The Logic of Landlord

The intricacies of the logic of most landlord is at first easy to envision. A landlord wants a return on and of his investment over the period of time they own the property. Now that being said there are many myths that a Tenant should dismiss.

Myth #1, An empty space is ALWAYS a terrible thing and the Landlord should take a very low offer of rent, rather than leave it empty.

The fact is the prudent Landlord has foreseen the potential for vacancies and has prepared for it. A landlord will find that accepting an offer for 40 or 50% less than the market rents, just to fill a vacancy will accomplish several negative results for the landlord and the property.
First and most obvious is the reduction in annual net revenue. 50% rent reduction for one space will take 6 month to recuperate each fiscal year. This means the Landlord could leave the space vacant for as much as 18 months while looking for a fair market tenant willing to sign a 3 year lease, rather than sign a lease, only to have a space filled.
Another result of accepting a low rent for space in a multi-tenanted property is it may, in effect, lower the "normal" market rents, therefore, lowering the rent in subsequent vacancies and in some cases even existing leases. Once a rent is accepted, it often becomes known by the market in general, or the very nature of the type of tenant the Landlord accepted a low rent from will reduce the viability of the balance of the Landlords building. More knowledgeable prospective tenants will know what a certain industry is capable of paying for space. They can then deduce that rent for some tenants is significantly less.
Yet another probable effect of accepting a low rent is the overall value of the building is reduced significantly more due to the net revenue reduction, than by having a vacancy. Potential buyers/investors for the property will give more credit for a vacancies potential than the lower rents will actually realize. Investment real estate is valued based upon the quality and quantity of the net cash flow. A 40% reduction from market rents will reduce the value of the building by 40%, while a 40% vacancy in itself will not reduce the value nearly as much, unless the market is also factored into the equation. While the building may not be for sale at this time the original fact is still very relevant: A Landlord wants a return ON (income over and above his investment) and OF (sales proceeds returning the original purchase or cost) his investment.




Myth # 2, Rent a Landlord receives is really all profit because he still has the building after the lease is completed.

Most Landlords have equity in the building they own. Many have a significant mortgage on the property. Often after paying the Landlord itself a fair return on the equity investment and the mortgage (along with the return the bank requires – i.e. interest), the Landlord will make very little "Profit" from the rents it collects.

Myth #3, Landlords always want the most rent they can get and don’t really care what the tenant’s issues are or who they are.

While this can be a true statement, most prudent Landlords are exactly the opposite. A good Landlord will want a fair market rent for it’s property. A multi tenant building Landlord will want his tenant mix (the types of businesses) to be very well thought out and effective. To give an extreme example for demonstration purposes, If a Landlord has an anchor tenant with the use being a moderately priced family dinning restaurant, an any sex hair salon, and a general dollar store, that Landlord will most likely search and give preference to such other businesses as a children’s or ladies clothing store, an electronics boutique, a tanning and nail salon or possibly a video rental business because any of these type tenants will feed and feed off of the existing tenants, thus making all tenants enjoy a better business and not encouraging them to leave when the lease renewal time comes. On the other hand the Landlord would most likely not show preference to a business that would either deter consumers from frequenting those existing tenants or even those that would not increase the potential of the existing tenants. For example, an adult bookstore, a pawn shop, a barber shop, an accounting firm, or even a very exclusive art gallery. While all these establishments are very possibly good tenants, they would not be the best choice for this building. The more obvious conflicts might be the adult bookstore could alienate the existing tenants and their customers, and the pawn shop often (but not always) demonstrates a declining neighborhood and could cause a reduction in the current trade, or at least shift the demographics of the clientele. One that is a little less obvious would be the accounting firm. While such a professional business would not alienate the current tenants or their customers, it would also not likely add anything to the mix. Finally, the barbershop would directly compete with the any sex hair salon, which may very well not be listed in the lease as an exclusive but would likely reduce the business of the existing tenant and simultaneously not maximize the potential of the new tenant. Both are likely to want to move by the end of their lease.







Myth #4, The longer a tenant signs a lease for, the lower the rent should be. AND, the more space the Tenant signs a lease for, the lower the rent should be.

