Sunday, September 27, 2015

Self-Driving Cars and The Coming Real Estate Revolution

Self-driving cars are coming and not only will they revolutionize transportation, they'll also change the way we develop real estate.

What is a self-driving car? 

I'm not talking about cars with steering wheels and an advanced form of cruise control; I'm talking about a car without any need for passenger intervention during the journey. You simply give it a destination and sit back and enjoy the ride. 

When is it coming?

Most likely soon. Google is predicting they'll release their self-driving car in 2020[1]. Other automakers  think they won’t be far behind with their own projects. Several automakers are already testing their self-driving cars on roads throughout the US and the rest of the world. 

Reasons for fast adoption
Okay, so these cars might be coming soon, but it will take years for them to catch on, right? I'm not so sure. Here's why:
  1.  Low cost. Dense urban areas will be perfect targets for large fleets of these vehicles. Per mile costs for autonomous cars will likely be so low that owning a car may not be much cheaper than renting one for your daily commute[2]. If the rental costs can come near to the cost of owning a vehicle, city dwellers will likely have no problem making the switch in a short period of time, because there's no large outlay of cash needed. 
  2. Change is in the air. Fewer people view driving their own car as something special and fewer people are enjoying driving their car [3]. More people are viewing driving for what it is, simply a method of transportation.
  3. Uber growth. It took less than three years for Uber to go from 0 to over 150,000 drivers 4. There was a pent-up demand for a convenient and low cost transportation alternative to taxi cabs. A cheaper self-driving alternative will likely enjoy even faster growth.
  4. No red tape? By some estimates car accidents caused by driver error result in a cost of 300 billion dollars per year in the US5. If self-driving cars can demonstrate that they are safer than human drivers, it will be difficult for governments to stand in the way of progress (or so we hope).
What this means for real estate

New development standards. One of the the biggest changes will be in city real estate development standards. As of now in most cities parking is a critical factor with all new developments and existing buildings. Cities use a ratio of available parking to square footage to help determine uses for particular property. These ratios may become meaningless when self-driving cars drop off passengers at their desired location and drive off to pick up their next passenger. 

Smaller parking lots. Once we can decouple people from their cars, developers will be free to create parking lot free buildings. The size of a development will no longer be tied to how many parking spaces can be provided. Properties will likely still need some amount of parking for deliveries, but parking lots as we know them can fade into history. By some estimate parking spots account for as much as 1/3 of the land use in some cities[6], so this change would represent a significant transformation for these cities.

Other impacts

  1. Fewer gas stations. Self-driving cars will likely be mostly electric, so their adoption will mean fewer gas stations. Also less pollution with less combustion engines (assuming we can find ways to generate electricity without burning fossil fuels).
  2. Less income for cities. Less parking meter revenue and less revenue from driving citations. Eventually no more speeding tickets!
  3. Significantly less personal car ownership would lead to fewer car dealerships.
  4. Fewer insurance brokers. You won't need insurance if you don't own a car.
  5. No need for valets and parking attendants.
  6. Less traffic. Ride-sharing will be easier, because cars can be compartmentalized to pick up multiple passengers for a single trip. Fewer accidents, no traffic slow downs to view accidents, trucks can travel on the roads at night, etc.
  7. Fewer auto mechanics. The large fleets of similar self-driving cars will likely be serviced by large scale operations rather than smaller mom and pop type operations.
  8. Cheaper and faster deliveries of objects too big for drones.

Self-driving cars have the potential to dramatically change both transportation and real estate. There are still hurdles including the fact that the law needs to be updated to deal with non-human drivers, but it won’t take long for people to realize that the following benefits outweigh the risks: less traffic, less pollution, and fewer accidents and deaths. Eventually the government may prevent human driving completely.

Sunday, September 19, 2010

Searching for and Leasing Office, Retail, or Industrial Property

A brief guide on how to get started searching for your perfect commercial space.

Starting Out
Begin by defining your needs for your new space: how much are you willing to pay monthly for rent, how much are you willing to pay to build out your space, minimum and maximum square footage, parking requirements, amount of foot traffic/accessibility, signage, specific use type (for instance restaurant or medical office), and type of building (e.g. multi-tenant, single tenant building). Once you've defined your needs you can begin your search.

Should I Use an Agent?

To answer this question we need to understand how a commercial leasing agent is compensated. Typically the agent representing the landlord and the agent representing the tenant are paid a percentage of the lease value by the landlord after the lease is signed. For instance, if the tenant signs a 3 year lease with a rental rate of $1,500 a month, the landlord might pay a total commission of $5,400, which is 5% of the total lease value of $108,000 (3 years x 12 months x $1,500). The $5,400 is then split amongst the landlord's agent and the tenant's agent (usually a 50%/50% split). There are also occasions where the landlord will refuse to pay a commission to an agent. If this happens, you may want to consider paying the commission yourself.

Now that we know how an agent is compensated we can better determine whether or not to use one when leasing a property. For short-term leases (1 year or less) or for small office or retail spaces an agent might not be willing to work with you, because the commission amount will be low. If there is enough potential commission, you should seriously consider using the services of a leasing agent. Not only do they have a better idea of what the current rental rates are for the area, but they can be an invaluable source of information when negotiating the lease.

Short answer: Yes, you should work with an agent if they're willing/able to work with you.

Where to Look

Driving around your desired area and looking for "for lease" signs is a great first step. When contacting landlords and property managers, ask if they have other similar properties and if they have any scheduled vacancies. There are several online sources for commercial real estate listings, but and seem to be the most popular. Loopnet is probably the best place to start your search and to get a good idea of what's available.  You'll also want to look in the classified sections of your local newspapers, but the most up-to-date information is usually found online.

