Health & Fitness Commercial Property : Colin Carr
Guest: Colin Carr
Release Date: 6/26/2023
Welcome to Trulyfit the online fitness marketplace connecting pros and clients through unique fitness business software.
Steve Washuta
What are other negotiable concepts outside of simply the price during a commercial lease process? Are there disadvantages and trying to handle a lease agreement on your own? What are the differences in a triple net compared to a gross lease? With the current interest rates and transition to a virtual workplaces? How are commercial property is being affected? We’ll discuss all this and much more in the upcoming episode.
Steve Washuta: Welcome to Trulyfit. Welcome to the Trulyfit podcast where we interview experts in fitness and health to expand our wisdom and wealth. I’m your host, Steve Washuta, co-founder of Trulyfit and author of the book Fitness Business 101.
Steve Washuta
On today’s podcast, we’re talking commercial real estate for health care businesses, whether you’re a personal trainer looking to get into a space, whether you’re a physician, a dentist. Anybody in the health care and fitness space I have on Colin Carr, who is the Chief Executive Officer and founder of car car, you can find everything about them@car.us. Colin is a commercial real estate agent.
Steve Washuta
He has been in the business since 2000. He himself has completed over 1000 transactions personally, his business more than that. He talks to us about everything we first break down some layman’s terms, what exactly is commercial real estate compared to residential? What exactly does it take?
Steve Washuta
On the front end the client experience when you’re looking at commercial real estate properties? How do you do your due diligence as the potential buyer and how do you work in coordination with your commercial real estate agent to make sure that you’re getting the best value, the negotiation process that is much more intricate than one could imagine. That’s why you shouldn’t be handling these things on your own.
Steve Washuta
The differences between let’s say a double net rent and gross rent and why might one might be advantageous for you. So many different things we talked about. I also had him do what I do to a lot of my people who are experts in one area that somewhat ties into finance.
I have them forecast about their specific business, what is to come five years down the road with all that’s going on now in the markets.
With high interest rates and people working virtually what is coming of the commercial real estate spaces that are open all over America in five to 10 years.
Steve Washuta
So it was a great conversation. Again, to find everything about Colin Carr and his business go to car.us. With no further ado, here’s Colin. Colin, thank you so much for joining the truly fit podcast, why don’t you give my listeners and audience a little background on who you are and what it is that you do day to day?
Colin Carr
Yeah, appreciate it, Steve. Thank you. So I had been involved in commercial real estate for a couple of decades now. And for the last 15 years, I’ve been focused exclusively in the healthcare and the wellness industries.
So our clients are physicians, dentists, fitness facilities, chiropractors, anything that has to do with health or wellness we’re involved with, and I started the company about 15 years ago, with a very specific niche that we would only be on the tenant and buyer side of the transaction, which is very rare, most commercial real estate agents want to put a sign in front of a building, they want like 90% of their work to be landlord or seller focused.
Colin Carr
We just took the position that we wanted to stay on one side of the transaction, no conflicts of interest. We wanted to help you know business and practice owners be as successful as possible. Help them maximize their profitability through real estate. We have been cracking up for about 15 years, we’re coast to coast. we have people in almost every state.
Colin Carr
And we represent, you know, I think we have over 4000 clients that we’re doing work for right now across the country and anything real estate related. If it’s a lease renewal, if it’s a new office, if you want to purchase commercial real estate for your business or practice.
That’s what we’re involved with. And you know, people typically say why is that so important? The answer is that real estate or facilities costs are typically, you know, first second or third highest expense behind payroll, or maybe one other type of, you know, overhead expense.
Colin Carr
It’s a big deal. It really affects the quality of the business of the practice, it affects the staff and the hiring, it affects referrals from current patrons or patients. And, you know, real estate, real estate impacts every aspect of the day to day operation. So that’s what we do commercial real estate for healthcare providers, for wellness businesses, etc. And that’s our focus.
Steve Washuta
Let’s take a step back here. Most of my audience are personal trainers, they are people who certainly are business owners, or maybe hope hoping to be business owners and some sense physicians, people in the health world, but not all of them understand the real estate market and and the definitions of real estate.
Steve Washuta
So can you define commercial real estate? Is it an entity that matters more about the building itself? Is it what its, let’s say the land designation? Is it a combination of the two? Can you give us a definition for like a layman’s terms?
Colin Carr
Yeah, absolutely. So I’d start by saying it’s, it starts with non residential, so you have multifamily or single family housing. That’s the residential component, whether it’s a condo or townhome, we’re not talking about anything residential. It’s all commercial.
Colin Carr
Yes. We can get into zoning designations but the number one question is what is the what is the use or the business that wants to occupy the space like that’s the main question. Commercial Real Estate can get into all sorts of like sub designations, you have industrial, you have Office, you have retail, you have mixed use. But the main question is what type of business or practice Do you want to put into the space?
