Raphael Collazo 0:00
You know, as far as retail is concerned, you hear the things in the news about, you know, online taking over and you know, retail just diminishing and that’s definitely still true. I mean, you don’t want to diminish the impact that online has had on on the retail environment. But since COVID, has, you know, started to normalize, you’ve actually seen an increase in retail activity outside of online and so the numbers of purchasing, as far as retailers concern online have dropped a decent amount since since COVID, has started to normalize. And so that kind of showcases that the American consumer is still very active as far as getting out there and purchasing. You know, in storefronts essentially.
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J Darrin Gross 1:01
Welcome the 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 Raphael Collazo. Raphael is a licensed commercial real estate agent who specializes in investment in investment properties. He’s also the author of Before You Sign That Lease. And before you buy that building comprehensive guides to leasing and buying commercial real estate. And in just a minute, we’re gonna speak with Ralph about how to analyze and assess retail real estate investment opportunities.
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Raphael Collazo 2:49
Hey, Darrin, it’s great to be here. I’m excited to learn. Talk a little bit more about retail, which is one of the focus areas of what I do so.
J Darrin Gross 2:57
Yeah, well, I’m looking forward to our conversation. Before we get started, if you could take just a minute and share with the listeners a little bit about your background.
Raphael Collazo 3:06
Absolutely. Yeah. And it’s it’s somewhat interesting. You know, it’s not necessarily a direct jump right into commercial real estate. So I actually am an engineer by trade. So I studied Industrial Engineering and economics in college. And then got into the software business. I was a software implementation consultant for a company that implement software systems for government agencies around the country and abroad. So I had the opportunity to work in Washington, DC for a couple of years, I worked on a big project in Puerto Rico to replace the financial software system for the island, and then moved over here to Louisville, Kentucky, where we help replace the financial software system for the city. Back in mid 2019, I actually transitioned into commercial brokerage, and I’ve been doing it ever since. And so that’s kind of a quick, high level overview of myself. My dad was in the military as a physician. And so I actually was born in northeast Italy. My mom’s Italian, and I’ve lived I lived in Europe until I was about 14 and then moved to Arizona, or went to high school and college. So got a very diverse background. But you know, I apply those experiences to hopefully better serve my clients in a variety different facets. So
J Darrin Gross 4:10
That’s awesome. I’ve always thought travel is one of the best education you can get. Just from kind of a world perspective, and and, you know, sounds like you’ve clearly had the unique opportunity. Hey, I wanted to ask you, so you mentioned by training, you are an engineer. sound sounds like you’re you’re fairly involved and doing a lot of projects here. What What was it that attracted you to real estate?
Raphael Collazo 4:40
Yeah, it’s a great question. It’s a question that I get a lot, you know, and they’re always like, why do you lead a software business? It seems to be a very, you know, a prosperous industry and enterprise and it definitely was, but in the role that I was in, in particular, it was a consulting role. So I was, you know, moving every couple of years, as far as the sustainability aspect It just wasn’t. So if I wanted to be able to start a family, I didn’t want to move my family every two to three years that so that was one facet as well. And then number two, I’ve always been somewhat entrepreneurial. I had a small Catering Company in college. And, you know, I after college for about a year, I had tried to grow that business and I thought I wanted to be a restaurant tour, I realized pretty quickly after I started managing a restaurant, that that was not what I wanted to do. But I always had that, you know, entrepreneurial fire that I wanted to kind of tap into. And so you know, that’s what initially got me thinking about the idea of doing something different. My mom is a residential agent in Arizona, and she’s been very successful at it, she actually started pretty much in the midst of the recession, in her career, and then kind of grew it to a pretty sizable amount. And, you know, she kind of encouraged me to get my license even back when I was in high school, but you know, you don’t really listen to your parents, when you’re that age. And so, you know, when I started thinking about different things to do, I started looking at the brokerage side on primarily on the residential side to see if it would be something I would be interested in after doing research and talking to a lot of people just realized that it wasn’t like didn’t fit my personality type that well. But when I started doing more and more research on commercial, it seemed a lot more in line with what I like to do. And so I gave it a shot and so far, it’s been great.
J Darrin Gross 6:16
And I can appreciate that 100% the emotional side of the residential is never mind on it. It’s making the decision when you’re making the purchase of one thing but leading others through it seems like a different kettle of fish or thing. Sorry, so now you are a commercial broker in Lou Lou. Is it Louisville or Louisville? Oh, no,
Raphael Collazo 6:43
It depends on who you asked. Depends on who you ask. Right? They say they say Louisville, Louisville Ville.
