Appearing Professional 

In our business you get one opportunity for a first impression. When meeting a client or customer for the first time you need to be prepared, have a positive attitude and dress like you deserve a big commission! 

Preparing for your first interview requires research. What do you know about the person and company you are about to meet? The internet gives us the ability to do such research. Look for commonality with the person you will be meeting; perhaps you both belong to the Chamber of Commerce, a local service club or attended the same schools. Find out what their company is all about; what do they do? 

Is your market knowledge up to date? Are you familiar with all the properties that are on the market in your area? How much are typical office buildings selling for per square foot? How much a month will a typical 1,000 SF store rent for? This is essential information in setting a listing price or guiding a customer what to expect. What kind of impression would you make if the client asks you about a building, on the market in your area, and you know nothing about it? 

Demonstrating a positive attitude is important. We are dealing with successful people who run business; very busy people. Expect that you will be asked to wait when you arrive for your appointment. Do not let that frustrate you or change your attitude. 

What will the client see when they come out to greet you? Are you sitting there reading a comic book, or a magazine, same difference? You do not appear to be busy! Making notes from your last appointment or planning the rest of your day shows you are just as busy as your client. Being on the phone is acceptable, provided you immediately get off the phone when your client arrives. 

Avoid casualness; the professional will always appear in appropriate business attire. I hate ties, but I wear a suit and tie because it is a part of my first impression and business “uniform”. 

Your professionalism must continue throughout your relationship with your client or customer. My greatest concern today is the changes in our language. When did words like “pissed off” and “sucks” become part of acceptable language? They did not! This is crude and rude language that unfortunately, I am hearing all the time from salespersons. These words and worse also appear in e-mails and text messages; which can be posted or forwarded to anyone. Using this street slang may turn off a client, end a relationship and cause a deal to collapse. 

Text messages and e-mails are loaded with chat acronyms and text message shorthand. But not everyone is versed in what these abbreviations mean, for example: CYE – check your e-mail, IMO – in my opinion, or PCM – please call me. You need to be clear in what you want to communicate and use proper sentences and punctuation. Be aware of your choice of wording, be profession in what you say and transmit. 

To build your business focus on appearing professional in all you do.  

Inadvertent Discrimination 

Discrimination is against the law and could also lead to a discrimination lawsuit against you and your Broker. By definition discrimination is making a distinction in favor of or against, a person based on the group, class, or category to which that person belongs rather than on individual merit. There are seven federally protected classes: Race, Color, National Origin, Religion, Sex, Familial Status and Handicapped. New York State has four additional protected groups: Age, Sexual Orientation, Military Status and Marital Status. And some cities have additional groups that you may not discriminate against. 

In the real estate industry we sometimes can get caught up with what I will call inadvertent discrimination. Since the tragedies of 9/11 and subsequent terrorist attacks throughout the world there has been an added sensitivity regarding discriminating against ones culture or religion. A culturally diverse customer (or any customer) may consider you discriminating (and possibly sue you) if you do not present to them all the listing you have that fit their requirement. “Why did you not let me bid on that building?” “Why didn’t you show me that building, because I’m ________”. Don’t make decisions for your clients. Let the customer decide. 

Don’t let the customer steer you in the wrong direction. “I only want to locate my business in ____ (that part of town)”; perhaps a specific religious or cultural area. This could be construed as Steering, the illegal funneling of real estate buyers to a particular area based on the desire to keep the makeup of that neighborhood the same or intentionally change it. Steering refers to the illegal practice of real estate agents only showing certain ethnic groups properties located in specific ethnic areas. An example would be showing an Asian businessperson store sites that are only located in Asian communities. Show the customer all properties available in your market area based on their size and budget requirements. Let the customer decide. Also remember customers do sometimes change or expand their criteria. 

Occasionally we find that our client is prejudice. “Don’t bring any ______!” “I won’t lease to_______!” The word prejudice refers to prejudgment: unreasonable feelings, opinions, or attitudes, especially of a hostile nature, regarding a racial, religious, or national group. You may have to walk away from this situation. Do not put your reputation and license in jeopardy. 

Be aware of Omission Prejudice, “Your Company represented the _____ building, why didn’t you show it to me?” Agents some times make decisions for their customers, that property is no good for them, it’s too big, too small, or too expensive, it’s in the wrong area. Show the client everything available in your market area: I like to use the 10/20 rule in showing property. Search all properties that at 10% smaller to 20% larger than the target size. Let the customer decide. 

You have a property that recently closed or is currently in contract with a sign on it. A new customer calls on the sign. You must disclose the facts, so you do not appear to be misleading with your advertising. Remember if the property is in contract, unless the owner has directed you, in writing, to stop showing the property, you must show it until it closes. If the new customer decides to make an offer, you need to caution the owner to consult with their attorney because they are in contract, and accepting another offer could have legal consequences. 

Communicate with your customers. A lack of communication, even if you have nothing that fits their criteria now, may be misunderstood and taken that you are discriminating against them.  Avoid even the appearance of impropriety.  

What should a tenant pay in rent?

Representing the tenant requires doing what is in the best interest of your client the tenant; sometimes this means educating them. How much rent can they afford to pay? Do they know? We ask our client what is your budget for rent, they reply but where did they get that number? 

