The Impact of Technology on Commercial Real Estate (Brokers Round Table)

Commercial real estate technology, often referred to as Prop Tech, is rapidly changing the way that we buy, sell, lease, and manage commercial properties. We've seen what it can do to the residential world and the writing is on the wall for many residential agents - how could this impact commercial real estate brokers? Will these technologies eventually replace commercial real estate agents altogether? Today, we're diving into the various software and prop tech that we use on a daily basis and what the future of CRE Tech looks like.

Special Guest: Nate Smoyer is an accomplished marketing veteran within proptech and the current host of Tech Nest: the Proptech Podcast. With over 10 years of experience building and leading marketing teams, Nate's helped startups such as Avail (acquired by Realtor.com) and Obie achieve industry recognition for growth, performance, and culture. https://www.technest.io

Key Takeaways:

• Commercial real estate has been slow to adopt new technologies compared to residential real estate

• Prop tech (property technology) is evolving rapidly, with new tools for things like 3D scans, floor plans, analytics, and more

• The future of commercial brokerage is uncertain but brokers will likely still provide value as advisors on complex deals

• Emerging technologies like AI, AR/VR, and flexible/short-term leasing models could continue to impact the industry

• Data quality and accessibility remain issues, with opportunities for new platforms to improve on incumbents like CoStar

Check out CRE Launch Pro: www.crelaunchpro.com

About Your Host:

Tyler Cauble, Founder & President of The Cauble Group, is a commercial real estate developer and investor based in East Nashville. He’s the best selling author of Open for Business: The Insider’s Guide to Leasing Commercial Real Estate and has focused his career on serving commercial real estate investors.

Episode Transcript:

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This episode of the commercial real estate investor podcast is brought to you by cre launch Pro. This online commercial real estate program is designed to take you from beginner to pro commercial real estate investor with access to all of my courses, our online community, and

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oops.

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Which I got I accidentally cut that out when I had it out of bed. Either way, doesn't matter. We are live. Welcome back to the commercial real estate investor Podcast. Today we're gonna be diving into negotiating commercial real estate leases. Yes, they are negotiable. That is one of the first questions I get asked can you actually negotiate these? Yeah, they're not like that apartment, lease, Eastside right out of college. Just about everything in them can be negotiated. We're going to talk about common pitfalls or clauses that you should have in your lease and some that are uncommon, but absolutely necessary. And tips for negotiating your next lease. Joined by Adam Williams and Chad Griffiths today for this brokers roundtable. Gentlemen, thanks for joining me.

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Hey, good to be here. Tyler. Good to see you too. I'm happy to be here. Hey, guys, welcome.

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Sorry about the technical difficulties. Adam, I gotta get that Google meat removed from the from the calendar invite.

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But yeah, let's let's talk about negotiating leases. I mean, that's, that's like commercial real estate one on one. Whether you're a broker, or a landlord or a tenant, you've got to know how to negotiate leases properly. So that you can better set yourself up for success over the long run, because you're going to be in these contracts for three to 510 plus years, it's very important that you get it right on the front end, Adam, I'm gonna kick it off with you, because you're on the retail front. And I think people will probably be more familiar with some terms that you might talk about in retail than industrial with Chad. But we also want to talk about industrial because there's a lot of people buying industrial today. But Adam, I'm gonna kick it over to you first.

1:52

Yeah, I'd say that.

1:55

All retail leases in general, they're very different than office leases, very different than industrial leases. Because retail is very typically used to amenitized a larger project, right? So we've looked at least is very different in a power center, where you're doing deal with your Old Navy and world market versus kind of your neighborhood services and Phil center, very, very different leases. And the main thing that makes them so different is the credit involved. Right we there's a there's a saying that I picked up a little while back in retail, it says you can be cool, or you can be rich, but it's really hard to do both right? There's not a lot of really cool brands that also have great credit in the retail world. Now there are some you've got the l catterton. Brands, the big boy, national and international private equity back brands that also still have some cool factor. Yeah, bar taco Barcelona, yeah, there's postino wine. I mean, there's certainly some, Sam Fox still is able to keep some cool factor and has big credit that you're gonna pay for that with a with a, you know, you're gonna have some scar tissue when you're done working out those leases with those guys. But credit is a is just a massive driving factor in retail leases, right? Everybody wants to dwell on, on the face of rent value number. And, you know, it's either gonna work or the pro forma, it's not, there's not some massive swings and ruin and what people are asking for versus where they need to be. And it's also a massive function of tenant improvement allowance. But credit is where the rubber really meets the road. And it's very common in office leases to overcome that with like a letter of credit situation,

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or, you know, a huge security deposit. And again, a lot of retailers if they are cool with it's like the sous chef of the hot restaurant that's spinning off to do his own thing.

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He's gonna look at you, like he heard a dog talk, when you asked him for a, you know, $150,000 letter of credit. So that's something that you're going to come across and fight with. It's it is the crux of, you know, 85% of every retail deal that I do. Yeah, credit credit is really important. And I feel like it's one thing that is very misunderstood on the retail front. Can you talk more about what credit is? Because it seems to me, it's very understood when you're talking about Bed Bath and Beyond, right, because you can look up their credit rating, but if you are not examples they've had, they've had a rough cut her off. Yeah. Not Not anymore. Not anymore.

