CIP Blog

Hey its Spring Break!

Not a lot of time to write the blog this week so let me tell you what we are going to talk about in the coming weeks.

• Purchasing Property:  What you need to look for, due diligence, red flags etc…
• Leasing vs Buying:  Boy, this can be a tough one.  Lots of decisions.  Lots of cost.  You have to look in to your crystal ball and have a very good idea of where your company will be in a 5 years.

Then we will get in to leases.  Not just why you should lease and what to look for; but the actual leases themselves. 

We we delve in to great topics like:

• Rent
• Term
• Operating Expenses
• Tenant Finish Allowances
• Sublease/Assignments
• Subrogation!

Its not sexy but you have to be informed about these topics to make a well placed decision before you sign on the dotted line.

As always if you have questions contact us at Commercial & Investment Properties. 865-584-3967, www.ciprop.com or jcazana@ciprop.com

See you next week.  Have a great spring break.

The blog below is taken from Matt Mireles the founder and CEO of SpeakerText.  It is adapted to fit commercial real estate but in the end is applicable to almost any business where investors are needed.  NOTE:  In many real estate deals investors can be a silent partner who has no input in to running the building (just collecting the check). Still this is a good check list for when you are looking for investors for your next purchase/development.

You can read all his blogs at http://www.metamorphblog.com/.   Enjoy.

Pitching your potential investment can be  a deeply personal matter.  More often than not, investors––politely or not––call your baby ugly. And that hurts.  Developers should learn to not take the criticism too personally. But in the end, it is personal. They are judging you. And your baby. Thumbs up, or thumbs down. 

And such is life. But how should we  judge them? Not all investors  are created equal, after all. Once betrothed, the investor––unlike the entrepreneur––is unfirable, a step-father to your newborn, an undivorceable spouse in an epic marriage.

Below is a formula. 

“Do I want this guy on my board?” This, above all else, is the question. 

Another way to put it:  Do I want to be accountable to this guy when things get tough? Do I want this to be the guy who has my back?

In good times, it’s always all smiles. But not all times are good. 

And it is this experience––combined with my own listening and study of the travails of those who have come before me––that informs what I am about to say. 

1) Intelligence

It should be obvious, but I want to be convinced that the investor is a very smart man. Preferably smarter than me. Steve Young (the 49ers QB with a law degree & his own private equity firm) once said that he aims to be “the dumbest guy in the room.” Amen to that.

The beauty of hanging around and dealing with really smart people is that they have a  rub off effect. Really smart people challenge you and force you to think bigger, harder and, at the risk of sounding completely vague, better. They pick apart your bad ideas quicker and see through the waste that even you might have convinced yourself to believe. 

That said, scoring high on the intelligence test is not a dealmaker. Brains is a big plus, but brains without self-knowledge or an approprite level of humility is just fucking dangerous.

2) Security & Self-Confidence

People who are insecure make bad, irrational decisions. We are all insecure in some way, so really it’s just a matter of degree. More is worse, less is better.

Generally speaking, being insecure causes you to make decisions based on fear, and people who are motivated by fear alone cannot embrace a big, disruptive vision. They end up being fundamentally risk-averse and drive you to be too. Invariably, this leads to a focus on outside factors, like what other people are doing. 

Even worse, you can’t honestly call bullshit on people who are insecure without undermining your relationship with them. For me, this is an instant dealbreaker. 

People who are secure, on the other hand, like to be challenged. They enjoy vigorous debate. The intellectual swordplay is what they live for. 

When someone is secure in themselves and their position, you can be honest with them. And I ONLY want to work with people I can be honest with. Life is just too short and I’m just not that patient. 

3) Reverence for the Entrepreneur

I can see how easy it is for venture capitalist to think of themselves as masters of the startup universe. As a VC, people compete for your attention and pitch you constantly. They are the judge in a never-ending baby beauty contest. It must get tiring. And in their shoes, I can see how it would be easy to think that the world revolves around you. 

But it does not. 