Today we have the ability to compare our client’s rental expenses to the industry standards for their type of business. This data can be found on the free site Bizstats.com and more detailed information can be found on the proprietary site, Bizminer.com. The information is gathered from tax returns of thousands of companies. They break down the allocation percentages for many categories including rent. Below are a few examples of industry standards, percentage of rent expense to gross sales income (known as the Industry Rent to Revenue Ratio, I - RRR):

Offices of Doctors                                         4.97%

Offices of Dentists                                        5.44%

Clothing Stores                                             7.53%

Wine and Liquor Stores                               3.34%

Manufactures of Wood Products                 1.55%

Manufacturers of Computers                      0.80% 

This can now be applied to the gross revenues of the business to determine what the tenant should be paying in rent. However, this must be modified based upon the type of lease, and if the tenant has “additional rent” pass troughs an adjustment must be made.  Local market conditions must also be considered. This will determine the Dollars to Occupy Ratio (DOR).

I –RRR + Other Expenses + Market Conditions = DOR 

Using the clothing store as an example; it is in a retail strip that requires the tenants to pay their own gas and electric and CAM charges. These expenses equate to approximately 20% of their base rent, so an additional 1.5% will be added to their

I – RRR. The location is not the greatest so a negative adjustment of .05% will be factored for market conditions. Thus the Dollars to Occupy Ratio for this store is 8.53%.

(7.53% I- RRR + 1.5% Other Expenses - .05% Market Conditions = 8.53% DOR) 

If the store had $3,000,000 in sales revenue, the base rent should not exceed $225,900. (3,000,000 X .0753 = 225,900). Their overall Dollars to Occupy should not exceed $255,900. (3,000,000 x .0853 = 255,900) Use these numbers to guide your tenant in their rent negotiations. 

This adjusted percentage of what rent should be, may also be compared to what the tenant is paying currently. Add together their annual base current rent and any additional rent items; divide this total by their annual revenue to determine their Current Rent to Revenue Ratio. Compare this to the industry standards. 

If your client is not making enough profit, maybe they are paying too much rent! Suggest another less expensive location or renegotiate their lease for them. 

Tomorrows Value

            Determining what a property is worth is a major challenge today.

            With investment property, historically the income approach is used. Basically the properties rental income, less the owners operating expenses provides the Net Operating Income (NOI). Dividing the NOI by the prevailing Capitalization Rate (CAP Rate) gives a Market Value.

            Leases were written five years ago or longer (before the economic crash) at high rental rates. With these tenants still in the building the current year’s financial analysis looks pretty good. BUT, going into the next two years some of these leases may expire.

In most areas of the Northeast rental values over the last five years have declined 25% to 30%. If the tenants renew the lease or new tenants replace them, today’s rental rates are considerably lower.

            If we project an income analysis for the next year or two, due to the anticipated lower rental income, the NOI is less; as would be the market value. Owners must understand a buyer will look at this before making an offer. We as, real estate professionals, need to do a five year projection (or longer), a spreadsheet of the properties future financial performance to show the real future value. We may see a projected reduction in value over the next two years, but then toward the end of the cycle we may be able to show a gain in value.

            Another basis of comparison that is used today is comparing costs per square foot. Historically, this compares the subject property to the recent similar sales. But we literally had no sales in 2009 and 2010, as financing was not available. Since 2011 we have seen increasing (but slow) sales activity. Comparisons of sales are now looking at what is the competition on the market. To equalize different sizes of similar buildings the asking price is broken down to a cost per square foot. Trends become apparent, if there are three other office building for sale in the area averaging a cost of $100 PSF, the probabilities of a buyer paying much more is slight.

            With the cost of rental space being lower, the focus on rental value is now largely also based on the local competition. If the competitions property is averaging an asking price of $15 PSF, it would be difficult to rent space for $25 PSF.

            Owners may not like the current value realities, but buyers and tenants will not pay more. In listing presentations it is essential to prove to the owners the current values. Go into the presentation armed with future value projections, know the competition and their asking cost per square foot or in the case of rentals what the competition is asking. 

Green Leases

Energy consciousness in this country only really started in the 1990’s, first with Energy Star ratings and then the LEED (Leadership in Energy and Environmental Design) Certification system. Development of actual “Green Leases” has only recently begun.  In the beginning traditional leases would contain agreements between the landlord and tenants about ‘green’ concepts and procedures, mostly on a best efforts basis. Today the benefits of “green” are well known, operating cost savings and healthier work environments. A new concern also has evolved, after a landlord or tenant has achieved a LEED rating they need to maintain it. 

Landlord and tenants increased knowledge of green has caused traditional relationships between them to change. Tenants want landlords to perform their operations and maintenance duties in specific ways. Landlords are dictating types of materials and equipment tenants can use in its office space and requiring compliance with recycling and conservation programs. 

Actual “Green Leases” that address building performance, building materials and supplies and sustainability have been developed. The Building Owners and Managers Association (BOMA) published in 2008 “Guide to writing a Commercial Real Estate Lease, including Green Lease Language”. It gives alternative wording if the lease is Triple Net or a Gross Lease. In 2009 the Real Property Association of Canada issued “National Standard Green Office Lease for Single Building Projects”. An actual model lease, designed as a net lease. Also in 2009 the “Model Green Lease” was created by the Corporate Realty, Design and Management Institute based in Portland, Oregon. This form is basically a modified gross lease. 

Each type of lease has certain pluses and minuses. Gross Leases encourage landlords to reduce their operating expenses from energy improvements and increase their return on investment. But, this gives no incentive to the tenant as their rent is fixed. 