4:35

I guess I guess most retailers are going to be tough to pick a good credit national retailer anymore. But like Starbucks, right? You can look up Starbucks is great at it. And you know, that it's it's got to be really good. But if I'm buying a shopping center that has all small businesses, how do I determine credit? How do I underwrite that? Yeah, it's really hard right? Because forever

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Starbucks. And that's a great example, because they sign through their corporate entity, right, you are going to get some Starbucks signature on that deal. But 75% of deals that we do are signed in what's called an S P e, a single purpose entity. And those crediting great right within with an SPD. So a lot of times, the credit rating is just a function of how bankable the tenant is, right. So if it's on a sliding scale, you would use Starbucks on one side or target, right on on one side, or Walmart or you pick your household name, they would be on one side of the credit spectrum. And then the sous chef, that makes great doughnuts and Bond movies or whatever the hell he makes, it's really good, or she makes really good.

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But maybe they're just getting a loan from their uncle, right, and they can't show you more than the 50 Grand the bank that would be on the other side. And sometimes, if it's a second generation space, and you really need the deal, and you're not putting a ton of TI into it, you're willing to do that deal. But credit is just a function of like, how dependable is it that the rent is going to show up in the first on the first of the month? What kind of cash backs this deal, right? So maybe the guy, maybe it's his first retail or his first restaurant, but he worked as a pharmaceutical sales guy for 15 years. And he's got, you know, five or 10 million in the bank. And he's willing to sign a personal guarantee that jumps the credit level and your risk tolerance in a huge way. Because it's not just you know, a guy with a dream, that makes great falafel. It's a guy that has run a really successful business and is willing to put his assets on the on the line in order to make sure you get your rent payment on first. So that that like it's a super lame and example of credit. But that's, you know, as simple as it is sometimes. Chad, I feel like industrial leases, you know, 10 plus years ago, were night and day different from retail leases, but it seems like they're kind of almost coming together to be identical. Can you talk about the differences between industrial leases and retail?

7:20

Yeah, that's a good point. And I'd say that that's largely driven just by very low vacancy rates. But we're even though vacancy is ticked up over the last six to 12 months, we're still even below pre pandemic levels. So when you have ultra low vacancy it, it tilts the favor into the landlord. So we have seen a lot more landlords starting to request things that are familiar in Adam's world, and credit as a huge one out there, it's it's very uncommon for a landlord to not go in depth on a tenants financial statements to really get a sense of what they're dealing with. And they can look for all sorts of things, they might want to see a pattern of revenue growth, or they might want to see a certain amount and retained earnings, but very simply, that at the very least, they're gonna want to see that they have an expense line item that's covering rent. So if a company doesn't have an expense line item for rent, what does that mean, if they have to add in a new amount, or perhaps a much bigger amount than they had been paying? And what a landlord is looking to do is just cover the risk, no different than if you if they treated themselves as a bank? Is the client or the tenant, in this case, able to repay that debt? Or are they able to pay their bills. And I think that that's come a long way where in the past, landlords might have been more lenient, they might have done a credit check or reference check and, and that might have satisfied them. But now they're, they're realizing that in a tight market, there's an opportunity cost of putting a tenant in there that might not perform, because if they had just waited a little longer, they might have gotten a better tenant and not have had to go through collections and evictions, and just all the headache and stress that goes with it. So I'd say that we definitely have seen more of an emphasis of landlords look to do more in depth background checks on who they're actually leasing space to. Now, I know everybody in the group here has has represented both landlords as well as tenants. Let's talk about looking at financials. What what do landlords want to see? And what do tenants want to share? Because that can often be two very different things. Let's start from the landlord perspective, let's assume that you're representing a landlord with you know, a vacant building and you're in you're talking to a tenant, what financials are you going to want to see from those tenants? And what are you going to specifically be looking at within them? Adam, we'll start with you.

9:40

I want to know how sophisticated these guys are. When it comes to accounting, right? It's very simple, like, can they produce a balance sheet that can they produce a p&l? How many years have they been in business? Like show me a track record that shows success? And then obviously, assets like if we're if it's all about this

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Binding entity like who is that signing entity, right? Like because go by the Starbucks example. Let's say that Starbucks wants to do a deal with you. But they're not signing the deal. It's it's another, it's another entity, right? Like I want to understand what is the actual signing entity unless there's a rider of a guarantee be attached to it, I want to understand that entity. So basically counting basic PFS personal financial statement or balance sheet peel and p&l, and just assets and track record. I mean, I don't think that I've ever seen two landlords asked for the exact same thing. They all want tax returns, they all want a balance sheet, they all want a p&l, but I don't think I've ever seen two landlords ask the exact same kind of package of financials. Yeah, it's funny, I've had some landlords have some very interesting requests in the past. But to me, it's always been two to three years of tax returns a personal financial statement, and then we'll probably do a credit check. If the credit check doesn't come back, we're probably looking at bank statements, you know, three to six months of bank statements. And that's the great thing about commercial real estate, right? You could never do this and in the apartment world, because you have fair housing acts, you cannot do this kind of stuff. But since we're in commercial, we're diving into businesses, this is a personal this is a business decision, we get to we get to ask for all that stuff. Chad, what about you?

