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CPM® Exam Prep Tutorial Marketing and Leasing

MKL 1

REVIEW CONTENT: MARKETING AND LEASING The outline below serves as a guide to understanding the main topic areas that you could be tested on in the CPM® certification exam:

Assessing the Market

– Market Analysis

– Property Analysis

– Competitive Analysis

– Pricing Strategies

– Comparison Grid Analysis

Developing Leasing Plans (Commercial)

– Leasing Plan

– Tenant Mix and Placement

– Space Planning

– Qualifying Prospects

Developing a Marketing Plan and Strategies

– Marketing Strategies (Commercial)

– Marketing Plan

– Marketing Tactics/Advertising

– Measuring Effectiveness

Formulating the Lease (Commercial)

– The Lease Document

– Lease Negotiation

– Lease Analysis

From Prospect to Lease (Multifamily)

– Leasing Office Competencies

– Legal Compliance

– From Showing to Closing: The Leasing Office in Action

– Mystery Shops

– Qualifying Prospects

– Evaluating the Lease Document

Increasing Tenant/Resident Retention

– Lease Administration (Multifamily)

– Lease Renewal Strategy (Commercial)

– Retention Strategies

– Lease Expiration and Buyouts (Commercial)


MKL 2

ASSESSING THE MARKET In order to make informed decisions regarding marketing and leasing activities, you must first define and evaluate the market in its current state, and estimate how it may change in the future. Understanding the region, subject property, and competing properties is key to conducting effective and profitable marketing and leasing operations. The interest of the owner is to achieve the maximum market value of the asset. The CPM® delivers that value by thoroughly analyzing the market position of the asset and guiding the strategies for maximum occupancy and rental income.

Market Analysis A market analysis consists of a specific evaluation of the competition and the property’s position in the marketplace based on comparison to similar properties. A region is the market area in which changes in economic conditions are likely to affect the fiscal performance of a particular building. Often times, the region is defined as the metropolitan statistical area (MSA) in which a property is located. A regional analysis (also known as a macro market analysis) will determine the economic strength of the area in general, including employment information, per capita income, and types of businesses. It should include an evaluation of the economic conditions, demographics, and psychographics of the region.

ECONOMICS: Economic conditions influence rental rates as well as the choice of marketing techniques. Information concerning a market area’s employment base, population, rent levels, and vacancy rates can be used to pinpoint trends.

DEMOGRAPHY: Study of various socioeconomic factors (age, sex, race, marital status, education, occupation, family composition, and income). It is important to study because a region’s economy is controlled by its residents and businesses. For residential properties, it is useful to understand the target market’s primary income group:

o Low income group

o Moderate income group

o Adequate income group

PSYCHOGRAPHICS: Psychological factors used in leasing decisions that are likely to appeal to different businesses or individuals and thereby help identify prospective tenants or residents.

A neighborhood analysis (micro market analysis) is more narrowly focused. It should evaluate the economic conditions of the area, including local employment, rent levels, and vacancy rates. Understanding strengths of a neighborhood will help create a successful marketing plan. Government regulations should also be considered.


MKL 3

Neighborhoods go through four identifiable stages in the economic cycle:

DEVELOPMENT: A developing neighborhood has increasing real estate values. The values increase because the neighborhood is a desirable place to live, work, and play.

MATURITY: When real estate values plateau, or are beginning to lose ground due to competition from newer communities or development in other areas, the neighborhood is said to be mature.

DECLINE/BLIGHT: Urban neighborhood decline is often driven by the sudden loss of nearby jobs and by population decline due to broader trends in suburbanization. The decline in property value can contribute to disinvestment of the area through reduction of public funds for upkeep of roads and other infrastructure. When living there is undesirable for all but the poorest residents, the location is often labeled “blighted.”

REHABILITATION: Private and public investment increases values so that the income level of the resident profile changes from low to adequate or high. Can be accomplished by municipal rezoning to spur investment, individual homesteading, historic preservation efforts, and changing renter sentiment.

Knowing how to market the property effectively means knowing what the market wants (e.g., location, employment, shopping, highways, etc.). Resources for conducting neighborhood analysis include mapping sites, review and recommend websites, market research companies, and government or business groups. Supply refers to the quantity of occupied and unoccupied space available in a particular real estate market at a given time, including buildings under construction and in the planning stage. Demand is measured by the amount of occupied space plus the amount of vacancy that is expected when market rents are stable. It is important to take into account the “stabilized” vacancy since there will always be some vacancy in a marketplace. Stabilized occupancy is the occupancy rate needed for market rents to remain stable (i.e., occupancy at market equilibrium).

Demand = Occupied Space ÷ Stabilized Occupancy Rate

Supply and demand are important considerations in setting rents.

LANDLORD’S MARKET: When supply is less than demand. Less competition for tenants or residents, therefore the value and rent of the space increase.

