Many retail tenants don’t realize that landlords fall into different categories with different motivations for owning their commercial real estate developments. To a small business owner, being a landlord looks easy on the surface. They take care of the property and collect the rent. However, landlords can become casualties of the economy and even victims themselves when their tenants can’t pay their rent or completely go out of business.
A professional landlord isn’t a person but a company that exists for the sole purpose of owning, developing, leasing, buying, and selling commercial, residential, and industrial property for a profit.
A professional landlord may not only own various real estate assets but also internally manage those properties. In some cases, a professional landlord can set up a management company to create the appearance of an arm’s length entity. Furthermore, a professional landlord uses various commercial real estate formulas to calculate and measure the rate of return on their properties.
When you’re negotiating a commercial lease or renewal, the leasing representative punches the numbers into a computer and gives the landlord a net effective rental rate, determining if the deal is advantageous or not for the landlord.
Two examples of institutional landlords include banks and insurance companies. One of the safest places for institutional landlords to invest your deposits (and their profits) is in commercial real estate.
An institutional landlord can generally afford to leave a property vacant rather than take a low rent deal from a tenant. Cash flow is important to institutional landlords, but property value is paramount. In some cases, a bank may have started out as the mortgage holder for a commercial property that eventually went into foreclosure. In this case, the bank’s property ownership may be more by accident than desire.
Investment Fund Landlords and More
Investment fund landlords can include teachers, nurses, and other professional associations who invest pension fund money to buy and hold commercial real estate. Investment fund landlords rarely construct new buildings; instead, they make a purchase decision on a commercial property based on the existing or predictable rate of return. Their decision to purchase real estate hinges on security, predictability, and safety.
Commercial developers are individuals who pool their financial resources to purchase a parcel of land. They then create design specifications and property site plans to maximize their return on investment. Developers want to have the highest number of rentable square feet on their properties so as to maximize the return.
A commercial flipper is a developer who sells the property quickly in hopes of a fast profit. This isn’t necessarily a derogatory term. From a tenant’s perspective, it’s important to distinguish if the developer is a flipper. If so, you can bet that within a year or so you’ll have a new landlord who is more a long-term investor. Plenty of hard work goes into finding land, designing good properties, pre-leasing, and finishing the projects. Many landlords prefer to not go through this process and prefer to purchase flipped properties.
A casual landlord typically has a few holdings and may have a very casual attitude toward their investment and their tenants. They’re often slow to respond and almost never proactive during the leasing process. Their investment is simply not a priority to them and, as a result, good tenants get neglected.
Mom and pop landlords are commonly wealthy doctors, architects, or families who have accumulated some real estate or have an accumulated wealth invested in real estate. Typically, they’re hands-on with the property and often quite accessible to tenants on a personal basis. Mom and pop landlords typically want low-maintenance tenants who pay their rent on time and don’t call them at midnight to report a problem with the property. The longer they’ve owned the property, the more emotionally invested in the property they become.
Understanding the motivations of your landlord will help prepare you for successful lease negotiations that meet your needs, as well as theirs.