At the center of the entrepreneurial universe is the entrepreneur. And behind the entrepreneur is the employees, the team, the company. It is they who are the heros. It is they who operate unhedged. It is they who take the real risk. 

In my mind, good investors get this. They understand their place in the ecosystem as enablers. They don’t let their celebrity status get to them. Which brings me to my next point… 

4) Humility & Self-knowledge

To be humble is to know your strengths and weaknesses, to be aware of your place place in the world. It does not mean being non-confrontational or a softie.

My favorite people are those who will push hard and argue vociferously on behalf of an idea but then freely admit that it’s possible their assumptions are wrong. They test you, but acknowledge the limits of their own knowledge.  Or maybe they really do know something about your corner of the universe. The important part is that they are acutely aware of when they do know something and when they don’t.

The other thing that’s great about people who possess a high-level of humility and self-knowledge is that they are not afraid of being challenged. Because they don’t have huge egos, they are constantly listening to the people around them and learning new things, which in turn makes them amazingly capable as teachers. And god knows I need teachers in my life. 

5) Does he understand what it means to be an operator?

The investors that scare me most are those who posses a low-level of humility in combination with a non-operational background.

Recently, I met a 20-something year old VC from a supposedly top-tier firm who served on the board of several companies. I had looked him up on LinkedIn prior to our meeting and noticed lots of board seats but little other experience beyond a graduate degree from a very prestigous university. He was obviously very intelligent, but after several minutes of opining to me about my industry, I decided to turn the tables a bit and ask…

“I noticed that you sit on the board of several companies. Tell me a little bit about your background and experience building companies that qualifies you for this role. What companies have you founded? As a board member, I’d report to you and you’d have the ability to fire me. In essence, you become my boss. Why should I entrust you with this power?”

Part of me actually wondered if this guy had had some previous experience that I didn’t know about. He squirmed. “Well….ahh,” he stuttered. “You know, board members are there to, ahh, give…intelligent feedback and, ahh, be there….ahh….as a sounding board…for the entrepreneur, you know.” 

What amazed me was not the vacuity of his response but that multiple CEOs had allowed this guy to take a board seat and a position of responsibility caring for their babies. 

As far as I can tell,  there’s good VCs out there who haven’t really been operators. But they tend to have grey hair and not be involved in super-early, seed-stage investing. As a first time founder, I want people around me who can understand and help me manage the extreme uncertainty of company building at the ground floor. 

6) Does he want me to lie to him? 

One of the red flags I look for is seed investors that want me to make things up and lie to them. This typically manifests itself in the form of long-term financial projections. “What will your sales be 5 years from now?” 

I have no clue, and if you’re asking me that question, neither do you. 

I am a first-time founder in an immature, rapidly growing market. Pricing, exact business model––these things are all up in the air. My task now is to go out and prove certain assumptions about the product and the market in a way that we matched the two up and acheive the magical paradise that is product-market fit. Before I’ve done that, don’t ask me for financial projections other than my expenses, because what you’re really doing is asking me to lie to you, and I hate that. 

7) Does he teach me things?

Some of my favorite investors are those who, regardless of whether they’ve said yes or no, teach me something about my industry, product, market, team, etc. Even if they say no, they’re the ones I’m gonna go back to down the road and try to lure them into the yes column. 

My reasoning is this: If in the course of a single 30-minute meeting this person has added value to my company and my life, just imagine how much this person would contribute if he/she sat on my board! MUST HAVE THIS PERSON ON MY TEAM. 

Is he a happy person? 

The world is full of extremely intelligent and yet unhappy people. These people are like poison. Their unhappiness rubs off on you, and invariably, they attempt to punish you and take out their frustrations with their own lot in life on you, potentially disrailing your company and your life. 

Again, I don’t want you to confuse being happy with being soft. One can be both happy and hard-nosed at the same time. In fact, I like to consider myself a happy warrior. I love life and relish in the entreprenurial adventure, but yet I am (or try to be) ruthless in how I judge and execute that which is important around me and my baby. 

