Jason Aster  0:00  

The reason why we are what we are we have a bunch of attorneys and CPAs and former property managers and brokers is that if you really want to get into the nitty gritty, it’s not math. You can call a lot of people to figure out the math. If you want to figure out did my deal work, right? Or did something changed in the market that no genius could have thought of? Because we don’t all have a crystal ball of lawyers certainly don’t have brokers don’t as well. You can’t do that from accounting perspective. You can’t call your CPA even if they’re good at auditing, right going to a landlord and say, let me see your books and records. I want to see your I want to see if you paid that bill. So of course they paid the bill Brookfields not passing stuff through to tenanted pay. The question is, should you pay it and what is your lease say? And what is your release mean? And what is your deal mean? Even if your lease doesn’t say it? And that’s I think a very different approach.

Announcer  0:48  

Welcome to C R E PN Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountant we are here to learn from the experts.

J Darrin Gross  1:07  

Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio. 

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Today my guest is Jason Astor. Jason is the managing director at KBA Lease Services nationwide lease auditing service that works on behalf of commercial tenants to recover rent overcharges and reduce occupancy cost. And it just a minute we’re gonna speak with Jason about how tenants can limit the effects of inflation on their commercial leases. But first a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at Commercial Real Estate Pro Network. And while you’re there, please subscribe. Without on welcome my guest, Jason Astor. Welcome to CRE PN Radio.

Jason Aster  2:44  

Good morning. Thanks for having me there.

J Darrin Gross  2:47  

Well, thanks for doing this. I’m looking forward to our conversation. But before we get started, if you could take just a minute and share with listeners a little bit about your background.

Jason Aster  2:57  

Sure. So I’m a non practicing attorney. I started in commercial real estate and structured finance back in the mid aughts, which was not a good time to be in structured finance. So I, I think I sort of fortuitously found my way into this niche that we’re going to talk about, which is advisory service focused on helping tenants avoid the risk of somewhat overlooked overpayments. So having a legal background makes, it makes a lot of sense because you’re looking at relatively complex, complex contracts, right leases. And so I spend my day to day for focusing more on the business side of running the company as opposed to doing like a lease audit. But I’m brought in in many times to help sort of think creatively about lease language, whether it’s traffic or interpreting after it’s been drafted. And of course, working on behalf of tenants with landlords to come up with some sort of satisfactory conclusion if there’s an issue that we find.

J Darrin Gross  4:00  

So, commercial lease services, or Kba, and your work. My, I’m gonna give you an assumption based on what I believe based on the little bit that I know without a service like you, I’m assuming that a commercial space tenant is left to work with a broker and the landlord is that the traditional the traditional model,

Jason Aster  4:31  

close so this wasn’t always a thing. The commercial focus lease auditing as a service you could go procure a really started in the mid 80s, with a guy called Mark Mitesh, who was the founder of Kba. So free that you were probably doing it yourself, right? Whoever was managing your real estate and payments couldn’t someone in finance someone in accounting or actually a real estate professional was looking at these bills you get from the landlord and saying, Do I feel comfortable with it or not? With the onset of This type of focused service, you would be either left to asking your broker, could you help me understand what you helped me get into, which is somewhat common. But brokers aren’t close deal experts, right? They’re no offense to brokers. But right, they’re transactional and they move on. So their understanding of everything that could go wrong is pretty good when they think about it in advance, but they’re not going into the books of records in the bowels of buildings and looking at accounting, accounting, treatment, so what they would think a tenant would typically call their accountant, right, and they would pick up the phone and say, Well, I know that I need to look, it’s I need a trial balance, or a general ledger or something for the lender, because I don’t have enough detail to understand why my costs went up like this, or why I’m paying for this specific thing. So I think they might call their accountant, they might call their broker. But there are a lot of managed service companies out there, right. So if you’re Cushman and Wakefield, and you’re JLL, and your colleagues and your new markets, and you have smaller versions of them, that are more regional, you have specific companies that offer lease administration services, right. So they offer that to landlords and tenants. That’s sort of like a data collection data organization all the way through checking in paying the bills or invoicing tenants on the landlord side. So there’s a lot of people, you can pick up the phone and call actually and ask the question. The reason why we are what we are, we have a bunch of attorneys and CPAs and former property managers and brokers is that if you really want to get into the nitty gritty, it’s not math, you can call a lot of people to figure out the math, if you want to figure out did my deal work? Right? Or Did something change in the market that no genius could have thought of? Because we don’t all have crystal balls? Lawyers certainly don’t. And brokers don’t as well. You can’t do that from accounting perspective. You can’t call your CPA even if they’re good at auditing, right going to a landlord and say, let me see your books and records. I want to see your I want to see if you pay that bill. So of course they paid the bill Brookfields not passing stuff there to tenant, they did pay. The question is should you pay it? And what is your lease? Say? And what is your lease mean? And what is your deal mean? Even if your lease doesn’t say it? And that’s, I think a very different approach. When people hear audit, they say green eyeshade? Well, that shows my age, right? So people do that anymore. But we think of it more as an advisory sort of consultative, like, almost renegotiation of like, what did you think was supposed to happen? What’s fair? Yes, you have to be able to do math. Yes, you have to understand building operations. Yes, you need to be able to read a lease, but really have to understand to deal with the context of the building the context of the market. Nothing is proving that more than what’s going on in the market today.

