Owning commercial investment real estate requires a lot of hard work, discipline and knowledge in order to create a successful investment.
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.
Donald Teel is Senior Associate with Arizona Commercial an Arizona commercial brokerage firm. Need more information call 1-877-777-9100 or, if you prefer, you may email Donald Teel