rules of thumb – real estate from Susan Halas

books & business • Finally we come to the junction between the book business and commercial real estate in which the typical scenario is the evil landlord is raising the rent and or evicting the virtuous hard working book emporium tenant and a great hardship is involved in finding other “affordable” space. After a lifetime in the book biz and 7 years as a licensed, mostly commercial, I have many reactions to this script. It amazes me that people who will hunt down every last point on a dust jacket or number line or variant edition, who will know and follow the most esoteric arguments for and against different bookselling bases and technologies, those very same people will take and occupy space on which their entire income depends without signing a lease. OR, if they sign a lease, it is rare that they have actually read, or understood it. Then when they have a parting of the ways with their landlord they will do everything in their power to aggravate the situation to almost guarantee that not only will they not get a new favorable lease but it will be even more difficult to find suitable space anywhere. Folks, the book business is a long and honorable trade, but please notice, it has two parts: Part I – books, Part II – business.

Herewith a few comments on commercial leases and dealing with landlords:

I should preface the remarks with a small bit of self promotion. Here on Maui, in an area known for a high rate of business failure and greedy landlords, not one single enterprise where I have been involved in the lease transaction (either representing the land lord or the tenant) has had problems. All are still in business, still happy with their lease and still going strong. This is an accomplishment. The main reason why is that a good fair lease was in place and both sides READ AND UNDERSTOOD AGREED ON the terms BEFORE signing.

What does the landlord want? • Commercial land lords more and more want to treat their property as an equity — that means they want to know the yield up front — they want a guaranteed rate of return on their investment, and most are aiming for 6% or higher. The landlord also wants to pass through ALL, repeat ALL, costs of operation to the tenant, so most leases being written today are what’s called TRIPLE NET. That means the tenant pays a base rent of so much per square foot + a Common Area Maintenance (CAM) of so much per square foot prorated for every actual cost associated with the running of the building including property taxes, security, upkeep, repairs, taxes, advertising, management fees and the list goes on and on + the applicable state/municipal excise tax. Those three numbers get added together and are paid monthly. The base rent is a fixed number. The CAM floats, it always floats higher, many landlords cheat on the CAM. The tax also floats, it always floats higher. In addition the tenant is usually expected to pay own insurance (naming the landlord as co insured), utilities, garbage, and make (with the landlords approval) all tenant improvements that are INSIDE the subject space. If those improvements are physically attached to the building and the tenant later moves, the improvments belong to the landlord.

learn your lease • Every single lease I have ever read is written to heavily favor the landlord. This is America, this is the way it works. That’s the basic idea. The trick is to find the space that works for you with the numbers that also work for you. The second basic idea is that in a commercial lease EVERYTHING IS NEGOTIABLE, it doesn’t matter what it says on the paper — you — or your representative can ask to strike it, change it, or make additions to suit you situation. The tenant does have leverage, but ONLY BEFORE the agreement is signed. Most common mistake made bycommercial tenants is taking too short a lease and/or not giving enough thought to an exit strategy. Three years in a business scenario is a heart beat, even five years is a short period of time. The longer the lease and the longer you can fix your overhead, the better it is for the tenant. The second most common mistake tenants make is asking for options to extend the terms of the lease and not understanding what the term “at market rate” means. At market means that no matter what you were paying before, when the next installment of the lease comes up (after the first 3 or 5 or 7 years is over) the landlord can set the new rent based on the PREVAILING rates for this area, and in some cases that could be double or triple what you were paying before. Also most commercial leases are written so that no matter what market conditions are, the rent never goes down or lower than the base stipulated in the first segment.

get help • Does that sound complicated? Well trust me, it is. That’s the reason why you don’t want to do it yourself. Just like you shop for a doctor or a lawyer or an accountant, you shop for a commercial realtor to represent the tenant’s interest. In 90 percent of the scenarios the LANDLORD PAYS THE COMMISSION. In most cases the landlord is also represented by someone who is looking out for his end of the deal, and if you are not represented you are very much at a disadvantage. The main ingredient in tenant representation is time and patience and being able to wade through all the lingo. The shortest commercial lease I’ve ever seen was two pages, but most were well over 50 pages and some in shopping centers and other commercial complexes the lease ran well over 100 pages. So get an agent and get one you like. Google commercial real estate for your area and make an appointment to talk to several agents who do this kind of thing. Do that before you go shopping, before you renew, before you negotiate, before you say anything to your landlord or his/her representative. Do yourself a favor, have somebody who actually understands how the deal works and whose job it is to REPRESENT YOU. When you find the right person develop a long term relationship with them because you are going to be in business a long time and the the leasing or purchasing of commercial property and how the terms are structured is every bit as important to your financial success as your inventory or your customers or your book expertise.

I notice this is getting long, if you have specific commercial lease situations or questions feel free to email me off list. Remember I’m only licensed in Hawaii, but the drill is pretty much the same everywhere in the US.

buy your space • Just one parting shot: The federal government, every state and many municipalities have small business development programs to help business owners BUY commercial space that they will own and occupy themselves. These programs are usually in the form of lowered down payment requirements and loan guarantees. Even though these programs take a long time and involve a tremendous amount of PAPERWORK they are well worth it because when you DO THE MATH you will often find it is just about the same cost to BUY your space as to rent it, especially if you can compute the numbers over 20 years. Think it over. Are you are still going to be in business 20 years from now? Would you prefer to end up with equity and have a hard asset like a piece of real property? (instead of say 20 years worth of rent receipts?) Then look into those programs, talk to your banks and lenders in your area and don’t be scared by the pounds and pounds of paper and months and months and months of time it will take to qualify. If it was easy everybody would do it. Again trust me, nothing will ever stabilize your business as much as owning your own space outright. It can be done, and often for the same price as you
would pay to rent. It takes time, it takes patience, it takes someone trustworthy to help you put it together to fit your own situation. Ask your AGENT to help you, to explain it to you, to guide you through the maze. Don’t be in a hurry and don’t get discouraged. If I can do it, (Susan the original NO MATH dodo), so can you.

Aloha
Susan Halas @ Prints Pacific, Ltd.
(book dealer, commercial property owner & licensed Realtor®)


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