What have you learned this year about Commercial Real Estate

Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes

There is always something to learn as I add to my checklist. One of the things that I need to do a better job is to button up future leases on the HVAC system. Some of the leases I have inherited are vague on the responsibility of these systems. Typically the tenant will maintain and repair and the landlord will replace. What I come to find out is that some of my tenants have done a poor job of maintenance, thus shortening the life of the unit. So going forward we will implement an amendment to the lease to insure the tenant has secured a semi annual maintenance contract. In some cases the cost of the unit will be shared by both parties.

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Courtney Duong

Property Manager · TX · Member since 2019 · 327 posts · 69 votes

Great point. I will add this to my checklist too. And that restaurant tenants will do quarterly cleaning of the grease traps.

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Courtney Duong
Property Manager · TX · Member since 2019 · 327 posts · 69 votes
3y
Great point. I will add this to my checklist too. And that restaurant tenants will do quarterly cleaning of the grease traps.
3 Reply
John M.
OP
Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes
3y
Great point about the grease traps! ....I guess you should add the hood to that too!
0 Reply
Ronald RohdePro Member
Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
3y
For both of those obligations, be sure to pay for the service if T doesn't provide proof of service. Bill it back to tenant with an admin fee. Its a common remedy, not a default under the lease.
2 Reply
Zachary Russell
Specialist · Member since 2021 · 26 posts · 8 votes
3y
i just learn more through time that the most important tool you can have is your financing, the sharper it is the more you can do
0 Reply
Joseph Gozlan
Real Estate Agent · Plano, TX · Member since 2015 · 734 posts · 511 votes
3y
Personally, I’d rather set the contract in place and bill the tenant than trust that they’d do it themselves.
2 Reply
Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
3y
We are all learning the costs and impact to real estate of excessive stimulus and government actions and loose monetary policy.
2 Reply
Jade S.
Investor · Evans, GA · Member since 2015 · 190 posts · 103 votes
3y
Quote from @John M.:

There is always something to learn as I add to my checklist. One of the things that I need to do a better job is to button up future leases on the HVAC system. Some of the leases I have inherited are vague on the responsibility of these systems. Typically the tenant will maintain and repair and the landlord will replace. What I come to find out is that some of my tenants have done a poor job of maintenance, thus shortening the life of the unit. So going forward we will implement an amendment to the lease to insure the tenant has secured a semi annual maintenance contract. In some cases the cost of the unit will be shared by both parties.

Great idea to require the HVAC vendor service contract, or at the very least a copy of the preventative service visits if they just want to engage an HVAC company ad hoc (and if they don't you can get the service performed and bill back the tenant, but also include that language!). Having a clearly spelled out clause of responsibilities for repairs and system replacement on the HVAC system can help clear up this issue. This also includes other types of repairs, such as roll up doors, etc. Repair issues have been the main thing that I have gotten calls about from my NNN tenants, so I have my own "lessons learned" on ensuring newer leases are crystal clear.
1 Reply
Ronald RohdePro Member
Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
3y
Quote from @Mike Dymski:

We are all learning the costs and impact to real estate of excessive stimulus and government actions and loose monetary policy.

Just easier to make more money IMO. Rich get richer and the middle class/poor get screwed.
0 Reply
John M.
OP
Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes
3y
It's surprising to me that the tenants don't read or understand their lease. Some of these commercial tenants think like it's a personal rental and expect the landlord to pay for everything.
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Courtney Nguyen
Spring, TX · Member since 2017 · 138 posts · 44 votes
3y
Quote from @Jade S.:

Quote from @John M.:

There is always something to learn as I add to my checklist. One of the things that I need to do a better job is to button up future leases on the HVAC system. Some of the leases I have inherited are vague on the responsibility of these systems. Typically the tenant will maintain and repair and the landlord will replace. What I come to find out is that some of my tenants have done a poor job of maintenance, thus shortening the life of the unit. So going forward we will implement an amendment to the lease to insure the tenant has secured a semi annual maintenance contract. In some cases the cost of the unit will be shared by both parties.

Great idea to require the HVAC vendor service contract, or at the very least a copy of the preventative service visits if they just want to engage an HVAC company ad hoc (and if they don't you can get the service performed and bill back the tenant, but also include that language!). Having a clearly spelled out clause of responsibilities for repairs and system replacement on the HVAC system can help clear up this issue. This also includes other types of repairs, such as roll up doors, etc. Repair issues have been the main thing that I have gotten calls about from my NNN tenants, so I have my own "lessons learned" on ensuring newer leases are crystal clear.

