MYWAY on Retail Real Estate
We all saw the images of Hurricane Katrina's destruction and the resulting humanitarian crisis it brought. One million people were displaced from Louisiana and Mississippi to Alabama.
As the shock wears off, the business of business starts to take the lead of just some of the problems the region is beginning to address. In the next few months and coming years, how Katrina impacts retail real estate and the law will be a billion dollar debate and I'm willing to bet that some of the laws as we understand 'em will be changed. Questions such as what amount of damage/destruction frees a tenant from paying rent? What if the center survived, but the customers left, is the tenant still responsible to pay rent? If there's a net leased building in the disaster area, is the tenant obligated to pay rent even if the building has been destroyed? Who's responsible for toxic waste now on the property?
What happens to commission agreements that were earned but not payable yet? Is there anyway an owner can avoid paying their mortgage? These are just some of the questions that face the industry and region for the next few years and I doubt if there will be easy solutions. However, if I had money, I believe investing in New Orleans for the long term makes sense and there should be great opportunities caused by this disaster. It's the famous silver lining in the cloud.
Unfortunately, the impact of high gas prices that started before the disaster is now worse and is just beginning to have an impact on our economy and I believe its long-term impact will be a substantially slower economy even as the cost of gas decreases. Retail sales only grew 1% last month and that number might drop in the coming months. I have a Ford 150 pickup and it now costs me $75 to fill it up, that's $150 a week I'm now spending on gas. If I'm having trouble adjusting to this insanity, what's the average "guy" who's earning $48,000 going to do? And that's before we take into account higher heating costs this winter. Also, I don't care what our beloved government says, inflation is higher than being reported and that's having a negative impact on retail spending. We live in "interesting" times.
Before changing subjects, I have to commend Wal*Mart on their contribution to the survivors of the hurricane. Unlike our government, they knew the hurricane season was coming and prepared for it. They're getting and deserve great press for their assistance and I have to admit I'm not a Wal*Mart fan, they can be EXTREMELY difficult to deal with, but I think they get a lot of bad press and raps just because of their size not because of their management philosophy. They don't pay their people less than Target, Kohl's, McDonald's or Kmart nor do they give fewer benefits. However, they are being constantly being blamed for the problems of the world. Down deep, I'm a Libertarian and believe in capitalism; no one is forced to work at Wal*Mart. If "you" believe you deserve more pay, either "fight" with your manager for a raise or get another job.
Talking about legal issues, ICSC's Shopping Centers Today ran an article on "Lease Land Mines" which dealt with two main issues. First is that sloppy lease languages can kill deals or create major headaches. That's a major issue in our industry that appears to be getting worse. Often the problem being the company writing the lease wants to "save" money, so they hire an in-house attorney who works for a lot less than outside counsel. That's the good news. The problem is the major reason for the cost difference between the in-house lawyer and outside counsel; the in-house lawyer is less experienced and in many instances doesn't know what they are talking/writing about. The other major reason is the in-house counsel is overworked and because they are not billing a client or wanting to be a partner and won't work until 10 p.m. every night to keep their head above water. Instead, they will just write quick and further complicating matters, either the leasing department doesn't want to or isn't allowed to review documents. Over the years, I've provided feedback to clients on leases being prepared and many times was told to mind my own business and in most cases not too politely; yet years later these provisions became problems for the owner. It appears no one reviews documents except for the lawyers and in most cases and that's the problem. The VP or president just scans the document and then signs, thereby prolonging the headaches.
The majority of the remainder of the article addressed exclusives, stating that exclusives can create problem later on or prevent certain uses from opening in the center. Duh!!! Yes, the article is 100% correct and in a perfect world "we" should never provide exclusives or restrictions but unfortunately we don't live in a perfect world.
Unless you have a grade "A" site with six anchors wanting in, Kohl's isn't going to allow restaurants, billiard parlors or schools near its store. Bed Bath & Beyond will not allow Linens 'n Things into the same center it's in and Giant Supermarkets won't allow the sale of off-site food consumption or beauty /health supplies. I want to meet the developer who says no to these tenants and walks away from the deal. Let me restate that. I want to meet the SUCCESSFUL developer who lets them walk because of these restrictions.