11:22

Yeah, on the industrial side, I'd say it's mostly common, just ask for a couple years of financial statements. So balance sheet income statement, we don't really dive digger dive deeper if we were having the tenant personally indemnify it, which isn't overly common, unless it's a new business, or there's a lot of tenant improvements, usually the company should have the strength to stand on its own. So like I mentioned, your retained earnings, you want to see some trajectory of income growth, top line growth, bottom line growth, into they have the capacity to pay their rent as an itemized line item on their expense sheet. So those would be the general things, it gets more nuanced and complex, if the company does have some financial issues, because then we start diving into all those personal things that you guys are mentioning as well. How do y'all feel about personal guarantees? I mean, at what point do they become an absolute necessity? Whenever I'm looking at smaller businesses that have a newer LLC, if it's an LLC that satisfy the lease, I'm having tenants personally guarantee it, sometimes we'll get around that by just having the tenants personally sign the lease.

12:31

I'd be curious to know if y'all prefer the personal guarantee or have the tenants sign the lease and have like a doing business as but yeah, we'll we'll start that off with you.

12:40

Yeah, it's interesting. Usually those would be on smaller spaces, like a small bay industrial space. In the larger properties, you're usually just dealing with sophisticated companies that that have the capacity to do it. But almost small ones, it's the full spectrum. There are some landlords out there that do want to have a personal guarantee, or they might want to have the tenant sign, there might be some that just accept that with small bay industrial comes the fact that you're typically going to be dealing with smaller industrial tenants, or even first time companies. And some people might take a little bit more risk, they might take a flyer on someone and say, well, this, this is what it is. In a hot market, though, they tend to be a little bit more selective and increased or criteria. It's interesting, I'd love to hear your guys's thoughts on this, as well as that, a personal guarantee, especially in these small spaces are very hard to enforce. Because it's you're sometimes you're trying to get blood out of a rock. If the company's not paying their rent, it's very hard to say, Well, they probably don't have any, or they probably don't have a whole lot that they have in their, in their personal name anyways. And then there's the optics of going and suing someone on their personal guarantee to try and get a judgment on it. If it's a big company doing it that doesn't reflect well, that this big companies chasing this small business owner who failed. So I've found that especially on the small ones, it's often not even worth it to pursue these these people individually. But there's certainly something to be said that there somebody has a responsibility, even a mental one if they're personally signing their name off. But I can't think of a single example, in 18 years that I've been in this business where a big landlord has chased a small tenant that personally guaranteed their need their name, and failed to pay their rent. I can't think of a single one where it actually went to court. I think you hit the nail on the head which is mental right like these guys. You don't want them to just kind of pick up their their stakes and move on.

14:42

When they've had a rough quarter. Right. I think the I think the mental attitude of having that personal guarantee there really does matter. But I would echo your sentiment that these things are almost impossible to enforce, especially for somebody with a failing business but I want to touch on one thing

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thing that really differs in your world, I say your world, the industrial world versus your retail world. And it's really coming down to like a merchandising mix, right? Because if you've got call it 25, or 30,000 square feet, which in my world is a good little chunk of infill space, if you're really trying to build an ecosystem, right, so if you want to do the bank deal and get the bank level, you get Chase, or TD, or one of these great bank guarantees that makes your bank and your equity happy, you got to balance that out with something cool, right? Nobody wants to live in an apartment complex, or you know, have have this really cool corner of a great retail destination, and you've got a bank and pick another couple of vanilla users, right, you've got to, you've got to kind of mix that up. So in my world, you're more likely to take a flyer on the sous chef, if you're able to get the, you know, the urgent care with a huge corporate backing or your bank or, you know, whatever boring institution you have to do to make the equity and the bank is happy that you're willing to take a flyer on the guy with the risky credit because he adds the cool factor. So you're like spread out your risk a little bit. So you're willing to you're willing to take a little bit of flyer you're willing to kind of squint when you look at the financials a little bit. If you have somebody else involved that, you know, you can count on.

16:30

Yeah, I mean, we did something very similar to that a couple years ago on a shopping center. It was well, it was mixed use at apartments above that one of our clients built, we ended up getting a regional bank to sign a lease. And then I told them like guys, you want to restaurant, the front, that's the one that we got to kind of take a flyer on. And we ended up getting a local group from that neighborhood to open their restaurant there from a food truck. So I mean, I think it it's all about the balance, right? Because you don't want to have too many corporate tenants. But those corporate tenants help with the valuation of the building. They help with your your window, getting comfortable with the Dental. Yeah. Make it such so much better. Yeah, I mean, they really changed the face of kind of the investment side of the deal. One other thing that I use with landlords to kind of get them over the hump on a deal like that, right? Like, there ain't no credit associated with the food truck guy that wants to start his first restaurant, right? It's just that as a risk, and there's no way to sell around that. But one thing that I have had a lot of success making landlords understand, and this isn't me, bullshitting. This is the this is something that I've, I've seen play out 100 times, you've got that raw shell, that might be worth 34 bucks a foot net, right. And you're gonna put 80 bucks 100 bucks a foot into that ti in order to get your in sometimes worth more than that I've done some really high ti deals here lately. But you're gonna, let's just use a round number, you're gonna put 100 bucks into that deal. And there is no way to underwrite that credit risk. But the bottom line is, if you have rights on how this thing is built, if you have rights to approve their construction drawings, and they're putting that $100 in writing, they're gonna agree to put that $100 in infrastructure, right? Mechanical, electrical, plumbing, baby, that's what makes my world go around venting. Also, if they're going to put that 100 bucks into that, even if you have to rip out the whole front of house because they wanted to do a Ramen Bar. And it's in the middle of July, when you're trying to lease it. Nobody wants to do a ramen deal in the middle of the summer, because it's 115 degrees in Charlotte,