At the end of the day, happy people are optimists. And when the world is going to hell, as startups seem wont to do (not to mention life more generally), you need happy, optimistic people around you to stay focused and productive amidst the storm and cataclysm. 

Oh yeah, and life is just too short to surround yourself with unhappy people. They suck on your soul, and leave it empty. 

I don’t know that this is an exhaustive list or even the right one to use, but it’s how I think. I hope my thoughts are helpful to and have some positive, enlightening influence on those who come after me. I also hope you my readers will add things that I’ve missed.

Where do we want to start when it comes to the “Green Wave”?  Of course I am referring to the popular push to create energy efficient buildings on both the commercial and residential sides of the industry. 

Green initiatives have two significant factors; first they lower building emissions which helps the environment but most importantly to many people they can save building owners LOTS of money!

When you hear about green initiatives you were hear lots of different view points and rankings.  Two of the most popular are ENERGY STAR ratings and LEED Designations.

Energy Star: This federal program has been around since 1992 and focuses on energy saving products and more recently houses and commercial buildings.

According to the ENERGY STAR web site: Energy prices have become a hot news topic and a major concern for consumers. ENERGY STAR provides solutions. ENERGY STAR provides a trustworthy label on over 60 product categories (and thousands of models) for the home and office. These products deliver the same or better performance as comparable models while using less energy and saving money. ENERGY STAR also provides easy-to-use home and building assessment tools so that homeowners and building managers can start down the path to greater efficiency and cost savings.

II Centre Square has recieved the Energy Star Rating

Recently, II Centre Square, a 91,000sft office building in downtown Knoxville that is managed by Commercial & Investment Properties (CIP) received its ENERGY STAR rating.  It’s only the second privately owned building in downtown to received the ranking.   CIP implemented a variety of energy-saving features to improve the building’s efficiency. 

Some of these improvements include:

• Replacing magnetic ballasts and T-12 lamps with efficient T-8 lamps.
• Replacing original cooling tower with a highly-efficient 215-ton replacement.
• Installing compact fluorescent lamps in place of incandescent floods lights.
• Installing motion sensors in common areas to control lighting.
• Installing variable frequency drives (VFD) on the HVAC equipment.
• Replacing the pneumatic thermostats & controls with programmable controls.
• Providing set backs for heating and cooling with push-button override for after hour occupancy.

CIP’s Director of Development, Ryan Cazana, says while these improvements save money in the long run they just make good environmental sense.  “Energy use in commercial buildings and manufacturing plants accounts for nearly half of all energy consumption in the U.S.  Plus these facilities are also responsible for nearly half of U.S. greenhouse gas emissions which contribute to global warming.”

These capital improvements will save tenants in the building over the long run, while lowering the building’s carbon emissions at the same time.  The payback for these improvements is less than three years thanks to lower operating expenses.

LEED: Leadership in Energy and Environmental Design

LEED is the internationally recognized green building certification system developed by the U.S. Green Building Council.  LEED provides third-party verification that a building was designed and built using strategies aimed at improving performance across all the metrics: energy savings, water efficiency, CO2 emissions reduction, improved indoor environmental quality, stewardship of natural resources and sensitivity to their impacts.

LEED certified buildings reduce energy use on average by 28% as compared to conventional buildings.  Since the launch of LEED in 2000, more than 4,500 buildings have achieved LEED certification. 

Not everyone is pushing to receive LEED certification.  In fact, many buildings are built to LEED guidelines but don’t go after the plaque.  The cost to have an outside firm come in and document your building & design process can be cost prohibitive. 

Nissan HQ-Leed designed

For example, Nissan’s 240,000sft corporate headquarters outside of Nashville is designed to meet Gold standards for LEED but does not have the designation.  Nissan says the cost of getting the designation would have exceeded two million dollars, instead they decided to take that money and put it into the building to even further improve the buildings efficiency.  

The good news is the cost of to certify a building is becoming less and less of a factor as more firms become capable of providing the certification needed.

