The Reata BizBlog

I just finished reading an article by Jim Gillespie, a commercial real estate coach, in which he discusses peak oil and its impact on the commercial real estate business.   But first of all, what does Peak Oil mean? 

Jim describes it this way.  “When oil fields are new, and petroleum is beginning to be extracted from them, they continue to produce increased amounts of petroleum every year until the production from the field reaches its peak level. Then after this peak amount of production is achieved, the field will only be able to produce lesser and lesser amounts of petroleum every year thereafter. This is the very nature of the petroleum extraction process.”

Jim says that US production peaked in 1970 and says that many experts think that production in Saudi Arabia is peaking right now. 

So what, you might say.  Well, declining production means less supply.  At the same time, demand is increasing rapidly in developing countries like China and India.  Put the two together and you have a formula for enormous upward pressure on oil prices.  And that means much higher gas prices.  Jim’s article quotes an oil industry expert who says it will go to $10 a gallon.

Here are Jim’s thoughts on what impact this might have to real estate.

1.  The values of homes and residential rental properties in and closer to major cities will probably do better in the long run versus those located farther away in the suburbs.

2. Office buildings will experience a major increase in heating and air conditioning costs, especially those located in areas with severe winters or very hot summers.

3. Commercial and industrial properties closer to the major cities will...command even more of a premium in the future when compared with commercial space in the suburbs.

4. There will be a need for a much greater amount of housing near the central business districts of major cities.

5. Industrial businesses will transition away from shipping and receiving their goods by truck and towards shipping and receiving them by rail which will be more economical for them.

6. Manufacturing businesses that already have substantial energy costs right now will be hit very hard with the coming increases in these costs and will find it increasingly difficult to remain profitable.”

To read Jim’s full article, go to http://www.realestatesalescoach.com/peakoil.htm.  He also has an audio interview here: http://www.realestatesalescoach.com/Energy_Interview.htm.

So what do you think of this?  Agree?  Disagree?  Don’t care?  Let me know your thoughts.

You signed a lease for an office for your company a few years ago, but it will expire in a couple of months. You really want to either move or at least do a market study to be sure that you get a fair deal if you stay and renew.  There is other vacant space in the building so you are sure your landlord won't mind if you stay a little longer than the expiration date.

Everything is working out until you receive a letter from your landlord a couple of weeks after the lease expired.  It says that you have to pay twice as much as the normal rent because you are now in holdover.  Now the landlord has your attention and your priorities are suddenly different. 

When a tenant continues to occupy the leased premises after the lease has expired it is call Holding Over.  It can occur with or without landlord consent.  The rent is usually much higher during holdover - 1.5 to 3 times higher - and that continues until the tenant vacates or renegotiates the lease.

That is why it's so important to plan ahead for your lease renewal or relocation.  I recommend that you start at least 3 months before you must exercise your lease renewal if you plan to stay in the building.  A move or purchase may require more time especially if construction is required.  Most renewal options require 6-12 months prior written notice to be exercised so I am suggesting that you start 9-15 months prior to expiration.  That may seem like a long time, but you should never exercise an option unless you know what the landlord's response will be and you can only determine that if you have done your homework in advance.

There is rarely a time when it makes sense to pay holdover rent.  If you are seriously negotiating with your landlord to renew, ask that the holdover penalty be waived.  A smart landlord will charge the holdover rent and tell you it will be credited to you if you decide to stay.  That way he keeps the pressure on to decide quickly and may give him an economic advantage compared to your other options.

Of course, the smartest thing is to hire a corporate real estate advisor - a real estate broker who exclusively represents companies in leasing or buying commercial property for company use.  This advisor is usually a free resource who does all the market studies and negotiates with landlords on your behalf as your fiduciary.  He or she will keep things on track to avoid falling into the holdover abyss.

Bob Gibbons is a Corporate Real Estate Advisor with Reata Commercial Realty, Inc. in Plano, TX - a suburb of Dallas.

I recently saw an email from a guy in Knoxville, Tennessee asking about how to market an office building for lease which hadn't been built yet.  He had received a lot of advice about how he should canvass all the businesses in the area, mail flyers to the businesses, and generally waste his time in other creative and wasteful ways.