J Darrin Gross  7:42  

Right. So do you find that it’s, it’s more of a present time reflection of what the intent of the lease was? At its inception?

Jason Aster  7:52  

Yeah, I think you know, I think that’s right. Again, when you go back to that, like, the word audit, people think, Well, you go, you’re looking backwards, and you’re gonna, you’re gonna unravel what happened? And the truth is, you need to right, you need to understand what happened, what were the trends in order to sort of predict the future. The problem with that is most tenants don’t have the ability to look very far back. So your average lease term, which obviously might change in the next couple years is seven years because it’s either a five or a 10. Right? Big, big tenants take 15 or 20, because of the financing of those spaces, but if you have a five or 10, year lease, let’s use 10. You look at year five, you might only be able to look back one year. So if there was a problem that germinated in year two, you might be able to fix it by year five, or it might be completely out of reach, and you’re kind of out of luck. So it is a it is a proactive behavior, your tenant should get into many do particularly those that hire companies like mine, where you negotiate a lease, you put it in a drawer, you spend your first year paying rent, operating expenses turn on the second year, right there, build that for the rest of the term, that’s when you should look, not six years into a 10 year term. So to your point, exactly right, when you want to look presently, every year from the inception of that lease to say, is this working as it’s written, and it’s just working as I intended, and I want to catch these things as they come up, because many of them are systematic, it’s not a one time oopsie I pass something through, you know, a cost on to the tenant, you paid it. And and I didn’t, I’ve never did it again, a lot of them are complicated equations or a shump assumptions that landlord make, and they just get built into the deal. And so you go five to 10 years paying this thing and you don’t even think about it because it becomes sort of an assumed cost. But it may have never, never been never supposed to be there.

J Darrin Gross  9:41  

I’m kinda I’m curious. I know my personal experience is that in things like this, the quicker you’re able to bring the attention to it, the more likely you’ll get a resolution that’s that’s agreeable, as opposed to Canosa Hey, you know, long time ago This, this happened and I was looking at and I think that overpaid. Yeah. Yeah. Yeah. And I know even like with insurance, you know, like with the claim the information is, is most valuable in the room immediately after the incident not trying to go on somebody’s recollection whether it’s I don’t recall the answer. So do you find that the the reception from the landlord’s is similar? Are they much more agreeable, willing to work through something or adjust to meet the the intent of the lease? If it’s right away?

Jason Aster  10:44  

I think that’s right. And probably for two, two or more reasons. I think the main reason is, I think it parallel to your insurance analogy. If you let something go on for a long period of time, sometimes it becomes sort of a business accepted, right in Atlanta. So what do you mean, right? I’ve been doing this for seven years. And it’s built into my my financial plan now, right? Like, I’ve been budgeting, either, you’re accruing for it. I’m budgeting to receive it. It’s part of my income. I report it to Trump’s or whomever. Right, like. And so to your point, yeah, it’s sort of like, you know, why didn’t you bring this up when it first happened, right in your lease doesn’t say I can’t do it. Right. So if you if it was a problem, why didn’t you bring it up? So there’s a little bit of that. But a lot of it actually boils down to the way this works out economically. If you wait, let’s say you have the right to go back as far as you want. The way these things and is a bit maybe too in the weeds. But a way these things technically work out legally is each state has a statute of limitations for when you can bring up a claim, which I’m sure you know, and insurance, it’s very important to track that. So every state, it can be as short as three years to be up to like 11 or 13 years, a lot of them are somewhere between three, five or six years. So if you just went on the state statute limitations, and you had a five year lease and the state statute limitations was five years and you waited to the very end of the lease, you’re asking for cash, you’re telling the landlord, you know, shame on you, you overcharged me 100 grand a year, give me half a million bucks. But that’s a cash that’s cash, right? If you had a 10 year lease, and you waited into the first five years, maybe they could excuse it as a credit, right? So now I’m not going I’m not going to refund you, but I’ll credit you right. But still, it’s completely screwing up, really expected income. So if you bring it up early, the value is the same. The assumption is, it’s going to happen anyway, it’s going to happen for the next 10 years, right? But if I catch it in your two, not only do you not as a tenant, pay the cash out, right, you’re not giving your money away, and then letting someone else will collect interest on it. Right? So you’re actually keeping operating money. But you’re also telling the landlord Hey, about that 100 grand, you’ve been you plan to charge me, I’m not paying it. And you agree that I’m not paying it, the landlord now can do a ton of creative financial maneuvering. So that doesn’t look as painful. It’s not a half a million cash, right? It’s totally adjusted, it can be made up on additional rent from somewhere else. And so it’s a lot easier economically for both parties to do it that way as well.

J Darrin Gross  13:14  

Yeah, no, I can only imagine with accounting, and the the notes and all that stuff. You haven’t explained that’s kind of a tough one.