TENANT’S OR RESIDENT’S MARKET: When supply is greater than demand. Increased competition for tenants or residents leads to a decline in rents and slow leasing activity.

The occupancy rate is the amount of space that is occupied, expressed as a percentage of the total supply of space. When subtracted from 100 percent, the difference is the vacancy rate.

Amount of Occupied Space ÷ Total Amount of Available Space x 100 = Occupancy Rate

The availability rate includes vacancies as well as space that is occupied but available (e.g., sublease space, buildings under construction)


MKL 4

Absorption is the net change in the amount of occupied space from one period to the next, normally a year. It should account for both construction of new space and demolition or removal from the market of existing space. Absorption can be computed as follows:

Square feet vacant at the beginning of the period add Square feet constructed new during the period subtract Space demolished during the period subtract Space vacant at the end of the period equals Space absorbed during the period (absorption)

When supply is less than demand, occupancy increases and absorption is positive.

When supply is greater than demand, occupancy decreases and absorption is negative.

Office buildings have some additional considerations such as:

MARKET SHARE: The subject property represents a percentage of the total supply in the market area; that percentage is used to determine the building’s market share. Using that percentage measured against annual absorption for the submarket, you can predict the building’s natural capture rate, or how long it will take to lease your vacant space.

BREAK-EVEN ANALYSIS: The real estate manager must also consider the break-even point, or the occupancy rate at which rents are just sufficient to cover expenses and deb service. A break-even analysis measures the vulnerability of the property to changes in occupancy.

INVESTOR’S BREAK-EVEN: An investor’s break-even point covers an additional specified return on the investment. It calculates the occupancy rate required to earn a certain rate of return.


MKL 5

Property Analysis When examining the property, it is important to consider the strengths and weaknesses of the property as they compare to other competing properties in the market:

Multifamily Commercial

In-house market surveys

Location

Space and Amenities

Property Appearance (e.g., age and appearance, curb appeal)

Location

Accessibility

Tenancy

Management

Competitive Analysis Competitive analysis provides insight into how the subject property relates to the nearest competition for the target market. Visiting your competitors will show you exactly what you are up against in terms of competing properties, and you can play up your property’s strengths compared to others. You can observe and implement others’ effective ideas and solutions and build a collection of information on those competing for your occupants.

Pricing Strategies

REVENUE MANAGEMENT: Based on the real-time demand forecasted by the market and by using an optimization model, revenue management (also known as yield management or real-time pricing) is an economic technique used to calculate the best pricing policy for optimizing profits generated by the leasing of apartments, based on real-time modeling and on the forecasting of demand behavior per market. Revenue management always addresses supply and demand.

COST VS. WHAT THE MARKET WILL BEAR: Most common initial pricing method. Focuses almost entirely on what is possible in the marketplace. Combines knowledge of what is needed to pay the bills and knowing which rent levels will result in an unacceptable number of vacancies.

PATTERN PRICING: Simplistic and delivers the needed revenue. Result is two or three levels of rent for each of the apartment types.

BEST-OF-TYPE PRICING: Involves categorizing the units into similar groups. Achieves the closest correlation between price and value.


MKL 6

Comparison Grid Analysis A comparison grid analysis is a compilation of data that allows comparison of the rents and features of similar buildings. It helps assure that a competitive schedule of rental rates is developed. Although intended to be data-driven, comparison grid analysis is, by nature, subjective because the choice of features to be compared and the values assigned to them are usually arbitrary. Steps for conducting a comparison grid analysis follow:

1. Describe the subject property

2. Determine the features

a. Include effective rent (total rent – concessions), general condition, appearance, utilities, pass-throughs, amenities, and space interiors

b. Select features based on their value to residents and their value in marketing the property to residents.

c. Assign ratings, such as poor, fair, good, very good, and excellent, for each feature listed in the grid.

3. Describe the comparable properties

a. At least 3 competitive properties

4. Determine the value of features

a. If the subject’s feature is superior to a comparable’s equivalent feature, enter the value as a positive number.

b. If the subject’s feature is inferior to a comparable’s equivalent feature, enter the value as a negative number

5. Total the value adjustments

a. Calculate the new value of rent price per square foot of each comparable property’s unit.

6. Analyze the adjusted rents

a. Calculate the average, median, highest and lowest adjusted rent rates of the comparable properties.

b. Calculate the average adjusted square footage rents of the comparable properties


MKL 7

DEVELOPING A MARKETING PLAN AND STRATEGIES There is a direct relationship between planning and success of a property; therefore, developing a marketing program should not be taken lightly. Creating a marketing campaign and implementing successful marketing tactics will attract qualified prospects to the property and lead to signed leases. Routinely measuring effectiveness will highlight successful tactics and call attention to areas of the plan that need modification for continued success.

