Actual Case Studies.
I. Asset Prepositioning:
Quandary: A building located in a fairly affluent area could not be sold or leased. It had sat on the market for over 1 year. No offers.
Background: Price was not an issue. The building had been remodeled. It was one of the nicest and largest buildings in the area. It had been divided into many separate offices and boasted two kitchens, one on each floor.
Research: The area although affluent and had a business district was not an area that housed corporate headquarters, which this one building had; it was more of an artsy community with a lack of cohesiveness and business vibe. In the past this building had also housed an insurance company and a dental office. Such industries had little presence in the immediate area. Other commercial properties in the immediate area were restaurants, banks and churches. Most leased spaces in the immediate area other than the mentioned latter were smaller. Additionally real estate professionals representing the building had mostly gotten calls for small office space needs (400-1000 sq ft).
Recommendation: After many conversations and research it seemed that the best approach was to reposition the asset to become a “business suite” where many different businesses could rent office space according to their specific needs and each shared bathrooms and a kitchen on each floor
II. Tenant Studies:
Quandary: A building in decent condition in a high density neighborhood has above average tenant turnover and greater vacancies than similar buildings in the same immediate neighborhood.
Background: The lease rates were in the lower range of those in the area; the building had been slowly updated as the tenants moved out.
Research: The area is a business district. The property sits in the midst of properties all built within 20 years of each other. This particular property has not been completely updated since built. The common areas have had some facelifts but the majority of suits have not. Many of the remaining tenants have been there for over 15 years. Their leases all show very favorable lease and option terms. The building has no onsite representation and management, it is done in house. The move-in incentives are poor when compared to the neighboring properties.
Recommendation: Relocate the property management to a professional company. Review the lease process and forms and make certain that all aspects of the lease process are up to date. Review the condition of the premises and opt to update not only the vacant units but the occupied ones as well. Regarding the occupied units the recommendation is to approach the tenant and discuss tenant improvements that would benefit the tenant but also serve to lengthen the term of the lease and create more stability for the landlord. Review the lease process and make sure that it is able to capture the desired tenant. Study the desired tenant and recommend alternative methods to capture such tenant.
III. Lease Reviews:
Quandary and Background: Client based out of California with multiple regional offices, purchases a building in another state. The building is partially occupied by several tenants that have been there for a while. Most leases are set to expire at the end of 2014. The goal of the purchase is for the client to occupy the larger portion of the building, offset a large fraction of the mortgage with the collected rents and have the flexibility to grow into additional space in the future. The client has no on-site management company.
The client’s regional office moves into a portion of the building and California Corporate begins to collect rents. The operations department in California is in charge of monitoring the leases. After a few months they discover that what they thought was a NNN lease is in fact a mix of modified gross and full service gross leases. The building only had one meter. The elevator broke down and there were no reserves in place for the repair. The original goal of offsetting a large portion of the overhead with the rents no longer seems as attractive as originally perceived. Additionally, the largest tenant left 9 months before the end of the lease term and although still honoring its lease obligation, is no longer paying for its utilities. It was the only tenant that was. All leases need to be reviewed and a consistent approach to the tenancies needs to be set.
Research: Each lease was reviewed, including the client’s with its regional offices. All building expenses for past 9 months (since purchase) were analyzed and grouped in categories. Each unit was re-measured and it was determined that the square footage on the leases did not match the actual square footage occupied by the tenant in all circumstances. Research was done on comparable rents in similar neighboring buildings. The building was re-inspected to determine the life-span of the mechanical systems, plumbing and so forth.
Recommendation: Sit down with the client to determine long term property goals. As tenants turnover, upgrade the units and increase the rent to market rents. Establish procedures for tenant improvement allocations. Restructure all leases as NNN leases. Establish accurate allocations for all building expenses. Set up a system to monitor these expenses and their proper allocations. Establish a priority list for capital repairs and a process by which client can accumulate reserves to offset future capital repairs. Determine least expensive method for client to pay for immediate repairs. Recommend yearly audits.
IV. Feasibility Studies:
Quandary: Client is a school looking to expand into a larger facility. They are bursting at the seams and are over capacity. After working with an agent for several months, they determined that there were no suitable properties on the market. Our team was called in help address the situation. The client explained the kind of property they were looking for as well as the demographics they were seeking.
Research: Our process was as follows:
- Do a property by property search in a specific geographic area and pick out properties that could potentially work for the client; zoning, square footage, neighboring properties, type of construction etc… all had to be taken into account.
- Select those properties that seemed to fit the bill.
- Contact the appropriate government agencies to make sure that zoning and occupancy would work.
- Go to the selected properties and take pictures
- Perform estimation of property value.
- Find the legal owner’s name and contact information.
- Prepare a document for the client
Recommendation: We reviewed our research and findings with the client and recommended a handful of properties we felt were the ones that best fit the client’s needs.