Jason Aster  13:23  

ASC 842, which we don’t need to get into. But it’s a accounting shift in the treatment of leases. So now, leases look like you own them on the balance sheet, it becomes what’s called a right of use asset for the tenant. The lower your liability, the better because now it’s really affecting your books and the value of your company, right? It’s affecting your cash balance, right? So if you can bring that cost down early, you recognize that day one. So now you can write down the value of the asset, right? And everything looks better you right? So it’s from the tenants perspective. In my opinion, it’s more important to do it early than it ever has been, because it actually positive, it has a more positive impact and just saving you money, right? It makes the company look more valuable.

J Darrin Gross  14:08  

And it makes complete sense. Does your service do you find that people are looking for this in advance of a lease? Is it when they get into a challenge where they they can’t make sense of things? When are you most likely to be brought in? I’m assuming ideally, it’s upfront your partner with the tenant. And you’re, you’re working with him, but do you find that the market is aware of this service? Or you know, are you guys a standard I’m not really familiar with?

Jason Aster  14:44  

Sure. I wish we were brought in for free. I always joke, you’d think it’d be the easiest thing in the world to sell a free service and we actually don’t charge we share in our result. It’s impossible people Do not look for this, it’s it actually still blows my mind that there’s so many options for this. Now it’s become a bit of a commoditized boutique business, if you can, if you can have both. And it’s very rare that somebody picks up the phone and says, Hey, Kba, or anybody else like, I need you. You already mentioned why they would, it’s after the fact, somebody’s boss gets an invoice on their desk, and they look at and go, Wow, this is six, seven figures higher than I expected. What the hell? Who’s my friend? Right? What would I do? And then they look around at each other and go, Oh, you know, there’s this company that has been sending me emails for the past 13 years. They think they think they focus on this sort of thing. So that’s usually when the phone rings. What’s much more common is that tenants are aware that this exists, they are aware that they kind of need to check the box in organizing their lease data and organizing the financial elements around that. And when the other priorities have been kind of managed, they’ll, they’ll receive a sort of an incoming request from a company like mine to say, You know what, we should cover that? Why don’t you come in here and start looking. So it’s more of an outbound to use the sales term approach where we are in front of as many tenants as we can be saying, but really need to look at this really need to look at this, and they eventually find the time to do it. Or, like you said, they have some sort of externality where they’re like, I just, I can’t let this go. It’s just three, three and a half million dollars more than I expected, like, you know, pick up the phone. So so we’re still kind of plugging away and trying to get attention. Although major tenants have been doing this and are aware of it for many, many years, it becomes a partnership. A lot of times, at least the way we try to articulate it is we want our larger clients with lots of leases, and a very regimented process for managing their leases, to think of us as part of their team. And you’re going to get the bill, you’re going to check it however, you’re going to check it or you might outsource that someone else checks it for you. They abstract stuff into a system for you. You’re tracking all this great stuff. You’re reporting on it. And our founder found it visually nice, right? That’s a system to actually do that. There’s quite a few others. What what do you do when you’re done? Oh, yeah, you know what? Jason and his team, they’re there, they’re there, they’re looking behind the scenes every time we make one of these payments, or we ask a question, and they’re kind of going a little deeper. And that becomes part of the cycle of managing a lease. That’s our aspiration is that people see us

J Darrin Gross  17:26  

makes make sense. I’m curious that you mentioned in the beginning about the change in accounting? Has that been a an opportunity for you? Is that something where people are now more conscious of and looking more at their lease? And, you know, wanting to make certain that whatever their pain is owed?

Jason Aster  17:46  

Yes, I think it changed the buyer a little right, traditionally, real estate had been the domain of real estate, right, it was, you know, guy or gal in the basement of a building, kind of left to their own devices. And it’s over the past 10 or 15 years, organizations like cornet and efma. And revenue have kind of elevated the brand of the real estate person. And you know, not that COVID has a whole lot of silver linings. But one of the silver linings in the real estate world to COVID is that it brought front and center the human resources, right health and safety value a real estate person can bring right what in real estate to accompany has become a big conversation, and how and how you want to use it to work or not. So the buyer was traditionally this real estate person who is worried about these costs. With accounting. Now the buyer might be the CFO, kind of Accounting and Finance Some people even risk right, there’s some risk people looking over this. So it changed, I think the importance of getting it correct. But I would have to say if I’m being you know, fully transparent, it didn’t really hasn’t really filtered all the way down to what we do in terms of like, a higher priority. Oh, my God, we got to do a lot in our leases, what most companies tend to do is they take their rent, they take their additional rent, or your operating expenses, your cam, your utilities, your insurance, real estate tax, they accomplish them together in a code, and they just add that to my rent payment. So they’re not really separating the two. In a way that gives us a great talking, if you’re blending these two things together as rent, and you’re paying 80 bucks a square foot or 100 bucks a square foot in New York or 65 bucks a square foot, you know, in Chicago or wherever. And then you’re paying anywhere from five to 20 bucks a square foot in operating expense if you put those things together. And yeah, you’d have to put them on your books, you should think of us a little more because we can bring that operating expense down a couple of bucks a square foot, that’s a big deal. It’s not a big deal to you know, in the grand scheme of things to these companies, right? Even their real estate costs when you think like JP Morgan even it’s not a big deal. There’s a rounding As big as their portfolio is, it’s not that big of a deal for them. So we’re down here. So it really hasn’t filtered all the way down dots yet, but it should.