Marketing Strategies (Commercial) Today’s tenants have access to a tremendous amount of information about the building and space available. They are active participants in the leasing process and they expect an interactive experience when searching for their new space. First impressions are critical. If the decision is made to use a broker, consider the following: reputation, previous experience, proven abilities, specialty, focus area, knowledge of market, size and responsibilities of team, resources, type of building, competing and/or complementary listings. It is important to maintain and enhance the broker relationship on an ongoing basis to maximize potential for filling your space in an effective and efficient manner. Types of listing arrangements:

EXCLUSIVE: Broker assured in writing that the owner will not deal with any other leasing agent without paying a fee to the original broker

NONEXCLUSIVE: Gives owner the right to deal with other agents.

Commission agreements:

FLAT PERCENT: broker is paid a fee based on the rent over the term of the lease multiplied by a negotiated percentage rate. Gross rent represents the aggregate rent for the entire term of the tenant’s lease.

DOLLARS PER SQUARE FOOT: an agreed-upon rate is multiplied by the total square footage of the space

DECLINING PERCENT (SLIDING SCALE): involves the broker being paid at a declining rate over the course of the lease term. The percentage rate is decreased as the term progresses, and the rate and payment schedule are negotiable.

Marketing Plan Marketing is the process of moving goods from producers to consumers. In real estate, it is the methods use to rent space and retain current occupants. The “four Ps” of marketing, as they relate to real estate management, are:

PRODUCT: quality, location, features, amenities, size, age, reputation

PRICE: rental rates, security deposit, concessions, lease term

PROMOTION: advertising, public relations, canvassing

PEOPLE: training and preparing staff

A marketing plan is used to advertise and relay information about the property for the purposes of attracting tenants. It should be developed to meet the owner’s goals and objectives, and is a


MKL 8

macroeconomic plan that provides the marketing vision and goals for the property. A typical marketing plan consists of the following elements:


Purpose (should contain SMART goals)

Target market

Brand focus

Key message and strategy

Timetable

Budget

Assessment

Purpose (should contain SMART goals)

Target market

Key messages

Timetable

Budget

BRAND: The overall concept created to reflect a “feel” or “perception” that your property creates. It is a psychological image projected to prospects and residents about what life is like at this place of residence.

THEME: Images, ideas, or symbols that are used to convey a message that can be adjusted for different communities or time-based at a single community.

Competitive advantage is gained by promoting the features of the property that set it apart from competitors (differentiating your product). It is important to differentiate the property from competitors by emphasizing benefits or advantages the center has over comparables.

Marketing Tactics/Advertising Advertising is any paid form of presentation and promotion of the property. Advertising outlets will be chosen based on prior decisions regarding target market and positioning for competitive advantage. From a budgetary standpoint, there are two types of advertising:

ONGOING: advertisement that will appear on an ongoing basis.

SUPPLEMENTAL: one-time advertisement that will appear for only a short duration.

When selecting media in your market, remember that there are two key elements to consider:

REACH: the specific audience exposed to the medium. The reach of the selected medium should be the largest possible number of prospects who mirror the target market.

FREQUENCY: the number of times the ad appears in the medium.

Advertising consists of a number of different activities including:

Internet listing sites (commercial)


MKL 9

Apartment search websites/ILS (multifamily)

Apartment locator services (multifamily)

Property website

Search engine optimization (SEO)

Adwords (Google)

Display advertising

Property management company website

Classified advertising

Print display

Collateral materials

Billboards, broadcast media, bootleg signs, etc.

Direct marketing

Types of Signage:

Identification

Directional

Informational

For Lease

Project

Social media channels provide great opportunities to expand your network. Socializing with business contacts can help build up clientele and expedite leasing.

Facebook is a public and private network of lined users used for personal and business status/news

Twitter is a way to broadcast messages to “followers.” The statements must be limited to 140 characters and the use of hashtags allows users to find relevant information outside of network

Linkedin is a business networking tool used to develop contacts within the industry and attract attention and talent to your organization

Public relations (PR) refers to any form of promotion that is not paid for, such as press releases and word-of-mouth endorsement. It is intended to increase awareness and build the image of the property.


MKL 10

Direct contact with prospects, either by phone or in person, is called canvassing (also called cold calling). Many office leases result from canvassing efforts. Disadvantages: Often time-consuming and may not produce immediate results. Advantages: Expands network of contacts and helps qualify prospects for future listings. Prospect cards (also called guest cards) should be completed during canvassing and site visits and should include prospect contact information, space/rental requirements, special needs, current rental rates, lease terms, and expiration dates. Include as much as possible about what prospect considers inadequate or unfavorable about current situation so you can do targeted benefit selling, or sell the advantages of your property as benefits that will overcome these problems. It is also helpful to compile the information in prospect databases for follow-up and comparison research.

Measuring Effectiveness Examining your marketing campaign will be helpful in measuring the effectiveness of tactics used, and underscore any necessary modifications. A variety of tools can be used to monitor and record the success of your marketing efforts and assist you in sharing the status of leasing activity with the owner:

PROSPECT TRAFFIC REPORT: Logs each prospect’s visit to the property (or contacted about leasing space) via phone calls, e-mails, visits, etc. Compilation or summary of prospect card information

WEB SITE TRAFFIC REPORT: Provides statistics such as how many users visited the site and when, approximate location of the user, amount of time spent on each page, etc.

