Western Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Western United States.
Issue link: https://westernrealestatebusiness.epubxp.com/i/888015
www.REBusinessOnline.com Western Real Estate Business • October 2017 • 47 Portfolio managers generally can't identify which type of portfolio comes with the highest risk of a troublesome or controversial tenant, as this is often a random matter. On occasion, a tenant will come under fire for actions in the public domain within tenants' business line that are simply beyond any- one's control. Apartment properties receive the highest return versus risk rating, according to the National Council of Real Estate Investment Fiducia- ries (NCREIF), with respect to property sector risk. This is followed by the industrial sector, indicating the return on these two property types is generally higher than the amount of risk involved. The office sector received the lowest return versus risk rating among the major property sectors, with the retail and hotel sectors ranking the lowest overall. A resi- dential property manager can deal with a trouble- some tenant with less impact to NOI compared to a commercial office building or retail tenant where a default or confiscation of an asset can ruin a pro forma and may cause a loan default situation. The growing cannabis industry is legal in 29 states, including Arizona, California, Colorado, Hawaii, Nevada, New Mexico, Oregon and Wash- ington. This industry has become a source of debate in the commercial real estate sector. Once upon a time, a landlord was primarily concerned with an apartment tenant growing weed on their patio, but today's commercial real estate debates now center around whether a landlord should lease his or her space to a cannabis dispensary, a grow farm, a ware- house or an edible factory. It's important to keep in mind cannabis is still illegal on a federal level, and high risk remains if a landlord elects to lease space to parties in this industry. Under federal law, the federal government can still confiscate an asset simply because your dispensary tenant was breaking federal law. In states where can- nabis is legal on the state level only, this budding in- dustry is bringing new life to occupancy-challenged retail centers and difficult to lease industrial build- ings alike. Many smaller landlords are taking on this controversial risk by capitalizing on its source of leas- ing income opportunity, regardless of the confisca- tion risk. That said, institutional owners, third-party property managers and brokers need to know both federal and state laws that apply to this issue, as they must proceed with caution. While the new business opportunity is compelling, institutional investors must apply the highest form of risk management analysis when considering this type of tenancy. Tenant relations is the bedrock of commercial real estate. In most cases, the quality of an investor's ten- ant relations has a direct correlation to successfully raising rents and maintaining the best net present values on renewals and expansions, both of which contribute to steady or increasing cash flow. Best- in-class companies focus tremendous energy on the quality of tenant relations, exercising social engage- ment and forward thinking of lease renewals up to 18 to 24 months in advance. At a minimum, a land- lord wants to comply with lease dates relative to renewal and expansion notices with exact precision as part of a quality tenant relations program. The property manager is the prima- ry point person for quality ten- ant relations, and how he or she interacts with tenants impacts overall asset value. Understanding and monitor- ing your asset and its tenant base is an important component of risk reduction. Commercial property inspections and prop- erty condition assessments share many common objectives and cri- teria. One aspect is to make observations about the tenants and their space. Suite inspections and site visits are often the first indicator of tenant trouble. Visiting adjacent tenancies to a troublesome tenant often yields observations and feedback that alert a property manager to trouble. Attention to detail is key, and a skilled property manager will generally identify the controversial tenant ahead of a negative event, swiftly and appropriately handling the con- troversial tenant, per the lease agreement activities. The property manager is key to avoiding and managing controversial tenancies, and risk aversion is a major part of protecting a landlord's asset. The quality of your credit and background checks, le- gal work on leases, attention to detail and personal knowledge of your tenants all play a critical role in mitigating risk and influence how you deal with the press, community and law enforcement. — Ross Crowe, National Director of Operations, Kennedy Wilson Properties Group in Beverly Hills, Calif. MANAGING RISK AMONG CONTROVERSIAL CANNABIS TENANTS Crowe Our secret is simple, our culture of excellence attracts the highest caliber of professionals. Kidder Mathews is the largest independent commercial real estate firm on the West Coast with nearly 800 real estate professionals and staff in 20 offices. We offer a complete range of brokerage, appraisal, property management, consulting, project & construction management, and debt & equity services for all property types. WASHINGTON OREGON CALIFORNIA NEVADA ARIZONA 877.454.3337 | kiddermathews.com 38 SIORS on the West Coast & still counting... Commercial Brokerage Annual Transaction Total $5.6B Property Management Portfolio 48M+ sf Valuation Advisory Appraisals Annually 1,300+