The modified gross lease, as used in the Green Leases is more like an Expense Stop Lease. The tenant pays base rent plus their pro-rata share of operating expenses and taxes over a base year, or pay operating expenses in excess of an expense stop. It is to every ones advantage to lower the operating expenses. 

In the triple net lease the Landlord pays for the capital improvements and the tenant receives the benefits of the energy savings when they pay their utility bills. Lower operating costs may help keep the building rented, or landlords may charge more rent as a result on those savings. But the landlord is not recovering the cost of those improvements.  

Traditional lease clauses are being modified. For example, “Assignment and Subleasing” may be worded as: The landlord may insist that its consent to a proposed assignment or sublease can reasonably be denied in the event the proposed assignee or subtenant will or could cause part or all of the building not to conform in accordance with green aspects of the lease, including the third-party certification system. 

Next challenge how do we enforce compliance with green practices and policies, especially if non-compliance by a tenant could cause the landlord to lose their green rating? 

Do I make my building “green”? A real concern of developers/ landlords is economics. If I do improvements how or when do I get a “payback” of those expenses? In the long run reducing energy costs make sense but what about the initial outlay? Payback can be simply measured; cost divided by the annual savings equals the payback in years. If I put in high efficient lighting fixtures and bulbs in my building it will cost me $10,000, but I will save $3,000 in annual electric expenses. $10,000 divided by $3,000 is a payback time of 3.3 years. 

New York City’s first “Green Lease”, developed by the NYC Mayor’s Office of Long Term Planning and Sustainability, contained language to address this issue utilizing the “split incentive” scenario. Basically this is a triple net lease; Landlord pays for capital improvements but does not benefit from any reductions in operating expenses because the tenant pays the operating expenses per the lease. But, in this lease form, the Landlord will recover the costs of those improvements from the tenants based on “simple payback”. 

Here is how it works: Landlord may include in the operating expenses (to be paid by the tenant) the aggregate costs of such Capital Improvements not to exceed 80% of the Projected Annual Savings. The aggregate costs of such Capital Improvements will be fully amortized over 125% of the simple payback period. For example, the Capital Improvement cost is $2,000,000, projected annual savings are $500,000, and the payback period is 48 months. The tenant pays additional rent of $400,000, (80% of savings) in operating expenses, for 60 months (125%) of payback period. 

During the first five years of the lease: The tenant has their operating expenses reduced by $100,000 a year. The landlord is reimbursed by the tenant for the full cost of the capital improvement. In the following years of the lease the tenant has their operating expenses reduced by $500,000 a year. 

Green Leases are and will continue to be a hybrid. Just like there is no standard lease, there will be no standard green lease. There are now good models available, that attorneys will use to create new green leases. What is apparent is the new green leases will specifically address the issues and concerns of landlords and tenants and consequently be more transparent. We will see things in the lease like requirements for Annual Environmental Performance Reports, requirements for exchange of information about operating hours, energy usage, renewable energy, water usage and recycling efforts. A tenant may require the landlord to monitor Indoor Air Quality (carbon dioxide and ventilation) on a regular basis. 

We will see lease clauses creating tenants (environmental) rules like: Tenant shall turn off all interior lights and equipment when not in the premises; Tenant shall comply with Landlord’s recycling program. This will require a section “Violation of Environmental Rules”. How to enforce the rules; fines? But when do repeated violations become a lease default? What if these occurrences become interference with third party certification of the building? This is an area that needs to be carefully worded by the attorneys drawing the lease. 

As Green Buildings continue to increase in number, we will see more of these “Green Leases”. 

Lease Buy Outs

The tenant no longer wants the space. What is the possibility of buying out of the lease obligation?  Why should the landlord even consider letting the tenant out of their lease? 

First, let’s look at a couple of examples of how this might work. A tenant is paying $5,500 a month rent and had 16 months to go on their lease; the remaining lease obligation is $88,000. If a landlord agreed to the buyout, they may consider discounting the obligation based on the present value of money. In this case, if a discount rate of 10% were applied, the present value of the obligation would be reduced to $82,066. (To do this calculation, you need a calculator that is programmed to do discounting.) Not a big difference to a tenant in trouble. 

Another example, a tenant with a long time left on the lease. This tenant is paying rent of $70,000 a year. They signed a ten year lease three years ago. Their business is failing and they want to get out of their lease obligation. 

Just to keep it simple, with no escalations, the overall obligation to the landlord for the next seven years is $490,000 (7years X $70,000 annual rent). If this landlord agreed to the buy out, and discounted the obligation using a discount rate of 8%, the present value of the obligation would be reduced to $364,446. This is a significant discount, but still a lot of money. In reality the negotiations for a buy out start this way and usually end up with 50% to 75% of the obligation being required for the buy out. 

Several major questions remain, can the tenant afford to do this? Perhaps major corporations can, but I don’t see our Main Street tenants being able to do so. 

Why should the landlord discount the obligation?  The real question is, how is the market today? Will the landlord be able to rent the space for the same rent, more rent or lower rent? When the market is good the Lease Buy Out gives the landlord more than sufficient money to lease the space without cash flow interruption. The dilemma is when we are in a declining market and the new rent would be less rent than the current tenant is paying. 

Are there any alternatives? Perhaps the landlord could renegotiate the tenant’s lease with lower rent. But how bad is the tenant’s business situation? This may only be a temporary solution. The landlord could make the tenant fulfill their obligation by sub-leasing and having to subsidize the rent. (Can the tenant even afford that?) But what if the landlord does not work out a release and the tenant goes bankrupt? Also many tenants today have signed personal guarantees for their leases. 