@Jade S. can you share what's on your lesson learned list?
1 Reply
Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
3y
Quote from @Ronald Rohde:

Quote from @Mike Dymski:

We are all learning the costs and impact to real estate of excessive stimulus and government actions and loose monetary policy.

Just easier to make more money IMO. Rich get richer and the middle class/poor get screwed.

I'm finding it much harder with 7% interest rates and much higher costs of labor and materials. I'm open to hearing about the easy path.
3 Reply
Eliott Elias
Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
3y
It is a lot less of a headache dealing with tenants than residential
1 Reply
Ronald RohdePro Member
Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
3y
Quote from @Mike Dymski:

Quote from @Ronald Rohde:

Quote from @Mike Dymski:

We are all learning the costs and impact to real estate of excessive stimulus and government actions and loose monetary policy.

Just easier to make more money IMO. Rich get richer and the middle class/poor get screwed.

I'm finding it much harder with 7% interest rates and much higher costs of labor and materials. I'm open to hearing about the easy path.

How does the interest rate make it harder? Underwrite for lower values, find sellers over adjusting on the downswing and profit. I wouldn't do value add labor and materials, just buy right.
2 Reply
Jade S.
Investor · Evans, GA · Member since 2015 · 190 posts · 103 votes
3y
Quote from @Courtney Nguyen:

Quote from @Jade S.:

Quote from @John M.:

There is always something to learn as I add to my checklist. One of the things that I need to do a better job is to button up future leases on the HVAC system. Some of the leases I have inherited are vague on the responsibility of these systems. Typically the tenant will maintain and repair and the landlord will replace. What I come to find out is that some of my tenants have done a poor job of maintenance, thus shortening the life of the unit. So going forward we will implement an amendment to the lease to insure the tenant has secured a semi annual maintenance contract. In some cases the cost of the unit will be shared by both parties.

Great idea to require the HVAC vendor service contract, or at the very least a copy of the preventative service visits if they just want to engage an HVAC company ad hoc (and if they don't you can get the service performed and bill back the tenant, but also include that language!). Having a clearly spelled out clause of responsibilities for repairs and system replacement on the HVAC system can help clear up this issue. This also includes other types of repairs, such as roll up doors, etc. Repair issues have been the main thing that I have gotten calls about from my NNN tenants, so I have my own "lessons learned" on ensuring newer leases are crystal clear.

@Jade S. can you share what's on your lesson learned list?

Courtney, here are a couple of things I've learned with my multi-tenant commercial properties with NNN tenants over time:
1) Clearly spelled out tenant repair/maintenance language in the lease, so that I can reduce the number of questions I get from tenants about repair issues (especially in the event that something needs replacement)
2) HOW MANY parking spaces each commercial tenant has access to and asking how much parking is required prior to placement of a new tenant! Previously as a neophyte landlord I left it to the tenants to figure this out my first flex industrial building has 2 parking spaces per 1000 sq feet. But no more as it caused issues with my tenants parking all over the lot, which led to a bit of grumbling with both tenants. Especially in a situation where one tenant is a distributor and the other tenant is a service provider for a major cable company with several work trucks.
3) Establishing a cadence of communication with each tenant. In the past, sometimes things like roof leaks were not always reported in a timely manner. But nowadays, I have established a good communication channel on issues, such as landlord responsible repairs or HVAC maintenance reminders, so that they are rectified in a timely manner.
I now have three commercial properties, and applying these lessons has been quite helpful.
3 Reply
Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
3y
Quote from @Ronald Rohde:

Quote from @Mike Dymski:

Quote from @Ronald Rohde:

Quote from @Mike Dymski:

We are all learning the costs and impact to real estate of excessive stimulus and government actions and loose monetary policy.

Just easier to make more money IMO. Rich get richer and the middle class/poor get screwed.

I'm finding it much harder with 7% interest rates and much higher costs of labor and materials. I'm open to hearing about the easy path.

How does the interest rate make it harder? Underwrite for lower values, find sellers over adjusting on the downswing and profit. I wouldn't do value add labor and materials, just buy right.

Thanks. Are you buying properties at a discount right now? I am not seeing those in my market yet.

