Strip Mall - Commercial Property Management

[Rick T.]

My company manages apartments and 1 retail location for over 10 years.  The retail location is just a fixed rent payment with no reimbursements.

I'm looking to manage a small strip mall that has NNN leases. From what I heard for this property, the tenants pay an estimated amount of taxes, insurance and exterior maintenance every month. At the end of the year, they settle up (clear the balances). I heard this is typical with NNN leases.

Does anyone know of any software that can generate statements to provide to my future retail NNN tenants (for the reimbursement arrangement I described)? The amount of taxes and insurance will go up when we take it over. How about any books that highlight the differences in managing commercial property and generate bills etc- any suggestions?

[Joel Owens]

Rick as mentioned generally before each new year the tenants are given an ESTIMATE of what tenant CAM amounts will be.

This estimate forms the the total cam per sq ft above the base rent they are paying.

There are all kinds of CAM gotcha's for an owner in the leases. One is for instance that the first year of the lease the tenant will only pay XX amount for property taxes. We have to get a credit from the seller prior to closing so we are not stuck with it. Usually the following year thereafter the tenant has to pay the full tax amount. Tenants try to put stops and ceilings on CAM the first year in business to limit expenses while they get established in a location. It's a battle between the landlord and the tenants on a lease.

The CAM estimate is then divided into 12 months of payments on top of tenant base rent. At the end of the year the CAM is reconciled for what the estimate payment was and actually what the bills were. If there is a difference owed to tenant landlord pays or has general language they rollover credit to next year. If tenant owes they have to pay the difference. Sometimes there is language that the tenant if landlord estimate was over 10% of actual CAM then landlord pays a penalty. They do not want landlord overcharging CAM estimate all year and keeping that money interest free to then give back as credit to tenant.

Another one leases generally have language that tenant only pays pro-rata cam portion for the space they occupy. So if strip center is 6 tenants and 2 go out the landlord usually would eat the extra cam costs to maintain those spaces and areas until re-rented.

People think retail is easy. It can be passive and great to own but I tell clients we MUST conduct thorough due diligence upfront  and any bad stuff we find seek credits etc. from the seller if possible. Sometimes developers agree to anything to  build a site and other times they used a general practice attorney instead of a specific commercial retail attorney to negotiate the leases.

I focus on the transaction side as a principal broker of my firm and also I syndicate deals as a sponsor and have my own investments. I have ZERO interest in managing other owners properties. Takes up a lot of time to do properly and pays next to nothing.

If you have gross rents on a small center for instance of 200,000 at let's say 4% management fee that is only 8,000 to look over the property for the whole year. If that property manager leased up a space in there where it's a 5 year lease at 50,000 a year that is 250,000 X say a 4% leasing commission = 10,000

So with one lease they make more than managing the center for a whole year.

Now let's take transacting.

Say NOI is 150,000 at a 7 cap value.

7.14 cap rate at about a 2,100,000 value X .03 commission = 63,000

If you work for a commercial brokerage they likely take half of that but if you are an owner and principal like me then you get the whole thing as I own the company. Of course there are business expenses to deduct and staff that is taken off of that amount.

If you syndicate as well then there are generally commission fees on buy and sell, ongoing cash flow as the sponsor, asset management fees, and also back end promote of the equity upside.

So going smallest to generally largest for return on time.

If you do not have experience managing a strip mall it might be a good idea to partner with someone close to the asset to learn the ropes. It is not a great idea to take an owners money without the training and experience to manage the asset. The other owners know each other and if the owner has to take the property and give to another management company because of a bunch of problems your reputation and company name can be sunk for future business.