The request for a lease buy out creates serious considerations all around.

 Having a “stack” of testimonial letters could be impressive, but will they get read? They may also all say basically the same thing; you are a “great”, “super”, “wonderful”, “excellent” salesperson.

 The residential listing appointment often goes 45 minutes to an hour or more and the owner may have time to read several of these letters. But on the commercial side our appointment may only be 15 minutes! There is great value in testimonials but they will need to be consolidated for our presentations. One page with perhaps 8-10 quotes from satisfied customers can be sufficiently impressive.

 I have always found it uncomfortable to be sitting at a closing table and to ask my customer, would you write me a letter telling me how “great” I am! Of course this could be worded more subtly, but the result is a stack of similar sounding letters. I have even heard of some agents writing the testimonial letter for their clients and just asking them to sign it!

 I get my testimonials anytime and anyplace. I may be showing a building or on the phone with a client and they say something nice about me. “May I quote you on that?” is my reply, and nobody ever says no. This gives you the ability to get many different comments that can tell a story.

 “We should have listed with you sooner; you sold our building in record time.”

“What a great job leasing our store. We never expected to get a National Tenant.”

 The key with effective testimonials is to use them to demonstrate the benefits of working with you. From the above, a retail client realizes you have contacts with National Companies.

 “Thanks for the tip on 1031 exchanges, you saved me a fortune.”

 “Saved me a fortune” will get anyone’s attention. If the seller never heard of a 1031 exchange, you get to educate them, if they have heard of it they know you are a professional based on the quote.

Testimonials are generally used in listing presentations; however they also may be used when seeking buyer or tenant representations. In your page of quotes include some for this group too.

 “We have been looking for space for months; I can’t believe you found us the right spot in weeks.”

“You located a great building for us and it was not even on the market yet!”

 One of the benefits of using a real estate agent is our existing relationships. The ability to call a building owner we worked with before and determining if they will have space available soon or if they, or someone they know, may be considering selling a building. This last comment implies that ability.

 Listen to your clients and customers and remember you are always looking for testimonials. Your goal is eight or ten different quotes that tell a story. Update them regularly. 

 Lease Termination Clauses

 A lease is a contract between a landlord and tenant that defines which party is responsible for what and who pays for what in a building. The “term” indicates the length of the lease. But what if the tenant wants to end the lease before the end of the term? Leases may or may not have clauses to allow the tenant to do so.

 The most common release clause is the right to sub-lease. This clause allows the tenant to rent out part or all of their space. It requires the landlords consent and approval. Language in the lease generally states,”…such approval cannot be unreasonably withheld.”

 When this is done a second lease is constructed between the Tenant, now referred to as the Master Tenant, and the Sub-Tenant. There is no direct contractual relationship between the Sub-Tenant and the Landlord. The Sub-Tenant pays their rent to the Master Tenant who in turn pays the Landlord.

 The original Tenant is liable under the lease for all rent due. If the amount of money collected from the sub-tenant is not sufficient to pay the obligation to the landlord, the original tenant must pay the difference.

 Sub-leasing space in a down market can be a real challenge. A 10 year lease was signed five years ago with annual rent that is now $70,000. Presently rents are down 25%; competitive space today is being rented for $54,000 a year. The tenant may be able to find a sub-tenant but may have to subsidize the rent by $16,000 a year to meet their leasehold obligation.

 But what if a profit can be made from the sub-tenancy? Often the lease will indicate that if a profit is made the profit goes to the landlord or is split between the landlord and the original tenant.

 Assignment Clause   A lease may allow the tenant to assign the lease to another party, subject to landlord approval. Here the Assignee takes over the lease and has a direct relationship with the landlord. They must abide by all the terms and conditions of the lease. However the original tenant continues to have a liability for the leasehold obligation. If the assignee does not pay the rent or in any other way breaches the lease the original tenant is responsible.

 Assignments of leases often result from the sale of a tenants business and consequent desire by the tenant to be completely removed from the lease responsibilities. The tenant who is assigning a lease generally desires to be released from any further liability; typically accompanying the assignment clause will be a Release of Liability clause. This requires the original tenant to pay a substantial penalty (perhaps six months’ rent or more) to be released from the lease.

No one has a crystal ball but I consider the planets, stars, whatever in perfect alignment for a very good “brokerage” year. Why am I so optimistic? 

I think the pricing bottom for commercial properties was reached in 2011. Prices are stabilized and by the end of 2012 we will see a gradual increase in values. Since 2007, throughout most of the Northeast, we have seen a decline in property values of 25% to 30%. Buildings are at their lowest prices in five years! Who can resist a bargain? Many investors have been sitting on the sidelines (with plenty of money) just waiting for these conditions. 

Owners are now realistic about values; they are ready to sell. Some may have lost value in the last few years. But many bought their properties 15 or 20 years ago, and even at today’s prices they are still making a considerable profit. 

The Capital Gains Taxes are currently at 15% on appreciation for most taxpayers and at 25% for the depreciation recapture tax. What is important is these rates are scheduled to expire on December 31, 2012. There is a strong possibility they will be higher in future years. (Remember to talk to all sellers about the possibility of doing a 1031 Exchange and deferring their Capital Gains Taxes.) This may also influence some sellers to sell this year. 

Buyers are ready to take advantage of “bargain” prices. Money is now available again, regional banks are lending and credit unions have become serious commercial lenders. For those buying buildings to house their own business the Small Business Administration (SBA) loan program is available with typically only 10% down required. 