While to some extent this is possible, some interesting points should be made. Many things must be taken into consideration when the length of a lease or the size of a Tenant’s space is considered, that at first glance seem irrelevant.
First, the length of the lease; Most retail Landlords understand that a term must be long enough to reduce the continual turn over of tenants in a building. Tenants moving in and out will tend to reduce the viability PERCEPTION of the building and it’s location. So often a Landlord will be happy to negotiate a slightly better rent for a longer term lease. However, it is also true that real estate markets change. Often a Landlord will willingly accept a 3 year lease from a neighborhood type tenant, but will fret a little when they expect a reduction in rate as a trade for a 5 year lease. This is overcome by establishing some formula for rate increases over the period of time if the expectation of market increases is strong.
Now regarding the size of the space. Unless the building as a whole is the indicated lease space, a Landlord must look at the potential of replacing the tenant in the future. Should the landlord allow a tenant to combine several spaces into one and occupy a large percentage of the building, that Landlord must weight the possibilities of default on the lease and eventual termination of the lease very heavily. While the immediate gratification of leasing such a large space is significant, the unforeseen negative ramifications are often horrible. What will the chances be for replacing the tenant later be? What will the new tenant’s effect be on the rest of the buildings current or future prospective tenants? What will the reduced rent for the larger space do to the net revenue stream of the building and does that combined with the potential higher risk decrease the value of the building?

There are many other perceptions and Myths regarding the Landlord and it’s investment, and there are many truths. As one might surmise the individual landlord and their specific investment goals are very often a determining factor in many decisions made regarding the rental rate, the tenant mix and other terms a landlord will accept.

One very important idea to keep in mind as a potential tenant, is that a Landlord is only a business owner. The Landlords product that it sells is space. Space sold for a given time and under a given set of terms. With that in mind try assuming that the Landlord sells shoes, or cuts hair or rents automobiles, while some negotiations are possible with these type products, most people would not presume to make the same assumptions as they often do when looking for space in a small shopping center. Just how much care would be taken by a barber who just agreed to cut your hair for ½ price? As with most things in life and business, the old adage of "You get what you pay for" seems very appropriate.

A good Landlord will desire stable tenants who pay as close to market rents as possible. They will look for a tenant that will enhance the traffic to the shopping center, mix well with the other tenant types, and stay put for a while. Not-so-good Landlords are looking for only the highest rents no matter what the rest of the story is. Those Landlords only benefit on the short term. That does not tend to support stability and will eventually negatively effect the value of the property.



Next, We look into the "Logic of a Tenant"



.

Announcement

It has been so busy around the office this past couple weeks I was very remiss in not writing a post about the next topic....

My fantastic business partner Steve Critchfield has completed several years of study and passed the necessary tests as well as turned in a thesis resume' to finally obtain his CCIM designation!

Those of you out there who follow advanced REALTOR designations will know of this huge accomplishment this is. Those of you who don't know it entails hundreds of graduate level class hours as well as many hours of work developing and writing narratives that demonstrate actual expertise in our field. There are only a very small percentage of commercial practitioners who have succeeded in obtaining this designation and it often take years and years of work.

Congratulation to my esteemed business partner Mr. Stephen Critchfield, CCIM.

Spend, Spend, Spend.....

Many of you who have followed our writings have certainly noticed a lack of entries of late. Sorry. It has been busy trying to keep our heads above water. It seems the city has been equally busy. Or, at least we will give them that excuse. Thus far they have managed to insult the owners of a major new potential employer. Cast aspersions upon their favorite whipping boy the Branson Airport and of course spent money needlessly and wastefully.

As far as the money spending goes, there may be a light at the end of the tunnel. It seem the 11 million dollar savings account handed over to the Mayor and her band of marry followers is nearing a zero balance. Not to worry though, we have a great list of accomplishments...

Purchase: 7.5 acres surrounded by city park with virtually no available access and the remnants of an old cabin and shed. Inquires into the value of this fine parcel of historic preservation with several local licensed appraisers sheds a little light. The city paid some $239,000 for what amounts to a $40, 000 value. But the view is wonderful.