TELEPHONE LOG: The number of telephone calls should be recorded, indicating the prospect’s name, phone number, and why the visit did not result in a lease (if applicable). Some residential properties may outsource telephone tracking to vendors.

INTERNAL MARKETING REPORT: Records frequency of advertising (print ads, direct mailings, billboards, broadcast ads, internet ads), public relations events and canvassing; can report effectiveness of techniques and areas in need of modification

MARKETING AND LEASING ACTIVITY REPORT: Keeps client informed of marketing and leasing activity (active prospects, submitted proposals and signed leases). May include progress charts comparing actual leasing progress to projected activity

PIPELINE REPORT: Brokers should keep owners aware of new or large competing space coming on the market as new inventory can change and severely impact market absorption, and owners need to analyze this information and reposition the property accordingly


MKL 11

The cost per prospect is the ratio of marketing costs to the number of prospects attracted to the property:

Cost of Marketing ÷ Number of Prospects =

Cost per Prospect

Cost per signed lease is the ratio of marketing costs to the number of leases signed:

Cost of Marketing ÷ Number of Leases Signed =

Cost per Signed Lease

A conversion rate compares the number of prospects to the number who actually sign a lease.

Number of Leases Signed ÷ Number of Prospects =

Conversion Rate

These assessments will assist you in determining effective and ineffective marketing techniques used in your campaign. Apply what you have learned through measuring effectiveness to make modifications to the marketing plan going forward.


MKL 12

FROM PROSPECT TO LEASE (MULTIFAMILY) Real estate managers must know leasing strategies, techniques, and procedures in order to ensure that the leasing staff has the necessary skills to lease units and comply with legal regulations. A lease is written contract for the conveyance of occupancy rights for part or all of an owner or landlord’s property for a stipulated period of time in consideration of the payment of rent or other compensation by the tenant

Leasing Office Competencies The success of a residential property depends heavily on having a well-trained and informed leasing staff. A variety of staff members may perform leasing activities. Staff must work as a team to achieve the leasing objectives. Leasing staff competencies include:

Communications

Problem-solving

Timeliness

Legal compliance

Sales

A critical area of competency for the leasing office is to demonstrate professional communications as set forth by your protocols and follow-up timelines in the following areas:

Telephone contact

Walk-in

Email inquiry

Online only

The entire follow-up process from contact to lease is referred to as prospect management:

Initial follow-up

Scheduling/support

Paper/online application

Processing

Notification

Many companies provide outsourced prospect management services. Also, mobile leasing applications allow leasing office team members or prospects to view available properties and units, amenities, neighborhood maps, and other leasing information through smart phones and tablets. The apps should integrate with central property management software to provide up-to-date information and collect data.


MKL 13

Legal Compliance

FAIR HOUSING: All aspects of the leasing process for residential properties must comply with federal fair housing laws. Discrimination, both in rental and sales practices, is forbidden on the basis of race, color, religion, national origin, sex, handicap, and familial status. Consistency is the key to avoiding fair housing complaints. Documentation is critical in order to prove compliance with fair housing laws if requested by a court.

– There are two types of discrimination: DIFFERENT TREATMENT (treating people differently on the basis of a protected class) and DIFFERENT IMPACT (means that an action or policy that involves no variation in treatment still results in a different impact on a protected class).

– OCCUPANCY GUIDELINES for residential apartments relate directly to the familial status protected class. Occupancy guidelines cannot be created that limit the number of children in a unit.

The AMERICANS WITH DISABILITIES ACT (ADA) of 1990 is the civil rights legislation for the disabled. Both residential and commercial properties are subject to the guidelines outlined in the ADA, which mandates equal access to employment, public service public accommodations, telecommunications services.

LANDLORD-TENANT LAW: The state or local landlord-tenant law specifies the respective rights and responsibilities of landlords and tenants. Local ordinances may also address the handling of security deposits and identify specific tenants' rights.

FAIR CREDIT REPORTING ACT (FCRA): One must inform an applicant if a credit bureau will be contracted to investigate their credit and obtain the applicant’s written permission to do so. In addition, if an applicant is denied a lease based solely on a consumer credit report (a possible scenario for a start-up business that has no established credit or financial history), the FCRA requires certain steps be taken.

FAIR AND ACCURATE CREDIT TRANSACTIONS ACT (FACTA) OF 2003: The Act attempts to curb identify theft by governing the use of consumer credit reports and related data.

BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT (BAPCP) OF 2005: The Act revises the United States bankruptcy codes. It has increased the ability of landlords or residential managers to overturn the “automatic stay” in certain instances.