Changing topics, last week I met with a potential client to lease and manage a 500,000 sq.ft. center that he was in the process of acquiring. One of the three anchors, a 100,000 sq.ft. "big box" owns their store and is vacating the premises in three months for a bigger unit a mile away. The vacating tenant is located "dead center" and has the most prominent spot in the project. I recommended he call the anchor before finalizing the acquisition and buy their store, so he controls his own destiny, not the retailer. He complained it made no sense to lay out $4 to $5 million and wait up to two years to start getting an income; there was no return in it for him. I tried desperately to explain a vacant store representing 20% of the center will hurt leasing and the flow of customers to the existing tenants, which ends up hurting him. The "big box" retailer by its very nature will be slow to lease/sell the space and under their REO can lease to any use they want. It's a disaster waiting to happen. He's prepared to buy the property for $35 million, and in reality isn't in control of the center's future. Needless to say, he didn't like my attitude nor did he feel that I was the right company to handle the management.
On a different note, I'm doing a 1031 exchange search for one of our clients and I've been "eyeing" hundreds or possibly thousands of properties available for exchange at a CAP rate of 5% to 9%, with such tenants as Walgreens, Wal*Mart, CVS, FedEx, etc. In addition to these credit worthy tenants there were dozens of tenants available at 7% to 9% CAP rates that IMHO, are an hour to an hour and a half away from bankruptcy. How can someone pay such an outrageous price for a weak tenant? I'd rather put my money in a totally safe CD at 4 ½% than get 7 1/4% for a tenant that probably will be out of business in a year. Pricing in our industry is totally insane, whether it's for a center or 1031, the numbers don't work for the long run and most of us are in it for the long run, so we have problems coming down the road SOON.
Last complaint of the day. Banks are DUMB. I was talking to a friend who borrows $50 to $75 million a year to acquire centers. He was bragging that he never puts more than 5% into any deal, the bank puts up 95% of non-recourse of the money. "How?" I asked and was told, "It's simple. I LIE." Add fictitious numbers, i.e. commission paid, TI, etc. and show, on paper at least, that "you're" putting 20% into the property. The banks never check, they just provide the cash. You know when the next recession comes, and it is, that property will be going back to the bank. Dumb, de, dumb, de, dumb.
As the shock wears off, the business of business starts to take the lead of just some of the problems the region is beginning to address. In the next few months and coming years, how Katrina impacts retail real estate and the law will be a billion dollar debate and I'm willing to bet that some of the laws as we understand 'em will be changed. Questions such as what amount of damage/destruction frees a tenant from paying rent? What if the center survived, but the customers left, is the tenant still responsible to pay rent? If there's a net leased building in the disaster area, is the tenant obligated to pay rent even if the building has been destroyed? Who's responsible for toxic waste now on the property?
What happens to commission agreements that were earned but not payable yet? Is there anyway an owner can avoid paying their mortgage? These are just some of the questions that face the industry and region for the next few years and I doubt if there will be easy solutions. However, if I had money, I believe investing in New Orleans for the long term makes sense and there should be great opportunities caused by this disaster. It's the famous silver lining in the cloud.
Unfortunately, the impact of high gas prices that started before the disaster is now worse and is just beginning to have an impact on our economy and I believe its long-term impact will be a substantially slower economy even as the cost of gas decreases. Retail sales only grew 1% last month and that number might drop in the coming months. I have a Ford 150 pickup and it now costs me $75 to fill it up, that's $150 a week I'm now spending on gas. If I'm having trouble adjusting to this insanity, what's the average "guy" who's earning $48,000 going to do? And that's before we take into account higher heating costs this winter. Also, I don't care what our beloved government says, inflation is higher than being reported and that's having a negative impact on retail spending. We live in "interesting" times.
Before changing subjects, I have to commend Wal*Mart on their contribution to the survivors of the hurricane. Unlike our government, they knew the hurricane season was coming and prepared for it. They're getting and deserve great press for their assistance and I have to admit I'm not a Wal*Mart fan, they can be EXTREMELY difficult to deal with, but I think they get a lot of bad press and raps just because of their size not because of their management philosophy. They don't pay their people less than Target, Kohl's, McDonald's or Kmart nor do they give fewer benefits. However, they are being constantly being blamed for the problems of the world. Down deep, I'm a Libertarian and believe in capitalism; no one is forced to work at Wal*Mart. If "you" believe you deserve more pay, either "fight" with your manager for a raise or get another job.
