Are Your Best Practices Outdated?

Muhlebach: “There will always be greater opportunities to increase a property’s NOI and value on the income side of the ledger (leasing) than on the expense side.”

SAN DIEGO—The best practices property managers used three or five years ago may not be best practices today, so it’s important to continually reevaluate them, Richard Muhlebach tells GlobeSt.com. Muhlebach, currently VP of Bond Retail, a San Francisco-based firm specializing in acquiring and repositioning retail properties on great retail streets, has 40 years of experience as an executive with real estate development and  real estate -management firms on the West Coast. In addition to being a national and international real estate instructor who has taught seminars and lectures in Singapore, Shanghai, Beijing, Taiwan, Spain, Poland, Hungary, Russia, Bulgaria and Canada, Muhlebach has also co-authored 23 books on commercial real estate, including Managing and Leasing Commercial Properties, and written more than 130 articles on the subject. GlobeSt.com spoke exclusively with Muhlebach about property-management best practices and what to avoid.

GlobeSt.com: What are some of the key best practices and trends in managing commercial properties today?

Muhlebach: When a real estate company discusses best practices the first question they should ask is, “What is most important to my clients or partners?” When this question is answered, a business plan should be developed for the property and specific best practices become tactics to achieve the goals and objectives for the property, the property ownership’s investment.

Many, many years ago, the Institute of Real Estate Management commissioned a study of the most important issues of owners of real estate. To no one’s surprise, four of the top six issues were marketing and leasing concerns. That survey is as valid today as it was years ago, and it is valid in strong markets and during a recession. There will always be greater opportunities to increase a property’s NOI and value on the income side of the ledger (leasing) than on the expense side. The opportunities are similar and different between residential and commercial properties.

A leasing program for existing buildings starts with an effective and creative residential- and commercial-tenant retention program, from the time the prospect first becomes aware of the building through the last day of their occupancy. This is a best practice.

Another best practice for a leasing program is leasing a property when it is 100% occupied. This is not the time to lose focus on the leasing program for the property.  The opportunities exist with commercial properties, such as analyzing lease expirations and not taking for granted renewing a commercial tenant, especially a retailer or restaurant. Is there a tenant that will improve the tenant mix of the property?

Replacing a non-credit tenant with a credit tenant should increase the value of the property and is another best practice. Look for opportunities to recapture space, downsize tenants, relocate tenants to free up valuable space for better and higher-paying tenants.

Another best practice for retail properties is to constantly be looking for better-performing retailers and restaurants. There is a direct correlation between retailer and restaurant sales and the amount of rent they can afford. Replacing poor- or average-performing retailers with those who can outperform their category will provide an opportunity to increase rents and possibly earn percentage rent—also known as overage rent—over and above the base rent.

GlobeSt.com: How do these practices translate to higher ROI for property owners?

Muhlebach: Each of them increases the value of the property by increasing the income of the property. Many are low- or no-cost activities. Repositioning or renovating a property  or an adaptive use could take a considerable investment, so it’s important to analyze the property’s current  income and potential income with nor changes versus the income anticipated after renovation, the cost of renovation and what the return would be on those investments.

GlobeSt.com: Which practices should be avoided?

Muhlebach: Many owners and property managers take renewals for commercial properties for granted. They’re happy with renewals at the market rental rate with annual 3% rent increases. Months before discussing a renewal with a commercial tenant, do your homework and analyze if renewing the commercial tenant is best for the short- and long-term objectives of the property ownership and the property.

The second common mistake is to renew a commercial tenant using an addendum. Leases are constantly evolving, and using an addendum just perpetuates the use of a dated lease form. Imagine if a lease was renewed twice or three times using an addendum, and now the commercial tenants has a 10- to 15-year-old lease form that is outdated. When the lease expires in five years, the lease form could be 20 years old. The lease will not have all the new lease provisions that provide better protection for the landlord and missing new pass-through charges that are now industry standard and will increase the property’s NOI. Renewing commercial tenants using an addendum is a practice to avoid.

The last best practice I’ll mention is when developing the business plan for a property, include a section on value enhancement. In addition to the issues we discussed, there should be an analysis of  opportunities to add more units or gross leasable area, renovation opportunities, repositioning the property among its competitors and possibly an adaptive use.

GlobeSt.com: What else should our readers know about best practices?

Muhlebach: Best practices are an evolving activity on a property. What was a best practice five years ago may not be today, and what is a best practice today could be outdated three to five years from now. Continually evaluate your best practices to see if they are current because they will most likely need to be enhanced.