16. Global Expansion and Working His Way Up with Ric Clark of Brookfield Properties

Welcome. This is Real Estate Investing Live from New York with James Nelson, the principal and head of Avis and Young's Tri State Investment Sales Group. In this program, you'll learn about the world of commercial real estate and find out why it is one of the largest investment opportunities in New York and around the world. Now, here is your host, James Nelson.

Welcome to show number 16. This is James Nelson, your host of Real Estate Live from New York. And we have a fantastic show for you today.

We have none other than Rick Clark, who is chairman of Brookfield's Property Group and Property Partners. And Rick is going to talk about his journey from growing up in the Farmlands to joining Brookfield's predecessor in 1984 and what it took and his team to build out the largest real estate portfolio in the world. Afterwards, we're going to have Larry Haber and Christina Smith back with us talking about considerations when leasing space. Before we get to that, let's cover the week in review. Powered by the Daily Beat in news this week, WeWork has named Sandeep Mathrani as its new chief executive officer, tapping an experienced real estate operator for a bid to turn around the embattled startup. Softbanks handpicked executive chairman Marcella Clar will remain in its current role and focus on growth. The decision to choose Marthani, who once ran one of the nation's largest mall owners, adds to WeWork's image as a real estate company focused on leasing office space. Mathrani previously served as CEO of the mall giant GGP after the company emerged from bankruptcy protection in 2010. Thereafter, its stock price surged as the economy recovered after the financial crisis, and the company was ult purchased in 2018 by Brookfield, where Mathrani subsequently led the retail group. So hopefully looking for another big turnaround story there. Elsewhere, despite a weak outlook for residential real estate, the number of building permits issued in New York City for new homes surged last year to the highest pace since 2015. It was the second highest total since the end of the last big building boom in 2008. Permits for 26,547 units of housing were issued in 2019, about 27% more than the year before. Some developers, according to the Wall Street Journal article, are adapting to the changing market by focusing on smaller rental apartments that keep rent low and attractive to young tech and professional workers, rather than $5 million in condos. I'm sorry, I can't help myself but give a little commentary here, which is although wonderful to hear that there's 26,000 units being added here in the city. That's still less than 1% of the overall housing stock here, which is over 3.5 million. Got a long way to go here in New York to create the housing that's going to be needed, especially after some of this record office leasing that we just experienced last year. Okay, so now onto sales. Billy Macklow and David Welsh have entered into contract to acquire 125th Avenue in Park Slope from Brian Ezra's Avery Hall Investments for under $65 million. The Keyfood Development Group had been hotly contested by the community as it will replace the local grocer with a smaller food store. The two proposed low rise buildings will sp span over 225,000ft and contain 165 units plus a smaller grocery store within its 90,000 square foot of retail space. The development will also consist of 220 parking spaces. After residents opposed the plans, according to the New York Post and Real Deal Story, the developers signed a cooperation agreement and committed to allocating 25% of the project's units as affordable rentals. So look forward to seeing that project get underway. Lastly, in financing and debt news Bucking the trend, Simon Property Group and Institutional Mall Investors have secured a $400 million CMBS loan from Credit Suisse to refinance the Westchester in White Plains. The 814,000 square foot shopping center is anchored by Neiman Marcus Nordstrom and also includes Tiffany, Gucci, Louis Vuitton, Apple, Burberry and Tesla Motors.

I might add.

That's actually where I bought my Tesla from. It actually does work having an auto showroom in a mall. Sales at the Westchester greater than 1,000 per square foot. The 10 year securitized debt carries a 3.25% interest rate.

So that is it for the week in review. We're going to have a quick break from our sponsors and we'll be right.

Back with Rick Clark.

Get the news on our shows and other happenings by following us on Twitter. Find us at Voice America, TRN or twitter.com voiceamerica TRN A different approach to.

Putting Our Clients First Avis and Young's Tri State Investment Sales Group sells multifamily office retail development and specialty sales throughout the New York metro area. As experienced thought leaders in our industry, our 35 member group is available to help you make informed investment decisions by advising you on your current holdings or identifying new opportunities in the marketplace. Our one unified team is built on an industry unique platform which promotes unparalleled collaboration and teamwork. We share core values of hard work, integrity and expertise. We put our clients first providing tailor made strategies to achieve superior results. Please Visit us at aytristateinvestmentsales.com and follow us on Twitter LinkedIn and Instagram amesnelsonnyc to learn more.

Now it's time for our Investor Spotlight.