Colin Carr
If you think that anything that’s health related, whether it’s MD or whether it is personal training, whether it’s any form of wellness, that’s going to be commercial real estate. They are going to be looking at not just the person who wants to lease the space, but they’re saying, What is the use of the space? And what is the business that you want to run?
Steve Washuta
Walk me through the beginning of a client interaction, I’ll give you sort of a beginning intro here You could expand on this, I am looking to purchase a gym, I’m looking at 3000 square feet, I’m looking potentially two or three towns, now you telling me to look up four or five, six different places, and then you’re going to show me these places and guide me as to what’s best. Are you doing the research and then sending it to me? How does this process go about?
Colin Carr
Yeah, that’s a great question. So no, we’re going to perform all of the due diligence on your behalf in coordination with you. We are doing the site selection, we’re going to we’re going to prequalify landlords, we’re going to figure out who likes your use, who’s willing to contribute money towards your deal, what type of concessions are available, we’re going to look at the surrounding areas, make sure that it’s an area that’s, you know, on the way up that’s doing very well, we don’t want to find a declining area.
Colin Carr
You are looking at maybe a grocery anchored center, and the grocery store is going to be moving out of that center. We want to perform a significant amount of due diligence on the types of properties ahead of time. and then whittled down to the top options, and then set up a time to tour show you the best properties. Then we’re going to be educating you on on the attributes, the pros and cons of each property.
Colin Carr
Ultimately, we’re gonna get to the place where you narrow down the list of your top two or three properties. Typically, you’re going to have a clear favor, that’s very common. But we want to negotiate on two or three or three or four properties simultaneously. at all times for a number of reasons, which I can walk through in a minute. But we’re doing the due diligence, we’re doing the site selection, and then we’re presenting you with the top options.
Steve Washuta
Can we go over some of those things when you’re doing the due diligence? Is it the roads that it’s closest to? Is it the businesses that are close as a competing businesses that might be in the area? What are some of the things that you’re looking at that you’re coordinating with the potential client?
Colin Carr
Yeah, absolutely. So if we have a specific type of, of, let’s say, gym or fitness facility, and you say, Here’s my competitors, the next question for us is, do you want to be a certain distance away from them?
Or do you want to be right across the street from them? And that’s kind of an interesting concept. A lot of times people will say, Well, I want to be Fox, my competitors, other people will say, No, we do it better, we have a better we have a better product, they have a better service, we have a better facility.
Colin Carr
So we would like someone who’s already going there to see our facility or our program and say, I’m going to check that out. Or we’re confident we can compete head to head and so I don’t care where they’re located. Just give me the best property. So we are looking at competition studies. And we do have really great software to help with that process.
Colin Carr
But then, yeah, it’s concepts like what is the what is the visibility? Like, is signage important to you? Are you willing to pay a premium for additional signage and exposure of like, let’s say, 50,000 cars per day drive by your property? Is that worth it to you? Or do you say no, we’re so specialized, or it’s all word of mouth referral, I don’t need that. I’d rather I’d rather save that money and go into a maybe a nicer property with less exposure.
Colin Carr
We are showing people all their options, we’re saying, Hey, here’s options to lease, here’s options to purchase, we’re showing you retail, if you say half of assign, and then we’re going to, we would only show you office properties that you know, accommodate your use. And we’ll give you some signage, too. But we’re trying to we’re trying to give you all your options so that you don’t get half of the process and say,
Colin Carr
You know what, why aren’t we looking at this, or let’s also add to this, the next we don’t we will go back to the well, but we want to try to get everything figured out in advance, show you your top options.
And then and then you’re making informed decisions along the process. And then you’re not starting over three months in or four months in, it’s a much more efficient way of looking at options.
Steve Washuta
Yeah, I love how you have a bunch of different metrics to look at and you make it less of a love purchase, so to speak. There’s so many people who find a property, they fall in love with it.
They are only seeing the good I had a friend who bought a gym, it was on a major road, there was a ton of cars driving paths, but the entrance was off of like you have to make two rights into a small driveway to get into there, there wasn’t an entrance off the main road.
Steve Washuta
And that lost him a lot of people and eventually had to close down I thought that was the reason why he didn’t look at that because he was so in love with the potential instead of looking at the realization of what are the metrics here and let me step away from this and look at this from a more you know, number standpoint and less of a what could be standpoint.
Colin Carr
Yeah, I liked the way that you use that terminology of not falling in love. A lot of times when people are thinking about real estate, they’re first associating that with residential real estate and that’s your home. You can do whatever you want in your home.
You can pay any number any premium Do you want to? Because the only utility is that you’re happy there? I mean, yes, there’s a utility of like, do I have enough bedrooms? I don’t have a kitchen and so forth. But the real question is, is that where you want to live.
Colin Carr
If that is the case, you can do whatever you want to do. Because you are the sole person who has to be content with that. When it comes to a business, you got to have not only good exposure is great, but like you said, if you don’t have good access, or if you don’t have good parking.