18:36

that back of house $100 is going to turn that 34 $50 space into a $38 foot space, and you're going to rent it like that. Because second generation restaurants are gold if they're in a good location. So that is another thing that some landlords get that some landlords don't, because they're like, wait a minute, you're telling me that I'm going to have to release this thing? And it's not necessarily that you're going to have to release it. It's that that $100 foot? Is it just getting burned into the ether, right? That is going to get us towards, you know, hard costs. It's not even honestly ti right? It's capex, somebody's got to spend that capex, right. Because Rachele spaces. Yeah, it was not all that marketable. So I know that's not necessarily a lease execution data point, but I think it has to enter into the equation somewhere. Yeah, let's let's start further into that because I see so many different delivery conditions today than than I used to five or 10 years ago. I mean, you've got landlords that are trying to do cold dark shell and give a tenant 75 bucks a foot to build it out versus, you know, maybe a vanilla box, which I think tenants are much more familiar and comfortable with.

19:47

So let's add up I'll kick it over to you first, since you're you're dealing with a lot of this right because I know in the retail world especially like every landlord has a different set of delivery conditions they want to deliver and it creates a massive mess.

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sort of headache, both on the leasing side, but also the tenant side? What delivery conditions should somebody be providing their building in? And then how do you determine what the tenant improvements will be above and beyond that? There's no There's no right answer. But what I would say as it comes back to merchandising, right, let's go back to that 30,000 square foot example, right, like, you know, that you've got this one pin corner, that would work perfectly for a restaurant, it's got a patio, it's got the visibility, it's got access to Ingress, egress, loading, dock, trash, whatever, whatever that is, you want that to be your restaurants, 5000 fee, works out perfectly, you've really got to dial in to that delivery condition. To make sure the MVP is sufficient for a restaurant, right, it's got to have the power, it's got to have the water, it's got to have the venting,

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you got to have a place to put all the shit that goes into making making a successful restaurant, right? So it comes down to that work letter. If it's a sophisticated developer, or a developer that is smart enough to hire a sophisticated owners rep. Right? You can help help them build their work letter in a manner that's going to save them orders of magnitude on the on the TI budget, right? Because you're not just gonna throw it away. I've seen people do it in a smart way, and then be able to offer what I would consider a market ti after the delivery condition. And I've seen people offer it in a bare bones way because it helped their perform on the front end. And then they have to go either mothball space or spend 3x on the back end to go fix the stuff that they should have done on the front end. So I don't think that there is a magic bullet on delivery condition and the landlord work letter, I think it's more of starting really early. Getting an architect that you either use a separate Korn shell architect from for the

22:03

lot of retails tail wagging dog, and you're talking urban, right, you've got 300 units above and 15,000 square foot on the ground floor. But you got to make the round four cool in order to lease the units up top. Right. So it comes down to understanding what you want to put in there. And then you building the work letter in an efficient manner. Yeah, I mean, there's really just one word letter for her shop looks totally different than a work letter for a full service restaurant. Yeah, or a dental office, right, they all have completely different build outs. And, you know, I mean, there's, there's really pros and cons to each, right? I mean, in a cold dark shell, you have the flexibility to go run plumbing for a dentist, or restaurant, or you could do a salon or a Porsche, right, it doesn't matter.

22:48

And, you know, typically, as a landlord, you can probably charge a little bit lower on the rate to find a good tenant, and just give them the money to finish it out. You don't have to deal with it. But tenants don't typically like that, right? They'd rather move into a second generation space or something that needs a little less work, they're willing to pay a little bit more for it, because they're gonna have to write the infrastructure is already there. But you know, again, it just depends on what kind of program you want. chatter, no, industrials, a little bit different on the tenant improvement side, or you're seeing a lot of that in the industrial sector today. What does that look like? Yeah, it's interesting. And it's a it's the full spectrum. So there might be a private guy that owns one building, and if he has a vacancy come up, he might do the bare minimum, you might just say, well, let's wait and see what 10 The tenant comes in. We'll see what they want. And then we'll do it from there. I found on the institutional side, though, it's the other end where one client that I deal with is a large REIT, what they do when they have a vacancy is they'll go in, they will replace all the lighting with LED in the warehouse. So new LED lighting will typically power wash the floors, if it's drywall demising walls, they'll paint the drywall white in the warehouse. So the warehouse will actually even if it's an older Class B Building, it will look very modern with new paint and LED lights. And then they'll typically go in and renovate the office, paint carpet, new ceiling tiles, and they'll have that almost in a show suite condition. And they'll do that automatically. Any vacancy comes up, they'll just go and do it. And they recognize that some companies might want to come in and paint walls, their company color make some minor changes, but they've just found that having that space look as presentable as possible, essentially move in condition gives them a little bit of an edge. What is it right or is the guy who just says Well, let's see who comes in and then we can build it ala carte on what they want? Is it different strategies work at different times and you know, really low vacancy market? I think both strategies have shown that they work so I don't know no one's better than the other but having shown an old tired industrial space, and haven't showing ones that have been recently renovated. The ladder always shows better.