Thrilled today to have Rick Clark with us.

Rick is Chairman of Brookfield Property Group, Brookfield Property Partners and Brookfield Property reit. And I'm sure we'll get into to what each of those divisions do in reading over his. I mean any of these projects could have encompassed an entire lifetime's worth of work. But as President and CEO of Brookfield Office Properties from 2002 to 2012, Rick spearheaded the repositioning of the company into a global office building business with the acquisition of Trizac Office portfolio in the US a portfolio in London and 18 Class A buildings in Australia. He's also expanded their opportunistic investment business with the creation of a five business billion real estate turnaround program which included the recapitalization of GGP in 2010 purchasing for Sidney Ratner. The list goes on and on. But above and beyond, Rick is such an incredible power of example. With all his charitable and giving back as chairman of the alliance for the Downtown New York Lower Manhattan Associates. He's also on the executive committee of rebny, the Board of Directors at the Real estate roundtable national September 11th memorial museum, just to name a few. So Rick, thank you so much for joining us today. We really appreciate it.

James, thanks for having me on your program and thanks for that very generous introduction, of course.

So Rick, let's go all the way back. Tell us, where did you grow up?

What was your childhood like?

Boy, that's probably the toughest question you're going to answer. Only because I didn't live anywhere more than two years as a kid. I moved a lot. So mainly I lived in small rural towns in Pennsylvania, Missouri a couple of times. Maryland once.

Was your family in the military or any reason?

My father, his job before he ultimately got in the real estate business was he sold animal feed to farmers. So we lived in these small urban communities among the farmers. And then he kept taking transfers and the company was Ralston Purina that he worked FOR, headquartered in St. Louis, Missouri. So twice we lived out there and he just kept moving us around. So where I grew up, I don't know.

So from there it was Indiana University. Was that where you went to school?

Yeah. Of Indiana University. Of Pennsylvania. Indiana. Pennsylvania, yes.

And what did you study there?

Business and accounting.

Okay, so did you have any idea, I mean, through high school or through college, were you doing any summer jobs or anything that.

Yeah, you know what? Both of my grandfathers were farmers. And one of my grandfathers, my father's father, realized that if he built homes on his farmland, he could actually make a decent living. So my father ultimately got into that family business with his brothers. And, you know, I spent summers kind of working on that business. It was mainly manual labor and construction kind of jobs, but certainly was exposed to all aspects of that business at the dinner table. And growing up.

So at the university then, did you have any exposure to real estate or was that even in the back of your mind?

At the time, I didn't really have a real estate program. It was just sort of general business. But, you know, real estate is what I knew. And when I got out of school, you know, I first took a job with a company called Penn Central Corporation, which was the reorganized bankrupt railroad. One of the. And basically what they were. I'll get this math a little bit wrong. It was a long time ago, but they, I think, conveyed their assets to the government, received a couple of billion dollars for that, and had about a billion dollars of tax loss carry forward. So one of the business that they acquired with that money was called Arvida, which was a residential developer primarily in Florida and California. So I had, you know, with that first job, I was sort of looking for a job in that industry. Honestly, the economy wasn't great and any job was good at that time.

And you weren't opposed to moving around. I guess you'd had some experience with that. So did they have you actually going out to the sites and inspecting the property? What was your job there?

So this was a holding company and they were in all sorts of businesses, one of which was real estate. My job was, I was in the internal consulting and auditing group. And we went from business to business and did reviews on how these businesses operated and. And also financial reviews and wrote reports on how they could improve those businesses to management. So great. Sort of a continuation of my education is the way I looked at it. But every Friday I was on a plane and every Monday I was on a plane going back out in the field. So, yeah, continuation of my moving around.

So. And then did Brookfield come next or what was.

Yeah, so, you know, I ended up in New York. I got transferred. This job started in Philly. I got transferred to New York. And then, you know, after a couple of years, I decided, okay, I didn't really want to move around quite as much. So I got a unsolicited call from Olympia, New York, and went to work for the Reichman family. Brookfield ultimately bought that business.

Was this 1984, because your bias is that you started there at the 35 years ago.

So I went, yeah, in 1984, I joined Olympia, New York.

And what do they have you do when you showed up?

It sort of feels like, yes, I've been with the same business for 35 years. My first job at Olympia, New York, I was in a financial analyst kind of in the Treasury Group, doing feasibility studies, acquisition analysis, cash flow analysis, that kind of thing. So just got to work my way up in the organization, I'd say.

