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07.04.2014, 08:31

Affordable leasing: Short-term commercial real estate fix or long-term best practice?

Real Estate

Why one Southwest Florida commercial realtor is in it for the long-term.


Southwest Florida is taking a cautious but collective sigh of relief, hoping, praying and trusting that the real estate market is finally showing signs of recovery.

The residential market received the lion’s share of attention during the height of real estate crisis. But, oh, how the commercial real estate market took its share of blows. Office complexes and shopping plazas became ghost towns. Your favorite pizza parlor might have been there one day – gone the next.


It’s Complicated

Analyzing the whys and hows of what created the commercial real estate slump is just as complicated as pinpointing exactly what happened in the residential market.

On one hand, you had start-ups, who just like first-time homebuyers, went into leases financially unprepared. Glad to finally get a signature on a lease, property owners often bypassed documentation, and reviewing financial statements.

Then you had (and still have) commercial property owners from the old man Potter school of finance. Rich in cash and dogged about sticking to lease terms. There was nothing formal in place or an advocacy for a commercial equivalent of a lease “workout” or modification of terms.

 

Invasion of the Foreign Investor Property Snatchers

With commercial property prices plummeting, foreign investors swarmed in and snapped up commercial real estate.

Many times the change in ownership is on paper or part of a huge hedge fund acquisition. In those cases tenants rarely even get to meet the owner of the building, shopping mall or plaza.

 

Resist a Rush to Judgment

It can be easy to label foreign owners and investors as vulture capitalists, and the resulting shift to foreign ownership as unfathomable, if not downright un-American.

But foreign ownership does not always preclude greed or yield negative outcomes. In fact, what one foreign owner is doing in Southwest Florida is just about as American as apple pie.

He lives in the community. And he knows his tenants by first name. He’s been successful with his approach in Canada and Germany. Now, he wants to see Southwest Florida commercial real estate thrive. Again.

 

Affordable Leasing

Paul Forsberg, of HG Real Estate Services in Northport, discovered this “masked man” of commercial real estate turnaround strategies.

“Before I met him, the properties I managed were 95% empty. Now, one property is 90% full. The other is at 30% occupancy. And we’re right on track to have both properties fully occupied by the end of first quarter 2014,” Forsberg projects with pride and confidence.

So what’s the secret sauce behind their success? To originate a term, we’ll call it “affordable leasing.” It’s like a commercial leasing equivalent to affordable housing in the residential market.

Forsberg and the owner are actually providing existing and prospective tenants with more for less. That’s right. More for less. They even stabilize rents for up to 5 years.

 

Unleash the Lessees

What Forsberg and his team have seemed to nail is how to develop pricing and practices that structure a collaborative relationship.

“Look, we understand that a business owner, especially a start-up, has lots of upfront costs to deal with. And most of them are undercapitalized from day one. Why saddle them with a high per square footage price? All that gets you is a lease that destined to be broken,” says Forsberg.”

Imagine Medical Prep, a company owned by tenant Justin Willis, provides medical training for Certified Nursing Assistants, medication assistants, and entry-level health care professionals. In short – he’s in business to create job opportunities for Southwest Florida residents. “Now we’re able to take on 3,000 square feet. Most property managers and owners would kill you on that,” Willis claims.

By stretching out to 3,000 square feet, the company will have its own testing capabilities – an important first which will enable them to compete for more contracts and provide more classes. Willis projects to quadruple revenue by the end of 2014.

 

Yeah, But is it Sustainable?

Forsberg will tell you it’s a blend of three essential business ingredients for success: savvy, strategy, and sustainability. “It’s business savvy in that we negotiated a deal to buy properties at fire sale prices. It’s strategy because we’re on track to achieve full occupancy through affordable leasing. It would be a huge redirect and misstep to revert back to the old practices of jacking up rents and not working collaboratively with tenants. We’d only be asking to rewind the clock and go back to facing an increase in vacancies. And that’s nothing we want to go through ever again. What we are doing now is leading us down the right path --- the road to sustainable business best practices.”

 

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