High CAP Rates are attracting investors back to the market now. Owner occupiers, if they occupy at lease 51% of their building, can lease out the rest and qualify for the SBA loans. Financing is again available to investors too! 

In the recent years of difficult financing many companies renewed their leases or moved to new rental spaces. The leasing market has been strong and will continue to be so as we come out of this economic cycle. Here too landlords are now realistic about current rents and know they must be competitive to keep their building filled. Representing tenants is fun again, because they have many choices and as agents we can truly assist them in getting very good deals.

 Washington, D.C.  So many things pending… What is congress going to do about taxes; the “Super Committee” what actions will they take to reduce the national debt and balance the budget. The Dodd-Frank Commission, creating regulations to regulate the regulators! Where will we end up with the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) proposed lease accounting issues? Although I have concerns for all of these things that could affect our livelihood, I think when the smoke clears we will see positive steps to stabilize our economy and get our real estate industry back on track. 

The good news is, it is an election year? The President and much of Congress are up for re-election. One would think the politicians would act carefully and do positive things for business and the public. Let us optimistically hope so. 

Historically, real estate has cycles, values rise, then fall, and then the cycle starts all over again. We are at the start of the next cycle; 2012 will create many opportunities for those of us in real estate brokerage! 

It was certainly not business as usual, but we have seen plenty of deals being done in 2011. The regional banks are lending as are the credit unions. Underwriting is still tough with typically a 30% down payment required and a debt service ratio buffer of at least 25%. 2011 did see an increase in the loan amounts for SBA loans, which are readily available for owner operators or investors provided they will occupy at least 51% of the building themselves. 

How did you do in 2011? Some of my agents have had their best year ever; others are singing the blues, blaming the economy for their lack of production. At this time of year be critical of yourself, what did you do well, and what can you do better?  

Analyze your 2011 business, where did it come from: referral fees, listing sides, and sale or lease sides? Track your success rate. How many listing presentations did you make, how many became exclusives, of those how many of the properties were sold or leased? If you’re not happy with your success percentage maybe you need to rework or update your listing presentations. 

How many new customers did you service in 2011, how many showings did you go on, how many of your customers actually bought or leased from you? If this is a challenging statistic to you, consider, do I always interview my new customer at their existing location so I can see, touch and feel their operation and real needs. Do you show them everything that is available in your market area and let the customer decide? 

Of all of ways you build your business what worked best this year: target mailings, referrals, networking, trade shows, cold calls, leads groups, advertising, or website marketing? Albert Einstein defined Insanity as “Doing the same thing over and over again and expecting a different result.” You must track your business to see what is working and what is not. 

To be successful in 2012 you need to have the right attitude, understand the numbers have a plan and follow your plan. Attitude is everything; you must meet every client and customer with enthusiasm, confidence, demonstrate your market knowledge and be the winner they want to hire. 

How much money do you want to make in 2012? Figure out what you net on a typical sale and lease in your market and determine how many sales and leases you need to close to accomplish your monetary goal. If you need to sell or lease 12 of your listings, recognize that perhaps half your listing will not be sold or leased; so you need 24 listings for 12 to close. Not every listing presentation you go on will end up an exclusive, again maybe half will; so in order to have 24 exclusive listing you may need to go on 48 listing presentations (say one a week). This becomes the basis for your production planning. Plan what you have to do each month, each week and each day to reach your goal. 

In most of our area we have reached the pricing bottom in 2011, growth will be slow but positive. Banks are lending, buyers and investors are ready, prices are the lowest in 5 years. 2012 is going to be a great year for commercial real estate brokerage. Get ready! Create a plan for success today. 

CBMS Basics:

A bank makes a $10 Million dollar loan with Commercial Real Estate as collateral. If the loan remains on the banks books they have a risk exposure of $10 million if the loan defaults. To minimize the risk the bank packages this loan with other commercial loans and creates a Commercial Backed Mortgage Security (CBMS) Trust. The Trust then creates bonds, these are rated and then sold to investors. By reducing their loan risk the bank can loan more money. 

Commercial Backed Mortgage Securities are historically bought by Insurance Companies and Pension Plans. They have been considered safe, conservative investments. These types of investments began being issued in the late 1990’s. By 2007 over $230 Billion CBMS were being issued annually. 

Their counterpart Residential Backed Mortgage Securities led to the “mortgage meltdown” in 2007-2008. In 2008 we saw the issuance of CBMS decline 94% to only $12 Billion issued that year. In 2009 there were virtually no CBMS issued. 

In 2010 we saw a slight return to issuance of CBMS with $11.5 Billion being issued.

2011 has, so far, been a very interesting year for these investments. In the spring of 2011, there was $22 Billion of CBMS issued. But as we headed into the summer we had the economic conflicts in Washington, DC coupled with the European Financial Crises; turbulence in the market reigned. 

In July, 2011 the delinquencies on CBMS reached a historical high of 9.88%. That same month Standard and Poor refused to rate a $1.5 Billion CBMS being underwritten by Goldman & Sachs and Citibank. In August, this package was rewritten providing less risk and was sold off. 

On the optimistic side there was an announcement in late August that Wall Street would be issuing a $5 Billion CBMS in October. Everyone has a different opinion as to how this year will end. We have seen estimates for $25 to $40 Billion CBMS being issued. 

A lot has to do with how the economy evolves. This category of investment, CBMS is very important as it directly affects banks ability to make loans. 

