revealed potential ground contamination from a site where there was once a dry cleaner. The report called for ground samples to be tested, also known as a Phase II report. This took several weeks to complete which meant that the Seller had to extend the buyer’s due diligence time. When the report came back, it revealed deep levels of contamination with a cost to remediate that could range from $500,000 to $2,000,000. Right out of the usual “re-trade” script, the buyer came back and asked for a $2,000,000 price reduction, which set off fireworks with the seller and a collision course of mistrust and bad-will ensued between the two parties. The deal died soon after.
If the Seller had conducted this investigation in the first place and disclosed the findings (with the potential costs) to the bidders while they were still competing for the deal, the impact of the environmental issue would have had a financial impact closer to the low end of the potential costs along with a much smoother transaction. The successful conclusion was that after another three months of negotiations, further tests and engaging high-price environmental attorneys, buyer and seller settled on a $1,000,000 re-trade amount and the transaction closed.
#2 Order and review a preliminary title report.
Do you remember those tenant improvements that one tenant conducted for their restaurant build-out? That is, unfortunately, the same tenant that never paid rent and you had to evict. Turns out, they did not pay their contractors either and they filed a lien against your property. This is just a small example of why you need to review your Preliminary Title Report.
On a much larger and dramatic scale, I recently closed a transaction where we discovered that the parcel map did not match the property description and buyer and seller were engaged in a lengthy, 9- month process) to correct and re-record the legal description. Thankfully, the buyer stayed with the transaction despite and overall market correction that decreased the value of the property during the escrow period. Otherwise, this misstep could have cost the sellers about $3,000,000- which is about 10% of the purchase price.
#3 Review and abstract all of your leases.
In most cases, a property owner has not dusted off old leases since they purchased the property. However, when it comes time for the due diligence period, sellers literally dust the lease and hand it to the buyer without the awareness that they are setting themselves up for a potential re-trade.
One of the first things my team does after we get an assignment is abstract the leases and look for missing pages. More times than not we always discover a discrepancy between the lease document and the previous abstract and or rent roll.
Recently, we were marketing a property where we reviewed the leases and discovered that the major tenant had one more five-year option than what the seller was representing on their initial rent roll. This discovery proved to be material to the value of the property since this particular tenant is paying about 25% of market rent and the initial value predicated bringing the tenant to market rent sooner than later.
In this instance, if we had discovered this during buyers’ due diligence we would have been re-traded about four million dollars. Instead, we were able to adjust the seller’s expectations ahead of time and avoid any an unnecessary re-trade over not knowing what the leases contain.
#4 Interview your tenants and control your surprises.
In the long history of buyers interviewing tenants during due diligence there has never been a tenant that has proclaimed to be doing so well that they could not wait to pay more rent.
I do not have a clear way to support this statement but after many years of being a concerned on-looker for these interviews, I know to expect the complete opposite from tenant interviews.
It is always a great idea to check in with your tenants prior to a sale to see how their business is doing and to harness whatever challenges they may be having. It is not necessary to advise the tenants that you are thinking of selling the property, but it will go a long way to sit with them and listen to their overall frustrations. This will provide you a glimpse of the overall health of their business and gives you an opportunity to address some of their logical needs immediately. This exercise will also give you an opportunity to disclose to your bidders any material findings that you discover, allowing for a smoother transaction.
The last thing you want is for the tenant to vent all of their frustrations during the buyer interview. Yet that is exactly what happens as most often this is where the tenant feels heard. I have witnessed tenants take advantage of the buyer interview to exaggerate their frustrations and to make their case for; a rent reduction, capital improvements, signage and better maintenance, etc.
In the meantime, the buyer is intently listening, making a much longer list of capital expenditures, and increasing their tenancy risk to make a case for a re-trade. By the way, never let the buyer interview the tenants without seller representation present during the interview.
#5 Make sure you understand your Buyer.
The most important way to avoid a re-trade is to make sure you have a genuine Buyer- it sounds so simple yet it is very simple to miss since the number one reason for re-trading a property’s price is because the buyer never intended on paying that amount in the first place. In a competitive situation where you have several buyers pursuing your property it may feel like a season of The Bachelor ( the ABC television series where several suitors pursue the opportunity to exclusively date one Bachelor /Bachelorette) where your suitor will tell you just about anything in order to get awarded the opportunity to exclusively date you. Therefore, before deciding to go “exclusive” and engage in a binding contract with a buyer make sure that you completely understand them. It is not enough just to interview the Buyer, but you must completely understand the reasons they are buying. You must understand their underwriting principals and their potential challenges while they investigate your property. Make sure you call their references and do research to find out whom else they have worked with and contact them to understand how they behaved during the transaction. Asking the right questions and diving deep into each answer may seem tough at first but will save a lot of time, which ultimately preserves the value of your property.