J Darrin Gross 6:49
Well, very good. All right. And that borders Indiana, is that right? Is it? Yeah. What’s the area? What’s What’s the area describe the area and kind of the size of it?
Raphael Collazo 7:03
Absolutely. So the the Louisville Metro area is roughly 1.3 million people. And that encapsulates part of Southern Indiana as well. So Louisville is located on the Ohio River. And so it’s split. It’s the the city itself is on one side. And then on the other directly across the the river is part of Southern Indiana. And so we have, you know, a city called Jeffersonville and northern New Albany, which are the, I guess, the bigger cities in that southern part of Indiana that is closest to us. You know, we’re about an hour and change away from Cincinnati. About two hours away from Indianapolis, you know, two and a half to three hours away from Nashville. So we’re pretty centrally located. In the Midwest area, I guess it’s considered us, Kentucky is considered south. But you know, it also has that, you know, has that Southern field, but But yeah, that’s that’s kind of a, I guess, a brief overview of the geographic makeup of of the area.
J Darrin Gross 7:58
And as far as the Metro size, how large is the
Raphael Collazo 8:02
Roughly 1.3 About 1.3? You know, and you know, there was a adjoining of the city in the past. So now Jefferson County, I think has so Jefferson County is the main county than encapsulate Louisville, and I think they have around 750. But if you factor in the entire metro area that feeds into Louisville, you know, within a, you know, between if you look at downtown, and you draw a 25 minute or 30 minute circle around it, you’re looking at about 1.3 million people in the metro. Alright, we’re in the top 50 cities in population size.
J Darrin Gross 8:34
Okay, I just I wasn’t familiar with her hadn’t really thought about the size of the area there. But definitely, you know, an area to contend with, like so the top 15 That’s, that’s good. Top 50 Yeah, or Yeah, top 50 Okay, yeah. And so, what if you focus primarily on retail, or do you what, tell me a little bit about your, your practice?
Raphael Collazo 9:00
Absolutely. So I’m with a boutique brokerage locally called the Grisanti Group. We were started by our broker, Paul Grisanti . He was in the restaurant space and him and his family owned restaurants in the area and you know, they decided to transition away from that into the brokerage side. And so as far as our specializations of what we do more so than anything, and I’ve done multifamily deals, I’ve done office deals with industrial deals, but you know, where my main focus area has been as blade has been the retail side in particular on the investment investment end. And so, you know, that’s I guess more so a function of the brokerage I joined because again, when you when you first get into the business, you don’t really know anything about the different property types or what you may or may not like and so, you know, I think a big reason why people specialize in a certain thing is either A, the position entails that you specialize in it or if you’re a boutique brokerage, you just kind of find where you you know, fit
J Darrin Gross 9:56
Okay, so the the news of late COVID Um, you know, excetera, post COVID has kind of led one early, least myself to believe that, that, obviously off is probably the most, you know, damaged or or, or challenged by the situation. But that also there were some challenges in retail. Can you describe kind of the current situation in your market? And? And, you know, vacancy and? And demand? Is there any new retail being built? What’s the what’s the story there?
Raphael Collazo 10:37
Yeah, of course, I mean, there definitely is new retail being built, I would say more. So on the higher end, you know, obviously, the higher price per square foot, you can, you can justify the development in certain areas of town. But as far as retail is concerned, we actually had the honor to interview on our podcast, James Cook, who’s a, you know, top research, the top research analyst for JLL for the Americas. And we kind of talked a little bit about the retail environment and how it’s shifted since COVID. And, you know, as far as retail is concerned, you hear the things in the news, about, you know, online taking over and, you know, retail just diminishing, and that’s definitely still true, I mean, you don’t want to diminish the impact that online has had on on the retail environment. But since COVID, has, you know, started to normalize, you’ve actually seen an increase in retail activity outside of online. And so the numbers of purchasing, as far as retail is concerned online have dropped a decent amount since since COVID, has started to normalize. And so that kind of showcases that the American consumer is still very active as far as getting out there and purchasing, you know, in storefronts essentially. So as far as you know, the retail environment currently, I think the biggest challenge going forward is going to be how we’re handling inflation right now, you know, the numbers have just recently come back for June, which I’ve been following pretty closely. And it’s actually increased month over month, roughly a percent, from what it was back in May. And so that’s not a good sign, as far as you know, where we are currently. And so I believe that, you know, the Fed is going to be meeting in a couple of weeks to discuss what actions they can take to kind of quell that, that inflation. And I imagine, it’s going to require, you know, an additional, you know, pull back as far as you know, or pull, increasing of interest rates, which is obviously gonna affect a variety different industries, not just retail, but you know, that that’s what I would be more concerned about as far as retail, but that’s really more so for the economy as a whole.