Today 1,300 banks are having loan problems; 884 banks are on the FDIC watch list. 350 banks have closed since 2008. It is estimated the nationally 50% of the commercial loans are “under water”. Meaning the current value of the property does not justify the outstanding loan balance on it. When the loan becomes due, the reduced value creates a gap between what is due and what can be refinanced under today’s underwriting standards. The borrower must either come up with more cash to fill the gap and refinance, or the bank must decide to foreclose on the loan or extend it. Plus the bank must also consider the bank regulators…difficult times for everyone. Ironically, even in these circumstances the monthly payments of many of these loans are being made; they are performing loans!   

Real estate works in cycles, I feel we are bottomed out and now we head up again.

It is a great time to buy real estate!

How do you build your business in a challenging market? It is not much different than in a robust market; it is always a people business. The more people you can meet the more opportunities will present themselves. However, with today’s market competition is fierce. How can you differentiate yourself from your competitors? Know your competition, how do they market properties, what do they do or not do? What unique value do you bring to a transaction? Be different. 

Be the expert and tell people you are! Know every listing and real estate event in your market area. When properties are sold or leased find out what was the closing price, create and maintain your own comparables. Read the business and trade newspapers. When you list, sell or lease send out “announcement” cards and press releases. Very often business groups or service clubs have speakers at their meeting. Become the speaker, talk about general market conditions and pricing in your area. Or give a brief talk on investments, financial analysis basics. Write a column for your local paper! 

Get back to back to basics, cold call and canvas. Set a goal to meet every business owner in town. Systematically visit every store, office or industrial building. Introduce yourself and see if you can be of any service to them or anyone they know (ask for a referral before you leave, “Is there anyone else you think I may be of service to?”)

Create a “data” file in your computer including whatever information you learn. Lease expiration dates, other properties owned, personal stuff like kids/spouses names, birthdates and hobbies. Add their e-mail address to your mailing lists which should be sorted by business type and size (i.e. retailers 2000-3000SF stores) 

Over communicate! When you find a listing for a small retail building for sale, send it to your mailing lists of retailers leasing small stores. If it is another brokers listing, arrange to co-broke and get permission to market it. Create a monthly Newsletter. It can be fancy or just an expanded e-mail with community news and a featured property of the month. 

Also create lists by birthdates and hobbies. If your client is a golfer and you see a great article about golf, copy it attach your business card or a brief note, “Thought you might find the attached article interesting”. Or scan and e-mail it. How about sending out Holiday Cards? Not just the usual, be different: Happy Forth of July, Happy Groundhogs Day.

Get out there, be seen, be heard, and build your business with personal contacts. 

A student of mine asked me how to choose what real estate firm to affiliate with? It is best to interview with a number of different types of companies to see what the best fit is for you.

 There are certainly a number of things to consider. Some firms ask each agent to specialize, become an expert in a particular segment of the market, office leasing or industrial sales or perhaps retail site selection. Other firms cross-train the agents to handle whatever opportunities they may encounter. In these offices often the specialization is geographic, becoming an expert in that particular market area.

 Do you want to be a full time commercial agent or a dual-practitioner doing both commercial and residential work? Some companies are strictly commercial, some do both disciplines. In some of the firms that do both there may be a “commercial division”. There can be advantages to both situations. In a purely commercial company there may be a mentoring program, perhaps working with an experienced agent for a period of time to gain experience. This could occur in a dual office too, but the other advantage of this type of office is the commercial agents can get referrals from the residential agents in their office.

 Should you work with a small firm or large firm? Another key consideration is what kind of training and support will be provided. In a smaller firm the Broker may be very busy and have little time to train new agents. They may also have their own clients and be in competition with their sales agents for new business. Other firms, especially the larger companies may have corporate training programs and educational staff just for this purpose.

 Ask about the company’s websites and marketing tools. Who makes your listing flyers you or staff?  Is there staff? How are your listings advertised? Who pays for what?

 The compensation issue – how much of the fee do I get?  This varies considerably, some firms start out with a 50-50 split of the commission and as the agents production increases they get a higher percentage of the fee. Other firms offer 70%, 80%, 90% or more of the commission to the agent. But usually in these cases there are monthly costs to the agent for operating expense or marketing funds. These monthly fees can be considerable and must be carefully evaluated.

 Your market – where do I have the best opportunity? What Brokerage firm(s) is/are dominating your area? If you join them will you be able to shine or are they loaded with agents now?

 When considering joining a firm, interview with the Broker and also speak with some of the other agents there. How are they really doing? Interview with several companies determine their structure, training, splits and your opportunity for success. 

 Our listing agreement basically indicates that the building owner has agreed to pay us a fee if we lease space in, or sell their building. In leasing we may be entitled to collect multiple commissions. If, for example there were an option to renew, extend or expand a lease or an option to buy the building.

 We may have been paid our fee due on lease signing, but now, five years later, our tenant is extending their lease for another five years. Are we entitled to another commission? What does your listing agreement say? Your agreement should clearly state that if the tenant renews or extends their lease you are due another fee at that time.

 What happens if the building is sold before the option becomes due? Is the new owner responsible to pay the Brokers commission? The answer is no, unless the listing agreement or lease addresses the issue.

The listing agreement is between the original owner and the Broker. Upon sale of the building that relationship ends. The Broker has no agreement with the new owner. The new owner has no obligation to pay a commission to the Broker. (This may also apply to an Exchange or Assignment of a Lease).