25:00

And it always gets much more positive feedback. So I'd say it's a full spectrum, ones like that the landlords are going to be a lot more reticent to give out T eyes if they've already spent money, building the space out. But industrial is also unique in the fact that there can be an endless amount of requirements that a tenant has, they might want an extra door put in, there might be a dock door that they want to have ramped, they might need a crane, all sorts of combinations that can happen that require a personalized approach specific to that individual company. So it varies. But there's also a lot of deals that get done where a company can just move into a space. And they make do with what they have. And it's just ready to go for them. So it really is an interesting asset class, not to say that office and retail isn't either because I'm sure there's a lot of variables that go into that. But it's just it is really hard to paint industrial with one brush, because there's so many variables and factors that go into it. Yeah, that's really interesting. It sounds to me, like you're saying it's almost better, even if it's marginal, to go ahead and fix the space up and get it ready for the next tenant, even if they're gonna come out and repaint something, the office is kind of the same way. I'll take that I'll take that asset class on today since Jesse's not with us, but office kind of the same way. I mean, if you can go ahead and put new new carpets in new paint, you know, maybe upgraded Lighting led tenants are much more likely to just sign a lease and move right. And, Adam, what do you see on the retail front? I mean, I would imagine it's probably the opposite. I mean, you're expecting tenants come in and do a full makeover because they they typically have heavier branding. Yeah, the trade dress in my world is everything right? And I go through this with, with large and lords kind of from the beginning, beginning like from the bones of the project, right? I'll give you a kind of a simple example, we'll get back to the 300 unit, multifamily example, right, if you're building this monolithic, straight up and down building, and you expect a high level sophisticated retail tenant to take the ground floor, and there's very little opportunity for them to distinguish their storefront from the rest of your building.

27:10

You got big problems, right? Because they feel like their brand is getting compressed, so heavily from the from the top down. If it's so obviously a top down construction project and development project, you're going to struggle, right, like so these guys, having their ability to express their brand is massive. So

27:32

to answer your question, yes, you need to give these people a tremendous amount of leeway to express their brand and to build out exactly what they want to do. Because it's so experiential, right? It's completely opposite of the industrial, like, none of your customers are ever going to see your your you know how the sausage is made. On industrial side, you want it to be clean, you want it to be efficient, you want it to be sophisticated for your use, but not exactly gorgeous, right? Retail is is very, very different. So you want to give a retailer the opportunity to express their brand.

28:07

And it really starts from how the building is this designed. And second generation is extremely, I would say it's like a sliding scale, the less sophisticated the retailer, the more important the second generation aspect is right because they can get in cheap. They can make some compromises to make the space work, right. A really sophisticated brand is backed by l catterton. Or Starbucks they're like now we're just gonna demo all that shit out anyway. My love to curse Tyler of curse now three out okay. We're off here. Yeah, make sure

28:47

so it's it is a sliding scale, right? So somebody wants to come in and just get a deal done. They want second generation but it's a more sophisticated, the more likely they're just going to demo out all the second generation stuff anyway. Because they want it to fit their specific brand specs to a tee mean your nose. I find Starbucks moving into a second generation coffee shop and just making it right. Right, right. It still says caribou like behind it through just through the bait. Yeah. Though, it's great. Ramiro saying, Thanks for these live events and your content. We're in so much as a beginner commercial real estate investor. Absolutely Ramiro. Thanks for joining us today. Ron's got a pretty interesting one co tenancy provisions, those can be brutal. He's saying center vacancy drops and a wide drops then that tenant gets to reduce read again, double whammy shadow know if there are any CO tenancy provisions in the industrial world. But we'd love to get your thoughts on that. Adam, I know you deal with this all the time. I mean, we've got some wild co tenancy provisions that we've had to deal with in shopping centers like Kroger not allowing another bakery to open up and considering a donut shop down the street to be considered a bakery. So how do you deal with that? From the landlord's

30:00

perspective.