So we know where the story gets to today. But for many of our listeners who are looking to get into the business, and maybe they're coming from a different industry, but the way you came in as an analyst and really running the numbers, would you say that that prepared you for the rest of your career?

Yeah, for sure. I mentioned I had an accounting background. And I think it's important if you're going to have a career in real estate that you need to understand the numbers. This is a numbers business. Returns are important. I'd say anybody in our organization that makes their way up the ranks has a good financial understanding. That can count, I would say.

So that was a couple of years on the job, and that was mostly for the restructuring New York and then once Brookfield ultimately took over the portfolio. Did you transition at that point?

I was with Olympia, New York, probably 10 years before Brookfield entered the scene. My first job was as a financial analyst. I moved into the leasing department. My first assignment in that group was. This may be hard for some of your listeners to appreciate, but this was at a time when the personal computer first came on the scene. So my first task with that group was to help come up with models where they could analyze leases of different durations and different sizes and compare them.

So you had to analyze the portfolio. So 10 years. What ultimately prompted them to divest ultimately to Brookfield? How did that happen?

Yeah, I mean, I mean, it's an unfortunate, sad story. I mean, I think the Reichmans, Paul Reichman was a great visionary. He really was probably one of the original placemakers. He understood place making you look at Brookfield Place when he built it called the World Financial Center, Canary Wharf in London, many projects in Toronto. But unfortunately, he did a lot of mismatching of debt to assets late in the cycle. So it was kind of Caught short when the cycle changed with debt that was maturing effectively, the company was illiquid and had to be restructured. And that's when Brookfield came in.

I mean, that had to be one of the largest restructures in history to that point.

I know it was at the time it happened. I think it was the largest restructuring on record.

And Brookfield was a Canadian company at this point. Did they have holdings in the US Were they already fairly established?

They had some. It was a far smaller business at the time, and they had some real estate holdings in the US they owned some office assets in Minneapolis and in Denver and had some multifamily businesses in Western Canada and owned some assets in Toronto. So it was a far smaller company. It was focused like it is today, on real estate and kind of infrastructure investing.

So how do they make a VI for New York? I mean, even at the time you have all the great New York families. Was that a surprise that you had this Canadian group coming from the outside, or were they really the one that had the most bandwidth, or were there other suitors?

Yeah, this thing went on for the recapitalization of Olympia, New York went on for four or five years. And I think Brookfield had made a loan to Olympia, New York, collateralized by the assets at the World Financial center, now called Brookfield Place. So they had a seat at the table when the whole illiquidity began. But I wasn't that familiar with them. I was also much younger and probably wasn't an important player in the restructuring.

To be honest, you were probably the only one that actually knew what happened to the leases over the next. So I'm sure Brookfield was knocking on your door very quickly, trying to make sense of what to do with these assets in New York.

I was one of the people that was sort of focused on the business and not on the restructuring.

Once Brookfield takes over, did your role. Did you stay as an analyst? But what was your next position from there?

Right. As they took over, I landed in a position sort of co heading what was left of Olympia, New York. I think we had a number of assets in New York City and also.

In Boston, co heading. So you went from an analyst to where now you're in a leadership position? Yeah, it had been 10 years.

Yeah. I mean, I sort of worked. Worked my way up. My boss at the time left when the restructuring occurred and I got moved into his position as co head of this business.

Wow.

When did you start looking to expand the portfolio? Did it start in New York or did you? Because now you're pretty much in every country, almost every asset class.

Yeah, I think there was a few years that really focused on just working the portfolio that came out of the restructuring. And then, and I think after our balance sheet was strong and some of the investors, some of the lenders that found themselves as investors in this new business were sort of paid out, then we were able to turn our attention to expansion. And first it was domestic and then ultimately became international. Wow.

So when you started to expand the portfolio and start to think about, because this was traditionally in an office portfolio at the time you said there was a little bit of multifamily, but how did you start deciding? Because I think especially for a lot of our listeners, they're trying to decide, should I be looking to get involved in multifamily? Is it office? Now you all have made a bet on retail as well. How did you decide? Decide where's the right place to invest and what's the right kind of asset class?