If you’ve got neighboring tenants that are going to bring your image down or or. you know, be less than ideal people that you want, you know, associating with your practice and your brand or your image than the other things do make a big deal, they do make a big impact.
Colin Carr
So you know, access, visibility, neighboring tenants, exposure, parking, all those concepts are part of the due diligence process. And then obviously, you get to what’s typically, most people’s focus outside of that is, what’s the cost, like, I might find a property that I absolutely love.
It doesn’t make sense for me financially. it’s going to crashing from a cash flow standpoint, or it’s gonna force me to be, you know, to work twice as many hours personally, or to have to grow the practice, or the business to a level that just isn’t sustainable. And so, you know, the intangibles we talked about are very important, the economics are very important.
Colin Carr
And ultimately, you’re trying to find a way to marry the two, what do you like? What can you afford? And then put yourself in the, you know, in the position of a customer, a patient, a patron, etc? What is their experience coming to you for the first time, repeat, repeat visits? But what’s their experience referring friends or family to you? And ultimately trying to find the best options available? You can’t, you can’t typically make up an option that’s not there. And so it’s a matter of what’s available? What are we working with? And then will it facilitate the vision of the business?
Steve Washuta
From the other end of the spectrum, from like, let’s say, watching healthcare businesses, whether you’re a doctor’s office, or a dentist, office or gym? If you see them fail?
What is typically the reason why outside of their their own practices I’m talking about from a commercial real estate perspective, what is the number one reason that you see that some of these businesses are failing? What are they overlooking the most.
Colin Carr
So I’ll give the asterik that when we see when we see in his healthcare that it fail, more times than not, it is something going on personally with the owner of the business or the practice.
So it’s your personal issue, it’s family, it’s divorce, it’s substance abuse, etc. So push those things outside of the equation. Typically, it’s rare to see people fail, it really is.
Colin Carr
But typically, it’s they bite off more than they can chew, it’s too large of a space, it’s too expensive of a space, they get too much equipment and technology, they go too big too early.
They just can’t they can’t get it up and running or ramped up fast enough. There is a balance there of how much space do you need now versus later, it’s not convenient to move, you don’t want to go occupy a space for six months, and then have to move six months later.
Colin Carr
So we’ve got to get a space that’s large enough that can accommodate your growth. But it can’t be to where you’re not going to need that space for five years, like that’s too long of a runway, it’s too steep of a ramp.
Just to let you know that without going too big with the square footage, not going too expensive to where you can’t afford it, especially on a startup. And then also, you just you got to work within your means as far as your equipment technology.
Colin Carr
A lot of times that is considered FF and E furniture, fixtures and equipment, you just got to make sure that that it’s sustainable. You might be able to only get certain pieces of equipment or technology now. And then you upgrade later like like a dental office, you don’t equip all six operatories. From day one, you equip two or three.
Colin Carr
And then as you start maxing those out consistently over several weeks or months, then you order the fourth operatory. It’s the same thing with fitness like you don’t, you don’t equip an 8000 foot facility with everything under the sun, you’ve got to start with what you need. And then you start adding pieces over time as you can sustain it.
Steve Washuta
Yeah, that’s great advice. And unfortunately, I don’t think people do that. Again, I think they fall in love with the idea and the concept, especially in the fitness industry, I can’t speak so much to you know, dental and other health care, but they want every toy under the sun, and they want to build out the facility.
Steve Washuta
And they think you know, if you build it, they will come the problem is if it takes a little while to build those client relations could take two or three years and you you might be underwater and you’re in that mortgage process and then fail. So I couldn’t agree more start, start with what you need, and then build on afterwards.
Steve Washuta
You talked a little bit about negotiating on the front end. Is this something that you do? Do you expect the clients who take part in that? Do you handle 100%? And then also, should you always go in with a negotiation mindset? Are there some prices you go you know what, this is too good to be true? Let’s just go ahead and grab this.
Colin Carr
Yeah, those are great questions. So let me hit those individually. Number one, yes, we handle the negotiation process. That’s our top expertise. That’s our top skill set. You know, at the end of the day, anybody truly could submit an offer and then ask for a lower price. Anybody can negotiate? We’re not talking about just negotiating.
Colin Carr
We’re talking about achieving the most things In normal terms possible, like that’s our number one objective. And so to do that, you have to have a strategy and you have to have a posture. If you just show up at a property and look at the property and then ask for a proposal, and then ask them for a lower lease rate or higher concessions, it becomes very clear to the ownership group or the listing broker, whether you know what you’re doing or not.
Colin Carr
If you come into a transaction, unrepresented, I don’t care how educated you are, how talented you are, the landlord is going to assume that you don’t know what you’re doing. Okay, it’s no different than someone trying to self diagnose or self treat, or whatever it is.