FAIR DEBT COLLECTION PRACTICES ACT (FDCPA). The Act is designed to protect the public from aggressive third-party debt collectors such as attorneys or collection agencies; it does not apply to individuals or businesses attempting to collect debts directly.

RESIDENTIAL LEAD-BASED PAINT HAZARD REDUCTION ACT OF 1992: For buildings constructed before 1978, landlords must give rental applicants and residents who renew leases:

– A government pamphlet on lead paint hazards

– A disclosure form detailing any lead paint hazards at the property

– Any reports the landlord has that describe lead paint hazards at the community

MOLD ADDENDUMS: Many states have mold disclosure laws for the sale and/or rental of property. If this applies in your location, a mold addendum must be signed by all residents along with the standard lease forms.


MKL 14

From Showing to Closing: The Leasing Office in Action Real estate managers must distinguish themselves from the marketplace through the range and quality of services. Service levels must be exceptional. Full service today means something very different than full service ten, five, or even one year ago. Critically evaluate your approach to the prospect in each stage of the process:

STEP ONE: GETTING ACQUAINTED WITH THE PROSPECT (taking prospect information during first “live” contact, scheduling face to face appointment, answering questions about online lease application if applicable)

STEP TWO: SHOWING THE UNIT/VIRTUAL DEMO (creating prospect records, ensuring models ready for showing, showing model apartment, employing sales techniques during showing, answering questions about virtual demos)

STEP THREE: CLOSING THE SALE (making the offer, explaining application process, explaining the lease (terms, rent, charges, etc.))

When the prospect makes contact with the property, it is critical that a record of the prospect’s information be created. by filling out a guest card. Some offices use software solutions to create records and e-mails for prospects during the first meeting with a leasing consultant or through telephone contact with any team member. Sales Techniques:

BENEFIT SELLING: Selling features requires matching the benefits of the apartment with how they will improve the lifestyle of the prospect.

PRESUPPOSITION: Presupposition is a “temperature reading” tactic that can be employed while you are discussing the apartment with the prospect

PERSONALIZATION: The sales approach the leasing team member uses should depend on the prospect’s reasons for searching for an apartment.

Expect common objections to layout or features of a unit and be prepared to counter them. If a prospect begins raising objections that is a sign of the prospect’s continuing interest in the apartment. The leasing team member must listen carefully to the objections and be receptive, not defensive. Uncovering objections in the following areas and turning them into positives is the key to success:

Price

Amenities

Location

Closing Techniques: Closing is an explicit invitation to the prospect to sign an application and a lease

BUILDING A SENSE OF AGREEMENT: Leasing team member asks questions to which the prospect is likely to answer “yes.”

THE “SUMMARY” CLOSE: Leasing team member repeats back to the prospect all the positive feelings they have found about the apartment

ORDER TAKING: Leasing team member fills out application with prospect as the apartment is being shown by asking the prospect the questions on the form. When all of the questions are answered, present the form for signature.


MKL 15

“IF I COULD, WOULD YOU…” Leasing team member asks the prospect if they will agree to sign the lease after you make a particular negotiated concession.

EMPHASIZING THE “PROS”: Leasing team member convinces the prospect that the reasons in favor of signing the lease are stronger than those against it.

SENSE OF URGENCY: Leasing team member instills a sense of urgency by explaining that this is the only unit with the desired features, or that you have another appointment shortly to show the apartment.

LEASING SPECIALS: During the showing, leasing team member details coupons or discounts to nearby businesses or other such incentives that instill a sense in the prospect that they will be losing out on something if they walk away without signing the lease.

Mystery Shops One of the best ways of monitoring the effectiveness of your leasing staff is through a shopping report. The leasing consultant’s appearance, behavior, techniques, and demeanor, in addition to the effectiveness of the leasing office as a whole, can be graded by “mystery shoppers” who visit the property in the guise of prospective residents.

Qualifying Prospects Qualifying a residential prospect involves examining household income, references, and credit history. To qualify as a potential resident, a prospect must show ability to pay rent and demonstrate acceptable prior performance as a renter.

The real estate manager’s responsibility to the owner is to maximize net operating income. It is crucial to the success of the apartment property that you establish minimum standards in a resident selection process, or the resident selection criteria.

Evaluating the Lease Document The real estate manager’s primary duties toward the lease document are to evaluate the following:

Are the lease terms accurate?

Is the lease being executed correctly?

Has due diligence on the lease been done?

The Sarbanes Oxley Act (SOX) has changed the requirements for how real estate managers must document file system backup policies, network security of prospect/resident information, and maintain all key records and communications, including e-mail messages.


