Tenants come in two forms, good tenants and not-so-good (okay, go ahead and say it, “bad”) tenants. There seems to be no middle ground.

Tenants are capable of odd if not bizarre behavior and often they succumb to the same economic pressures impacting owners and landlords. Pressure can create abnormal responses in any person but when those pressures find their fundamental genesis in the economy, expect surprising tenant behavior.

Stories I have heard or read about lately make some tenants sound like Freddie Krueger…a bad Nightmare on Elm Street.

How to Handle the Next Nightmare. Whether on Elm Street or a strip mall in Atlanta, if you are a commercial owner, landlord, broker or property manager, you are going to eventually meet Freddie and have a nightmare tenant on your hands.

Dealing with Mr. Krueger begins with tenant screening and qualifying. If there was ever a precept that was violated by many owners during the market run-up from 2000-2006, it was qualifying tenants.

However, even after qualifying tenants economic and other factors can erode the performance of any tenant, creating desperation and a propensity to go sideways.

Owners can reduce but not totally control the “Freddie effect” by bearing down on the up-front analysis of the tenant. Controlling a future nightmare on your street begins with qualifying the tenant but it does not end there…read on.

A Second Line of Defense against Freddie the Tenant. Exceptional lease documents, drafted and designed to anticipate nightmares are the second line of defense against the Kruegers of this world. “I’m sorry,” I recently told a prospective tenant who complained about the length of the lease, “…the 28 pages of your lease are designed to anticipate just about anything and to protect you and the owner from misunderstandings.”

Bad documents seem to become “badder” (is that a word?) in the hands of a Freddie gone wild. Simplicity in the lease document can be a formula for future complexity and trouble on Elm Street.

As an investor, you don’t want to ever meet Freddie, the tenant, armed with a deficient lease document, cluttered with ambiguity. Freddie loves ambiguity!

Another thing I have learned along the highway of success and failure is that taking a strong position backed by logic, not rhetoric, is something Freddie understands.

When tenants have escalated the action, so to speak, the best position is a position of strength based upon facts, not emotional responses. Freddie loves fear…he thrives on it.

When a recently signed tenant angrily complained to me about not being able to occupy on the commencement date my response was to take a position of strength behind a quality document. My response, in part, was “…that is addressed in clear language in the lease and there is nothing I can do about that issue…” This defused a potentially volatile situation and kept the tenant from going “Krueger” on me.

Well drafted lease documents keep Freddie in place. After all, it’s much better to have a Mary Poppins than a Freddie Krueger on your hands.

When Freddie Keeps Coming Back. Like the horror flicks, Freddie never really dies and neither to tenant problems. If you have great tenants, stick around, Freddie is hiding in there somewhere, waiting for a chance to make a comeback.

To manage the potential return of Mr. Krueger, I recommend owners always use experienced property management as the front-line defense against negative tenant eruptions.

Property management is the third piece of the investment puzzle and can serve to help an owner keep his/her distance from day-to-day issues that should be handled by a Manager who knows the tenant, maintains the property and is not subject to the same emotional responses an owner may experience when faced with Freddie.

A good property management company will have its finger on the pulse of the property at all times and keep the owner informed but at a safe distance, thus increasing long term value through focused attention on the asset. Your property manager can warn you that Freddie is loose and enable you to solve issues before the slashing begins.

If you have never had a Freddie on your hands, count your blessings and be thankful this Thanksgiving Day. If you want to diminish the odds of an encounter with Mr. Krueger, use the three best tools available to you; (1) thorough screening of tenant, (2) a great lease document and (3) a property management company.

Posted by Donald Teel, Arizona Commercial

Taking the guesswork out of commercial real estate investment requires more than a hope, a prayer and signature.

The genesis of commercial real estate investment is found in the analysis of the basic math surrounding the transaction. Costs, cash flow, depreciation, appreciation, money in and money out. Math is the science of the deal.

While the origin of commercial transactions is found in the science of basic mathematical functions, the art of performance is found in the crafting of the document; this is the model. Well crafted documents are extensions of the numbers and the intentions of the principals.

If there is to be any semblance of predictability of performance such must be memorialized and embedded in the language that constructs the investment, i.e., the purchase agreement or lease agreement.

Then too, the document’s credibility is only as good as the integrity of its signatories; their motivations. They who sign are those who are called upon to act in accordance with their written promises.

Summary: the deal is as good as the numbers (the Math), the performance is as good as the document (the Model) and the execution of the promises is only as good as the integrity of the principals (the Motives). Upon these three the investment hinges.

The numbers are the science, the document is the art and the performance is the warranty. Upon these three the deal hinges and the door of performance opens and closes.

I have seen and written a lot of documents. In my career I have seen short documents that were good and long documents that were bad. There have been times when the short word accomplished as much as the long word and vice-versa.

Good numbers, contrary to the opinions of some of my contemporaries, are seldom the guarantor of performance. My experience has shown me, countless times, that the integrity of the transaction is always found in the fulfillment of the promises of the principles and this only as a result of superior documentation, whether short or long.

In retrospect, I have seen great documents backed by great numbers end in disaster due only to the diminished capacity, whether intentional or not, of a Principal Party to perform as promised. Lawyers want us to believe that documents are everything. I have seen good deals with superior documents go south because of bad intentions.

Nothing can overcome a Principal with a misguided principle, no matter the document, no matter the math.

Then too, I have seen miserable documents when placed in the hands of principled Principals run their course without incident.

After more than two decades I have learned that the math, the model and the motives are the three inseparable ingredients of any commercial real estate transaction; the most powerful being the later.

To me, this is the holy trinity of real estate investment and one cannot function without the other two.

Upon these three the deal hinges.