Here is the advice I gave him:

"Knoxville is probably like most other cities in America where 90% of new tenants in office buildings are represented by a corporate real estate advisor (tenant rep broker).  Therefore, it makes much more sense to concentrate your marketing efforts on the tenant rep brokers in your city than on the tenants themselves.

Here is my logic.  There are dozens or hundreds of those tenant reps depending on the market whereas there are thousands or 100's of thousands of companies.  The tenant reps are beating the pavements every day trying to find companies which need to renew or relocate.  Your chances of finding a company directly that needs your space is incredibly small.

So here's what I recommend.  Call the top manager of each of the tenant rep companies in your market.  Ask if you can bring bagels or donuts or sandwiches to their next sales meeting and make a presentation on your project.  Do this for every tenant rep firm in the market.  There probably aren't more than 5-10 with more than 5 agents.  But by doing this, you will have reached the equivalent of 50-75% of the true prospects in your market.

Be sure to get a list of the agents in each company and follow up with email flyers of your property which include floor plans, pretty pictures, a map, rental rates, etc.  This will make it easy for them to forward the info to their prospects.

You also much keep your property info updated on all the listing services - Xceligent, LoopNet, CoStar, etc.  Tenant reps will often be online during the lunch hour, at night or on weekends or may be pressed for time putting together a tour package.  You don't want to be left out because you didn't take a few minutes to update your info online.

This last tip seems so simple you will think I'm crazy for even mentioning it, but it is possibly the most important.  Return phone calls and emails quickly.  I can't tell you how often I contact project leasing people and never get a reply. Or maybe I'll get it several days or even weeks later.  If the real owners of the buildings knew about this, they would flip.

Good luck with your project."

Reata Commercial Realty, Inc. is a corporate real estate advisory company which represents commercial tenants when leasing or buying buildings for their company use.  These include office, warehouse, medical and retail building.  Reata is based in Plano, Texas - a suburb of Dallas.

Estoppel.  Sounds like a medical condition you don't want to talk about in polite company.  Or something you'd need a medicated cream to clear up.  Think of the embarrassment of checking out at the grocery store when the cashier gives you that knowing smirk.

But an estoppel is really nothing to fear or worry about.  It's actually just a document signed by a tenant at the request of a landlord which confirms the terms of the lease and that they are in effect with no default by either party. So it simply says that the lease is still in effect and nothing is wrong.  Seems kind of silly to have a legal document which confirms another legal document you already signed, but that's pretty important information if you are buying a building or giving a loan on one with a bunch of tenants in it.

Estoppels are, therefore, required by investors when buying buildings with leases in place.  Lenders also want them when they refinance a building or make a new loan. Leases are the documents which create value in buildings so buyers and lenders want to ensure that they are in full force and effect and that the value is real.

If you know someone who receives an estoppel, please have them contact their attorney. Or better yet, have them contact Reata Commercial Realty, Inc.

For other real estate terms, see the Glossary on Reata's website.

Reata Commercial Realty, Inc. is a corporate real estate advisory company which represents commercial tenants when leasing or buying buildings for their company use.  These include office, warehouse, medical and retail building.  Reata is based in Plano, Texas - a suburb of Dallas.

We have just added a new page to our website which features listings for the excess space which our clients no longer need.  These properties may be for sublease or sale.  The current inventory includes a 2,226 square foot office condo in Plano near Coit & Legacy, a 1,442 SF retail store in Plano at 15th & Custer and a 2,115 SF class B office space on The Tollway in Far North Dallas.

If you know of a company which needs inexpensive space, please go to our website at www.ReataCommercialRealty.com and click on the Properties menu option to see what's available. 

If you know of a company which has more space than they need, we'd like to talk with them about how we can sublease their space and save them money.

I came across the following quiz and thought it put things in perspective fairly well.  I don't know who the author of this was, but I like it.  Your thoughts?

Take the following quiz:

1. Name the 5 wealthiest people in the world
2. Name the last 5 Heisman trophy winners.
3. Name the last 2 winners of the Miss America contest.
4. Name 10 people who have won the Nobel or Pulitzer prize.
5. Name the last 6 Academy Award winners for best actress.
6. Name the last decade's worth of World Series winners.