Purchase: $200,000 for a old school building that had been on the market for about 3 years. No idea of the actual value. It could be we got a deal. but ask now why we made the purchase and the answer seems to end up with a blank stare of bewilderment. Surely there is no need for reason or plan. Evidently we bought it because it was there.

$150,000, I mean $200,000 or I think $225,000, oh some small amount like that bought our revered kingdom a slightly modified boilerplate novel dubbed "Comprehensive Plan". See, we do need plans. We hired a company from that bastion of green space, tree hugging, anti growth, self loathing gleaming light from the west. We had a need to spend thousands educating our employee plan writers as to how unique and special our community is so they could write a few extra paragraphs and insert them into their one size fits all 20 year plan for the future. A plan that will probably cost another 11 million to start enacting. But we will all be one big happy Kumbaya singing family when we get to the finish line. Broke, but happy with plenty of hiking trails. By then perhaps the voters will tell some of our leaders to take a hike.

Several Hundred Thousand spent in investigation of the previous administrations digressions and misgivings. Yes, it seemed we were in a forever state of investigation for the first two or three years. We had experts scour the books. We had professionals reviewing contracts. We had staff auditing decisions. AND we found some very important answers. We found out that the city under previous administrations made and saved money. Yes lots of money. Nearly 11 million dollars. They had solid contracts with strong companies as partners. They had built a convention center that in spite of a nation wide, if not world wide, recession is performing at or above projections. They encouraged and aided the growth in the private sector and created many new jobs that pay more and have benefits. And much more was learned in the repeated and costly investigations. You might not ever hear the results though. Most investigations led to the results they did not want to hear. The old guard did very well and represented the city properly.

Many more thousands were spent to find out how terrible the past administrations had been in wasting money paying too much for our city employees. Survey a few towns our size around the area and compare their wages and benefits packages to those of our employees. SURVEY SAID..... Branson better start giving raises or demotions and pink slips. Seems workers out on the streets were being paid at one to three levels beneath their counterparts in other cities. Woops....

Legal fees...... Wow! I mean, Wow! Breach of contract must really be an expensive endeavor. But I digress. City of Branson legal expenses are an article if not an entire blog of its own.

Energy Make-over.... How many dollars does it take the City Aldermen to screw in a light bulb??? One Million! OK, lets see if any of you can find a calculator handy and do the math. 1,000,000 dollars and it is expected (hoped) we will save $34,000 per year. Assuming Johnny will be paying ZERO interest on the $1,000,000 loan and assuming the savings is always the government analysis's estimated savings of $34,000 and assuming the city aldermen and our Mayor do not file bankruptcy in the next few years, how many years will it be before Johnny will actually start "saving" money??? That's right about 30 years.



Other Accomplishments:

Affordable Housing - Discussed so many times it became a yawnfest of the utmost. We talked about it, we spoke on it. We dialogued about it. We hemmed and hawed about it and we consulted about it. What we did not do is define it. We also did not make any changes to our development code that would effect it positively.

Signs - Thanks to the leadership of our City board of aldermen and the Mayor, we can all safely drive down Highway 76 without seeing any obnoxious unpermitted Garage Sale signs.

Community-Neighborhood Associations - In true spirit of liberal think tank spiritualism, our alderman board has taken it upon themselves to help form community associations. It seems they do not think our citizens are capable of thinking for themselves and forming an association, unless guided by their superior intellect. In the ever foreseeable actions of this administration, we have spent months organizing and initiating groups into small units of followers. Set aside even smaller subsets of more loyal subjects as leaders and created a movement of feel good rule setting people who will now feel incentivized to show up and root on more important portions of the liberal movement headed by our leadership team in office. But we got logos and monuments out of the deal.

No-Growth and No-jobs: Four years after the famous KY3 interview. We did it. We stopped and took a breath. My biggest fear is we took our last gasping breath this year, or last. The small movements in our chest are just reflexes. So far not a soul has stood up to run for office and see if we can get just a little air pushed back into our empty lungs. I don't blame them. Who wants to be attacked by the adoring press or worse, the like of me. Who wants to volunteer for what should be a few hours a week shaking hands and cutting ribbons, only to find out the micromanagement of this administration has turned that pomp and circumstance office into an 70 hour a week hands on multi-million dollar business. Come to think of it, that is a good question. Why does anyone want and seek that position? What is in it for them? One wonders...