MKL 16

DEVELOPING LEASING PLANS (COMMERCIAL) The real estate manager’s leasing strategies and techniques, which maximize rentable space and synergize tenancy, directly impact the success of the office building. A lease is written contract for the conveyance of occupancy rights for part or all of an owner or landlord’s property for a stipulated period of time in consideration of the payment of rent or other compensation by the tenant

Leasing Plan The leasing plan should always reflect the goals and objectives of the owner and should include:

Stacking plan and details of leasing the space such as:

– Square footage

– Rental rates

– Tenant mix and placement (floor plates)

Rent schedule (current and desired rents) and rollover schedule

Tenant improvement expenses

Tenant renewal possibilities

Cost to renew, taking into account tenant improvements, concessions, and rental rate increases or decreases

Tenant Mix and Placement The right tenant mix (the types of businesses that are carried out in the building and the stature of the individual tenants) will reinforce your building’s position in the market and will locate the tenants in the way that best suits their needs. In order to provide the best tenant mix, consider the following factors:

Type of space and its size and location

Good fit for ground-floor tenants

Best demographics to suit target market and property image

Retail tenants bring multiple benefits to the office building, in addition to the potential for additional income. In order to make the right choice:

Make sure the retail activity is complementary to the tenants

Conduct a market survey of retailers in the immediate area

Understand the differences between base rent leases and percentage rent provisions

Leasing Medical Office Buildings (MOBs) The healthcare industry and healthcare real estate have changed dramatically in the past several years. Healthcare reform, the recession, lower reimbursements and other issues continue to drive changes. Almost every aspect of these properties is unique, so it is good practice to become familiar with the following as it relates to MOBs:

Ownership


MKL 17

Leasing issues

Tenant profile

Attracting tenants

Maintenance and facility management

Space Planning Space planning is an important component in the leasing process. It is particularly important during the early leasing stages. The real estate manager’s role during this process is to:

Consult with the tenant to determine needed space

Ensure a balanced relationship between space and work flow

Respond to the tenant’s present space requirements

Anticipate the tenant’s future needs

Professional space planners include interior design firms, major architectural firms, office furniture companies, and layout firms. Once space needs have been determined, it is necessary to plan for construction. Estimating the cost of tenant improvement (TI) work is extremely important in order to understand the economics of the lease transaction. This estimate becomes the Year 0 input for a Discounted Cash Flow analysis of the lease transaction in order to achieve a desired effective rent. Factors that should be considered include:

PROPERTY TAX IMPLICATIONS: Should tax increases resulting from substantial TI work be attributable to a single tenant? Are tracking and calculation mechanisms in place to assess the dollar amount of the increase?

CODE COMPLIANCE ISSUES TRIGGERED BY TI WORK: Is the building grandfathered? Does the specific TI require adherence to codes not required for building? Is this code compliance a tenant expense or a building expense?

Once the costs are identified, the manager must consider several lease options:

TURNKEY: Landlord will perform specified improvements at its sole cost

TI ALLOWANCE: The tenant will be provided a fixed dollar amount or specified dollar per usable square foot of leased space to complete improvements

AS-IS: Landlord is providing the space in its current condition and has no obligation or responsibility for improvements during the term of the lease

AMORTIZED TI: The landlord will provide TI cost up front but will add that cost to the tenant’s monthly rent over the term of the lease. CAUTION: A tenant with good credit and financial knowledge can typically borrow TI dollars at a lower cost on the open market. A tenant unable to obtain funds from alternate sources may have financial constraints the landlord should be aware of in underwriting the lease.

MIDTERM IMPROVEMENTS: The landlord can commit to providing improvements at a specified point during the lease term. This is an effective tool if the landlord does not have the funds, if the tenant is a credit risk, or if the improvements are not essential today but will be during the term of the lease.


MKL 18

Qualifying Prospects Only the most highly qualified prospects should be considered for tenancy. Important factors to consider in prospect qualification are:

Space requirements

Financial strength and stability (business history, personal guarantees, financial statements, credit ranking)

Service requirements

Qualifying retail prospects


MKL 19

FORMULATING THE LEASE (COMMERCIAL) Analyzing, comparing, and negotiating lease terms can maximize the financial outcome for the owner.

The Lease Document The lease can be defined as a written contract for the conveyance of occupancy rights for part or all of an owner or landlord’s property for a stipulated period of time in consideration of the payment of rent or other compensation by the tenant.

The lease document will always include standard basic elements:

Identification and signatures of parties to the lease

Description of the leased premises

Term (duration) of the lease

Statement of intended use of the premises by the tenant

Rent and other charges

Provisions of the office lease

Rules and regulations

Parties to a lease may include:

Sole Proprietorship

Partnerships

General Partnership

Limited Partnership

Corporation

Limited Liability Corporation (LLC)

Rents are commonly stated in office leases in one of three ways:

Base rent

Percentage rent

Combination of the two


MKL 20

When establishing rent structure, it is extremely important to consider the financial impact of operating expense recovery, an integral part of determining net effective rent and capturing the value of the lease. Two common methods of billing the tenants for their shares of the building’s operating expenses are:

BASE YEAR APPROACH. The owner establishes the initial rent using existing levels of taxes, insurance, and maintenance. These costs are then built into the lease rental rate, and during the term of the lease, the owner pays the expenses up to the amount established in the base year.