Well, at the time Brookfield recapitalized Olympia, New York, we had a long discussion about what just happened. And we decided at the time that we wanted to be, I guess coming out of that, we just reconfirmed that real estate and financial markets are cyclical. There's a lot of risk associated in investing in real estate. And we wanted to be a bit more conservative, at least initially, and only invest in assets that we could sign long term leases, put long term debt in place and not get caught short if there's a market downturn. The asset class that probably worked best was, was office, because office, you sign long term leases or whatever, apartments are annual leases, hotels or daily leases. So we just didn't want that risk exposure at the beginning. And we over time decided one of the keys for us and one of the important things is we feel like it's important to have an operating capability so that we can understand the assets from the ground up. You know, we feel like it's helpful if you're going to be an investor to really be able to, you know, understand the assets and how to operate them, how they fit within the market, where their exposure points are, how you can sort of mitigate those and basically operate through throughout real estate cycles. So, you know, we ended up buying operating capabilities in different sectors, you know, multifamily, industrial, you name it. And then once we had those teams, we made modest investments. Once we were confident that we really knew what we were doing, we make bigger investments in those sectors. It's all evolved over Time and mostly began with opportunities to buy small platforms, bring the people and the expertise in house.

I'm really glad that you mentioned the cycles and also taking that conservative approach, especially coming out of that situation where you have one of the largest real estate empires in the world that basically imploded because of that leverage. I'm sure it can be tough, especially as you're starting off looking to compete out there. Even back in the 80s or 90s, I'm sure there was plenty of competitors that you were bidding against who were using leverage and high risk, high returns, but clearly you were still able to build a massive portfolio and a brand. I want to talk a little bit about how you were able to grow the company, because one thing that Brookfield has an incredible history of is your people. You're a testament. You've been there for 35 years in its various forms. But the idea of kind of promoting from within. What do you look for in a candidate for the company?

Well, I think for us, our culture is really centered around collaboration. And some businesses are. They have a lot of sort of sharpshooters, I'd say, and. And they're very effective businesses. And that's one way to operate. I'd say we're the opposite. The company was founded by the Bronfman, Peter and Edward BROMPMAN in the 70s, I think. And one of the things that was important to them is that we hired people that understood collaboration and teamwork and sharing of credit. And they weren't I folks. They were kind of we folks, but also financially astute. So when we hire people, not everybody has the experience to jump right in. But we're looking for people that have a solid background, good instincts and financial smarts. But they're just good people. They're going to come in and work hard and play nice in the sandbox.

I know for our company, we really believe our business is our people, so couldn't agree with that more. But just to dig a little deeper on that, how do you really know? You get tons of resumes and you have incredible people, but how do you really know that someone is going to be a team player before they show up to your office?

Yeah, that's a good question. I think it's. At this point, it's just more instinct than feeling. I think if you spend an hour or so with a candidate, you can ask enough questions to get a sense on what motivates them, the kind of person that they are. And we'll have multiple people interview candidates. We never have just one Person interview.

So you've built out New York. And then I guess if we want to go back to 2002, 2012, when you really expanded this into a global office business, and mentioned earlier in the bio, the Trizac office portfolio and then the Hammerson office portfolio in London, then Australia, you're here in New York. How do you go to not just another city, but another country and figure out what is the lay of the land, how you want to buy into these markets? We're not talking about just dipping your toe in the water. These were massive, massive acquisitions. I think you maybe alluded a little bit to it before about buying the right platform, but can you talk a little more about that?

One of the things, when Brookfield came in and recapitalized O and Y, There were probably 60 of us in New York and maybe 200 people in the real estate business in North America and also a few people in Brazil. Today, that's 19,000 people around the world. And we didn't grow overnight. We do a few things to make sure that we are able to maintain the culture and the connectivity. And one of the things that we do is when we bring young people into our company, we rotate them around. Someone may come in and we may start them in the leasing department and move them to the development department and then to the acquisitions group and asset management over the course of, say, three years. And the reason we do it is we want them to really, I think, to be the most effective investor, it's really important to understand how everything impacts value. Right? There's things you can do in a lease that can enhance value or destroy value and et cetera. So rotate people around. But not only endorse apartments, but different countries. So we try to see different parts of the world with different people. And so we'll have boots on the ground. And that's kind of helpful. But, you know, part of it is, well, you know, we're good, talented people that we fly in SWAT teams and we're able to get a sense of a market in a hurry. And I think we have the asset class capabilities that's pretty transparent, portable. It's the market knowledge that takes a little more work.

Is there a certain type of asset or opportunity that is instantly appealing to Brookfield? You mentioned sense of place before. What do you look for in an asset?

Boy, that's a little hard. We're in all different asset classes. Basically, we're in the business of making money in the real estate business. It's a bit of a difficult question.

There's different strategies. You're also lending. I mean, you're doing an opportunity zone. Yes.