Higher labor and materials (along with property taxes and insurance) are hitting my stabilized properties.
0 Reply
John M.
OP
Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes
3y
I just picked up a 7.2 Cap NN with a national tenant in place so I am seeing discounts. Brokers are calling and saying just make an offer, so I suggest you do the same. Not sure about the multifamily side of things but you always have to work backwards on your numbers when making your offers.
1 Reply
Ronald RohdePro Member
Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
3y
Quote from @Mike Dymski:

Quote from @Ronald Rohde:

Quote from @Mike Dymski:

Quote from @Ronald Rohde:

Quote from @Mike Dymski:

We are all learning the costs and impact to real estate of excessive stimulus and government actions and loose monetary policy.

Just easier to make more money IMO. Rich get richer and the middle class/poor get screwed.

I'm finding it much harder with 7% interest rates and much higher costs of labor and materials. I'm open to hearing about the easy path.

How does the interest rate make it harder? Underwrite for lower values, find sellers over adjusting on the downswing and profit. I wouldn't do value add labor and materials, just buy right.

Thanks. Are you buying properties at a discount right now? I am not seeing those in my market yet.

Higher labor and materials (along with property taxes and insurance) are hitting my stabilized properties.

I don't like "discount" it implies some static value to a property. The market price has changed. We are buying cheaper than a year ago thats for sure. Gross leases suck, get into NNN and worry less about things you can't control!
2 Reply
Henry ClarkPro Member
Developer · Member since 2020 · 4k+ posts · 4k+ votes
3y
Buyers market offers. Or you don’t know what the sellers situation is.
Bought properties in Belize for teak plantations. Made a list of 13 properties in descending order of preference. Listed their price and my offer. Had my realtor start from the top an d make 3 day offers subject to inspection and 30 day due diligence.
Bought the third property. Originally listed for $310,000 bought for $180,000.
Where is the market today? Where is it going? Recommend in this market to pick several targets and make abnormally low offers with 2 day offers and 30 day due diligence. You don’t know the other persons situation.
They could be 89 years old like mine and want to get out of their teak plantation. Doing a 1031. Need equity out. Caught short on refinance terms. Who cares. Keep making offers till you get a bite.
3 Reply
Paul MoorePro Member
Commercial Real Estate Fund Manager · Lynchburg, VA · Member since 2015 · 1k+ posts · 1k+ votes
3y
Hi @John M.! Great question. My firm manages a commercial real estate fund. We invest with the best operators we can find in various recession resistant asset classes. As a result, I can only answer best from my point of view.
I've learned that when a market gets shaky and interest rates rise like they have that I need to do a better job than ever communicating with investors. It's not enough to continue to tell them what we're doing and about our successes and challenges. Investors, not surprisingly, want to know details about how we are dealing with the current interest rate increases, movements in cap rates, and more.
A lot of investors want predictions on the market and we've all found that's impossible to do well. Check out this graphic showing past predictions of forward looking interest rates. This is from an expert who spends a lot of time evaluating the market. If they can't predict the future then it is a fool's errand for us to try to.
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Michael K GallagherBusiness Member
Real Estate Agent · Columbus OH · Member since 2018 · 1k+ posts · 1k+ votes
3y
Quote from @John M.:

There is always something to learn as I add to my checklist. One of the things that I need to do a better job is to button up future leases on the HVAC system. Some of the leases I have inherited are vague on the responsibility of these systems. Typically the tenant will maintain and repair and the landlord will replace. What I come to find out is that some of my tenants have done a poor job of maintenance, thus shortening the life of the unit. So going forward we will implement an amendment to the lease to insure the tenant has secured a semi annual maintenance contract. In some cases the cost of the unit will be shared by both parties.

Great point! we usually try and get language in the lease for our clients that they will replace the HVAC unit if it fails, but will only be responsible for the prorated cost of system amortized over its useful life. the making sure that the system is maintained correctly is a tricky one, I've seen some leases with stipulations of having maint records on file etc. but in my mind those are only as good as the enforcement.
[email protected]614-362-2231
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John M.
OP
Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes
3y

Agreed that it's tricky to monitor maintenance activity of units but I still need the tenant to be accountable. This could mean termination of lease, loss of deposit etc, if proof is not produced. I like your idea of a prorated cost for a new HVAC system in certain types of leases.
0 Reply
Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
3y
The problems a property has doesn't phase me if the price is right for taking on and correcting those items.