EXPENSE STOP APPROACH. The costs for operating the building at a certain occupancy percentage are calculated and broken down to a square footage basis. This figure is then built into the rents; the owner is responsible for the established amount, and the tenants pay any increases above that level for each year of the lease.

Base rent is the rent per rentable or usable square foot per year, usually paid in regular monthly installments. It can be based on market rents, which are determined by comparing rents of similar properties. Percentage rent applies to retail tenants leasing a space. For retailers, percentage rent involves the tenant paying the owner a percentage of gross sales in addition to the base rent, or the greater of the two. The amount of gross sales at which the percentage rent equals the minimum rent is referred to as the natural breakpoint. Some leases may be negotiated to include an artificial breakpoint, a dollar amount of gross sales that is higher or lower than the natural breakpoint. Most long-term leases include an escalation clause calling for regular increases in the base rent. The escalation clause permits the rent to be adjusted to accommodate changes due to inflation and may be based on the Consumer Price Index (CPI), in which the cost of goods is compared across the country. Whether a lease calls for payment of base rent, percentage rent, or both, tenants may also pay a portion of the overall costs of operating expenses. Grossing-up is the process of estimating what the operating expenses of a property would be if it were fully leased. The actual operating expenses for a building that is not completely full are either fixed or variable. To “gross-up” this figure is to project the actual operating expenses of the property to the level of being fully leased.


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The following are typical office lease clauses listed in alphabetical order:

After Hours HVAC

Alterations

Assignment and Subletting

Cancellation Options

Condemnation, Damage, and Destruction

Default

Estoppel

Expense Stops

Guaranty of Lease

Hold Harmless

Holdover

Insurance

Late Charges

Maintenance of Tenant’s Premises

Quiet Enjoyment

Relocation

Rules and Regulations

Security Deposit

Signage

Subordination, Non-Disturbance, and Attornment (SNDA)

Subrogation

Tenant Improvements

Utilities

Options are sometimes negotiated for renewal, expansion, or cancellation of the lease. All options favor the tenant over the landlord and should not be granted without obtaining something in return.

Option to renew

Option to expand

Option to cancel

If a prospective tenant does not have sufficient credit, a guaranty may be required. A guaranty calls for the guarantor to pay all of the tenant's obligations to the owner in case the tenant defaults.


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In the case of a corporate entity, a corporate resolution must be an addendum to the lease indicating the party allowed to enter into the lease (authorized by the corporation’s board of directors), as well as the period and terms of the lease. The resolution must support any additional consideration for the duration of the lease.

Lease Negotiation The first step in preparing for negotiations is to examine your position and determine the BATNA, or Best Alternative to Negotiated Agreement. BATNA is the course of action that will be taken if an agreement cannot be reached. Lease negotiation requires agreement and compromise, often resulting in concessions by negotiators for the landlord. The costs and benefits of individual concessions need to be evaluated. Over the long term, these concessions have an impact on the office building’s cash flow and property value. Possible concessions:

Base Rent Reduction

Free Rent

Free Pass-Through Charges

Cap on Pass-Through Charges

Cap on CPI-based Rent Escalation

Percentage Rent Adjustments

Tenant Improvement Allowance

Options

Lease Term

Other Restrictive or Financial Provisions

Lease Analysis The effective rent is the total rent over the term of the lease. Calculating effective rent (especially on commercial leases) is rarely as simple as multiplying the rental term by the rental rate. Often, you have to consider the following:

Periods of free or reduced rent

Allowances for tenant improvements

Brokerage commissions

Buy out incentives such as prior lease buy out or early termination option

Time value of money because you are setting today the amount of money you will receive in the future

Lease proposals, or Letters of Intent, can be submitted from tenant to landlord, and from landlord to tenant. When assessing comparative lease proposals as a landlord, it is important to consider issues such as:

What the proposed tenant’s use will do for the building

How the tenant will fit with the tenant mix

How creditworthy each tenant prospect is


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INCREASING TENANT RETENTION The real estate manager can reduce turnover, maintain occupancy, and meet the owner’s goals by implementing a retention program.

Lease Administration (Multifamily) The signing of the lease is the official starting point of a long-term relationship between the resident(s) and the property owner and manager. Every interaction with the resident, from move-in through expiration of the lease term, is an opportunity to encourage subsequent lease renewals and foster resident retention. Renewal incentives include:

Renewal rewards

Scheduled inspection for apartment

Security deposit reduction

Consider effective rent when making concessions. Effective rent is the total rental income derived from the apartment for the entire term of the lease after it is divided into equal payments over the term of the lease.