Listing agreements should contain a clause to address this contingency. Typically the clause directs the building owner, if they decide to sell the property, to have the buyer sign an “Assumption Agreement” (in recordable form). In so doing the new owner accepts the liability for future Brokers commissions that may become due if a tenant exercises their option to extend the lease. Without such a clause in your listing agreement an option commission could be lost upon the sale of the building.

What if the tenant takes more space in the building? Your agreement should also address if the tenant “expands” or leases more space in the building. Are you entitled to a further fee – what does your agreement say? This contingency should be addressed within the lease negotiations. When working with your customer; ask them where they see their business in the next two or three years, are they growing? If that is a possibility, negotiate a “First Opportunity” clause in their lease, whereby if a vacancy occurs in the building in the future, they are given the first opportunity to lease the additional space. Also address the rent for the additional space, “at the rent the tenant will be paying at that time” or a method to determine fair market value.

If there is an option to buy the building be sure your agreement specifies your fee if that is exercised. But, what if there is no option to buy in the lease and your tenant decides they want to buy the building. Are you entitled to a fee – what does your agreement say?

A “Purchase by Tenant” clause in the listing agreement covers this contingency. It generally states in that event:  the lease ends, any options to renew, extend or expand are cancelled, and an adjustment is made for any “unearned commission”. This is sometimes referred to as the “Fairness Clause”. You were paid on lease signing a fee based upon a ten year lease, it is the end of year six and the tenant is buying the building. The part of the commission you were paid representing years seven through ten is unearned commission; this dollar amount should be credited (deducted) from the sale commission due you.

Listing agreements need to cover many contingencies, review your agreements with your Broker and an attorney to be sure you are protected for all possibilities. 

Listings are controlled by the listing Broker who may choose to share the listing with other Brokers or not. Some firms belong to MLS systems which may require all listings to be shared with the other MLS members. Consumers generally expect their Exclusive Broker to market their property direct to customers and also to circulate the availability to the brokerage community.

 Typically the listing Broker will create a Co-Brokerage agreement; this will specify any showing “rules” for the property and indicate the commission splits involved. In commercial, the commission split between the brokers is usually equal, but this, as is the commission rate, is negotiable. It would seem logical to get the co-brokerage agreement signed prior to offering the property, but, some brokers wait until after an offer is made.

 Co-broke agreements can take many forms but typically they included a declaration of the property involved, a requirement that all offers be submitted in writing, the listing broker to present all offers and the fee distribution split between the brokers. When the agreement is presented after the offer is made the document will be specific as to the amount of commission dollars and the payment schedule.

 Some firms do not use co-broke agreements. To me this is dangerous as misunderstandings or commission disputes between the brokers could arise later. If the listing firm does not have a co-brokerage form a simple letter of understanding can outline the agreed terms. It is important to both firms that whatever co-broke terms are agreed be in writing.

What if the listing Broker has an “open” listing? I don’t mind working with someone who has an open listing, provided that their listing agreement is in writing. In such cases the co-broke agreement should indicate that status.

 If the listing broker does not have a listing agreement (Exclusive or Open) in writing, co-broke agreement or not, getting paid could be in jeopardy. The key to getting paid is always to establish a paper trail direct to the owner, especially when co-broking! 

Depending upon the market (and the agent’s skills), open listings may have to be taken.

I would like to have a “handshake” agreement with every owner; I will sell or lease your property and you will pay me an agreed fee. Unfortunately in a small number of transactions commission disputes arise or an owner tries to renege on an agreed fee. Our “handshake” or oral agreement will not help us win if we have to go to court to collect our commission, a written listing agreement and other evidence will be required.

 First we need to define listing agreements. The Exclusive Right Agreements make the owner responsible to pay the  broker a defined commission if the property is sold or leased by the broker, or in cooperation with another broker or by the owner themselves during the term of the agreement. Exclusive Agency is basically the same except if the owner sells or leases the property themselves the broker does not get a fee. Then we have the “open listing”, basically this is a written agreement that states if the broker sells or leases the property the owner will pay them a specified fee, however the owner may also “hire” other brokers to market the property or sell it themselves, in which case the “open listing” broker does not get paid.

In the event of a commission dispute does the court care if the listing is Exclusive or Open? No, what the court cares about is: is the agreement in writing and if it contains the basic seven elements of a listing agreement:

• Property address
• owner information
• broker information
• offering price and terms
• agreed commission fee and when payable
• the term (length) of this agreement
• the legal jurisdiction

In the eyes of the court the only thing that counts, is a written agreement,  exclusives only affect the agents ability to market the listing. Most commercial listing services require exclusives for inclusion.

When in a situation necessitating an “open” agreement, the easiest way to deal with it is to take your regular Exclusive form  and cross our the words “Exclusive”  and insert the word “open” and have both parties initial the document changes. This preserves all of the important clauses in the agreement.

If that does not satisfy the customer I recommend you have your firm develop a “Listing Authorization Form”. This document authorizes the agent to market the property on a non-exclusive basis and should contain the seven key points indicated above. By requiring such an authorization we have a written document indicating our fee if we bring about a sale or lease.

Can we co-broke “open listings”? I get nervous when I ask another agent if they have an Exclusive and they “dance around” the question. Probably they did have an exclusive, but it may have expired. Are our fees protected? No! If your exclusive runs out and the owner is not giving the listing to another Broker, at least get a Listing Authorization signed. You must have a written fee agreement to protect your commission if you have to go to court to collect it.