J Darrin Gross  20:09  

And it’s always amazing to me how, you know, things that that seemed like a big cost, but in the scheme of the client and their, their, their numbers, it’s just, like, set around the generic kind of thing. But, but I would assume that, you know, you’d see you have to look at it more as a duty to the, you know, to your owners, to your investors, to whoever that is to yourself to, to, you know, not overpay for something just because it’s easy, or it’s not a big deal. I think that, you know, computers, I feel like with, with all the data that’s been collected, and all the data I’ve been put in computers over the years, it feels like it’s finally, you know, there’s a data science is actually something that’s real. And that’s actually, you know, it’s been used, I don’t know, it’s always been used for me, it feels like a lot of times it’s been used against me. But there is a a, you know, an actual attempt to sort through it and make sense of all the information that’s been collected. And I think we’re to a point now where that’s more standard, it’s, you know, it’s kind of the transition from just, you know, whatever to Oh, boy, and kind of the exact stuff, but I hear you. So let me ask you, do you guys It doesn’t sound like brokers or property managers are looking to refer you it’s usually the pain point of the tenant, when they feel the pain that they reach out or realize this email you guys have sent or that they’ve received has value, and maybe they should check into it. Is there? Is there any referral partners? Or do you have anybody that’s, that’s, you know, seeing the value and trying to say to the, to the tenant, mutual client, hey, look, you need this.

Jason Aster  22:02  

Yeah, yeah. So property managers? Certainly not. Right. I mean, not to say they they go running when we caught, but you know, we’re looking over their shoulder, right, their property manager is the one who puts a lot of these costs together. And so we’re, you know, we’re the ones who question and tenant rep brokers are not agent broker agents or tenant rep. brokers. Right, your occupier side will refer us all the time. You know, the, frankly, what’s interesting is that, in our opinion, right, the top producing brokers in most markets are some of the first to actually bring us in, because they recognize the value of the service when everything gets as complex as it can, if you have a very basic lease, and you’re a small tenant in a, you know, regular like Cincinnati, or Portland or wherever, like a regular market, right? There’s very complex deals going on there. But if you have a 510 15,000 square foot lease, and you don’t have a lot of bargaining power in the building, you’re probably going to get a template lease from a landlord, you’re going to read a lot of it, right. And that’s, you know, although from a volume perspective, you might be a tenant brokers kind of core client, you’re not their dream client, right? Their dream client is the 50 100,000 square foot tenant that’s going to, you know, pay for their kids college in perpetuity. So the higher end the deal, the more relevant we become. And the brokers and the lawyers at that level, all know it, because the amount of negotiation that goes into these leases, not just in our part, but specifically in our part, is so sophisticated. And these buildings are very complicated, that everybody knows when the parties walk away, and the landlord brings in, you know, a group of people to manage hundreds of leases all at once to have 1000s of different lease terms, and the tenant goes back to doing whatever the tenant does. And the broker goes back to being a broker and the lawyers go back to being but no one’s looking at this at the level that they negotiated it at. So yes, if the higher end the deal, lawyers and brokers actually do bring this same kind of thing, we end up calling them and asking them, hey, you should pay attention. They go, yes, we should. And then they do. But yeah, those are Vegas referral partners that actually be the law firms on behalf of whom we work, right. So we work on the law firm leases in an audit capacity, and we also work on behalf of their clients in the same capacity. And then the brokers. They’re also smaller companies that are standalone lease administration companies that will manage the lifecycle of leases for companies and they’ll actually tie a seat into the back end of their administrative processes I mentioned before, where they’re checking everything and they’re putting everything in beautiful spreadsheets and doing what’s called a desk audit, right just kind of sitting there looking at the general categories and making sure this is nothing you know, flying off the page at you and then we show up and we actually become a regimented part. So they will actually bring us in as well. So like a, you know, like a screen call or even a Cushman and Wakefield or JLL will kind of plug us in minutes.

J Darrin Gross  25:01  

With respect to the different asset classes, is there a, a limit to the different asset classes? I mean, I’m assuming office is a big office and retail, I’m assuming are are big clients, you also work with industrial warehouse? Is there any limitation to the different types of asset classes you can work with?