How did you do?  The point is, none of us remember all the headliners of yesterday. These are no second-rate achievers.  They are the best in their fields. But the applause dies. Awards tarnish. Achievements are forgotten.  Accolades and certificates are buried with their owners.

Here is another quiz. See how you do on this one:

1. List a few teachers who aided your journey through school.
2. Name 3 friends who have helped you through a difficult time.
3. Name 5 people who have taught you something worthwhile.
4. Think of  3 people who've made you feel appreciated or special.
5. Think of 5 people you enjoy spending time with.
6. Name half a dozen heroes whose stories have inspired you.

Easier?  The lesson?  The people who make a difference in life are not the ones with the most credentials, the most money, or the most awards. They are the ones that care.  Which are you to your clients?

Some people are just natural marketers.  I'm not sure I could ever be this creative.

I used to carry a micro-cassette recorder so I could make "notes" to myself when I was driving.  When I got to the office I would listen to the recording and write down my To Do list.

Then mobile phones and voicemail came into the picture and I would then just call my office phone and leave a message with the reminder.  But I'd still have to listen to it and write it down.

Well all that is behind me now.  I now use www.Jott.com - a free service which converts my voice memos into emails both to myself and others.  So here's how it works.  I call a toll-free phone number using a speed dial button on my mobile phone.  The Jott system recognizes that it's me calling (I guess it uses caller ID to know it's me) and asks me, "who do you want to Jott?"  I say, "me" and it responds, "Jott yourself." After the beep I leave my message and hang up.  The voice memo is then converted to text and an email is sent to me automatically.  I can Jott my wife, one of my agents, or even a group all at once and emails go directly to them.  I could make a call to them just as easily, but sometimes I don't have time for a conversation and just want to send a quick message.

You can sign up for Jott for free.  It takes a couple of minutes, but will save you lots of time, keep you from crashing your car while taking notes, and prevent forgeting something that's really important if not written down that second (maybe that one is just me).  There are other services that do this as well, but I haven't used those.  CopyTalk (www.CopyTalk.com) is one of those.  It requires a fee but then it probably offers additional services or features.

Bob Gibbons can be reached at bob@reatacommercialrealty.com. 

Recapture is a term used for the landlord's right to terminate a tenant's lease for all, or a portion, of the premises in order to prevent a sublease or assignment.

I saw this happen one time on the day before a business sale was expected to close.  It was really the fault of the seller of the business who was the tenant in an office building.  The buyer came to the landlord to let him know of the sale.  The landlord referred the buyer to the sublease and assignment clause of the lease in which all subleases or assignments had to be approved in writing by the landlord.  Furthermore, that clause gave the landlord the right to terminate the lease if he chose to do so.

In this case, the market rent for the office building had gone up by about 25% since the lease had been signed and there was very little vacancy in the submarket.  So the landlord terminated the lease because he knew he could get more rent for someone else. 

Of course, the buyer of the business needed a place to conduct business and he didn't have time to move.  So he asked the landlord if he could lease the space.  The landlord agreed but at a rental rate 25% higher.  The business no longer had the same value since the expenses had gone up and the net operating income had gone down.  So the buyer went to the business seller and demanded that the purchase price be reduced by the amount of additional rent.  The seller accepted the deal and walked away with far less cash in his pocket than he had planned.

Now this situation could have been avoided in two ways.  First, the seller of the business could have approached the landlord long before the day before the sale to determine his attitude about assigning the lease.  He could have then used that information to plan the sale better and get a more accurate estimate of the business value.  Someone should have been watching the lease or consulting their corporate real estate advisor.

Second, the business seller who was the tenant in the office building lease should have addressed the landlord's recapture right when he signed the lease in the first place.  If that had been negotiated out of the lease years before, he would have kept the extra money he lost.

If you know of someone thinking of signing a lease, you might mention that they look at the sublease/assignment clause carefully.  Or if you know of someone thinking of selling or buying a business, please tell them to read this clause of the lease carefully.  Or better yet, have them contact their corporate real estate advisor.

Bob Gibbons is a Corporate Real Estate Advisor with Reata Commercial Realty, Inc. in Plano, Texas - a suburb of Dallas.  You can reach him through his website at www.ReataCommercialRealty.com.