I mean, I'd say, look, when we make an investment, when the investment comes to the investment committee, one of the things we're really focused on is risk. I probably mentioned it a couple of times already in this interview. It comes from what happens 20 some years ago. And so there's a lot of discussion about, okay, how does this asset fit in the market again, what's its exposure points, what can we do to mitigate it. But also importantly, there's lots of people with capital. All of our capital is looking for the same kind of returns. So we're looking for some kind of operational advantage or edge that we may have for the asset. So just, you know, a couple of examples. What I mean is we bought an asset here in New York City that helped fortify our Manhattan west project. It was 450 W. 33rd St. Now been redeveloped and rebranded 5 Manhattan West. And you know, most people that looked at it thought, okay, you know, I can do a modest renovation and get market rents of 38 bucks a foot or I can tear it down and, and spend all this money building a brand new building and get higher market rents. But we came in and I think because of our investment in operating and development capabilities, we saw a building with great bones that you could spend a little bit more money on, put a new facade on, new systems, new lobby and really transform it. And so we ended up for a meaningful but far less investment than building a new building, creating what is a new building very appealing to technology tenants. And we're able to Capture rents that were 3x what we originally, what others might have underwent.

What's your day to day like.

As.

Far as Take us through your typical.

Look at this point, we've got 19,000 people in our business. So I'm not in the weeds on everything. For sure. We've got great people. So it's really just checking in with folks and relationships and looking for new opportunities and making sure we've got the right organization in place. And as chairman, like it or not, I guess the politics of our business falls in my lap. So, you know, there's a, let's say real estate now. I'm not sure how this happened, but it's become a dirty word. It's almost like the tobacco industry. And so, you know, there's lots of politics that could impact our business. And you know, I find I spend a fair bit of time on that as well.

Well, hopefully you still get to walk.

The projects you still get to, you.

Know, clearly weigh in and apply some of the vision.

Well, that's, you know, that's the exciting part.

Yeah, for sure. So what would you say over the course of your career, what has been your key to success?

You know, I think it's been, you know, hiring good collaborative people, you know, being there to help them, help train them and support them, putting the systems in place to do that and when they're ready for more responsibility, getting out of their way. And so, you know, I think for someone to come into the business and be successful, obviously they have to be reasonably intelligent. I think financially astute, hard working. But, you know, I think it's important to also make sure you, when you're starting, that you know the basics, that you're getting good exposure to the basics.

And what advice would you give to someone right now looking to start out in the business?

You know, I think. I think that's it. Make sure that you're learning the basics of the business, that you understand the financials. I think it's good to understand real estate from all angles. There are some investors that really, they understand how to buy a property. They may not necessarily understand how the property works or what could impact value. And I think it's useful when you're starting out in your career, getting exposure to those, leasing, asset management, other aspects of the business. I think that really will help you be a better investor as far as.

Working for a big shop or working with a smaller firm, trying to do something on one's own. Any thoughts about kind of where's the best place to start?

There's probably no right or wrong and depends on the individual, to be honest. There's some great small firms that if your personality suits, you could go and learn the business and be very successful. Personally, I'm biased towards a big organization. I like the ability to see the different parts of real estate and also different sectors, different geographies. I think going to a big organization, you're probably more likely to be able to spend time in different parts of the business and get a broader exposure. But it's not one size fits all. It's really about the personality and what's the right fit.

Great. So what are your thoughts for the future of the business? I know Brookfield, if I'm not mistaken, is also active in investing in technology. Maybe talk a little bit about that and the future of our business.

Real estate. I think the future is good. I don't see any other than political threats as being existential threats to It, I mean the world's population is growing, it's reorganizing. Those people need a place to live, a place to work. So, you know, I think the future is bright. The industry I think gets a bad rap for being slow to embrace technology. I don't think that that's exactly true. I think, you know, for many years, you know, most real estate businesses have been really focused on technology to enhance the back of house operations, you know, what's going on with the systems that run the buildings, etc. But you know, there's a new wave of technology that's more focused on consumer experience, tenant experience. You know, for years I think landlords kind of treated their real estate as a box and you know, they turned a floor just on the office side of the business, turned a floor over to a tenant and okay, you take it from here. And didn't really provide amenities or experience. And today Millennials followed by Gen Z are really driving the world's economy. This age cohort is probably 50% of the workforce and probably the part of the workforce that's really driving the world's business. And these folks were born with a smartphone in their hand. The all about convenience. And so, you know, there's a big shift in real estate to sort of focus on those things. And we're in a pretty unique position with about 600 million square feet of space in different sectors around the world. When we see these new technologies or innovations and they're ones that we think can really help our business, we're also seeing seizing the opportunity to invest in those businesses too. So if you can imagine rolling out a convene which we're invested in across their portfolio, or Honest Buildings, which recently merged with Procore, which is a software based systems that help asset managers track capital projects. You know, this is something we're using in 20 million feet. And we said wait a minute, you know, this is a great product. So we're making investments in those as well.