J Darrin Gross 12:37
Right? No, and I look at that, as I can’t really control that. I just know that it’s, it’s a constantly moving thing. They’re constantly tinkering with it. And, and sometimes they they’re putting, you know, putting the rates too low for too long, which gets us to this point where you have to correct and, yeah, and the pan.
Raphael Collazo 12:55
And a big thing is the supply shock. I mean, we can’t control how the supply chain has been affected. And, you know, obviously, with geopolitical issues that have been prevalent right now, with Russia and other other countries. I mean, that’s causing issues as far as supply chain is concerned. And, you know, that’s putting pressure on, you know, oil processing, refining of oil, which is, I think, one of the biggest bottlenecks right now. And since oil prices are an input in a variety of different goods and services, I mean, you know, obviously, that’s going to cause inflation. And so, you know, that’s, that’s, I think, what the Fed is going to be trying to manage is they’re going to have to be concerned with, you know, obviously, inflation is out of control, but we don’t want to put in, put ourselves in a situation where you have an economic slowdown, and inflation continues to rise, because that’s what happened in the, in the 70s, with the oil embargo, because you you got into stagflation, and so they’re, I think they’re trying to manage that as best they can. And it’s going to be very, very, it’s gonna be a fine line to tread over the next several months. So,
J Darrin Gross 13:50
Yeah, no, we’re in it, we’ll get through it, but not fun in it, but see what happens. So talking about retail, you mentioned that there’s, there’s definitely some new construction going on. Are there are there vacancies and older properties? Or what what kind of overall I mean, are people or businesses opening up in spaces or current businesses leasing larger spaces? I mentioned that the you know, the kind of the, the online is kind of waning, and people are looking for that local or the the physical, physical experience. What are you seeing just on that? You know,
Raphael Collazo 14:34
Yeah, no, or but that’s a great question. And I think that it depends on the type of retail that is being talked about, I think a big part of like restaurants for example, in particular, you know, fast casual drive thru restaurants, they’re going gangbusters. I mean, that’s they’re, they’re looking for space on a regular basis. You know, obviously experiential retail. I’m representing people who are looking to open up tattoo shops they’re looking to do you know, things that cannot be replicated In an online forum or an environment that’s still very active, as far as Louisville is concerned, we have a very strong culinary presence, we have Sullivan University, which is a, you know, a very well respected Culinary Institute, and other other you know, you know, institutions that can support the culinary scene. And so, as far as restaurants are concerned, you can’t find second generation restaurant space, meaning that it’s already built out as a restaurant, here, it’s just impossible. I mean, that obviously, you know, to the level with which you can operate, because, you know, a big concern for a lot of people right now is build out costs, you know, obviously, to build out a space to a specification that you would need to with rising labor costs with rising costs of materials, it’s becoming very, very expensive. So the demand for moving ready space is, is higher than it’s been since I’ve been in the business. And so, you know, those types of uses are still very prevalent. As far as new developments are concerned, I think a big one that we’ve been pushing for, for quite some time that it had, it had some contention early on here in Louisville was a top golf. I don’t know if you’re familiar with that, that that business, but essentially, it’s a restaurant slash bar that you can hit bought golf balls, and you know, it’s like a driving range. But, but that’s a big one that’s happening here in the East End, that they’ve been pushing, trying to push through for the last several years, but there was some contention at the local level for a rezone to be able to allow for it. And that’s one thing that I think, you know, obviously, is going to be unique to each individual. City, but, you know, whether or not the city is supportive of, of development, is another factor. And I think the city itself historically has not been the greatest with that. But I think with new leadership that’s coming in, there’s gonna be a lot more support for those types of uses, which is promising.
