Avoiding property management horror stories
As a property manager, Dan Roseliep has experienced his share of tenant disasters, both manmade and natural. For Roseliep, the managing director and owner of Sperry Van Ness Commercial Real Estate Advisors, perhaps the most blood-boiling episode came when a tenant abruptly up and left — and left Roseliep’s management company with some tasks they never bargained for.
Many commercial buildings are mixed-use properties with upper-floor space devoted to offices and lower-level space devoted to retail and restaurants. Roseliep once managed a historic, high-end Class A structure with a five-star restaurant in the lower level. Without prior notice or even much warning — other than to say a quick goodbye — the restaurant served its last meal, closed, and everybody walked out the door. That wouldn’t have been such a hair-raising experience had it not been for the fact that winding down a restaurant is a little different than closing a certified public accounting firm.
Without any lead time, and without a procedure for unwinding the restaurant, the news came as a total shock. The restaurateur had a very good reputation and had operated an established, venerable restaurant in a nearby town for many years. Nobody saw this coming, and Roseliep and his staff did not understand what a challenge they faced just to close a restaurant and prepare it for another tenant.
“Of course, it makes all the sense in the world to be a strong partner for your tenant and work something out. Hopefully, they can get things going in the right direction because that’s the only time we’re doing well.” — Daniel Brinkman, DSI Real Estate
First, there was a significant inventory of perishable food items to dispose of, not to mention a good supply of liquor and wine, and last but not least, there were many pieces of equipment that were leased, not owned.
Roseliep’s staff spent a considerable amount of time removing all the perishables, donating all of the remaining food to a local homeless shelter. Not that shelter residents were complaining — the shelter came and emptied the coolers and freezers of lobster, steaks, and just about everything else the former restaurant had.
Roseliep’s take-down crew then had to make arrangements for all of the equipment vendors to come and remove leased items such as beverage dispensers, telephones, television sets, and music systems.
Then there was the task of sanitizing the restaurant (in many cases, those “dirty dining” investigative reports are no lie), which had to be done to ensure safety and get the vacated space ready to show another restaurateur.
“It was difficult for those reasons as well as the fact that in an office building, the other tenants had come to depend on having a restaurant there for lunch and in the evening, so it was a real inconvenience for people who used it as a place to entertain clients or just to have lunch,” Roseliep noted. “It took a long time, but we were able to successfully re-lease the space, and that operator still runs a very good restaurant to this day.”
When tenants just pick up and leave, without obeying lease provisions in the process, it’s probably the worst thing that can happen to a property manager. From his vantage point in the commercial brokerage world, Roseliep knows it’s much easier to sell a property with a business that is operating than one that is defunct because there is established history and some continuity. “You have some basis to go on and be able to predict the future with,” he stated.
For Mike Ring, executive vice president of building services for Park Towne Development Corp., the most startling experience was a sizeable investment made for naught. Ring is quick to note that Park Towne has very few issues with its commercial tenants, including the most common landlord misery of tenants being late with rent, but when Park Towne lured a national tenant to one of its properties, the recession of 2008-09 showed its fangs.
With that prominent tenant on the way, Park Towne invested $100,000 to build out the space. The company was just finishing the remodeling work during the early stages of the recession-inducing financial crisis, only to have the would-be tenant, a financial services group, file for bankruptcy. As a result, Park Towne had to eat that $100,000 and try to salvage as many features of the new space as possible for the next tenant.
Park Towne has experienced other annoyances, including situations where tenants stopped paying rent or, like the aforementioned restaurant, simply flew the coop. But Park Towne had never committed this much to a tenant that never came.
“We were able to use some of the stuff, but there were also things like cabinets, work surfaces where they would handle mail, and other things that didn’t carry over,” Ring explained. “Some of those things were expensive, and you just had to tear them out and get rid of them. There was really nothing we could do about it.”
There is something both property managers and tenants can do to prevent such revolting developments — communicate early and often. For commercial tenants, that means communicating not only when their building systems fail and need repair, but also consulting with the landlord when business challenges arise. When the economy goes south and cash flow gets tight, property managers have every incentive to work with tenants, lest their buildings become a commercial haunted house.
Business problems should be disclosed as soon as possible. For example, if your company is mired in a financial rough patch and won’t be able to pay the rent without laying people off, it’s best to be proactive. That’s true not only because the longer you wait, the more limited and difficult the answers become, but also because many landlords are willing to negotiate an amicable solution. A landlord is much more likely to work with somebody who is upfront with them than somebody who’s not, especially if the troubled tenant acts before a small problem escalates into a large one.
“A lot of times when we talk to people about their lease and the lease obligations, primarily paying rent, it’s not really any different than securing a loan,” Ring says. “You’re expected to pay every month, and if you don’t pay, the landlord has to do something to protect his interests. But just like with a bank, if a tenant is running into business issues, and they can’t pay all their rent, it’s to their advantage to contact the landlord early and talk about it. You could potentially work out a period of reduced rent, and maybe the landlord will reduce the rent by a certain amount and extend the lease for six months or a year.”
“From the landlord’s point of view, if you can keep somebody in there and keep them going until they get themselves on track, you can work on getting that money back over time. If they ultimately lose their business or end up leaving, well then you start losing income from that point on, and it’s tough to make that up.”