Last thoughts on where the future opportunities lie. We're live from New York. I know you remain very committed to New York and everything that you've done downtown as well, but do you have a view on urbanization as we look 5, 10 years, 20 years down the road where we're going to continue to see the densification for our investors out there, Cities, things to be thinking about.

Yeah, the world's population is growing and at the same time re urbanizing. And I'm not going to be crisp on statistics, but projections are in the next 20 years that's going to continue and it's going to be pretty profound, the number of people that move into cities. So I'm a big believer in big cities. A few years ago I probably would have said, and we're focusing a lot of investment on those cities, you know, again, providing the housing and the places that work and the places to hang out and retail and that kind of thing. But a few years ago I would have said that I wouldn't have touched a secondary city with a ten foot pole. But I, you know, and I think smaller cities and even suburbs and went through a period of time where they were out of favor. And now secondary cities I'd say are coming back strong. So there's probably a lot of talk about Nashville and places like Austin, which won't surprise the listeners. But places like Pittsburgh are also great places.

Carnegie Mellon's there. So I mean, you've got the talent. I mean that's.

The tech industry is hiring thousands of people a year in that city. And again, they'll need places to work and live, et cetera. And why are they doing it? Once, because the schools like Carnell Nagy Mellon are there and they're cranking out the talent. But secondly, it's a more affordable city. So if you're an engineer working for one of the big tech firms, you probably make roughly the same amount of money in Pittsburgh versus New York, but your dollar goes a lot further in a place like Pittsburgh. So I'm kind of big on those opportunities as well. Perfect.

Well, we are live from New York.

But we are also interested in other cities.

Rick, this has just been phenomenal. Thank you so much for spending time with us today and thank you for everything you do for the industry and the community as well.

My pleasure, James. Thank you.

All right, stick around for just a minute or two. We're going to have a word from our sponsors and we'll be right back.

Have you friended us on Facebook yet? Why not just go to facebook.com voiceamerica or search for the keywords Voice America. Once you are part of our Facebook network, you'll receive daily messages about what's happening with our shows, this week's featured guests and new happenings at the Voice America talk radio network and you can add your voice to the always active discussions on our timeline. Just go to facebook, facebook.com voiceamerica or search for Voice America.

Hi, I'm Mark Rose, Global CEO of Avis and Young, the world's fastest growing real estate services firm. And we are proud supporters of Voice America. With over 5,000 professionals in 120 offices in 20 countries, Avis and Young delivers local expertise in partnership with global reach. Because we are principally owned, Avis and Young prioritizes client success over shareholder profits through our open architecture. Our firm's experts provide value added client centric investment, sales, leasing, advisory management and financing services to clients across the office, retail, industrial, multifamily and hospitality sectors. Our culture is the bedrock for collaboration that enables each assignment to benefit from the collective intelligence garnered from a company wide database partnership performance Learn how we deliver different@avisonyoung.com to learn more.

Larry and Christina, welcome back to Real Estate Investing live from New York. Our listeners were very appreciative to hear you a while back when we talked about the basic provisions of a lease, what to consider when you're buying a property. Larry, you talked about some of the.

Things to look for in a commercial.

Lease and Christina, being an expert on the residential side, what to look for there. Not that we ever want things to go badly, but I think it is.

A good follow up for the show.

To talk about what happens when the tenant does not follow that that lease that you all have taken the time to craft. So Larry, what happens and I think maybe your answer will be based on the severity of the issue. Right. Because on one hand it could be what happens if a tenant just doesn't pay rent.

Okay.

That's probably on one side of the equation.

I love Christina, by the way.

Thanks, Larry.

I'm a lover, I'm not a fighter. Christina is both.

That's right.

Thank you.

You could never tell by her voice, but yes, she's tough when she needs to be. So Larry, what constitutes a default and kind of raises it to the occasion where you do need to take action.