Colin Carr
The idea is that you’re not trained in this area, you don’t specialize in this area, and you’re just kind of like winging it, or giving it a shot. So that’s going to cost you that’s going to cost you economic terms, it’s gonna cost you concessions, a strategy that is very successful that every fortune 500 company uses is they have somebody who is trained exclusively in this area to represent them, they could be an in house real estate team, if it’s a large company, but typically, it’s an outside company.
Colin Carr
It’s their exclusive agent. And when they’re communicating with the listing broker or the landlord, they’re telling them listen, here’s what we like about your property. Here’s what we don’t like about your property. Here’s, here’s what we’re willing to do if we were to lease from you. But you’re one of three or four landlords we’re negotiating with simultaneously.
Colin Carr
And then what’s happening is, you’re negotiating on a non binding basis, which is different than residential, residential, you find the house you like, you submit an offer and a contract, if the seller signs it, you’re under contract, and you’re starting the process now to where you’re in a binding contract. You can terminate for due diligence or things typically, but you are in a contract that’s binding.
Colin Carr
And so it’s different commercial real estate, you’re negotiating on a non binding basis on ideally three or four properties, and you’re going three or four rounds of negotiations. It’s different than residential, because you’re talking about, what’s the lease term? What’s the lease rate? What are the annual increases? How much time do I get for build out?
Colin Carr
How much time do I get free? Once I move in? What type of personal guarantees are we working with here, what type of deposits, and you have all these other economic considerations, and so there’s all these levers like, if you pull this lever, it’s in effect, this one, if you want to do a one year deal, you’re not going to get any money from the lender, that’s significant, because they don’t have enough time to recoup that investment.
Colin Carr
Contrary to that, if you say, Hey, listen, I’m willing to give you a seven year deal, they can contribute more money to the deal, in exchange for a long term lease as a benefit to them, not to have to release this thing seven times in seven years. So that’s a value. So you’re going back and forth three or four times, typically. And then you’re using those negotiations to leverage against each landlord.
Colin Carr
For instance, if one landlord has a higher lease rate, but it’s a good property, but their tenant improvement allowance is a lot lower, you can you can leverage and say, Listen, I’m getting this X amount of TI allowance from these other three landlords. And your property is very similar, like we’re gonna have to be more competitive here for us to continue negotiating with you. And so you’re leveraging factually, you’re leveraging with data. And it’s not just a you know, what would you give me a lower lease rate?
Colin Carr
Why? Because I asked you for it. Why? Because I want a lower payment? Well, I mean, most people find themselves in a situation where they’re literally just begging the landlord, like, Would you please give me more money? Would you please give me free I mean, it has no posture, no strategy. And that is the difference between the pro companies, the fortune five, hundreds, are is factual. It is strategic. They are never at the mercy of one landlord or one owner. And they’re, they’re playing this as a game. And it truly is a game.
Steve Washuta
Yeah, reminds me when you walk into a car dealership, and you don’t necessarily have a plan, and you tell them exactly what car you want, and then they just they have you by the balls at that point, right? They know exactly. They’re like, Oh, I know, you want this car. So basically, the price is secondary to you.
Steve Washuta
And we’re gonna figure out a way to screw you. And that’s why you hire experts, like Colin to help you and I love what you said, about, you know, pulling one lever is going to affect the rest, because I think the average person thinks, oh, this is just the cost and the years. That’s it, right, there’s $1 amount, there’s a year as I started the lease, and I’m just fighting to change one of these or both of these.
Steve Washuta
So it’s like now there’s a lot more nuance to this. And if you don’t understand those nuances, it’s going to affect you down the road. And when you’re starting off at a business, most business owners know this, it could take up to three years before you’re profitable. That’s the average business. So you need every advantage you can on the front end to make sure you’re not fighting that uphill financial battle. Can you name some of those other things that you could potentially negotiate in a commercial lease outside of just the years and the dollar amount?
Colin Carr
Yeah, absolutely. So the tenant improvement allowances is a huge one. And again, this is a difference between commercial residential, residential, if you’re gonna go rent an apartment or a home, typically, you expect the carpet to be clean and the walls be painted. And that’s it. Like maybe you negotiate a new dishwasher, or something like that, but it’s basically just take it or leave it. In commercial real estate.
Colin Carr
A lot of times you’re walking into a second generation space that was formerly something different and needs to be renovated. If you’re walking into a shell with a brand new building, landlords and commercial real estate are waiting and accustomed to giving significant amounts of money to build out spaces and exchange for a business that they like and believe in a person they like and believe in.
Colin Carr
And then also, in exchange for a longer term lease, like commercial real estate, landlords want to do five year deals, seven year deals, 10 year deals, and when you give them a longer term lease, they will contribute meaningful dollar amounts to that. So, you know, you’ve got to figure out, there’s a balance between what’s the lease rate, how much money you want to get from the landlord.