The Branson Comprehensive Plan (as of May 2011)

I will surprise all of you today and wholeheartedly yell from the highest ridge top of no more than 18% slope that I support in theory and in many cases in reality the Branson Comprehensive Plan. Yes I love so many of the ideas that I read over the past week.

Why we have a suggestion that the City encourage renovation and replacement of old worn out properties. We have suggestion that we grow our park system by expanding trails and adding small neighborhood parks. One sentence even suggested that the land to do this be bought rather than extorted (yet I digress). It is exciting to think we all got together and want a Library System and will all work to get that accomplished, in fact the work is already underway without the help of this Comprehensive Plan.

I had planned on relating unto you readers at least four or five long paragraphs about the wonderful virtues of the Plan, but I will fall short and cut to the chase. The Comprehensive Plan is very well written, well designed, a bit long winded, and in general balanced. At least that is the plan I read. I read a one and a half inch thick document three times. I tried the first time to just read it and not try to evaluate it and not try to seek out the underlying meaning and hidden agendas. Let's face it, I do tend to do that with this administration. I tried and except for a few very blatant lefty crybaby spotted owl moments, I was successful.

I tried the second time to read it with my less than rose colored glasses on and perhaps some long winters eve I will try to identify the monstrous passages I perceived in the text. Those clauses and paragraphs that I saw as absolute abomination of the Branson Way and of course the American Way. Oh, that is in there and quite prevalent if you read it that way. Idealism and environmentalism is abundant in this novel. Idealism akin to that of a 3 year old. That absolute attitude of "I want more and you can't have any". Yes we have a bit of the old protectionism, a little touch ( or more) of Socialism, and to just tip off the top, a smidgeon of Marxism.

Then I read the document for the third time. This time I made believe we had a totally different group of people in charge of the city. I imagined we had a group of entrepreneur enabling business minds who realized the idea of bigger pie is the way to the future. They all wanted a town to grow and prosper, not just the people they went to grade school with, but all kinds of hard working business minded, pro-growth people who contribute would benefit. This perfect group of leaders wanted to produce a playing field whereby everyone had a chance to succeed and therefore help grow the economy. This wild group of leaders also understood the benefit of failures too. They encouraged new business practices and new venues, even the risky ones. They understood that growth includes setbacks as well as successes. This crazy group actually started encouraging an attitude in City Hall of customer service and aid in development.

I just have to tell you, when read with that attitude, the Comprehensive Plan is pretty palatable. In fact if we actually had that attitude, there would be no need for the plan. See, decades ago and up until recent times, this town had that attitude. Why, once I witnesses competitors welcoming competitors. I even saw companies join forces and voluntarily contribute to joint marketing plans. Motels actively sent overflow to the motels that were in need of more business. Shows and entertainers climbed on the same bus and went to small venues all over the Midwest actively marketing Branson as a summer vacation destination. YES, they did that together. If a park was needed someone donated the land. If trails were wanted, city official asked and offered something in exchange. If community outreach was a need, PEOPLE came together and served the need. Affordable housing was attained by having plenty of businesses here who needed employees, not by searching for ordinances and rules while all the while feeding the problem by slowing and even stopping the addition of those jobs.

So I said I wanted to get to the chase and then rambled for two pages. I simply love the new Comprehensive Plan. I just want a different group of people interpreting what it means.

So, lets ADOPT the plan and DIVORCE the planners.

April 2012 is nearing and we need a group of brave people ready to step up to the plate and change the way this city is being run. We need a group that will honor contracts, stop wasteful spending and rebuild the savings account this administration was given and has quickly disposed of. We need less micromanagement and more professional administrating. It is time for the doors to the community to be re-opened and someone tell the world we want them to consider Branson as their next personal home as well as business home.