Jason Aster  25:24  

Yeah, not really, there’s, like you said, I think there’s, there’s a prioritization of them just based on the structure that the lease takes when it comes down to what you pay for. So as a tenant gain a skyscraper in San Francisco, you know, you have a couple floors in a building, or a single floor or half a floor doesn’t really matter. It’s not your building, you are paying almost everything to the land, right in one way or another, but you’re not managing your own services for the building. Usually, that’s about the most complicated and expensive as it’ll get, going down the chain. If you have a warehouse, for instance, you usually have the warehouse, it’s your warehouse. Now, there are huge facilities where you share warehousing space, and everything else. But if it’s your warehouse, even if you’re leasing it, you’re controlling a lot of the expenses. So there, it still might be expensive, but they’re within your control, they’re not being passed through to you by a landlord, he’s making subjective decisions about what your lease says. So the warehouse situation has less opportunity, usually because it’s cheaper, and because there’s less expense being kind of muddied through the landlord’s decision to bill you. So the way we look at this internally is there’s their leases, called modified gross leases, or base year leases, they tend to be the most complicated and cause the largest ongoing problems when they are wrong. And they have been very, very wrong in the past two and a half years due to COVID. which we’ll get into, then you have net leases, which is the common United States leasing function, that still a skyscraper or any kind of other office space, or even industrial or manufacturing space are often net leases, the difference there is you paid rent to a landlord, vacuum, and you pay operating expenses to a landlord, in a vacuum in a base your lease, you actually don’t do that you pay rent. And then in the following years, you pay your pro rata share of the increase that the landlord passes through an operating expenses. So your rents gonna be higher, your operating expenses will be lower, but they’re muddied. So those are so those are the two common once you get into like pure warehousing industrial built to suits those who call it what’s traditionally called triple net net, which means that you are responsible for paying your taxes to authority, you’re paying your utilities to the utility company, you’re paying insurance to the insurance company, you’re handling everything, there really isn’t a landlord billing you much other there is a landlord and you’re paying rent. That’s about it. You’re just paying rent.

J Darrin Gross  27:45  

Right? Right. No, it makes sense. So speaking of COVID Tell me how COVID has changed? Or has it accentuated the need for a company like yours? I mean, have you found that, that there’s some some opportunities in the lease for tenants to take advantage of? Service like Kba?

Jason Aster  28:12  

Yeah, not to trivialize things like what we do, again, is going to dip at the tail. Right? So COVID has done a number on everything that has to do with commercial real estate. But in our little world. Yes. COVID exacerbated things that already happened. If you think about a building that typically operates with 85 to 100%, occupied, right, and what I mean is people butts right in seats 85% to 100% of this sort of assumed amount of people that can fit in the building COVID happens, and you’re operating between what five to if you’re lucky. 40%. Right. So it’s probably still hovering around 20. I think Castle systems on some markets, you’re getting 40 to 50% on a high day, but not across the whole week. So when you think about that, the costs to operate the building are significantly depressed, because you don’t have as many butts in seats, you still have the same amount of leased space, though. It will go down, right? No one knows by how much but people are obviously paring down their square footage because they don’t use much space. But the current situation is very unique. You have a million square foot building. That’s 90%. Leased, right? And no one’s in it. So the operating costs are now depressed, but they still have a rent roll. Right? They still have a lot of people paying rent. So what do you do? Right? There’s a methodology in real estate and other industries as well called grossing up right? You look at a number that’s not what it should mean. You kind of artificially inflate it. There are really good reasons for landlords to gross up certain costs that they pass into tenants and it’s fair they should do it otherwise they kind of get screwed. There are also reasons you don’t gross up. And so it got really confusing for landlords and tenants during COVID. Because you have this artificially depressed cost basis for operating expenses, if you grossed it up, but your building was still fully leased, aren’t you making more than you should, you should only make what you spent. That’s the deal, the deal if the tenants are going to help you pay your operating expenses, not create a profit center. So it causes a problem. You don’t grow us up because people don’t come to work, you grow up because you don’t have leases. That’s the right they have leases, right? So you would absolute so if you had a building that was 100%, occupied and 100%, leased, you don’t need to gross up. If you have a building, it’s 50%. Leased. You gross up, you got to make things even if you have a building that’s 100%, leased and 50% occupied, you shouldn’t be grossing up, you are creating a profit center. So that COVID created this confusion. And it’s not that some landlords probably look at it opportunistically and said, Yeah, I would do it. Anyway, my leases allow me to do it, I’m doing it. There’s no definition of what occupied means. It doesn’t say leased versus humans running around my building. And I think something like that just didn’t know what to do. And a lot of them did. And they did the right thing, right kind of all over the map. That same concept affects what I told you before the complicated base releases, which you see on your coasts, usually, the coastal cities tend to use the base here, methodology. If you walk into a building, and it’s fully operational and fully leased that people are there, you can assume that that’s what it costs to run the building, right? So when you set your basis, it’s a million dollars a year to run my building. Alright, so Darren, and Jason go and we get our lease, we know it cost a million dollars a year in 2022, to run the building, I’d expect other than this crazy inflationary period, four to 6% increase next year on what it cost to run the building. So next year, it’ll be four to 6%, higher than that million, you and I will pay our share of that spread that four to 6%. Increase, not the million, just the increase above the million. Right? What if we went into that same deal, but the building was empty? Now, it’s not going to look like it costs a million dollars to run the building? Is it gonna look like it’s gonna, it’s gonna cost half a mil. So now our, our starting point is half a million. And then in 2023 50% of people showed up, that’s going to double your spread just now. Now it’s costing a million, it doesn’t go up by four to 6%, it goes up by 100% or 80%. You know, you’re paying that spread now that they’re getting crushed. And we’ll get crushed forever, until we get out of our lease, that’s just gonna keep getting bigger. So there’s COVID causes really confusing, sort of nexus between, like, what does it mean to be occupied? What does it mean to be leased? How do I design my pass throughs were based here versus a net lease versus an escalation here, and I’m throwing a lot of terms out, and it just a cause, I wouldn’t say pandemonium because again, we’re talking about operating expenses. It’s not the end of the world, but it’s caused a lot of confusion. And it has created an opportunity for us to help people clean this up.