Colin Carr
And then you can engineer and structure deals like for instance, you shouldn’t be going after free rent to start a new lease to help offset startup costs or moving costs. And to ramp up, you’re hoping for a lower lease rate in the first year two or three, like you said, to give you less pressure more room on the cash flow, as you’re ramping up. And as you’re getting started. So you got lease rates, you got annual increases, like 99.9% of all leases are going to have a bump each year.
Colin Carr
That’s negotiable. Is it 2% 3% 4%? Well, that can literally be 10s of 1000s of dollars over a 10 year period. You’ve got concepts such as, such as free rent, once you open the space as well, or once you open the business. And then you can get into all sorts of random concepts like who pays for what like who’s maintaining the HVAC system is janitorial included are utilities included? And so a lot of it’s just kind of fundamentals, how’s the building structured? Is there one water meter are there separate water meters, so all sorts of intricacies there.
Colin Carr
And then you get into I call non economic deal points. For instance, if you have a certain type of business or practice, and you don’t want the same type of business, or practice posting up next door to you, you need to negotiate what’s called an exclusive clause or exclusivity. And you might say, Well, what type of a lead I would put in, you know, a second chiropractor or a second CrossFit gym or whatever leathers are put in anybody who shows up who’s got the money, okay, the landlord’s not your friend, they don’t care about you, at the end of the day, they are in it to make as much money as possible in the vast majority of scenarios.
Colin Carr
So if you don’t want another exact type of facility posting up, that’s an exclusive clause. But you need to go one step past that, you might say, well, they’re not going to call themselves the exact type of fitness facility. But what if they offer the same thing, it personal training is going to be a major aspect of your business, then you need to get an exclusive clause that they will not lease to anyone else who is offering Personal Training Services or you know, listing your your services or your offerings. So that’s a big one. Another one I tell you, too, is you might want to sell the sell the business at some point in time.
Colin Carr
That’s called an assign ability clause. And then you got to go one step deeper. It’s not just can you assign it? The question is, can you get off the lease? People This is one of the top mistakes people make in the non economic deal points is they will not get an assign ability clause, they go to sell their business or practice and the landlord’s like, I’ll let you sell it, but you’re gonna stay on the lease.
Colin Carr
And that’s a massive pivot of like selling your house and then stay on as a guarantor of the buyers mortgage, like that’s the last place you want to be. But having assignability clause is very important. And then along with that, too, but you’ve got to have a trigger in there to where you can get off that lease, or off that personal guarantee. Otherwise, you’ll find yourself in a place where you can’t sell it or you don’t want to sell because you’re still on the hook line, but liability where financial wise. Yeah, I
Steve Washuta
guess from a business perspective, we call that like an exit strategy. I actually worked at a gym in which the lady basically couldn’t pay the last month of rent. And whatever was in the clause said she had to be out like the day of so she ended up selling all of her equipment for I’m talking pennies on the dollar, everything in there because it had to be out she was going to get sued otherwise, and because she didn’t have somebody like you and have like a proper exit strategy to know like, Okay, what happens if like, shit hits the fan.
Steve Washuta
And I have to get out of here and I can’t take these next steps. And then speaking to something else, you said, I tried to rent a place out to start a personal training studio about four years ago in a different city that I don’t live in now. And I found what I consider to be the perfect place until I found out there was a yoga studio, basically, you know, around the corner around this L shaped section.
Steve Washuta
And they had a clause that said no other fitness or health entity could be inside of there good for them to Shea on their part. But I didn’t even know that was a thing. I’m like, we’re not actually direct competitors, but I get it from their perspective, there is a chance that I could take some people away and and they made sure they had someone like you to help assign that to make sure that their business continued successfully.
Colin Carr
Yeah, and from that perspective, you might say, well, we don’t offer yoga, what they’re saying is someone’s gonna choose between personal training or yoga as their next fitness strategy. And so they’re just trying to try to minimize how many other funnels are out there and get as many people in their funnel as possible.
Colin Carr
So, I mean, there’s there’s definitely overreaching exclusive clauses, but at the end of the day, you know, you’re going to offer that lamb are, you know the value of having a quality tenant who’s gonna pay them faithfully for the next five 710 years? It’s not unusual or uncommon to ask for things that help protect your business.
Steve Washuta
Can you give us the layman’s definition of net, double net triple net? why one would be more advantageous in a certain situation? Or why you might push one regardless of situation?
Colin Carr
Yeah, so when it comes to lease structures, typically, whatever the landlord has in place for the center, or the building already is typically what’s going to stand or be be the process moving forward, it’s very difficult to get a landlord, if they have 10 tenants in an office building or in a retail center to give you a differently structure, it can’t happen.
Colin Carr
But it’s very rare. So typically, the questions are, what type of a lease structure are you guys proposing? Or do you already have in place, if it’s a retail center, that’s multi tenant, or if it’s a multi tenant office building, you’re going to typically see one of two leases, you’re gonna see a triple net lease, and the triple net, the net stand for taxes, so property taxes, insurance, property insurance, not liability, but property insurance, and then common area maintenance or operating expenses.