30:02

Chad, do you want to start as there anything like that and industrial, you'd be rare. But there's certainly one off scenarios. And interestingly, Ron has a building himself, Ron's a lawyer and investor based out of Dallas, he's got a building where he rents out, it's an industrial building, he rents out units inside the building to numerous different tenants. And he almost draws an imaginary line where the, where the space would be partitioned off and, and, to me, that is a cool way of taking a building, which otherwise might be limited, because it's an older industrial building might be limited in how much rent you can get. But by breaking it into smaller tenants, he's able to do it. That's not something that I don't I don't know, if I have the interest in doing that myself as an investor, or what I would advise someone else to do. For the reasons that Ron alludes to is that it's difficult coming up with an arrangement where you appease everybody, and mitigate any risk that can arise from having co tenants in there. So what I would say is, if anyone is entertaining that ideas to make sure you've got a very strongly worded agreement that that identifies those potential pitfalls. And that's why you want to have a lawyer like Ron drafting that up to to alleviate those concerns in advance, but it wouldn't be overly common industrially. One out of 1000, you might see a scenario like that. So hyper hyper common in my world, and it cuts both ways. So we have the provisions that that gentleman mentioned, where, you know, if you if I'm paying a lot to go next to a Kroger, if they go out, that's gonna drop your footfalls in your in your center by 75%, which means my rent needs to buy down by 75%. That's kind of what he was alluding to. And that's pretty common when you're going into anchored centers. And the other side, which is honestly, just as much of a pain in the ass in my world is exclusives, right. So a lot of a lot of those people like Victoria's Secret is not going to sign a lease unless they get Athleta, or Lulu, and yada, yada, yada, right, like a few other kind of herd mentality, kind of kind of retailers, but then they also want you to get the Lulu or the Athleta they're gonna make damn sure that or they're gonna try their best to make sure that you can't get one of their competitors. And, and it's you want to as a landlord be like, Hey, man, I'm a good guy, I'm not gonna go put one of your competitors right next to you just trust me.

32:43

But then you also have tenants that will really stretch right like Victoria's Secret. For example, they sell leggings also, right? So you get into these, this minutia of percentage of sale clauses, like the donut, the bakery thing, like how much percentage of what they do is bread versus donuts or with Dunkin Donuts, they don't sell any frickin donuts, it's all coffee, right? You get into, you end up having to get in people's business way more than you want or need to. Because once you start agreeing to exclusives in the center, it I mean, I've got some centers that the book of exclusives looks like that and every time you do a deal, you've got to get an attorney to kind of pick through it with a fine tooth comb to make sure you can even do the deal. So it is very common. And you we spent a lot of time in my world kind of navigating those things. So that was a good question from our from that person. Yeah, I, we have to deal with that all the time. I mean, like we dealt with the wash, right? I mean, we've got tenants to come in every single one of those restaurants once an exclusive on a specific type of food. And we had to get very specific with what that was. It wasn't just you know, hey, I want an exclusive on Asian food. Right, because, you know, Mongolian barbecue is very different from BA. So we can't grant a an exclusive on Asian food, because you could have two different businesses in the center that are not competitive with each other. But if they had that exclusive that would prevent a sushi restaurant from going in. Again, nobody else would be making sushi. But you're you're completely eliminated. So, you know, as a landlord, you want to be very conscientious of how, how general or specific these exclusivity clauses are, because it can get you into a lot of trouble.

34:39

Let's talk about length of term and options. Some tenants want shorter term lengths somewhat really long. You know, we're talking three years on the shorter side, maybe even one year we don't even bother with that most of the time, all the way up to 1015 20 years, sometimes for a base term.

34:57

You know, how do you guys handle that?

35:00

length of term on your deals because a lot of landlords get worried that, you know, in five or 10 years, I'm going to be behind on market rents. I don't want to sign a 10 year lease. Chad, we'll start off with you. Because I know in the industrial world, 10 years 710 year deals are relatively common.

35:15

Yeah, I'd say right now, that probably is the most common. But what's so crazy about our industry is that maybe not so much right now with the higher interest rate environment that we've come into, but call it a year ago, anyone buying a new industrial building, or buying an industrial building is an investment. They were looking for short waltz, a weighted average lease term, they specifically wanted short terms on those leases, because quite often, a lease that was called three or four years into a five year lease, it was probably well below market. So if they had a property that could buy that had a lease expiring soon, they could mark that to market and realize some gain on that right away. So different investors are going to have different priorities on where they place their emphasis. I personally am more on that long term side where I'd like to have the stability of the long term tenant. But quite often it's driven by the deal itself. So if the company going in there needs a whole bunch of work done on that space, maybe they need to have the crane installed, or they need to have a few more doors punched in or heavy power added, that cost will typically just be amortized over the deal. The longer you can do that deal, the cheaper the rent is going to be because you're advertising for a longer period. So there's, there's a lot of variables that go into it, I'd say just very cold notes.

36:35

investors that are opportunistic, they're going to typically want to have deals that are expiring soon, especially if those rents are below market. Whereas there's some investors, the one guy that I point to all the time that are Mansi Ortega, who's the founder of Zara, he's got a pretty robust real estate portfolio. And he bought almost a billion dollars worth of industrial real estate last year. And his weighted average lease term was over eight years. So it's FedEx and Home Depot's and like large, well known companies that have their distribution centers in these buildings, he wanted that long term lease rate in there, and I imagine he probably fixed his debt matching that lease term or perhaps even longer, and he knows that he's going to get the predetermined amount of rent, they're all triple net leases. So he knows he's going to make the same return. And it's almost like a bond for him. So I think you're gonna have that full spectrum, you're gonna have some opportunistic value, add investors who want to immediately add value, all the way to the stable value put on cash flow more than anything else. But what will ultimately drive the length term is quite often just what makes sense for both the tenant and the landlord for that individual space at any given time.