J Darrin Gross 16:45
So I was curious, you mentioned kind of the restaurant space and demand and talking about that fast. You know, the fast casual Yeah, you know, there was in the, in the beginning of COVID, there was kind of a leased thread of, of these kitchens for like delivery for like DoorDash, and Grubhub, or whatever these things were, and I don’t remember what it was called, it seemed like there was some sort of a, you know, more of just a kitchen kind of a thing where meals were prepared and, and delivered. Is that, do you see any of that? Or is that anything? That’s kind of any kind of momentos
Raphael Collazo 17:24
Ghost kitchens? Yeah, so there, there are some ghost kitchens in town, it’s not as prevalent as in other markets. I know, like, you know, obviously, in the larger markets, where rent pricing is absurd, I mean, you’re, it’s going to be a lot easier for you to be able to break into the restaurant space by utilizing those kitchens. As far as here’s concerned, depending on where you’re located in town, I mean, you can still get in at relatively reasonable rates. Obviously, if you’re starting to look into the East End, which is kind of our, you know, more affluent area, then you’re going to be probably charged a lot more. But then again, it’s a function of what your sales are what you project your sales to be in that area, then you can maybe afford it or not, but But yeah, I would say that ghost kitchens are definitely here in Louisville, and there’s people utilizing those. And I always encourage people that are looking to start a restaurant to either a consider a ghost kitchen, or be looking at the food truck route, just to provide a proof of concept. And then from there, once you build up enough of a clientele and you you, you establish a proof of concept, then, you know, committing yourself to a space long term is probably a more reasonable approach. But yeah,
J Darrin Gross 18:33
I love the fact that it you know, there’s some steps one can take and really like said test and prove the concept before you go in and sign them for the full monty kind of thing. And, you know, be more improve your your chances of success, which I think everybody would, as a fan of. So let me ask you so in your role or your efforts spent more on leasing space, or on actually sale of retail assets.
Raphael Collazo 19:06
So that’s a great question. I do a little bit of both. I’m I’m at a boutique brokerage. I’m not at a large house like JLL or Cushman that you know, you specialize in tenant rep or you specialize in you know, property management or specialize in the sale and buy side. For me, I do a lot more on the on I do a lot on the leasing side, but also on the acquisitions and sales side on primarily retail centers, you know, small strip centers to midsize strip centers. And so that’s kind of what I do a lot of.
J Darrin Gross 19:38
Okay, and on the sales side are are most of the the buyers, I guess and the sellers or the individuals or the syndications. Are they Yeah. REITs are what’s?
Raphael Collazo 19:53
Great question. I would say most of the people that I deal with are individuals but they’re also retail owners. So they have you know, Maybe they own a couple liquor stores, or they own some gas stations, they own, you know, another business that funds their ability to buy these types of assets. And usually they’re multilocation, you know, operators that now want to divert the income that they generate from their businesses into long term investments. So those are my primary clients. I haven’t done too much on the institutional side as of yet. But, you know, my, my, my primary clients are retail operators that own multi locations that will now want to invest that money into buying primarily strip centers.
J Darrin Gross 20:33
And when they do that, are they looking to occupy part of the space for new who, you know, operation or
Raphael Collazo 20:43
Sometimes yes, I mean, there’s, there’s definitely situations where, you know, you know, and this is more so strategic in a lot of senses, because, you know, they may buy a property that you know, has a vacancy, and instead of, you know, building it out to where they need to build it anyways. But instead of, you know, marketing for lease, they’ll just say, you know, what, I can put my business in there, and I can achieve a, you know, whatever margin I can with my business, so I’d rather do that than, you know, lease it out to someone else. And that’s definitely happened in scenarios, you know, as well, but it just depends on to the user, or the owner, I should say,
J Darrin Gross 21:15
I can totally appreciate the, you know, the opportunity to expand your business, and also acquire the the real estate, I think, sometimes the, there’s kind of a line of confusion know, when you have the asset, and the numbers that, you know, the NOI for the real estate versus the operational aspects of the, the tenant. And, you know, I think, because I see that more and more, like, I’ve been talking with people that are like buying hotels, and, and, you know, as opposed to just buying commercial real estate, and, and, you know, you’ve crossed the line from being a landlord to being, you know, an operator kind of thing. And so I think that that’s, it’s an interesting thing, because I think that it’s clearly, you know, two revenue streams, and, you know, a neat, neat opportunity, but it’s just something that’s different in that I would assume, in those cases, do most of the, I would assume that they’re buying the real estate in a different entity than the entity, the operator, their, their main business is that typical?
Raphael Collazo 22:21
Yeah, typically, they’ll build a lot of times, they’ll just start a new corporation and purchase the asset and there and then they, you know, lease it to the entity that they have for their own operations. So right, they sign a long term lease for this space, and, you know, at whatever rate, sometimes it’s not as formal, especially if they’re going to be occupying it. But, you know, if you’re prepping them for sale, you would encourage them say, hey, look, let’s formalize this relationship, so that, you know, if you’d or sell this to another investor, then they can count on that being the case versus just, you know, kind of flying by the seat of your pants. But that that’s the type of thing that’s, you know, before you list a property, you kind of advise your client on ways to make it as marketable as possible. And then also, you know, kind of mentioning to what you referenced, I mean, the the the opportunity for people who own their own building, and they’ve operated in that space for a long period of time, and they want to execute what’s known as a sale and leaseback I mean, that’s something that is also a pretty attractive opportunity, where you essentially sign a long term lease in the building to the, to the extent with which you want to remain in that building. A lot of times, it’s near the end of your career, maybe you’ve been operating a mom and pop shop for a while and you’re 55 or 60. And you say, Okay, well, I’ll wait another five or 10 years, we’ll sign a five or 10 year lease, and then sell the building to an investor. And that essentially becomes investment property. Thus, you can use the net operating income as far as the, the, to come up with a price for that for that property. And typically, you know, if it’s located in a desirable area, you can achieve it a higher price than you could if it just were vacant property,
J Darrin Gross 23:58
Oh yeah. I’d think if you’ve got cash flow, that’s, that’s gonna be you’re gonna be noi, as opposed to just dead or something like that. So let’s talk about just how you work with investors on how to analyze retail opportunities. I’m assuming you’ve got, you know, leases, which, you know, equal rent, you’ve got operating expenses, expenses, and you get an NOI and a cap rate. Can you describe, are there any unique revenue streams? Are there any unique expenses on the operational side that that you have to look at when you’re when you’re doing that? And And also, if you can describe what, you know, what’s a typical percentage of revenue that that the expense is equal in retail?
Raphael Collazo 24:57
Yeah, that’s a great question. I think it all All, unfortunately, depends. And it’s a function of the leases, right? So, you know, typically in our market, if you’re in a retail environment, you you’d seek out what’s known as a triple net lease, meaning that you know that the tenants responsible for pro rata share of taxes, insurance and general maintenance on the property. But that’s not always what happens. Sometimes landlords, you know, with just not knowing the market well enough, they they end up signing a lease with a tenant. That’s a, you know, a modified gross or a gross lease where, you know, the tenant is responsible for just one single rent payment, and then the landlord takes on all the operating expenses. And so those are really value add opportunities for investors. As far as other metrics to look at is obviously, my I always tell people, it’s visibility, accessibility, and traffic counts or foot traffic, like how many people are actually going to be able to see the property from from the street or whatever else, the How easy is it to access the space, and then what’s the traffic counts and foot traffic, and that’s more so just just related to attracting the tenants to the space because that’s sales is a function of how many people come into the store, and ultimately purchase a property. So if you can generate a lot of foot traffic, a lot of, you know, people coming into the property, you can typically charge more in rent. And then the next step is obviously analyzing each individual tenant and the leases, you know, obviously, a corporately backed lease is probably going to be more secure than a mom and pop shop that’s just opened up a year or two ago. So analyzing what, you know, tenants are currently in the space. And if you know, you don’t believe that a particular use is going to be successful. Because again, you know, if you’re, if you’re, if you’re if you operate a frame store, and the rent is 400 bucks a month, and the real market rents are 1200 to $1,500 a month, you know, is that Framestore gonna survive at, you know, whatever they’re paying right now. So you have to do that analysis and say, Okay, if they were to vacate, what can I achieve, potentially in rents, and then as far as the leases are concerned, just walking through them and getting a feel for what the expenses are, and then what the value add opportunities are, I mean, you know, if the market rate if the market is triple net, and all the leases are modified, gross or gross, looking to see are there, when’s their expiration date come up, so you can start passing along some of these expenses to the tenants. And then one of the things that really kills investments, unfortunately, is the options. So what an option is, is the right to renew a lease for a predetermined amount and different set of terms, once the the final lease, lease term is up. So you know, you may sign a three year lease, and then you may have another three year option at the end of that lease that specifies, okay, we’re gonna pay XYZ amount of rent here, the terms of the lease, and so ends up happening sometimes with landlords is that they grant too many options to the tenants, and they end up tying the property up for decades, I’ve seen some scenarios where they gave them a three year lease, and then four, five year options. So, you know, you could literally the tenant literally could hold you hostage for 20 years. And, you know, if unless it’s keeping pace with inflation, you’re you’re essentially, you know, it’s an underperforming asset for that long. So we’ve walked away from opportunities because of that. So yeah, and again, like reading the leases, and being very diligent about it, we have like lease abstracts that we create for our clients to make sure they understand all the provisions within the lease and what ways we can add value to it. And then once you get under contracts, verifying those those values and, and that information through what’s known as an estoppel agreement, where you provide that document to the tenant, and they verify that in fact, they’re paying what rent they’re paying that the the security the security deposit information is correct. And you know, if there’s any outstanding issues with the landlord that gets addressed before you close on the property, so those are just some tips.
J Darrin Gross 28:27
No, I was gonna say the, the triple net lease I think sometimes it gets referenced, but I I’ve also come to understand there’s like a double or I don’t know, it’s like there’s yeah, there’s certain certain aspects. And you mentioned, taxes and insurance, I think are the two constants. What’s the triple is that maintenance? Is that
Raphael Collazo 28:53
maintenance? Yeah, okay, yeah, and typically triple net so the way that triple net work or networks they’re called net leases, so they’re single net which operates you know, they just pay the taxes double net is taxes and insurance and then triple net include incorporates general maintenance, so that includes you know, the interior of the property sometimes it includes you know, some of the exterior maybe the parking lot etc. But you know, absolute net or you know, there’s another another in other markets and maybe call it something different but that’s what you typically see with like a Walgreens for example where they literally at the roof goes out they’ll replace it if the structure is bad, they’ll deal with it. Typically triple net you know, the, the responsibility for the roof and structure are on the the landlord.
J Darrin Gross 29:34
Got it. In a triple net lease versus a what do you call it when the landlord to just a gross lease, I guess when the landlord gets all the rent and then pays all the expenses. So as far as an expense ratio, if you just were to ballpark the difference for for doing an analysis. If if I had a a gross lease, and I had rent of x, what would you expect the percent of the rent to be in operational expenses?
Raphael Collazo 30:11
Yeah, I mean, that’s, that’s a great question. And a lot of times, it’s based on the user that’s in the space. I mean, you know, if you’re a heavy energy user, then obviously, that’s going to dictate what you what you can do as far as operating expenses are concerned. But, you know, you don’t usually see a lot of gross leases in our market, as far as retail is concerned. But you know, as far as triple net is concerned, 20 to 30% Max, on the operating side, I would imagine, if you’re looking at a fully gross lease building, you’re probably looking closer to 35, or 40% expense ratio, which I’m assuming is similar to, you know, apartments.
J Darrin Gross 30:45
I was gonna say, because typically for multifamily, I think that just a basic rule of thumb is somewhere around 50%. Just based on just quick back of the napkin, kinda, you know, math, just based on, you know, management, I mean, you also have a little bit, I don’t know, if it’s a little bit more, but I would think that kind of a management expense, you know, with leasing, and although you have the same thing, if you have a vacancy in a retail space, you gotta get that filled up there. So,
Raphael Collazo 31:18
yeah, and then you’ve got your vacancy rate, projections are going to be a little bit different, and retail is going to be probably higher than multifamily. But the turnover is going to be less typically. So you know, you, you have the three to five year lease timeframe, whereas in multifamily, it’s a one year commitment. And, you know, what’s the turnover on that? I’m not sure it depends on the market, I’m sure.
J Darrin Gross 31:36
Right. Can you talk a little bit more about the the value of the tenant in just their financial wherewithal?
Raphael Collazo 31:46
Yeah, I mean, that that’s a good point. So really, you know, when you do a deep dive analysis on all the different tenants, you know, you’re just trying to get a feel for what is their likelihood of a being able to fulfill their lease obligation as it currently stands? What’s their likelihood of them actually sticking around after their lease term is up. And then if they’re underperforming, as far as if the rents are under market? You know, can they survive, if you know, we re re up the lease and we push it closer to market rates. So those are types of figures that we do, we try to walk through with our clients. And again, you don’t have a crystal ball. So you can’t really tell, you know, sometimes, but you know, you can get as you start looking at a lot of these different tenants, you can get a feel for whether a frame store can pay what what a market rate is versus a, you know, a, you know, a higher margin business, like, you know, I know liquor stores decently high margins, you know, smoke shops, obviously, do you have a variety different other users that just can support a higher rent payment, but as far as the credit worthiness of tenants, I mean, obviously, you know, franchisor franchisees, you know, just because it says, you know, Buffalo Wild Wings, for example, and I don’t know if what the what the, the franchise requirements are for Buffalo Wild Wings franchisees, but, you know, just because it says Buffalo Wild Wings doesn’t mean that, you know, it’s a corporately backed lease, it may just be the their first operation they started two years ago, and it’s just a brother combo that just decided they want to start that. So, you know, just because that’s the case, that doesn’t necessarily mean that they’re going to be, you know, a strong tenant long term. So, you know, again, it’s just, it’s just doing a little bit of digging and a little bit of research. So, you know, the more franchises they have, if they’re corporately backed, and some some tenants are all corporately backed, and they’re, you know, a multi national corporation, that’s obviously going to be a lot stronger, as far as least as concerned than someone who has a one shop operation. And again, it’s just a lot of analysis. And that’s why I love retail, because it’s a lot of numbers, a lot of things to consider a lot of check boxes to check and,
J Darrin Gross 33:50
Yeah, I think the the analysis and retail seems to be, you know, much more critical. And I don’t see more critical, but I mean, more involved in really assessing the tenants, whereas I’d say multifamily, it’s matter, did they make their rent? Or their problem? Kind of thing? kind of curious on two things. One on you talked a little bit about the length of the lease and the options. Is there a rule of thumb that you abide by or subscribe to that? That kind of is kind of a target for length of lease, if you’re, if you’re signing somebody up, say they’re a restaurant, a known brand? Because there any kind of, you know, guideline that you work with?
Raphael Collazo 34:40
Yeah, I’d say, you know, three to five years is kind of the standard, you know, if there’s going to be a build out involved, you know, sometimes to attract certain tenants, the landlord will offer what’s known as tenant improvement, which, you know, essentially, you allocate a certain per square foot amount to a build out of space. So let’s Say you’re going to a restaurant and you’re looking to lease 5000 square feet of space, the landlord may say, You know what I’ll give you, you know, let’s say $30 a square foot, or $40 per square foot, which equates to 200 grand in build out, that, you know, you’ll, you’ll, you’ll take on the responsibility of doing the build out, but then we’ll reimburse you, when you provide receipts and whatever else. And so in those scenarios, if they’re going to be granting a significant amount of tenant improvement, they’re going to want a longer lease. And a lot of times, you’re going to try to amortize some of that over the course of the lease. So instead of maybe the market rate being $20 per square foot, maybe now you’re paying $24, a square foot, to cover the fact that you know, you that the landlord’s invested that amount into the space for you. And so it’s no exact science, but but I would say, you know, three to five years is pretty standard. And then if there’s going to be significant buildout involved, that the landlord is going to take some responsibility for you’re going to be looking for longer leases, you know, in the 710, maybe more range? And then, you know, typically, you’re going to have the the lease rate the higher than market, just to amortize that that expense over the over the term of the lease?
J Darrin Gross 36:04
And what about the options you mentioned, you know, you can kind of pin yourself in to where you missed the market? Is there a kind of a standard, one two option after the initial lease or would
Raphael Collazo 36:18
One is typically what you’ll grant. And, and again, with the options, you just got to be careful with how you word the language, as far as the rent increases are concerned, because sometimes you can afford it to say, you know, two to 3% annual increases, which is fine. We’ve seen others where, you know, it’s a fixed amount for five years, and then jumps up to 10 10%, in your, your five, your six, I guess, all the way to the end of the term. But, you know, again, it’s just what you can negotiate, especially now with, you know, the Consumer Price Index being, you know, so volatile, you know, I think that, you know, there’s there are historic, I’ve seen this in the past where I’ve seen, like, the increases tied to the CPI, which, you know, I’m sure those tenants are, are shooting themselves right now. So, again, it’s just all what can you do you negotiate.
J Darrin Gross 37:10
Well, it’s, it’s fascinating, and I’m sure, in your role of doing this on a daily basis, you’re able to be a good resource for your, your clients and, and, you know, get a good you know, you have a good feel of what the market is, and and how to best help both sides. Do you typically represent the landlord? Or do you work with the tenant? Or is it kind of like you you listed? And then also lease it? Or how’s that work?
Raphael Collazo 37:38
Yeah, so that’s a great question. So, you know, I’ve worked primarily with the tenants, as of right now, we don’t do a whole lot of property management as of now, but we are, we were starting to get a little bit more into that space. But I have represented the sellers of these of these centers as well. So it’s one of those things where, you know, more so on the buy and sale side, and then also on the leasing side, but primarily on the tenant side.
J Darrin Gross 38:04
And as far as marketing your, your business. How do you how do most of your clients come to you? Or is it? You reaching out to them?