The basic is, listen, you don't pay rent in a timely fashion, then there's a late charge that's inside the lease. But then you go beyond that. Now you haven't paid whether it's for 10 days from the 1st of the month or 15 days or there's a non monetary default, you don't have insurance, which is really a bad sin. Or you just, you have a repair obligation, you're not taking care of that. And then you send out default notices. And whether you send them out as the managing agent of the property or you get someone like Christina involved to send out a notice of default. But the idea is that these documents are supposed to have language in them that I'll put in language if you have assigned your space incorrectly. I'LL have language to the effect of, you know, that the tenant acknowledges and agrees that this was a material inducement for enter into this lease. I have rights of injunction.

I love the legal lingo. I'm already scared, so I'm frightened.

And then it's like, so my job as the draftsperson and negotiator is using a golf term, is to tee it up for Christina to come in and kick some butt.

It's really quite true. I mean, if I. And I get this call a lot from landlords who have resi and commercial. Hey, I rented to a guy who said it was, you know, a chicken place. And suddenly, you know, there's. There's. There's a sign for lo mein out front. You know, what's going on here? And typically it's an assignment that wasn't approved by the landlord. And I'm going back.

And what might have happened there is one business owner thought they could just sell that lease to someone else. So they're making money on it as.

Yeah, exactly right. That's happened. That happens, you know, seven out of seven days of the week too often. And ultimately I'll go. The first thing I'll do is ask for a copy of the lease, because my ability to help you are as strong as the lease was drafted. So Larry's got the no assignment clause in there. What can I do in the event, you know, of a default of an assignment without written consent of the landlord? I can serve exactly what Larry said, a notice of default. And in commercial litigation, that the stakes are so much higher because there's more zeros at stake. When a commercial tenant fails to pay the rent, there's a percentage of the arrears that gets tacked on and tacked on, and it gets compounded. That's a very different type of late fee structure than an aresi lease. So there's more zeros. There's lots more at stake in commercial litigation, especially for the tenant. Because if a tenant gets served with a notice of default, the first thing they need to do is get injunctive relief. Because quite literally, the lease says that if you default under this lease and you get served, your lease terminates. We have that in the resi world, but it's not as literal. So the tenant now has to hire counsel and run down and get injunctive relief to make sure that they don't forfeit that leasehold interest. So the stakes are higher, the dollars, you know, the zeros are more plentiful, and a lot of times it can be good Money after bad. When a commercial tenant defaults, sometimes it can work in the landlord's favor because the market value of the space has increased since the lease was drafted. And you're okay letting the tenant walk with a significant amount of arrears to get a new tenant in. Maybe the neighborhood has changed. Maybe there's a better use for that commercial retail store than what was happening before. It's a business decision when it comes right down to it. But just to circle back, I can only help my client as well as the commercial lease was drafted, which is why I'm so appreciative of Haber.

For those of you who missed our last show when you all came on, you want to definitely go back and listen to that episode if you missed it. Larry, There are several ways, I guess, that a default could happen. It doesn't just have to be the rent being paid, because in a lot of commercial leases, the tenants are also supposed to pay a portion of their operating expenses. So, you know, they might be paying the rent, and then all of a sudden you say, wait a second, they haven't contributed towards their portion of the real estate taxes. So there's a lot of things to look for to make sure they're living up to their responsibilities.

That's the question. There's additional rent. Different markets are different. In New York, we're more of a modified gross state, which means we have a base tax year for. I underwrote the deal as a landlord. We just did a lease in July in New York. It's fiscal year. So it's a fiscal year of 2019, 2020. When the tax bill comes out next July in New York, the tenant's going to pay an increase over that. The same with operating will have establish a year of 20, 20. And when the bills, you know, there's a true up, and then the tenant will pay the expenses. But, you know, when it comes to that, those clauses are so, so pro landlord, which is a beautiful thing. As an example, on the flip side, the definition of operating expenses in my lease, okay. Is just I could get everything and anything, and a lot of it is of a capital nature, which isn't really an operating expense. I have different versions when I'm wearing the tenant hat, meaning, as the attorney, where I have exclusions to the debt definition of operating expenses. And I have the 25 version list exclusion, the 35 and the 47 exclusions to the definition. So what's kind of the point? They were saying if you are a landlord and you're drafting a Lease, you should throw the 10 at the bone of somewhere between 10 and 15 to show your reasonableness, so to speak, that you're trying to make them feel, that you feel their pain and that there's things that they shouldn't be putting through. But the end of the day, they're very, very pro causes. As far as landlord goes in, the bottom line is if they don't pay them just as they're supposed to pay with base rent or fixed rent as it's called, there's going to be a default. And that's when Christina comes in.