Colin Carr
So basically, these are all of the costs of running the property outside of the mortgage, or attorney’s fees to the landlord or commissions, etc. What does it cost to operate the property, property taxes, property insurance, and then commentary, maintenance or operating expenses. And so what that basically means is that the landlord’s taking all the costs of running the property, putting it into like an Excel spreadsheet, or a software program for property management, and then any cost of running the property is gonna get pushed back out to all the tenants on a proportionate basis.
Colin Carr
And the proportion of basis should be on a per square foot basis, not an occupancy basis, not on a who’s paying what rent basis, but on a per square foot basis. So for instance, to use super basic numbers, if it was a 10,000 foot building, and every space was 1000 square feet, you would be paying 10% of the operating expenses, and you should be paying 10% of the operating expenses, whether that property is 100% leased, or you are the only tenant, your your proportionate cost of running the property shouldn’t change, whether whether it’s fully leased or it’s almost all vacant.
Colin Carr
So, a triple net lease is you pay your proportionate share of variable that that can be there on top or included in this. Is the question of are janitorial expenses included? Or are they separately? Are they charge? Do you personally? Are you in charge of them? And then are utilities included inside those operating costs? Or do you pay them separately, if it’s an office building, they’re typically included inside that triple net cost. If it’s a retail property, typically the water and sewer are going to be included in there. But you’re going to have a separate electric and gas meter and then you’re going to contract for that separately.
Colin Carr
So try to keep this not not too not too advanced. A triple net lease means you pay your proportionate share of all the operating expenses, regardless of the occupancy of the property, regardless of lease rates, etc. You pay your proportionate share. You have to ask the questions are there any additional costs I’m paying for am I paying for parking is happiness, signage, utilities, janitorial, etc.
Colin Carr
The other type of most commonly is gonna be what we call a gross are a full service lease. You can also have a modified gross but keeping assembly or a gross means the landlord’s just gonna give you one one sum of money, you pay it, and they’re not going to break down or spend time telling you how much all the other costs are. Here’s your total monthly rent, you pay it. Then you don’t have to deal with a lot of the reconciliations and all these other costs that are involved.
Colin Carr
That’s a really layman’s way of saying it. Modified gross can mean you pay, you pay one number, but you also have to pay for like snow removal, or you have some other random cost, where the landlord pushes it off on you. So the most important thing to know is what type of lease structure are you proposing?
What do you have in place, and then the best thing I can tell people is, as opposed to becoming an expert in lease types, get a really good real estate attorney, and then they will make sure that what the landlord is proposing is market or fair.
Colin Carr
I will mention one more comment this one too, because when always comes up, be aware, if you’re a tenant, the lease is going to be in favor of the landlord. Like when we talked about getting a fair lease, that’s kind of somewhat of a funny term. It’s not going to be that fair. Okay, it’s going to be in the landlord’s favor, because they’re the one with a typically a multimillion dollar mortgage.
Colin Carr
They’re the one of the highest level of exposure, they’re the one with the highest risk for insurance, and then they’re going to be offering you the benefit of a several 100,000 Or a multi million dollar lease deal. Basically, they’re giving you the equivalent of a million dollars that you pay them back over five or 10 years.
I
If you’re gonna give someone a million dollars, or other rights and other benefits. like you would want a personal guarantee, and you would want the deal in your favor.
Colin Carr
It’s kind of like this. Read your student loan documents who is the document In favor of read your credit card document, read your mortgage document, read your auto loan, every time someone offers you any financial benefit or credit or value, it’s in their favor.
Colin Carr
So, you know, it’s common for tenants to get these leases that are like 6070 pages and they say, Well, this thing’s totally in favor, the landlord is like, well, of course, it is like so is your mortgage document. This is the equivalent of a mortgage just in a rent scenario. So long answer to a short question. How’s that?
Steve Washuta
No, that was great, actually. And I I’m gonna ask you the hardest question of the mall, maybe? Because the there’s no maybe one specific answer. This is just from a macro global perspective, your own personal ideology.
Steve Washuta
What is going on? Let’s say now in the commercial real estate market as far as interest rate hikes and people working from home and there’ll be more technology and AI? What are you predicting to happen in the five years? Are you yourself pivoting? Because of all that’s going on?
Colin Carr
That’s a great question. So I will tell you, so we’re talking right now it’s towards the end of June 2023. So you’ve got to look at this by product type inside of real estate.
So for instance, if you look at the stats for residential real estate across the board, and this takes into consideration the worst markets in the best markets, but the report that I saw a few weeks ago said that real estate in 2023, in June is down over 22%, from where it was last year as far as values. So we’re seeing residential values decrease.