37:47

In my world, like sophisticated restaurants, which is a lot of what I deal with, are in sophisticated retailers, they all want to in your terms were and they all want to five year options. And they all want to understand their increases. That's where the rubber meets the road on a lot of ideals, because institutions want to, I think one of you guys mentioned this a moment ago, they want to be opportunistic, right, they don't want to fall behind your CPI or fall behind just a market, right? They're buying in these markets that they expect to have,

38:27

you know, predictable, if not explosive, rent growth. So where we always get into a fight, really is either on that first option, or that second option being fair market value versus fixed increases. And, you know, I've sat on both sides of the table many times so I, you know, I feel like I have a little bit of empathy with the other side. When I'm when I'm talking about this stuff, but that fair market value, you get into the potential of multiple appraisals and arbitration, and it can get kind of messy. You think, like an example in my market would be south end. 10 years ago, south and rents were in the 20s and now they're in the 50s. Right? So you've got some donut shop that's in 2000 square feet. And you know, they got they got a kid going to college and they're paying 20 bucks a foot and now they're out for an auction and it's 50 they're out of business, potentially so that that's where term really starts to get a little a little prickly in my world is you know, how are you going to how are you going to validate his options? Yeah, we tend to try and stick to five years I just I like the number. I like the I like the idea of 10 year leases, but I mean it's the same thing here in Nashville is what you're just talking about Adam, I mean, you know five years ago where lease rates were compared to where they are today is a night and day difference. And you think as a landlord, how much noi how much valuation on your property you're missing out on

40:00

If I had signed a 10 year lease a 3% annual increases, we wouldn't be anywhere near the true value of the property. We end up if a tenant is adamant about doing five years, we'll sign five years at 3% annual increases. And then the second five years is that 100% of the fair market rates, you know, which which we determine. And typically the evidence that we'll bring to a tenant to say, hey, here's fair market rate is not only like, what other other buildings are leasing for, but here's the last couple of leases that we side of this building. Right? That's very hard to argue against, you know, an appraisal. Sure that's, that might be one person's opinion. But if you're signing leases that, you know, 30 bucks a foot in the last 12 months on that same building, it's going to be hard for that tenant to argue that it's not 30 bucks foot.

40:54

But yeah, you do open yourself up to an argument. And nobody really wants to have those conversations.

41:00

Victoria saying greetings. Thank you all for doing this, who are the main anchors and industrial or even the flexspaces that someone should be seeking to get as a tenant chattel lob that went over to you who who should they be going for it have to rent their spaces,

41:16

I might answer that actually a different way in say that industrial, it's not necessarily as important as building that ecosystem is an Adam's world of retail. But there's the potential to add the wrong tenants in there. And if it's a free standing building, that's a single tenant use, it's not as much of a concern, you really just want to get a tenant in there, that's, that's going to be a good fit in the building. But if it's a multi tenant building, whether it's a flex building, or just a multi tenant,

41:45

Business Industrial Building, I would steer away from certain tenants. So doggy daycare, the noise, the smell makes it very much a nuisance to surrounding tenants, auto body shops, and car mechanics is another tough one, because they typically have broken down cars all over the place. So I would say would be more important than trying to identify one specific tenant to be an anchor of the Cendant Center, I'd be just trying to find a mix where everybody is getting along, there's no overlap, probably don't want to put to the same companies beside each other. Even if they're not retail locations, it probably just isn't going to be a good fit for the one that's already there. And then I would void some of those certain types of tenants because it does create chaos and a bit of disharmony when there's one tenant that that affects the other. So I personally, I wouldn't put a lot of emphasis on getting one specific tenant in there as much as I'd focus on keeping certain ones out.

42:45

Yeah, I think that kind of gets us to our next point, which is like unique clauses that you should have in your lease. So you know, and Adam will probably go to you first on this, because, you know, like one thing that we've dealt with, we've done, I've done a handful, probably, like half of the cycling studios in Nashville, I don't know how we got into that world, we started doing a whole bunch of leases for cycling studios. And one of the biggest issues for them was always noise, always noise. And, you know, we had one landlord that said, you know, hey, I'm not gonna put any decibel requirements on you guys, you know, we're good. Don't worry about it. The building is soundproof enough. We're like, Okay, let's get that in writing that you're fine with this. Well, he was a very, very upset landlord, when it came down to how loud those classes were every other deal that we've done, landlords have always put in those leases, some sort of decimal rating where they're going to read it from and you know, if you if you go above that, that it but that will be considered a violation of your lease, we're going to notify you of that. And if you have chronic violations, here's how we're going to handle that. Adam and what other scenarios have you seen clauses like that within a ways that other landlords should keep in mind when dealing with a specific type of tenant?

44:01

Yeah, yeah, we just we lump all those into like noxious use uses, I guess. And a couple of them I mean, honestly, the dog one is a really good example. Because dogs I mean, are like humans to millennials, right? I mean, there's a tremendous market for your dog walkers, dog groomers, doggy daycare, so that's definitely one

44:27

food is another like in the more dense a project the harder it is to to vet them properly. So you have some people that either kind of skirt the rules like they permit as being like a coffee shop when they're going to be cooking chicken wings and french fries all day. And so you've just got like, horrible smells coming out all the time. nail salons, they smell like hell yeah. You see, cigar bar, right like places like that that are I love cigars.