As far as cap rates rising in single tenant NNN not so much yet for the best assets and locations. With an impending downturn buyers will pay up for A locations as a defensive position. There were about 30 billion proceeds dollars in 1031 exchanges nationally and that went to about 20 billion and recently about to 17 billion.

The sellers with premium properties with strong tenants and long term leases are hoping to land the 1031 buyer with a big tax penalty and putting a lot down. The buyer knows very little cash flow to start BUT they are hoping for interest rates to fall in 18 to 24 months when election gets closer and 1031 out to another property or refi with rental increases and make a bigger spread between debt and cap rate.

Most brokers including myself feel more February to March of next year more of the 1031 money will dry up leaving all cash buyers or regular buyers using debt in the market. At that point the sellers testing the market will mainly leave or place long term debt than take a large equity hit to sell.

There are always sellers such as merchant developers, estates, trusts, groups that have to exit per the operating agreement at a certain date and time, etc.

Most of my clients buy absolute NNN. A doctor making 1 to 1.5 million a year doesn't have TIME to get tenant notices with demands or communicate with a property manager to do it for them. They just need the property to GO and produce PASSIVE INCOME without their energy or time. Sometimes we will buy NN if it's just roof with a warranty that transfers to the buyer BUT do not want to own as much in coastal areas or cold belt states when the lease is structured that way. Those areas the properties tend to take more of a beating due to weather elements and often require more often maintenance requests.

Retail centers are a totally different animal all together. Not typically as involved as multifamily but still some involvement.

As far as tenants the hand holding INCREASES as you go down the quality stack from investment grade credit, to national company, to large franchisee, to small franchisee, to mom and pop. The sophistication of these tenants and how they run their businesses and operate changes drastically REGARDLESS of what they lease says. Even large investment grade credit tenants might not keep up their properties like they should. The facilities managers are often over hundreds of locations and unless a store manager bugs them or a buyer gets an inspection done and shows the report they might not know what work a property needs to maintain a standard of care.

As to 2023 if I get no more clients the rest of this year already easily looking seven figures next year in brokerage income just like this year. Buy more all cash value add for myself and syndicate the rest when too much cash out. Have over 100 properties on my radar for years end and making offers with sellers that want to get off the books for years end.

Looking to acquire 3 properties a month next year as a baseline on the syndication side.

Life is whatever you want to make it to be. Probably work about 4 days a week next year and refine my back end system processes to get my returns per hour even higher. Just hired some more employees to have systems and let the machine run and I stay doing the highest and best use of my time and what I am passionate about.
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2 Reply
John M.
OP
Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes
3y
What else have you learned in 2022! I challenge you to be humble in your responses.
Today I learned that my Insurance company wont cover a 50 year old property unless I can prove the age of the roof. Now I have to hire a roofer to give me an analysis of its current state as the seller has no clue!
0 Reply
Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
3y
Roofer get core samples if flat roof. Could have pretty layer on top and all junk underneath in bad shape. Also could have too many layers and even if in good shape insurance company will not insure the buildings as too many layers is against code where the property is located.
A 50 year old property in retail whether single or multi tenant most times has outlived it's expectancy timeline UNLESS it has been gutted down to the studs and rebuilt with just the foundation.
Most properties are redeveloper multiple times by the 20 to 40 year marks.
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Lucia Rushton
Realtor · Dallas - Fort Worth Metroplex, TX · Member since 2016 · 1k+ posts · 925 votes
3y
Quote from @Mike Dymski:

Quote from @Ronald Rohde:

Quote from @Mike Dymski:

Quote from @Ronald Rohde:

Quote from @Mike Dymski:

We are all learning the costs and impact to real estate of excessive stimulus and government actions and loose monetary policy.

Just easier to make more money IMO. Rich get richer and the middle class/poor get screwed.

I'm finding it much harder with 7% interest rates and much higher costs of labor and materials. I'm open to hearing about the easy path.

How does the interest rate make it harder? Underwrite for lower values, find sellers over adjusting on the downswing and profit. I wouldn't do value add labor and materials, just buy right.

Thanks. Are you buying properties at a discount right now? I am not seeing those in my market yet.

Higher labor and materials (along with property taxes and insurance) are hitting my stabilized properties.

Not yet, just the spread between buyer's offer and seller's expectation is slimming down, so I do expect to see more realistic purchases soon.
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