Colin Carr
Now someone’s gonna hear that and say, Well, my neighborhoods not decreasing. I’m not saying every neighborhood but as a whole, the values have come down over 20% in the last 12 months. The feds did not raise rates again, but they did say they’re gonna raise probably two more quarter point raises.
Colin Carr
So we do know that prime is going up again, that affects commercial borrowing and typically affects mortgages as well. Industrial real estate is at an all time high, they cannot build distribution and warehousing space fast enough, people are not slowing down their spending as a whole they are buying, they are ordering and people are making things and shipping things at an all time rate.
Colin Carr
So if you’re talking about industrial real estate, they they are writing the biggest wave they have ever written in the history of commercial real estate that I’ve seen multifamily, they can’t build it fast enough more people want to rent and more people want new combinations. And never before.
The places where we’re seeing things really dip is traditional office space. It’s the large like six storey office building or high rise, you’re seeing a lot of companies there that are saying I don’t need 40,000 square feet, we probably could get away with 15.
Colin Carr
And then we still want people come into the office, but they don’t need to be here five days a week, it’s the work from home scenario, it’s the Zoom scenario.
So if you’re talking about large office spaces, that that market is down significantly, and I think we’re going to see somewhat of a bloodbath there over the next two or three years because companies are not willing to pay the freight in a lot of scenarios and they’re not taking down these large spaces like they were so you’re seeing a lot of people move out of larger spaces, downsize close locations.
Colin Carr
So traditional office space is gonna be a huge opportunity for people to rent spaces at lower prices, higher concessions, nicer properties, etc. Retail is the other major one I’ll talk about retail While some companies are struggling,
you know, the amount of private equity that’s available for new concepts for new franchises just continues to rise. And so we’re seeing new retail concepts just getting spit out like never before.
Colin Carr
And so while some companies are struggling, new restaurants new quick serve new fast food, you know, new new health and fitness. I mean, like, all these new consoles are just popping up everywhere. Just within like two miles of my house. There’s three dry sauna franchises that have just popped up in the last three months alone. Three. And so it’s like, so retail as a whole is doing pretty well.
Colin Carr
So residential, I expect to see prices continue to drop because they were over. They were inflated they weren’t, they weren’t where they’re supposed to be. My home included, I don’t believe my home’s worth even even 80% of what they’re telling me it’s worth probably only like 60 Honestly, so I think homes are gonna come down for the most part, industrial calculate number for multifamily Krankheit never before office, that’s where you’re gonna see a lot of opportunity.
Colin Carr
And then retail is gonna stay pretty steady. So it’s not it. This is 2023 this is not 2008 or nine when the stock market crashed and all it was like buildings just went went dark all over the place. It’s not 2002 either. It’s a weird market, but commercials been staying pretty strong for the most part. So you don’t expect to see like a 30% off sale. Unless something significant happens if we have a stock market crash or there’s like a World War, then then all bets are off right now. Commercial is humming along pretty well outside of the office sector.
Steve Washuta
I’m not sure if this question is in your wheelhouse, but it’s directly related to what we’re talking to now. I just moved less than a year ago from Oklahoma City. I spent a lot of time in the Midwest visiting friends talking Cincinnati, Pittsburgh, all these cities.
Steve Washuta
And what I see, again, this is purely anecdotal, I don’t have I don’t have the numbers, is there will be brand new buildings built right next to old buildings that are abandoned? What Why is it that old buildings aren’t being refurbished? This is a price thing? It’s just too expensive to do it? Are they getting tax incentives to start building new buildings? Why are there so many new buildings being built and old buildings not being used?
Colin Carr
That’s a great question. And so you didn’t hit it. There are a lot of times there are a lot of times tax incentives or tariffs and so forth to where, you know, they won’t pay property taxes for a season or they’ll get other breaks on your other expenses that they normally would pay higher tap fees for water permits or whatever.
So there are incentives for new development and a lot of like major cities, etc. But a lot of times it can just be it can be more expensive to renovate, then it can be to build brand new depending if the building is it’s functionally obsolete. Like if you’ve got ceiling heights that are too low, like you can’t fix that on a three storey building, it just it is what it is. If the building doesn’t have the right access or parking, I mean, it can be challenging to get the product you’re looking for in a renovation.
So at the end the day I couldn’t tell you, individually speaking, I’d have to look at the actual property. But as a as a generalization, I would tell you, it’s probably tax related tax benefit related tips, etc. And then also, it’s just what does the end user want? Or what do they think is going to yield them the highest return? And if they could build a brand new building, that’s great. But I mean, you see that some of these big cities like Detroit, I’m from Michigan, originally, last time I was walking around Detroit, the amount of buildings that are being renovated were insane.
But it’s because the people that were renovating them were getting massive, massive breaks from the city of Detroit because Detroit was tired of having, you know, what they’ve had for the last 20 years, which is a pretty pitiful existence. So I think you will see those those old buildings get renovated or get ripped down and rebuilt, but it might just take some time.