Lease Renewal Strategy (Commercial) Real estate cycles are a result of imbalances between supply and demand and a reaction to the general business economy. Economic cycles in business are typically triggered by a variety of influences, including variations in international money exchange, trade deficits, government debt, and monetary and fiscal policies. The business cycle has four stages:

RECESSION: Slowdown in business activity

DEPRESSION: Widespread reduction in business activity, increased unemployment rates, lower wages, and a decline in stock values

RECOVERY: Unemployment rate falls, wages may increase, consumer demand returns, and prices climb

PROSPERITY: Businesses begin to see higher profits, production is increased, banks are willing to lend funds as a result of business expansion, and consumer demand is at a high, as are prices

In response to the business cycle, the real estate market rises and falls in four major phases that lag behind the business cycle. The peaks and valleys of the real estate cycle are typically more pronounced and can be characterized as the following stages:

Overbuilding

Adjustment

Stabilization

Development

Leasing practices vary based on business and real estate trends. For example, during cycles of prosperity, managers may see more lease buy outs and tenant expansions. However, during


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cycles of recession, managers may see more “blend and extend” transactions. Also, lease terms and option periods may be more conservative during challenging economic times because the owner (and/or tenant) does not want to get locked into unfavorable rates for longer than necessary (e.g., 5-year term vs. 10-year term, or a -year fixed term with an option for an additional two years as opposed to five years).

Retention Strategies Tenant retention is important because it helps owners and managers avoid the expense and effort of tenant turnover

Turnover = Move outs ÷ Total Units

Keep in mind that retention is a process, not an event. Renewing an existing lease is more profitable than finding a new tenant because:

Avoids/reduces marketing and leasing costs

Eliminates loss of rental income while space/unit remains vacant

Costs less to improve space for current tenant (or improve an apartment for an existing resident) than preparing vacated space or apartment for a new tenant/resident

Maintains established relationship with current tenant/resident (must be established all over again with new tenant/resident)

– Favorable payment history

– Respect for property and neighboring tenants

Creates loyal customers and promotes positive word-of-mouth advertising and referrals

Avoids leasing commission costs

Properties that have sound retention programs show that they care from the beginning, instead of only when leases are about to expire. Retention programs should contain:


Customer relationship management (CRM)

Ongoing communication strategy

Established emergency policies

Resident conveniences available from resident portal

Resident feedback capabilities

Customer service

Communication

Facilitating tenant success (environment, technology, space planning)

Appreciation events

Curb appeal


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There are two levels of service in real estate management:

MINIMUM EXPECTATION that the leased area clean, presentable, and in good working condition

SERVICE EXPECTATION that management will ensure high-quality and timely repairs. Quality is measured in terms of whether a problem was fixed or only temporarily repaired. Timeliness is measured in terms of whether the work was done immediately or put off until another time.

A moment of truth can be defined as any episode in which the customer comes into contact with any aspect of the organization and gets an impression of the quality of its service.

A PASSIVE MOMENT OF TRUTH is one that is inherent in the business of real estate management

An ACTIVE MOMENT OF TRUTH is one that is created intentionally

Resolving Problems Determining and promptly addressing areas of dissatisfaction will reinforce your commitment and highlight areas of the property or management practices that may need to be improved. Strategies include:

Responding to complaints

Soliciting Feedback

Tenant/Resident Surveys

Reputation management is an important strategy to have in place due to the use of review and recommend websites. Three approaches to managing the property reputation online include:

Avoid unfavorable comments by being open and approachable at the site

Set up an account with automatic alerts

Reply at site to unfavorable or inaccurate comments within 24 hours

In order to prevent lease violations, it is important to maintain good relationships and open communication. You must stress why you want to monitor the lease carefully as well as the rationale for each lease term. Ultimately, the goal is to protect yourself and the owner’s investment. It is also helpful to explain the consequences of default such as the loss of free/reduced rent and options.

Lease Expiration and Buy Outs Because office leases are typically for a term longer than one year and may involve complicated negotiations, lease renewal notification may be given six months to a year or more before lease expiration. Changes in the lease terms, particularly increases in base rent and pass-through charges need to be explained and justified. The exact amount of a rental increase may be subject to negotiation depending on market conditions. In such instances, the negotiations may be as comprehensive as for a new lease.

Adding space to a building is another way to make a building more profitable as well as increase its value. If the expansion is to create a larger space for a single tenant, it may be appropriate to


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charge different rental rates for the new space as compared to the old one. The cost of the new construction must be factored into the negotiations.

When economic conditions are bad, a viable option for negotiating lease renewals can be to blend and extend. Basically, this approach takes the tenant’s current lease rate, lowers it to a market rate, and extends the lease terms. Essentially, this combines the old rate and old term with the new rate and new term. A blend and extend may be the only way to keep a tenant that is in distress, but it will impact the building’s value. When a tenant's presence no longer contributes to the overall success of an established building and another tenant is eager to rent that space, the most beneficial negotiation alternative may be for a landlord to offer to buy out a tenant’s lease. A buy out involves paying the tenant a sum of money to break its lease. In a tenant-initiated buy out, a tenant may approach a landlord and offer to buy out of its lease.

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