J Darrin Gross  33:04  

Ya know, I the whole conundrum of, you know, the office space. And just like you said, On a good day, 40 to 50% of people are showing up, you know, not every day, kind of thing. I mean, that’s that’s a total shift on the expenses. And I would expect that there is a little bit of confusion and, and, you know, it just, I guess there’s, there’s opportunity for you. And it’s kind of a opportunity for the tenants and even the landlords to try and, you know, reconcile and get on the same page and recognize expenses are different. But that’s, that’s, that’s great. Do you guys have any kind of requirement that that you have boots on the ground? Or is this all something you can handle through? If I’m in Portland, Oregon, and I’ve got multiple leases, and I contact you? Can I just email them to you and you guys, you know, look through those and then the bucks or is there any reason for an actual physical on the ground inspection.

Jason Aster  34:13  

So kind of going back to the point you made about data collection and organization kind of coming into its maturity recently where you can actually use it. Same thing happened in our industry, this used to be a get on an airplane or have an office in every city you need. So you could go into the landlord books do office and look over their papers. We used to have a staff that would take how old you’re listening to bases, but they would take a portable copy machines, again, a little thing and we sit there and copy. So now it’s everything’s digital. I mean, so from a engagement perspective, like a client of ours, which would be a tenant can email us their leases and bills and under a second. So it really takes nothing for them to just you have one lease and if you have 100 leases put in a drop box, we’ll go grab it right Very, very simple. So our initial assessment is that it’s like, let me get your leases, let me get a couple of your bills and your operating expense reconciliation statements. It’s just a couple of documents, put it somewhere I can grab it. It’s all confidential. We just sit quietly looking at it, right? We don’t talk to landlords or anyone else. Because like you said, we’re all becoming data companies. We have a wealth of data on what buildings cost to run. And most likely we’ve seen it if we work from mostly like your Tammy and fire companies, right? So major tech, major finance, major professional service, insurance, so forth. A lot of media, anyone who’s using big offices are these had. So if you think about it, it’s it’s data that they’ve collected, and they all go to the same buildings, right, like a certain type of company likes One World Trade Center, a certain type of company likes the Embarcadero center, right? So if we’ve looked at it, once, we it kind of looks the same, right? Not the lease, but the cost structure of the building. So if we have one tenant and the market arrow center, we should probably get a few more because it kind of helps us. You know, to continue to contextualise we never trade data, right? We don’t use information if we’ve gotten it from the landlord at one building for another tenant. But usually, if something’s occurring in a building that is negatively impacting one tenant, it might actually be happening to other tenants. Right? So we have a whole database of this stuff. So tenants I mean, you’d think it’s like if it takes you an hour of your day wants to send us a bunch of information. And then we’ll come kind of process it and come back to you and say, This stuff looks great. This stuff’s on fire. This stuff, we don’t know, we’d have to ask further questions. It’s like why not? With technology we can. We can do it all over the world, which we do. Most of our clients have really big portfolios or fortune 500, and so forth. So we sit in New Jersey in New York, we have offices all over the country, we don’t anymore, because we don’t we never have to go anywhere. Right? So I just said, we rarely have to go anywhere. Some leases do have a requirement, a lot of Toronto leases actually make you go to Toronto. But usually you can gotta get around because landlords don’t want you in their building, either. Right? Right. Right.

J Darrin Gross  37:02  

Right. snooping around there, hey. It was just sitting there thinking as you’re talking and almost sounds kind of like a cost segregation of a lease. Kind of a. And again, not not that they’re the same, but just kind of the analysis of, you know, what’s on the lease and trying to find where the opportunities are. And, you know, it’s not a tax thing like building cost segregation, study, but it’s still just, you know, kind of getting in the weeds. And really,

Jason Aster  37:33  

it’s not, it’s not this similar. If you think about, take your average law firm or, you know, media company, right? What they have a variety of roles that you space differently, or a bank, right? So you have people who are in trading floors, right? You have people with huge screens, you have people who want to draw on whiteboards. I mean, there’s any number of different uses for this type of space. So when they take a lease, it’s not just rent, right? From a cost center, right? You have rent, you have the operating expenses, however, that’s being passed through. But you have a bunch of vent, right? You have people who are cleaning the space you’re paying, depending on what market, you’re paying taxes to the landlord, you might be paying taxes to the city, right? If you’re in New York, for instance, you pay commercial rent tax, you’re actually paying a tax to New York, for the privilege of leasing space in New York, and I live in New York, and I want to keep my job and I want to keep auditing leases, but that is kind of ridiculous. But keep it but right. So there’s all of these costs attended to rent, everyone talks about rent is due I, I can’t say Who but a really big, big, big tenant in downtown Manhattan told me the other day, you know, I’ll edit the cursing, rent doesn’t screw you up. Everything else screws you up, you know what your rents gonna be? It’s everything else in New York, New Jersey, Connecticut, some tenants pay five to $15 a square foot for additional cleaning, think about having 100,000 square feet and paying 10 bucks a square foot just to keep it a little cleaner than the landlord’s done it right, that stuff can screwed up. So it is like a cost. So we look at all that stuff, anything you pay, because if people pay, you know, Swiss Post for mail services, and laundry and all this stuff, there’s all these things people forget about. So you’re right, right, there’s rent, and there’s everything else and rents always the big boy number, but these numbers add up.