Steve Washuta
Yeah, I think it’s certainly an economics issue. Like you said, you have to give people incentives to renovate the old buildings. They are not just building new buildings, letting the old buildings sit there because then it becomes an eyesore, both for the business owner. And for the people in the city to have new buildings built built up everywhere.
Steve Washuta
That looks great, but old buildings are still sitting there. What are you doing with them? Maybe the people, like the cities that I’ve been to that I’m talking about need to do the Detroit thing and just incentivize people to say, Hey, listen, we’re gonna give you extra money. We’re gonna give you these tips, not for new buildings, but to renovate old buildings.
Colin Carr
Yes. I think also, the other thing, too, is certain certain businesses just have a brand and they want everything to look the same. Like for instance, like Walgreens, like for the most part looks the same everywhere you it’s the same building, the city might say, hey, we need you to put some green on the building.
Colin Carr
Because you know, we’re up in the mountains of steamboat in Colorado, we want you to put some timbers on the outside or whatever. But for the most part, like Chick fil A is with like, Chick fil A is Walgreens left like Walgreens.
A lot of times it just kind of brand damage, whereas like a Starbucks, I mean, you see every shape and size, and I mean, anything you can imagine. But some businesses are just like, hey, we want we want we’d rather start from from the ground up. And if that’s what they want, that’s what they’re gonna get.
Steve Washuta
Do you have to have tough conversations with clients? And and I’ll break this down to two or two answers from you here. One, you as an A commercial real estate agent, and then to you as in Collin car, right?
Are most people having tough conversations with clients, talking them out of things? Saying, Hey, listen, I know you’re down to A and B, I really recommend B because of X, Y, and Z, or do you kind of stay out of it at that point?
Colin Carr
You should be wanting to have tough conversations. I mean, you’re being hired as an advisor. Our job is to help them maximize their profitability through real estate to protect their interests. We have a legal fiduciary, like from a licensed law standpoint, to give them our our best thoughts and practices.
Colin Carr
So you definitely should be willing to have tough conversations. If you’ve done it the right way. It’s not going to be a surprise to them. Like if you if you’re doing it the right way, as you’re showing the properties.
And as you’re narrowing things down, you’re telling them pros and cons. So, you know, they’re not surprised all the sudden, at the 11th hour, you say, hey, this property is probably too expensive.
Colin Carr
Like they should have known that early on. And if they say to you, Hey, listen, this is my money, my decision. We don’t make the decision for them. We should be telling them what we think like a good attorney, or a good CPA would say. Listen, you have two options here. Here’s the pros and cons of each. If I were you, I would do this.
Colin Carr
At the end of the day the client chooses. But they should know where you stand, there should never be a scenario where someone like closes on a property. Buys a piece of land or rents the property or rent the space. only to find out later that you disagreed like that would just be that would be negligence on behalf of the agent.
Colin Carr
And here’s the name. It’s not emotional for you either. It’s like, look, we’ve got two options here. I think you’re better served in this property and, and I would say the vast majority of times our clients follow our direction, but there’s times when they just say hey, come on. I appreciate that. I respect that but I’m willing to pay A monster premium, I want it. And at that point, it’s okay. It’s your call,
Steve Washuta
This has been fantastic information, want to give my audience a insights into where they could find you personally. If they have any questions, I want to reach out to you and obviously to get to know more about your business and your website and anything else you want to talk about.
Colin Carr
Yeah, that’s right, I appreciate it. The best way to get a hold of myself or any of us is to go to our website. car.us, ca rr.us, upper right hand corner of our website.
You can click to get in touch with anybody on our team. Find an agent, whether you’re in Miami, Florida, or you’re up in Seattle, Washington anywhere in between, we’ve got agents across the country.
Colin Carr
So if you say, Hey, I am thinking about something, whether it’s preliminary could be two years out.
Or could be that you have a lease expiring of six months. Our team will talk to you at any stage in the process or any stage preliminarily, as well, too. And we’ll help figure out areas we’ll help you with due diligence, we have demographics, we have comp studies.
Colin Carr
We are trying to get you enough information to where we can point in the right direction and then start the process. Everything that we do by the way to just for what it’s worth. we don’t charge any money for it. We don’t charge we don’t we don’t put a retainer app, we don’t charge hourly. We get paid as a portion of the deal percentage of the commission. It is just like in residential.
Colin Carr
And so you’re able to hire a tenant or buyer wrap at no cost to you as the owner. And we invest a lot of time to help make you successful. If we do a good enough job with it. Eventually, there’s a transaction and if we don’t, that’s just that’s part of the game.
Steve Washuta
My guest today has been Colin Carr. Colin, thank you so much for joining the truly fun podcast. Thank you. I appreciate it. Thank you so much for listening in.
Steve Washuta: Thanks for joining us on the Trulyfit podcast. Please subscribe, rate, and review on your listening platform. Feel free to email us as we’d love to hear from you.
Thanks again!