Even retail & hospitality centers are getting involved.  The article below is from Tuesday’s Knoxville News Sentinel and talks about a new green theater in Chattanooga:                                   This week, theater owners across the country gather in Las Vegas for a major industry convention, and among the topics on the agenda is the greening of the movie business. The industry’s poster child sits just down the road from Knoxville – a Carmike cinema that recently opened on Broad Street in downtown Chattanooga. The theater, which began showing films in October, expects to receive LEED certification any day, according to Dale Hurst, director of marketing for Georgia-based Carmike. “We’re the first LEED stand-alone theater,” Hurst said. “We’re right in the middle of the running to be gold certified.” The theater features sustainable building practices, including use of local and recycled construction materials, rainwater and condensation collection systems, environmentally friendly cleaning and maintenance products, energy efficient air conditioning and lighting technologies and close proximity to public transport. And while, from a customer standpoint, the movie experience isn’t so different from other cineplexes, the building does feature bathroom lights that turn off when unoccupied, a lobby full of natural light from banks of windows at the theater’s entrance and plenty of recycling containers.

Click here to read the complete article: http://www.knoxnews.com/news/2010/mar/16/carmike-greens-its-screens/

Many tenants are also looking for green buildings.  In the past few years most all tenants being represented by national brokers ask about the designations when they are touring the building or during a Request for Proposal.   We have yet to have a tenant demand a LEED desgination but they do want to know about it.

There is no doubt that green initiatives will continue to be popular and you will see more and more new buildings follow these guidelines as it gets less expensive to implement and the rewards grow even more.

Knoxville is a bit different when it comes to the industrial/warehouse/distribution market.  Because of the market’s proximity to so many major interstates, I-40, I-75, I-81 and being so close to major cities like Charlotte, Atlanta, Nashville and Cincinnati, you would expect more of a distribution presence.  But that is not the case.  While there is about 32 million square feet of what would be considered industrial space much of it is dated and not the new high-bay space required by top-flight tenants.

DCP Warehouse-Amherst Road

What do you need to look for?  It varies just like retail and office, but functionality often replaces locations on the priority list (as long as the location is not to bad).

Space Attributes

A wide range of storage alternatives, material handling equipment and software exist to meet the operational requirements of a warehouse space type.  Intergration of these features is essential. Warehouse spaces must also be flexible enough to adapt to future operations and storage needs.

Functional / Operational

• Use of Space: Warehouse space types are often designed with higher bays to take advantage of vertical storage. Utilization of space is maximized while providing adequate circulation paths for personnel and material handling equipment such as forklift trucks.
• Design for Live Loads: Designs should anticipate the loads of stored materials and associated handling equipment, typically 250 LB/SF. Snow, wind, and seismic loads shall be considered where they are applicable. Racking in seismic areas must be built stronger and be better braced.
• Power and Utility Requirements: Differentiate between spaces that require power and utilities, and those that are for storage only. Depending on the goods being stored and handling equipment required, there may be a need for well-distributed power and utility lines throughout the space. Attempt energy-efficient lighting when possible. Warehouse spaces typically include one floor drain for every two bays of storage, as well as sand and oil traps on waste lines.
• Loading Dock: Warehouse space types are typically designed with one electro-hydraulic dock leveler per every five truck bays.
• Fire Protection:  New buildings sometime are built with an ESFR sprinkler system that allows each sprinklerhead to put out almost 100 gallons of water per minute!
• Special HVAC: Provide proper ventilation under all circumstances. Plan for 100% exhaust from storage areas with paint, petroleum, aerosol, or other minor amounts posing moderate hazard storage conditions.

Determine the type of space you’ll need. Have a good grasp on requirements for phone, broadband data service, HVAC, gas, water and electricity. You’ll want enough power to provide adequate lighting and operate necessary equipment. Take all your needs into consideration when looking at space: storage for raw materials and finished product, a production area or assembly line, ceiling height, column spacing, dock-high or drive-in truck access, signage, offices and rest rooms. Think about proximity to freeways for access, as well as public transportation, parking requirements and, possibly, rail access.

Try to develop a preliminary layout that takes into account all aspects of your operations. The layout should include utility connections for each piece of equipment. With this information, you can determine what type and how much space you’ll need.