45:00

Uh, but I mean that that's a use that you got to know what you're getting into if it's, if again, you're trying to build that ecosystem like Chad said. So we lump those in a noxious uses, I'm sure if I sat here with a whiskey and cigar, I could think of another 50 examples of them. But those are those are some off top my head that you you got to know what you're getting into, but you hit the best one at the sound from fitness studios, oh, my God, you can spend 100 grand on the front end, doing doing it the right way and soundproofing it or even less, or you can chase it forever. I can tell you or stories, I can tell you times we've done it really well. And I can tell you times that you know we would pay to a tenant any anything just to go away because they caused so much chaos. So that's that's a big one. Yeah, I mean, it can be brutal, because all your other tenants start complaining. And then usually those tenants will have something in their lease about quiet enjoyment of their space, which means, which means you are as a as the landlord are basically violating their leases, because you're not being able to provide them with that. So it can be brutal. I mean, that's why it's so important to have a really good owner's rap. And an attorney involved in all this now Chad, I bet, I bet you've got some really unique things in the industrial world, because of the like the level of concrete that these you know, spaces will have the amount of pounds per square foot that they could actually take in terms of the load bearing and stuff like that for you know, your your forklifts and heavy items that are heavy machinery they're getting moved around. So what what do you kind of look out for in the industrial world? Yeah, I think you nailed that is the use clause becomes pretty important in our space, where the landlord wants to fully understand what's being done in there. And if there is a concern, and it could be a forklift and a light industrial building. Maybe even that is there's it's probably engineered adequately. But I appreciate where you're going with that analogy is that there's, there's always going to be unique cases in there. So I think it does involve a lot of contemplation by the landlord and the tenant to say, Well, what exactly is happening in your space. And let's make sure that if there's any racking or if there's some mezzanine space, that it's not going to cause a problem, I'd say even bigger than that. One, though, is environmental issues. And that's a category that makes and breaks so many industrial deals is that when it goes to sell, a new purchaser is going to require an environmental site assessment. Ideally, it's just the phase one, but it might go to a phase two, or they actually boreholes and test that soil in the lab to see if there's any unhealthy amounts of contaminant in there. And there's industrial uses that are much worse than others. So if it's a clean wholesaling company, and all they're doing is bringing in pallets with boxes, there's a very, very low probability of any environmental issues. But if it's a chrome Plater dry cleaning, and actually in retailers is another bad one, but quite often I

48:01

stay away.

48:03

What's interesting, though, is a lot of these dry cleaners, at least in my market now I don't know if it's everywhere is that they'll have retail front locations where they accept all the clothes, but they actually send it to warehouses where it's done in batch in these big warehouses. And that that perk that comes off of that that dry cleaning process is just destroys soil, it can contaminate well beyond just that own property. So there's there's issues on the environmental side. So that's where the use is just so important, as the landlord needs to understand what they're doing in there. And there's usually going to be provisions in the lease that says that there aren't any toxic things, there's nothing that will be damaging to the, to the environment that they're using in there. But what's a really contentious point, and which goes well beyond the scope of what we're trying to do right now is what happens if some contamination is found. So a company goes into a space and they lease it for 10 years. And even though they might not have done anything in that site, which could have compromised the soil. What happens if when the owner goes to sell it, the buyer goes and actually uncovers that there's contaminants of the acceptable level and it's, it needs to be remedied what happens in that scenario up to the it that's what just opens up a whole can of worms on industrial in general, which have typically not encounter with Office or retail. But that is a major consideration in industrial is what's been done there. And equally important, what what happens if an issue arises? That's really interesting. I hadn't thought about that in terms of like, what you could uncover after taking a space back from a tenant because I mean, that could lay dormant for years, right? You're not necessarily just gonna go in and run a phase two after every single tenant is there so it's definitely something to be aware of on the industrial side. Well, guys, this has been a great discussion on negotiating commercial leases, things that people

50:00

pool should be keeping an eye out for or considering when they're going through this process. Do you have any final parting advice or tips? When when landlords are going through the commercial leasing process? Landlords or tenants? Either or you know what you hire good freaking attorney like cheeping out on ready, man, don't cheap out on brakes for your car. Oh, yeah. Your buildings, man. I've seen tenants sign leases without a wall, your right side. And they just that without a shred of ink on the papers? Yes. They don't negotiate anything. I mean, I had to step in and help this girl basically try and get out of our ways. I mean, of course, the landlord was like, Nope, you personally guaranteed it. We're not letting you out where she signed the lease and accepted full responsibility of a 15 year old HVAC unit. Well, guess what, six months into her lease that blew out and she was responsible for paying for an eight or $10,000 unit she couldn't afford. It's like why would you not have to pay an attorney $3,000 to look at your lease. Yeah, yeah, that's a big one.

51:03

I would echo that completely hire a good lawyer worth their weight in gold. Awesome. Well, guys, appreciate y'all joining me today to the audience. We will be back with another episode here in a couple of weeks. And we will see all them. I will curse. And sorry, I work. That's right. And we get the whiskey and cigars going for the next episode.

51:24

Yeah, I like that idea. I actually picked up a pipe over the weekend because I lost mine from a long time ago. may not. I enjoy it. I like that more than cigars. We should get some whiskey and smoke some tobacco. I love it. I love it. Thank you guys. I always appreciate you guys. Likewise, appreciate y'all Y'all take care of you guys.

51:44

group coaching calls on how to confidently buy your first commercial property today at www dot c r e launch pro.com