Viewing Spaces

Arrange to tour spaces that fit your criteria by scheduling with the landlord/property manager or the leasing agent. Bring a notepad to write down any information supplied during the tour and bring a camera to take photos to help you remember each space.
Some things to consider and ask about when viewing spaces:
  • Will the city allow my hair salon/doctor's office/Italian restaurant to operate in this space?
  • Date of space availability
  • Construction costs to prepare the space
  • Parking, ease of access, safety issues
  • Space visibility and signage opportunities
  • Ask about outside interest in the space. You probably won't get an honest answer, but it's worth asking about.
  • Any restrictions business type, operating hours, advertising/signage
  • Accessibility for the handicapped
You've Chosen A Space
If you've decided on your space, it's a good idea to send the landlord/property manager a non-binding letter of intent (LOI). The goal of the LOI is begin negotiations for the space by clarifying the major deal points, which will make the lease easier to prepare. The letter can be as simple or detailed as you want it to be. For instance, here's a very simple version:

Dear Mr. Property Owner,

This is a non-binding letter of intent. I'd like to lease your 1,200 sq ft space at 900 A Street in Los Angeles, CA for $1,200 a month. I'd like a five year lease and four months of no rent (rent abatement) for the build out of my clothing store. If these terms are acceptable to you, please sign below and prepare a lease draft based on these terms.


Clothing Store Owner

If you have an agent, he or she will help you prepare a letter of intent that covers all the important deal points. If not, here are a couple of sample letters that you can use as guides:

Don't forget that the LOI should be:
  • Non-binding - You or the landlord/property manager could walk away from negotiations at any time. Make sure that the term "non-binding" is included somewhere in your letter.
  • A starting point for negotiations - Don't be afraid to start by asking for more than you want (e.g. lower rent, more months of rent abatement), so you can give up some of your terms and make the landlord/property manager feel like they've accomplished something in the negotiation. Try not to be too greedy though, because the landlord/property property manager may not respond if they think both sides are too far apart from the beginning.

In some cases you may be asked to complete a rental application before the landlord/property manager will begin negotiations. From the landlord's perspective this makes sense, because he or she doesn't want to waste time negotiating with someone who doesn't have the finances or required experience to successfully launch a business from the location. At the same time, you don't want to waste your money on an application fee or your time preparing the application if the landlord is unwilling to meet your terms. You're better off insisting that a letter of intent be finalized first and reminding the landlord/property manager that he or she can walk away if the application falls short of the requirements. It's also a good idea to find out ahead of time what the landlord application requirements are for the space (e.g. asset, credit, experience requirements). If you can't meet the requirements, let the landlord know and see if an exception can be made before working on the application. Make sure that the landlord/property manager only considers one application at a time before paying a fee and ask to see if the application fee can be applied to the first month's rent.

Negotiating the Lease
Too many tenants without representation sign landlord lease agreements without questioning any lease provisions. Please commit this to memory: NEGOTIATE EVERYTHING. There may be standard forms with standard amendments, but you can (and should) make changes to them. If you don't have an agent representing your interests, you should consider having an attorney review the lease drafts and make adjustments.

A few items to consider when negotiating a lease:
  • Cap triple net expenses (if you have a net lease) and rental increases, so that they don't increase more than a certain percentage each year.
  • Ask for options instead of a long-term lease. Expect to pay more during the option period.
  • Try not to a have a personal guaranty. Expect to put down a larger security deposit if the landlord allows this.
  • Why negotiate a short-term lease: Your space is not unique and is easily replaceable, like an office space. You're opening a new business and aren't sure if you're going to succeed.
  • Why negotiate a long-term lease: Your space is unique and not easily replaceable, like a restaurant space in a busy downtown area. You're able to lock-in a low rental rate during a poor economy.
  • If you're looking a long-term lease, ask for credits for tenant improvements (TIs). If you're going to be putting in $50,000 worth of construction improvements to the space, you should be compensated by the landlord for some if not all of what you put in.
  • Ask for a period of rent abatement (a period where no rent is paid). With a longer term lease, you're more likely to get some rent abatement.
  • Specify the exact location of each sign for your business. Make sure you understand any limitations that the landlord places on signage, like sign size or type.
  • A gross lease where you pay a flat rental fee is preferable to a net lease where you may pay the landlord's taxes, insurance, and common area maintenance charges. As mentioned before try to cap the triple net expenses if you have that type of lease.
  • Understand exactly what space you're renting. For instance, is the patio in front of your restaurant included?
  • Make sure you can terminate the lease if your use is unacceptable with the city. Cities aren't always transparent, so you may find out after signing the lease that the city will not allow your use.
  • Make sure you have the ability to sublease or assign your space if you need to leave for any reason.
  • Who will pay to make your space ADA (Americans with Disabilities Act) compliant? This can be very expensive depending on the age of the building and its use.
  • What equipment will you be responsible for maintaining? Check the condition of these items, because the last thing you want to pay for is a new $5,000 AC unit in the first few months of your lease. If you're going to be responsible for equipment, such as an AC or water heater, make sure the landlord pays for its maintenance for at least the first 18 months of the lease.
  • Consider asking about an exclusivity clause which will prevent the landlord from renting another space within the building or shopping center to a tenant with the same business use.
  • If the landlord/property manager makes any promises regarding repairs, make sure that they're written into the lease.
This is not meant to be an exhaustive guide and is simply an overview of the commercial leasing process.

Here are a few websites with other helpful hints: