Jace Bankhead is a retail leasing and investment specialist with Legend Partners in the Salt Lake City office. Jace loves working with clients to find the perfect new addition for a growing portfolio.
I was born a “car guy” and have always had a particular love for European cars. And yes, I’m a sucker for manual transmissions! Over the years I’ve learned some hard lessons about the importance of keeping up with the routine maintenance recommendations. When money was tight, it was tempting to delay doing the non-urgent items and kick the can down the road for another day. Making that choice nearly always came back to bite me when what could have been a few hundred-dollar repair turned into larger bills where one minor missed item caused other issues to flare up. These days, I am more careful to keep up with maintenance and set aside money each month or year for upcoming repairs. It’s made a big difference in my ability to actually enjoy the ownership experience.
I see the same thing happen frequently with building owners I work with when it comes to the maintenance of their properties. Just because you may not have an active roof leak, a failed HVAC unit, or a major asphalt problem today, doesn’t mean you don’t have to pay attention to these items or prepare for the inevitable. The fact is, each day that ticks by is another day into the useful life of these crucial and expensive parts of your real property. The sun, rain, hail, wind, ice, snow, hot and cold are unrelenting and don’t take days off. These elements all take a toll on key capex components of a property such as the roof, and the HVAC units. Additionally, normal traffic in and out of the shopping center, large delivery or garbage trucks, old cars leaking oil, and the aforementioned weather elements all take a toll on your parking lot. Just because a property is newly constructed or these capex components have been recently replaced does not mean you don’t need a reasonable plan to prepare for the next future maintenance event. Setting aside funds now in a sinking fund or reserve account can make dealing with these big-ticket items a much easier pill to swallow.
I hear you saying, “wait a minute- I have absolute net or NNN lease that requires the tenant to maintain these items, so it’s not my problem”. Well, that may be partially true, but my experience is that most tenants (like most landlords) will wait until the very bitter end to spend their own money to maintain the building the way that it should be maintained. It reminds me of the old adages of “drive it like you stole it” or “drive it like a rental”. I have seen tenants let HVAC units die and remain inoperable for a period of time until their lease expires or it comes time to renew and bring it up at that point in time despite what the lease language says. I’ve seen tenants have lousy roof repairs made to band-aid a larger underlying issue, or fail to clean up grease residue from their kitchen exhaust fans which damages a roof and can void an existing roof warranty. If a tenant does a poor job maintaining what they are supposed to, it ends up being the landlord’s problem eventually either when that tenant vacates the property or it comes time to renew the lease and they throw these requests back on the landlord’s lap. The terms of the maintenance section of a NNN lease still need to be overseen, enforced and administered; that may require a landlord to have periodic audits or inspections done and to give a tenant written notice of lacking maintenance efforts towards the building.
As a broker that focuses my time on investment sales, landlord leasing, and tenant rep work, here are some tips (in no particular order) that can make things better for everyone involved:
Get a current roof inspection from a qualified commercial roofing company and repeat this process every 2 or 3 years. Most roofing companies will do this for free. They’ll likely notice a bunch of small stuff that can often be repaired in a day’s worth of work and can make a big impact on getting the full lifespan out of your roof. A couple thousand bucks of repairs in your CAM budget isn’t going to be a big deal for anybody and can buy you many years of additional useful life before biting the bullet on a full replacement.
Keep HVAC units on a routine maintenance plan. Quarterly or semi-annual maintenance of filters, belts, cleaning condenser coils, and inspecting parts is a pretty common maintenance routine and honestly doesn’t cost all that much money. Pay attention to tenants whose use category tends to be hard on HVAC units (pet groomers, restaurants, gyms) and make sure routine maintenance is happening as either a landlord or tenant duty depending on the lease.
Have a parking lot company inspect your lot every year or two. Keep up on the routine maintenance of crack sealing, seal coating and striping. When things get broken up, they can cut and patch sections and get a lot more longevity out of your asphalt before full replacement is needed. This also makes a big difference in the curb appeal of your property.
Have all of these aforementioned professionals give you some idea of what to expect for future costs when the inevitable grim reaper of replacement will knock at your door. Start to set aside reserves to go towards handling that. By setting aside these crucial reserves, your CAM budgets will be much more stable, and it will help prevent you as an owner from holding the full weight of the bag if your tenant bails or doesn’t do a great job keeping things maintained. It’s so tempting to take every drop of NOI out of your property to use for personal reasons, but you’re only strangling the golden goose if you fail to prepare by clearing out the bank account every month for living your life. Running a property is like running a business and you need to have retained earnings (reserves) to reinvest into the property to keep it firing on all cylinders. And, you’ll be in a safer and stronger financial position when it comes time to negotiate terms with a new tenant
When it comes time to lease a vacant space, as a landlord you should have some basic idea of the condition of the capex components of your building. Know the age of the roof and the age, condition, and tonnage of the HVAC units. It will save time and make negotiating LOI terms much more efficient. Savvy tenants or their brokers will ensure they understand what is happening with these key capex components and what their current condition may mean for their anticipated occupancy costs. Savvy tenants or their brokers will pay attention to major deferred maintenance items, particularly if those items are included in the laundry list of what constitutes Common Area Maintenance in the lease and could lead to a large increase in future NNN fee charges. Also know that at some time in the leasing process, prospective tenants are likely to end up chatting with the existing cotenants in the building as they perform basic due diligence and they’ll end up hearing the war stories of roof leaks that continue to be not properly dealt with, the old HVAC unit hassles that frustrated their employees and customers, or that obnoxious parking lot pothole that has been around for multiple years… you get the idea. This stuff actually makes a real world difference when it comes time to lease space in your building.
Soon, I will be sitting down with an owner of a 20-year-old shopping center that has a roof that is shot and numerous HVAC units that are in fair to poor condition at the end of their lifespan (where the tenants are supposed to repair/replace but likely won’t have the funds to do this when the units inevitably die). I am representing the buyer and we get to discuss how to handle these items from a sales price perspective. Whether the deal hits the goal line with my buyer or the deal dies, it’s going to end up costing the building owner more money to deal with this stuff now than it would have with the tips above.
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Legend Partners is a commercial real estate brokerage with offices in Denver and Salt Lake City.
Forza Commercial is a commercial real estate firm in Salt Lake City focused on capital raising,
development, and property management.
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