In Roseliep’s view, every tenant, no matter its size, should have one spokesperson or project leader in house to serve as a liaison with the property manager. One good management technique is to encourage periodic dialogue with tenants, not just talk to them when it’s time to renew a lease. Today, this includes the use of social media to inform, schedule maintenance events, build a networking community, and connect the building’s occupants. Roseliep considers social media apps to be game-changing tools that astute property managers employ to benefit their operations.
“The best managers have an open door and a means for the tenants to communicate on an ongoing basis, whether it’s social media or email or surveys, throughout the lease term,” Roseliep says. ”This is fundamental throughout the term of the lease for tenant retention.”
Daniel Brinkman, vice president of DSI Real Estate, said his company tries to be as proactive as possible with tenants, in part to head off trouble. “If we see anything like late rent payments or something like that, we’ll get in contact and talk those things through,” he stated. “Oftentimes, the tenant will contact us ahead of time. We’ve had several come to us and say things like, ‘Our business is seasonal’ or ‘We had a bad quarter but things are going to get better.’ As long as we have a plan and it’s reasonable, it only makes sense for everyone to work together and get through those hard times. By and large, it usually works out just fine.”
When Brinkman says “plan,” he means both the tenant’s business plan and the plan he or she devises to get through hard times. “If someone comes to me and says, ‘I can’t pay my rent, and I want to delay a couple of payments for a few months,’ we might entertain that, but that’s not good enough. You have to tell us how you’re going to do that because we would want a reasonable plan on how you recover those funds and pay the rent within a reasonable amount of time.
“Of course, it makes all the sense in the world to be a strong partner for your tenant and work something out. Hopefully, they can get things going in the right direction because that’s the only time we’re doing well. When our tenants’ businesses are successful, then we’re successful.”
Brinkman says property managers don’t have to understand a tenant’s business plan to the same extent a banker does, but they need a general idea of the renter’s vision. “The other thing we want to make sure of is that we’re putting good tenant mixes together, so that we understand someone’s business and can put them in a particular location without harming anyone else’s business in that location.”
Flirting with disaster
Not all horror stories are manmade disasters. Roseliep once managed a 100,000-sq.-ft., seven-story commercial building that flooded on a Fourth of July weekend. After the disaster occurred, he was escorted to the front door in a police boat and discovered 14 feet of water in the lower level. That knocked out electrical service to the entire building. None of the floors had elevator service, none of the floors had ventilation, and none of the windows opened. Needless to say, the building became fragrantly challenged.
That was only the beginning of the problems. The municipality lost its water supply for two weeks, so there was no running water in the building for that duration. It cost $400,000 just to restore the electrical service, and roughly another $600,000 for the reconstruction.
“We had to first pump the water out of the building,” Roseliep recalled. “If you pump it out too fast, the concrete can come up under the floor. Then we had to dry the building out. Then we had to restore the electrical service, and we brought in temporary equipment to ventilate the building because there had been no air movement in that period of time. We had very large industrial dehumidification devices because we had to get air movement because none of the building was opened.”
When flooding or fire or smoke damage strikes, the onus for recovery and business continuity is on both the property manager and tenant. A common provision in leases spells out the requirement that occupants of the building have their content insured if something happens in the space, especially if a tenant causes it. In that scenario, the insurance company for the building is going to go after the insurance company for the tenant. Meanwhile, it’s generally up to the property manager to insure and restore the building itself.
According to Ring, not only are individual tenants responsible for all of their property within their space, they might also be responsible for any partitions if they build out the office a certain way. The landlord’s insurance covers the building itself, but it may or may not include repairing damage to the office wells that are in the space.
If the tenant has to vacate, usually there is a clause in the lease that allows the tenant to stop paying rent on the space, or the rent is prorated for the amount of space that is unusable until it’s repaired.
The property manager usually will have loss-of-income insurance because while the tenants aren’t paying rent, the landlord’s expenses (the mortgage, taxes, etc.) continue. Loss-of-income insurance only covers casualty losses, not the loss of rent due to a sluggish economy, for example.
Devil’s in the details
A property manager can be a strong business partner, especially if tenants understand their own lease agreement. The most common tenant error is nonpayment of rent, but failing to understand the terms of the lease is a close second.
One thing that gets tenants in trouble is violating leases that require the landlord to give permission to change things, especially things inside the office suite. “Over time, we’ve had tenants that changed walls or painted without getting permission, so that’s one thing the tenant should know,” Ring says. “Be sure to know what your lease or notification requirements are if you want to make changes to your existing space.”
Leases are legal documents, so Ring usually recommends that tenants talk to an attorney in the event it contains something they don’t understand. “That is where they usually run into trouble, when they don’t understand or have not really read the lease and they do something or don’t do something they are supposed to do,” he noted.
Despite the isolated horror stories, Roseliep says commercial office management across all the different types of the property spectrum is less intensive than residential, apartment, or condominium management. That’s because the commercial office tenant is, all things considered, the most responsible kind of tenant.
“The office tenant is there for a nominal eight-hour day,” he added. “The building manager’s job is to make sure the property is in good condition and conducive to the occupant being able to conduct their business in an efficient manner.”
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