Side Note:


Well it has already started. self serving interpretation, selective attention to snippets and quotes, combining just the right points of interest to further an anti-growth campaign. I have knowledge of at least two "Special Interest Group" meetings and the agendas include "USE" of the Comprehensive Plan. USE to further self serving anti competition futures. USE of certain statements that can be interpreted many different ways. More as we hear the details.

Letter to the Editor of Springfield Bussiness Journal

( Sent May 12, 2011 )



Gentlemen,

I've read your coverage of the Branson Airport with interest for several months. I admit I'm an obvious Branson supporter but I must say I'm turned off by your biased reporting about this company. Normally, I believe that your reporters do a good job of being even handed and attempt to just report the story. But in this case your obvious bias often pours from the page. I don't expect you to be a cheerleader for this project, but you should at least admit that it is an interesting story as it relates to private enterprise versus total government control of a typical public enterprise.



Yes, the projections have missed their plan which was prepared during much different times. Yes the business has lost a great deal of money during this time. All fair points that must be reported. However, wouldn't it be more accurate to report that these projections were not prepared in anticipation of the worst recession we have suffered in many decades. Those projections were made....not when airlines were cutting service and markets throughout...but during the "good times" when it appeared that more service would be needed...not less. In fact, it would be interesting if you were to talk to bond people to see how many of their bonds that were issued during that same period are performing as projected. Couldn't this be included in the story, instead of making these guys sound like idiots or just out to fleece the bond holders when they did their business plan and revenue projections. How many of the other similarly timed issues are getting forbearance agreements negotiated at this time.?



As a reader I think it would be interesting to know that the airlines that are flying into Branson are making money. Frontier Airlines are reducing seats nationwide, but they are adding flights to Branson because they are flying at about 90% load factors. Department of Transportation data reports that for the second and third quarters of 2010, the Branson Airport was in the top 25 percent of all of AirTran's flights for "revenue per available seat miles"...a very important indicator for Southwest's future plans. Instead, your story makes the airport sound like it is a ghost town....when in fact you can take pictures of nearly full flights landing everyday.



I appreciate your quotes from Mr. Hynes, the aviation consultant, but don't you think that including any of the following quotes would have been accurate and balanced his opinion?

“We have an airport starting from scratch,” Hynes said. “Branson started from zero.” Hynes said in 2009, when the airport was only open eight-and-a-half months, it saw 48,167 passengers. “To get 40,000 passengers the first year was great,” Hynes said. In 2010, the airport saw 94,923 passengers. “That is a tremendous increase,” he said. Hynes estimates in 2011, the airport could see 140,000 passengers, but doesn’t expect that kind of growth rate to continue into 2012. He expects a 5-15 percent annual increase starting in 2011. The Southwest Airlines acquisition of AirTran Airways should be great news to Branson Airport. “Southwest’s acquisition is probably the greatest thing that could have happened to the airport,” Hynes said. “I think they will make Branson a mini-hub.” Couldn't you find any of these thoughts important and or intersting enough that you could have included them in your story?

I totally understand your frustration when the subject of your story won't talk with you....but that doesn't give you the right to just fill in the story based on your own opinions...or perhaps that of The Springfield Branson Airport management. As a business publication it would appear to me that you would be interested to see how much the Springfield Branson airport ticket prices have dropped since Branson began operations. I would also wonder if the millions of dollars in national advertising that the Branson community has invested in the "low cost airline service now available" message has had in the past increases in passengers in Springfield. Check out the chambers web site, it includes links to Springfield's airport as well. Won't lower cost transportation help the entire SW Missouri region? Wouldn't it be interesting to see Branson continue to add service to its airport and bring more visitors to this region? As for me, I have several businesses that will consider Branson and or this part of the state to locate their business if we can provide good low cost air service. It might even help current businesses to expand....its a much bigger story than just tourism.

Again, you don't have to be a cheerleader for this enterprise, I just think you should give the project a fair shake and at least do some fair reporting. I would expect this sort of treatment from your friends at The Newsleader, but I had higher hopes for you.



Stephen N. Critchfield
Broker/Partner
Commercial One Brokers, LLC
Branson, Missouri