Talking about legal issues, ICSC's Shopping Centers Today ran an article on "Lease Land Mines" which dealt with two main issues. First is that sloppy lease languages can kill deals or create major headaches. That's a major issue in our industry that appears to be getting worse. Often the problem being the company writing the lease wants to "save" money, so they hire an in-house attorney who works for a lot less than outside counsel. That's the good news. The problem is the major reason for the cost difference between the in-house lawyer and outside counsel; the in-house lawyer is less experienced and in many instances doesn't know what they are talking/writing about. The other major reason is the in-house counsel is overworked and because they are not billing a client or wanting to be a partner and won't work until 10 p.m. every night to keep their head above water. Instead, they will just write quick and further complicating matters, either the leasing department doesn't want to or isn't allowed to review documents. Over the years, I've provided feedback to clients on leases being prepared and many times was told to mind my own business and in most cases not too politely; yet years later these provisions became problems for the owner. It appears no one reviews documents except for the lawyers and in most cases and that's the problem. The VP or president just scans the document and then signs, thereby prolonging the headaches.
The majority of the remainder of the article addressed exclusives, stating that exclusives can create problem later on or prevent certain uses from opening in the center. Duh!!! Yes, the article is 100% correct and in a perfect world "we" should never provide exclusives or restrictions but unfortunately we don't live in a perfect world.
Unless you have a grade "A" site with six anchors wanting in, Kohl's isn't going to allow restaurants, billiard parlors or schools near its store. Bed Bath & Beyond will not allow Linens 'n Things into the same center it's in and Giant Supermarkets won't allow the sale of off-site food consumption or beauty /health supplies. I want to meet the developer who says no to these tenants and walks away from the deal. Let me restate that. I want to meet the SUCCESSFUL developer who lets them walk because of these restrictions.
Changing topics, last week I met with a potential client to lease and manage a 500,000 sq.ft. center that he was in the process of acquiring. One of the three anchors, a 100,000 sq.ft. "big box" owns their store and is vacating the premises in three months for a bigger unit a mile away. The vacating tenant is located "dead center" and has the most prominent spot in the project. I recommended he call the anchor before finalizing the acquisition and buy their store, so he controls his own destiny, not the retailer. He complained it made no sense to lay out $4 to $5 million and wait up to two years to start getting an income; there was no return in it for him. I tried desperately to explain a vacant store representing 20% of the center will hurt leasing and the flow of customers to the existing tenants, which ends up hurting him. The "big box" retailer by its very nature will be slow to lease/sell the space and under their REO can lease to any use they want. It's a disaster waiting to happen. He's prepared to buy the property for $35 million, and in reality isn't in control of the center's future. Needless to say, he didn't like my attitude nor did he feel that I was the right company to handle the management.
On a different note, I'm doing a 1031 exchange search for one of our clients and I've been "eyeing" hundreds or possibly thousands of properties available for exchange at a CAP rate of 5% to 9%, with such tenants as Walgreens, Wal*Mart, CVS, FedEx, etc. In addition to these credit worthy tenants there were dozens of tenants available at 7% to 9% CAP rates that IMHO, are an hour to an hour and a half away from bankruptcy. How can someone pay such an outrageous price for a weak tenant? I'd rather put my money in a totally safe CD at 4 ½% than get 7 1/4% for a tenant that probably will be out of business in a year. Pricing in our industry is totally insane, whether it's for a center or 1031, the numbers don't work for the long run and most of us are in it for the long run, so we have problems coming down the road SOON.
Last complaint of the day. Banks are DUMB. I was talking to a friend who borrows $50 to $75 million a year to acquire centers. He was bragging that he never puts more than 5% into any deal, the bank puts up 95% of non-recourse of the money. "How?" I asked and was told, "It's simple. I LIE." Add fictitious numbers, i.e. commission paid, TI, etc. and show, on paper at least, that "you're" putting 20% into the property. The banks never check, they just provide the cash. You know when the next recession comes, and it is, that property will be going back to the bank. Dumb, de, dumb, de, dumb.
posted by tedkraus at 10:05 AM
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