J Darrin Gross  39:30  

You referenced it in the beginning. I just wanted to kind of go back and make sure I understood your fees. It’s a free service. But did I hear you say that you basically have a you know if you can get somebody you know a couple million dollars back? Is that your Do you have like a percentage agreement then that you get a percentage of that is that?

Jason Aster  39:50  

Yeah, I say free service, you know, because,

J Darrin Gross  39:53  

right, but there’s no upfront costs. It’s more math or whatever. If I can get your money back. I’m gonna get a percentage of that. You’re gonna win When is the winning? Like? Is your fee then? Is it a one time fee? Or is it like a, like an ongoing fee now that you found this? This discount?

Jason Aster  40:12  

Yeah. It’s, it depends on the structure of the settlement and the type of issue. Right. So to your point, there are literally no cost. It’s not like some sort of Homecoming garden thing. Like if we can’t save money, and it’s not a realized, you know, factor, you don’t, we don’t charge anything. So there’s a lot of tonnage we go through before we get a what we call a hit, right? Because a lot of these issues are too small for a tenant to care about, right? You know, a couple 1000 here or there, nobody’s gonna go banging on doors, right. So to your point, if you can save 100,000 Or a million we’ve seen we see a lot of mid six figure low seven figure claims, those aren’t usually one time hits like that would be a pretty big mistake, or really big space. If you got whacked with a seven figure one time mistake. What tends to happen is we structure a settlement. Going back to our discussion before like, why when do you do this? We try to structure a settlement that makes it easy for everybody and Fairford. It’s not Hey, Mr. Mrs. Landlord, give me $6 million. Today, it’s this is a $6 million. I wish, right because I get my fee upfront. But it’s nobody expected this, let’s fix it. It the value to the tenant is a million dollars a year for the next six years. So as that is recognized, from an escrow perspective, from the tenant, we share in it year over year. So we’re basically putting our, you know, we’re segregating into the tenant, or we’re putting our shoe feet into the shoes of the tenant, say, if you’re here for six years, and you save $1 Every year, I’d like a piece of that dollar. Do you agree? And I’m sure of course, right? If I can’t get you $6 million today, but I can get you $6 million over the next six years. What’s the difference? Right, the difference is just when you realize it and how I get paid. So to your point, if there’s an issue where we catch the landlord, you know, I’m no charging for landscaping and the weeds literally says no landscaping and that cut and dry. One time, right? You charging for landscaping, give me my 20 grand back, Katie will share and the 20 Grand if it’s something a lot more complicated, like you’re supposed to pay for landscaping with all of these crazy calculations and caps, and none of them are working. The assumption is you would pay this crazy, weird unworking way for the next six years. If we can fix it. Now you actually don’t get any money back. No one right. There’s no money today. We’re just saying don’t do it that way in the future, we have to share in what happens to in the future otherwise there’d be there’s no value, right? So it really depends on how we can structure the settlement. There are situations where landlords and tenants want to just get it done with we’ve had huge 20 $30 million settlements, where the wild goes, What if I just give you the net present value of it today? Sure, you know, maybe not wise, if the tenant cuts out earlier, you’ve actually opioid they would debate it. But it really just depends on the parties and the type of issue.

J Darrin Gross  42:54  

Ya know, if you can get the cash today, go for it. Absolutely. Hey, Jason, if we could, I’d like to shift gears here for a second. As I’ve mentioned, by day, I’m an insurance broker. And as such, I work with my clients to assess risk, and determine what to do with risk. And there’s three strategies we typically consider a first look to see if there’s a way we can avoid the risk. When that’s not an option, we look to see if there’s a way we can minimize the risk. And when we cannot avoid nor minimize the risk, we look to see if there’s a way to transfer the risk. And that’s what an insurance policy is. And as such, I like to ask my guests, if they can look at their own situation. Could be clients investors. You know, the political situation, interest rates, however COVID. But if you can take a look at your situation, and identify what you consider to be the biggest risk. And again for for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Jason Aster, What is the Biggest Risk?