Raphael Collazo 38:16
Yeah, no, that’s a great question. So I’d say that it’s a combination of a lot of things. I mean, obviously, I’m very active it locally, you know, I’m on several boards locally, I’m on you know, I run several meetups in town, for one for real estate, investing the other up for commercial real estate. So it’s commercial real estate, one on one meetup. I have, you know, podcasting that I do with a commercial real estate Academy podcast, I’ve written seven books, four of which were on personal professional development, when I first was in my previous career that was just more of a passion project for me. And then, now that I’ve gotten into the commercial real estate space I’ve written for you signed that lease before that, buy that building. And I’m working on finalizing before you sell that building, which is going to be a comprehensive guide to sell commercial property. So the goal is to become a series. So it comes from a variety different ways I’ve had clients come to me through through just watching me on YouTube, I’ve had clients that I’ve met through networking that have been connected to me through other people, I’ve had clients that I’ve that I’ve sourced just through my outreach efforts. So you know, there’s a variety of different ways to generate business. Obviously, COVID is, has has, you know, been a blessing and a curse and in some ways, and that, you know, it forces you to be a little bit more creative with how you do your outreach. And so in my case, when I first when COVID first hit, that’s when I really went digital, like super heavy with podcasts and, and YouTube channel and it’s paid dividends so far.
J Darrin Gross 39:34
Sounds awesome. That’s awesome. Hey, Raphael, if we could add like to shift gears here for a minute. By day, I’m an insurance broker, and work with my clients to assess risk and determine what to do with the risk. And there’s three strategies we typically consider. We look to see if first we can avoid the risk. And when that’s not an option, then we look to see if there’s a way we can minimize the risk and Mmm, when we can neither avoid nor minimize the risk, then we look to see if we can transfer the risk. And that’s what an insurance policy is. It’s a risk transfer vehicle. And as such, I like to ask my guests if they can look at their own situation, could be clients, investors, tenants, the market political interest rates, however, you choose to identify or frame the question. But I’d like to ask you, if you can, you know, take a look at and answer the question, what is the biggest risk? And, again, 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, Raphael Collazo what is the Biggest Risk?
Raphael Collazo 40:55
Yeah, no, I think we kind of touched on it a little bit early on. And I think that’s just a broader risk as a whole. I mean, you know, it’s somewhat out of our control what’s going to happen over the next six to 12 months, I mean, the Feds gonna have a part to play but, you know, geopolitical issues that have been arising and supply constraints or, or things that we’re at work trying to work through, but it’s going to be reality for quite some time. So as far as the risk is concerned, if you’re a property owner, and you’re in the retail space, in particular, just working with your tenants understand getting a pulse on how they’re doing, you know, talking to them, just being that that their relationship, because again, they as tenants are supporting you as landlord, and vice versa, it should be that type of relationship. So in situations where we go into a, you know, an economic recession, which is likely going to be the case, you know, working with your tenants to try to get them through it if you can, and if not, then obviously repositioning the space to be, you know, attractive to to particular users, and understanding that, you know, what you could maybe charge two years ago, may not be realistic today. But that’s going to change going forward. I mean, as you know, we go through recessions, and then we eventually come out of recessions. And so, you know, again, it’s better to keep a tenant that’s good than to lose one and then have to replace them. And I’m sure that’s the case that you’ve dealt with in all different property types.
J Darrin Gross 42:14
No, amen to that, if they’re paying and they’re good tenant, that’s kind of rule one is, don’t push them around, that’s at least that’s my kind of thing, although I know others have kind of a sense of energy pushing, pushing, pushing, but in turn costs is it’s kind of a negative, it’s a cost, you know, and I can add on that kind of thing. So I’m more of a subscriber to keep the good ones as long as you can. So
Raphael Collazo 42:40
The devil, you know, is way better than the W don’t as they say,
J Darrin Gross 42:44
Yeah, absolutely. Raphael, where can listeners go if they’d like to learn more or connect with you?
Raphael Collazo 42:51
Oh, for sure. Yeah. So my, you know, they can reach out to me via LinkedIn, you know, I’m pretty active on there, you can check out my website at www.RaphaelCollazo.com. And I’m pretty easily accessible. Just feel free to reach out I have my email and phone number and everything on there if they’d like to get in contact. So
J Darrin Gross 43:09
Raphael, I can’t say thanks enough for taking the time to talk today. I’ve enjoyed enjoyed it. Learned a lot. And I look forward to do and again soon.
Raphael Collazo 43:19
Definitely the thanks again. It’s been an honor Darrin, really?
J Darrin Gross 43:22
Oh, all mine. All right, 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.
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