What type of landlord are you dealing with?
Wednesday, April 15, 2015
Most tenants don't realize that landlords fall into different categories, and these landlords have different motivations for owning the types of commercial real estate investments that they do. Here are a number of different types of landlords and how to deal with each of them.
Professional landlords: A professional landlord isn't a person but a company that exists for the sole purpose of owning, developing, leasing, buying and selling commercial, residential and industrial property for profit.
By definition, a truly professional landlord may not only own various real estate assets, but also manage those assets internally. In some cases, a professional landlord can set up a management company to create the appearance of an arm's length entity.
Institutional landlords: A couple of typical types of institutional landlords are banks and insurance companies. You may not have thought of your bank or insurance company as a commercial landlord, but most of them are indeed just that. One of the safest places for banks and institutional landlords to invest their profits and your deposits is commercial real estate.
An institutional landlord can generally afford to leave a property vacant rather than take a low-rent deal from a tenant. To these institutional landlords, cash flow is important, but property value is paramount. In some cases, a bank may have started out as the mortgage holder for a commercial property that eventually went into foreclosure.
Investment fund landlords: Real estate investment trusts (REITs) are commonplace. Teachers, nurses and other professional associations invest pension fund money to buy and hold commercial real estate. An investment fund almost never constructs a new building; it makes a purchase decision on a commercial property based on the existing and predictable rate of return.
These investment fund landlords aren't gamblers or risk-takers. Their decision to purchase real estate hinges on security, predictability and safety. This type of landlord is most likely to invest in large and stable shopping centers and downtown office high-rise complexes.
Developers and flippers: Commercial developers are individuals who pool their financial resources to purchase a parcel of land. They then create design specifications and property site plans to maximize their return on investment. Developers want to have the highest number of rentable square feet on their properties to maximize the return.
Developers can hold their investment for the long term or flip it for a fast profit and move on to their next development. "Commercial flipper" isn't necessarily a derogatory term. From a tenant's perspective, it's important to distinguish whether the developer is a flipper. If so, you can bet your bottom dollar that within a year or so, you'll have a new landlord who is more a long-term investor.
Mom and pop landlord: Typically, these are small, local landlords who may own one or two properties as investments rather than a sole means of income. It is not uncommon to negotiate directly with these landlords rather than a leasing agent or property manager.
It may be more difficult to negotiate for large tenant improvements, allowances or significant landlord work with this type of landlord as opposed to a larger professional or institutional landlord as they simply may not have access to this capital. When negotiating with a smaller landlord, you may want to focus on rental rates or free rent to improve your lease deal.
As you can see, the type of landlord you have can greatly impact your commercial lease negotiations and/or renegotiations.
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