Monthly Archives: December 2010

Scattered, Smothered, Covered, Chunked and Topped!

By Ken Ashley

(ATLANTA) December 31, 2010

Many are preparing for New Year’s celebrations and some just might end up having a little breakfast after the party. In the Southeastern United States, the iconic

No they don't serve pancakes

breakfast spot is the Waffle House. Since its founding in 1955, the company’s website reports that they have served  495,264,367 waffles, 957,041,599 cups of coffee and a whopping 1,173,838,328 hash-brown potato orders.

The Waffle House may be best known for those hashbrowns which are certainly a delicious right of passage in the South. You can order them a number of different ways. In the vernacular they should be scattered, smothered, covered, chunked and topped (and further covered with Bert’s Chili). Just what you need for breakfast in the New Year.

And what in the world you might ask does this little vignette have to do with real estate? Those hashbrowns represent the confusing lexicon we use in this industry for what the tenant pays. You would think we would develop a clear way to tell the tenant what the charge is. But like many industries – including breakfast establishments – we have our own lingo.

Triple What?

The Triple-Net lease (“NNN”) originally meant without (or “net”) of three expenses: taxes, insurance, and exterior maintenance. Today there are many variations of what is netted out of the rate the landlord is quoting you, so don’t be afraid to ask what is and what is not included in the rate.

The NNN structure is many times found in single tenant office, research and development, or industrial buildings. Landlords often prefer the NNN lease because the tenant is responsible for all aspects of the real estate except for (in most cases) the building foundation and roof. However, this structure can benefit the tenant, who then can hire and control all vendors and make sure they are monitoring costs closely. The tenant can also decide to keep the air and lights on till 9:00 or even all night, if desired, as the user is in control.

Modified Gross

No, this does not describe the hash browns after you added hot sauce. This rate concept is the middle ground between NNN and Full Service/Gross leases. Modified Gross refers to a rate scenario where the rate includes everything but interior utilities and janitorial cost. The rate includes exterior maintenance, roof, structural maintenance and taxes.

Modified Gross is used in many single story buildings, which may be all office or have a warehouse component in the rear of the building. If a developer creates a single story office park with multiple buildings, then this is likely the rent approach you will see. The landlord can hire one landscape contractor, one roofer, etc. to maintain the entire park. The tenant just cleans inside and pays the light bill.

Gross or Full Service

Most Class “A” buildings quote a rate with “everything” included. In the sometimes anachronistic terminology of real estate, this approach is both referred to as “Gross” to mean all included, and Full Service. Everything means: rent, maintenance, taxes, insurance, operating expenses, air-conditioning and janitorial.

Why wouldn’t you want the landlord to quote a Full Service rate on everything all the time? First, in this scenario the building management contracts for all the services and then charges them back to you in the rate. You hope they get the best deal, but its hard to know if, for example, they are buying paper goods at a rock bottom price.

Secondly, if you want MORE of anything, you pay a lot for the privilege. For example, if you need to keep a project team in the office till 7:30 in the summer months for several weeks, then you will need air-conditioning. In a full service scenario, the landlord will charge you $50 or more an hour for running the chiller.

And Now Back To Our Program

So, most importantly, what is scattered, smothered, covered chunked and topped in that hashbrown order your friendly waitress will bring along shortly? Glad you asked: scattered refers to the hash brown potatoes, smothered

Full Service but NOT Gross. Yummy.

with onions, covered with cheese, chunked with ham and topped with Bert’s Chili. A culinary delight of monumental proportions, er, portions.

Enjoy the New Year. May it be prosperous for you and your family.

Life Is Simpler When You Plow Around The Stump

By Ken Ashley

ATLANTA (December 13th, 2010)

In a recent visit to a friends office space I took a second look at the common areas for the so called class “A” office building. The poor quality of the maintenance was simply stunning. The “deferred maintenance” included loose floor tiles, dirty wall covering, squeaking doors and many burned out light bulbs. Heaven only knows about the condition of the building systems such as heating and air conditioning.

Times are still hard in the commercial real estate business and many owners who are hanging on for dear life have really no option but to put off maintenance. A great article in the October edition of Commercial Investment Real Estate Magazine entitled The Big Fix addresses the topic of delayed maintenance from the investment point of view.

The article explains that:

“When property values decline to the point where negative equity exists, the owner’s perspective and incentives change dramatically. First, the owner no longer has the option to sell or refinance without making an additional investment in the property. More importantly, on nonrecourse loans, if the borrower were to default, the amount of negative equity makes no difference with respect to the owner’s cash flow. Whether there is $1 million or $2 million of negative equity, the borrower gets and pays $0 when the lender forecloses on the property.”

In other words, the ownership isn’t worried about the squeaky door, or the indoor air quality, or for that matter key safety issues like operating life safety systems and elevators. They are all focused on keeping control of the asset while you as the tenant (the customer!) are required to pay rent no matter how poorly the building is maintained.

Make’s you wish the industry had a “Carfax” for buildings. Instead as a tenant you should use common sense when evaluating building options. That unbelievable amount of free rent in a proposal to lease can really be unbelievable and unsustainable as the landlord tries to maintain the asset you are leasing for years in the future.

Entering into a lease with a landlord is really like a marriage. You will be living with each other for 5, 7 or even 10 years. Make sure your potential spouse isn’t a slob; especially when you are dating!

Look at a property from an owners perspective and be wary of superficial maintenance issues like caulk and paint that aren’t taken care of. Below the surface there may be other major issues that will make you miserable. Also, ask to walk the physical plant of a building you are seriously considering leasing. Talk to the engineers and property managers and ask the hard questions. You might be surprised at what you hear.

Finally, ask your broker and attorney to review the lease for the landlord’s obligations. It is a huge beef of ours that landlords have page after page of tenant obligations but sometimes literally two sentences of landlord obligations. Your advisors should help you spell out industry  and market standard requirements by landlords.

At the end of the day, if you aren’t comfortable with the landlord, no amount of free rent is worth miserable employees and lost productivity. Plow around the

Gotta get me this t-shirt

stump and keep moving to better pastures.