Jason Aster  44:09  

In my little space, the Biggest Risk is willful blindness to what you should be paying for your lease. You spend a lot of money and time getting into these major leases, hundreds of 1000s of dollars in legal fees, brokerage millions and brokerage fees depending on what party you are, you know, FF and E fit out for you 200 bucks a square foot a huge amount of money getting into them. I think you mentioned this before. It shouldn’t be your duty, if you’re going to spend this amount of resource to get into it to make sure you’re getting what you’re supposed to add of it. So the biggest risk is just being willfully blind and not having an expert. Look at it behind the scenes. The interesting thing about risking our space and kind of in relation to the way you describe your day to day work is is operating expense pass throughs is a risk adjustment. That’s what it is the landlords back in the 70s, they just charged rent. Like a lease when you were a kid in an apartment, like you paid your rent, and they factored in some amount into it. And then one day, their insurance policies when there was a fire now the rent another, what do you do? You got to pass it through, you have to shift the risk. operating expense theory is a shifting of the risks that landlords have said, You’re backing this up, it’s too much risk. look and think about all the things inflation is happening too fast rents not enough, I don’t have the ability to Jack my rent though. My insurance policy taxes are going up. Right, the union rebar bargained for something right 32, BJ in New York bargained for better fringe benefits. And now I have to pay that, I have to figure out how to reallocate the risk of operating my building across my tenant that basis because I can’t bear it anymore. That’s what operating expenses are, they’re an adjustment of risk. What’s happening now from a risk perspective, other than just please Don’t bury your head in the sand, pay whatever the landlord tells you is inflation. How do you avoid inflation? It’s hard. And Elise, because least has happened one time and then you sit in, right? In your world insurance, landlords pay a fortune, as you know, for insurance, and they have every right to pass that through, guess what they can’t control the cost of insurance. So if inflation increases the cost of insurance or some pandemic increases the cost of insurance or some you know, environmental thing, they got to pass that through. So that’s construct that’s considered an uncontrollable cost, right landlord can’t control insurance, they can’t control taxes, they can’t really control within reason, the amount of money they spent for utilities. So when you negotiate a lease, landlords will fight as they should, to say, I can’t control these these things, we’re gonna call them costs, I can’t control, you just gotta pay your pro rata share, it is what it is, I’m not going to fluff it up, I’m not going to put a percentage on top of it. So if I pay $1, for insurance, and you have half my building, I’m passing through 50 cents to you. And that’s fair. The other bucket of things, all the other things cleaning security, right? You know, certain common use of things that is controllable, who you hire, what rate you pay for it would cost to manage your building is a big number. Sometimes those are controllable expenses. And that’s where tenants can start to adjust their risk, including caps to, I guess, Cap inflation, right? If inflation is causing the rise of payroll, payroll is going up in the CPI is going crazy. What do you do? Well, if I think about it in advance, well, you know, inflation is usually around four to 5%. What if I kept kept some of these costs that the landlord can control? Now I’m adjusting my risk, because I don’t have to worry that if we hit a hyperinflationary period that I’m ever going to pay more than this 5% cap on these costs. Now these this is only fair to a landlord, if these are costs the landlord can purportedly control. That’s the road, right? That’s where you need lawyers. How do you argue what’s controllable, if I’m a landlord, I would go I can’t control payroll, I’m in I’m in a union state. They tell me pretty good argument that I call BS. But you know, if you’re a tenant, you’re not well represented, you know, you’re right, you can’t control, right. But there’s all these like, really interesting nuances. And it’s all about shifting risk. It’s all about shifting the risk of operating one way or another. And the bigger the better the tenant, the less risk they’re going to assume. And the more they’re going to push back on the landlord. And in today’s market, landlords are happy to have tenants. So you will see, if you are a company looking to negotiate a lease, maybe you’re negotiating a smaller one, but you’re still negotiating, you might actually have an opportunity to adjust some of their shifts, some of them it’s back to the landlord in the operating costs of us. That’s what I would say in the landlords are going to do the opposite. Right, rents are going down in some markets. I mean, I mean, this is insane market, right? You go to the middle of Manhattan, and rents have never been higher commercial office rents. One Vanderbilt Hudson Yards one Manhattan recipe show $250 a square foot people are gobbling it up. Three blocks over on Third Avenue. Can’t give it away for free, crazy. So if you’re a landlord, and you happen to have great product, you’re pushing the rest of your tenant. You want to be in here. If you have a half empty building that was built in 1976, and nobody wants to be there, it’s a free for all.

J Darrin Gross  49:39  

Jason, I can’t say thanks enough for doing this today. Before we wrap up, where can listeners go if they would like to learn more connect with you?

Jason Aster  49:50  

Prior to institution because why would you want to learn more about? Yeah, so we have a website. It’s kind of just a placeholder. It’s to www.kbalease.com.  KBAlease.com. It gives you all the information you need about the company. My email address is JAster@Kbalease.com. That’s my name and my first initial my last name, except emails from anybody would love to talk about it, you know, we live and breathe this stuff. It’s all it’s largely an educational process, right? When you sell something like this, it’s like the value sort of obvious. It’s like, you know, finding change in your couch. You don’t need it, but you take it as someone handed it to you. Right, but to learn the thing about what’s at risk, you talk to my landlords, you’re talking to my vendors. So it gets very complicated. So there’s actually it’s usually people wanting to be educated, and then they make that decision of okay, this this is this is worth the risk, which in our, in our parlance, there is no and because we’re just doing a confidential assessment, but they have to learn that and they have to get comfortable. So the website’s KBAlease.com. My email with Jaster@kbalease.com.

J Darrin Gross  51:00  

Awesome. Jason again, I can’t say thanks enough for taking the time to talk. I have enjoyed it. Learned a lot. And I look forward to doing it again soon.

Jason Aster  51:09  

Yeah, this is thrilling. Thank you so much as amazing questions, by the way. Very good.

J Darrin Gross  51:13  

Appreciate that. Thanks. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow. That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks, CRE PN Radio.

Announcer  51:34  

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