 Commonly we think of an RFP (Request for Proposal) coming from a municipality when they want to hire a company for specific services i.e. snow removal, or from a company seeking bids for their purchasing of certain materials or supplies. The purpose of an RFP is to create a competitive situation.

 The RFP technique can be successfully used by real estate agents when representing a tenant. Landlords need to keep their buildings fully rented; vacancy affects their cash flow. Given today’s economy landlords have to be aggressive to keep and get new tenants. Properties are shown and the tenant narrows there interest to four or five buildings. They know exactly what each landlord is asking for. The tenant, or the agent for the tenant, can create a Request for Proposal and send it to these owners creating a competitive situation. The landlords then respond with their best “offer” to lease space to this tenant.

 Generally we begin by establishing a brief window of opportunity and brief synopsis of the tenant, for example:

 On behalf of our client, ABC Corp., we have been authorized to solicit Requests for Proposals for the leasing of space. We invite your firm to submit a proposal to us by April 30, 20__. (within 10 business days of issue)They have inspected your property as well as others and are in the final decision stage. A description of their business, the services needed and other pertinent information follow: 

 ABC Corp. (background and why moving)

ABC Corp. is an Insurance Agency that has been in business for over 5 years. Their annual revenues are between are between $10 million to $12 Million per year and they employ 35 people in one location. Their current lease is expiring in 90 days and they are now seeking larger space for growth.

Follows is a very detailed list of what the tenant would like to see in the lease and what the tenant is willing to pay to rent space in a building. Think of it as the tenants “wish list”. It lists key elements in leases; how much space is required, the amount of rent they can pay (the tenants budget); or the price per square foot they are willing to pay, they may also be willing to pay additional rent for items like utilities or common area charges. It addresses all issues: i.e.  security; desired terms of the lease; any options to renew or purchase; concession periods; sign requirements; parking; insurance; build out, construction or tenant improvements required. A complete picture of what the tenant needs, what they expect, and what they are willing to do. The proposal will also have a time line; landlords must respond by a certain date.

The tenant‘s credibility must also be shown to the prospective landlords by attaching financial information to the proposal.

The landlords who receive the proposal can now respond item by item to the proposal. They are willing to do this, but not this, or suggest compromises. Based upon the initial responses the tenant can now decide which building they wish to pursue. The stage for the final negotiations is set, using this technique usually results in initial agreement on many of the issues; those remaining may now be negotiated to the successful conclusion of a lease.

The competitive situation the landlords are placed in, knowing what is important to and the capabilities of the proposed tenant, allows them to decide if they want this tenant for their building. It also encourages them to present their best deal to the tenant. The RFP says to the landlord that this tenant is serious and will shortly by moving into new space in your building or another owners building.

In representing a tenant I can’t think of a better way to get them the best deal possible. 

The New Tax Laws 2011

In December of 2010 the “Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010” was passed into law. In this article we will examine the key elements pertaining to Commercial Real Estate and Business

 Tax Brackets

The 25%, 28%, 33%, and 35% individual income tax brackets were due to expire at the end of 2010, they have been extended for an additional two years, through 2012.

If this occurred the rates would have reverted to 28%, 31%, 36%, and 39.6% respectively.

 Capital Gains and Dividends

The capital gains and dividend rates for taxpayers below the 25% bracket is now zero percent. For those in the 25% bracket and above, the capital gains and dividend rates are currently 15%. These rates were scheduled to expire at the end of 2010, and would have reverted to10% and 20%, respectively, and dividends would be subject to the ordinary income rates. The bill extended the current capital gains and dividends rates for all taxpayers for an additional two years, through 2012.

 Cost Recovery

The bill extends for two years the special 15-year cost recovery period for certain leasehold improvements, restaurant buildings and improvements, and retail improvements. Note, the 15-year accelerated depreciation schedule expired on December 31, 2009. This bill made the effective date of this retroactive to January 1, 2010 and is therefore now scheduled to expire on December 31, 2011. Prior to establishing this special 15-year cost recovery for these categories of properties the cost recovery for these items was 39-years.

Bonus Depreciation

Under current law, businesses are allowed to recover the cost of capital expenditures over time according to a depreciation schedule. Congress allowed businesses, beginning January 1, 2008 through December 31, 2009, to take an additional depreciation deduction allowance equal to 50 percent of the cost of the depreciable property placed in service in those years. Under the Small Business Jobs Act of 2010, this temporary increase in the depreciation deduction allowance was extended through December 31, 2010. The bill extends and temporarily increases this bonus depreciation provision for investments in new business equipment. For investments placed in service after September 8, 2010 and through December 31, 2011, the bill provides for 100 percent bonus depreciation. For investments placed in service after December 31, 2011 and through December 31, 2012, the bill provides for 50 percent bonus depreciation.

Section 179 DeductionsReduced in 2012

Under current law a taxpayer may elect to deduct the cost of certain property placed in service for the year rather than depreciate those costs over time. Over the years the thresholds and phase-outs amounts for this have been increased and extended several times, including most recently as part of the Small Business Jobs Act which increased the thresholds to $500,000 and $2,000,000 for the taxable years beginning in 2010 and 2011. This bill reduces these amounts; it reverts to the 2007 maximum amount and phase-out thresholds for taxable years beginning in 2012, of $125,000 and $500,000 respectively. This is effective for taxable years beginning after December 31, 2011.

 For specific application of these statutes be sure to consult your accountant or tax advisor.

 Issues Ahead

Most of the provisions discussed here expire at the end of 2011 or 2012. We must be very aware of the changes that could occur at that time.