As far as Knoxville is concerned there are dozens of small/medium warehouses (less than 40,000sft)  available but fewer of the larger size (+40,000sft ).  In fact only 14 can be found on the MLS (and only one exceeds 100,000sft).  Doesn’t seem like much does it.

For comparison, Columbia, South Carolina (with a metro area only 50,000 more that Knoxville) has three million more square feet of industrial space. Birmingham, Alabama has 123 million square feet of industrial space.

There is space out there.  It just depends on what you are looking for.

Resources:  Whole Building Design Guide (WBDG.org), Grubb & Ellis, Graham & Co.

Opening new retail in these economic conditions is a 50/50 proposition.  Most importantly, the unsteadiness of the economy has many people worried but there are opportunities to get great deals on retail space for lease.

Finding the ideal space in the ideal location

I will let individual business owners make thier own decsions about the economy, but there is a plethora of retail space available all over Knoxville.

Almost every center from Strawberry Plains to Turkey Creek has some type of space available.  Some property owners are in more dire situations than others.  A older center may not have the debt service of new construction so the owners may not be as motivated to deal.  But some centers that were once asking $28.00 per square foot in popular location are down below $20.00.  Those are pretty serious concession.

Even if you are getting a “deal” there are many details to consider before choosing a location.

1.   Of course, Location, Location, Location: Walk in traffic is the best way for a new retailer to be discovered. Spend time in the neighborhood, learn the flow of traffic, the demographic, etc.

2.    Type of space: What side of the street is the space on? Do you get afternoon sunlight? Is the space deep and dark? Is there a lot of wasted square footage in the space? Notice as much as you can on the first tour and make sure to come back several times at different times of day.

3.    Neighbors/competitors: What businesses are located in the area?  Will their customers see value in your merchandise or service? Ask other merchants about the pros and cons of the area.

4.    Crime:  Being in a neighborhood that is gentrifying or potentially has some crime issues is fine for a restaurant or office, but potentially disastrous for a retail outlet. Your most valuable asset is your inventory and although insurance will help make up for losses, it is a major distraction from your business. Do a little research and see how many police reports have been filed within a mile of your potential location.

5.    Parking: How far away is the nearest parking lot? Do your customers need parking or will most of them be walking to your location?  The ability to have your customers park close by and affordably is extremely important.

6.    Signage: How big of a sign do you need to attract attention? What are the regulations of the landlord or the city as it relates to signage? Make sure to check out the neighbors and ask them how they got through the system if the regulations limit what you are hoping to do.

7.    Foot traffic: How busy is the street during the daytime? How busy is the street during evening hours? What types of people seem to be walking around? Is their a bus stop or school nearby. Take note of who walks by and what percentage of people seem to be window shopping because the more people looking the higher likelihood you’ll find a new customer.

8.    Brokers: Most shopping centers will have a broker to negotiate the deal…you should too.  They are experts in finding you the proper space, picking out the details and getting you the lease you need.

What works best for you may not be ideal for others

Potential hidden cost:  NNN Pass thrus.  We have discussed these before.  Shopping centers are not trying to hide these numbers from potential tenants but they are calculated differently than rent.  They are CAM (common area maintenance), taxes and insurance; also know as pass-throughs or NNN charges.  They are different at every center.  Some NNN charges are as low as $2.50psf in older centers or neighborhoods.  NNN charges in lifestyle centers such as Turkey Creek can be between $5 and $8 per square foot!  In many cases these charges are passed through directly from the property owner to the tenant without mark up.  But they can still add a considerable amount to your monthly rent check so pay attention to these.

Basically, if the time isn’t right don’t force the issue.  Find a good broker who is experienced in the field to guide you along and make the decsion when all the pieces fit properly. 

Commercial & Investment Properties manages and leases more than 350,000sft of retail space in the Knoxville market.  If we can be of assistance please let me know so you business has the proper headstart. 

www.ciprop.com   //  865-584-3967   //  jcazana@ciprop.com

Justin Cazana, CCIM