Well, unless, and these are really market driven situations, if you have a retail lease where that tenant is paying well above market, they might need some relief and you might want to work with them to restructure that lease so you don't get the space back and you might have to sit down vacant with it for years. But yes, you make a good point that if the objective is to get the space and have them live to the letter of the law, that as long as the lease is written in.

The right way.

You do have ability.

To act on that. Christina, I know this is a tough question to answer because we do have a national audience and New York City, especially landlord tenant law, is so, so specific. But for our listeners who might be thinking of investing in Texas versus Wow. I don't know why my voice went like that with Texas. I think I should have.

You were thinking of barbecue.

I don't know what it. Yes, you hear that if your tenant defaults, you basically show up to the property with the sheriff and you get the space back. That's probably on one end of the spectrum. If that's true, New York's probably on the other. So what is the recourse?

That's an amazing point.

State by state.

Yeah. I mean, as a practitioner for 20 years, I tell people stories about New York City and eviction process and the length of time it takes. And in any other state bar, California, it's outrageous to think that a landlord has to wait this long to recapture the space. But you're right. In other jurisdictions you send a notice to cure and then a termination notice for basically every breach. Right. The big one is failure to pay rent, but there are other breaches. You know, again, I'll bring up noise if you're noisy. A landlord has the right to serve a notice to cure, you know, asking the tenant to stop, you know, interfering with the quiet enjoyment of the other tenants.

What about that illegal sublet situation that we talked about in the past? Whether you find a tenant who's renting out their places by the night on Airbnb, what do you do with that?

You can go straight to termination of the tenancy in that regard, there isn't an opportunity to move everybody out, so to speak. You can go straight to a termination notice. And more often than not, you will have to serve a petition to get the tenant into court. I'm going to assume that's nationwide. So there is a due process element of this. The tenant might come with their defenses and say it was my seven cousins who were just coming in for the night or what have you. But there is obviously a judicial process. But nine times out of 10, in every place but New York City, the landlord can cure these lease breaches by effectuating an eviction by virtue, using a sheriff to evict.

So, Larry, going back to my last point about market driven and what happens if you want to keep the tenant? How do you approach that when maybe your tenant is paying an above market rent and you do want to work it out? You're not going to bring in Christina the sledgehammer. You're going to try to be a little more diplomatic in trying to work things out.

Well, listen, price capitulation could be a very good thing. It wasn't. And I'm from the school in business and in life that a very good percentage of something is better than 100% of nothing that comes with a vacant space. And you know, given the cost before we talked about it in our prior segment, you know, about how expensive these deals can be between giving a free rent concession, a tenant improvement allowance, don't.

Forget the brokerage commission, of course.

Who deserves.

They always have to get their who.

Deserve every penny, mind you. Okay. Because how many times, James, have you done deals where you spent 25, 50, 200, 300 hours on a deal and not got him paid?

Thank you, Larry. I appreciate you saying that. That was not a paid endorsement, but I appreciate that.

Yeah. But part of, just so we're clear here, it's we're in a business where there's this perception that we work too little and make too much. And I'm going that that's a misperception. But the way you overcome that is you channel my Albert Einstein, Snoop Dogg Drake, bring your a game theory. Because Albert Einstein said the 21st century of what he said is try not to be a man or woman of success, rather be a man or woman of value. And Snoop Dogg loved Albert Einstein, whether he knew it or not. And he basically took It a step further and said, it doesn't matter if you're flipping hamburgers at McDonald's, be the best hamburger flipper in the world. There is. No matter what you do, master your craft. It's about pride and workmanship. And bring in your A game.

I had no idea how you were.

Going to actually find the common ground between Albert Einstein and Snoop Dogg, but you did it.

But the whole point as it relates to you as the broker, it's. You have to find ways to add value when you're sitting and you're preparing a letter of intent as a broker, if you end up doing, and I'll go back to the nail salon, if you end up for the use, end up putting any lawful retail use as opposed to a nail salon and no other purpose. And in the assignment in sub clause, you don't provide because you have to tee it up for the landlord attorney. Because not sometimes. I'm talking about national tenants and major landlords. A lot of landlords are mom and pops. Okay? They don't focus on the, on the assignment and subletting clause.

But if I want to keep the tenant, I might be okay to take.

The noodle shop.

Onto the back end of the lease, set an option.

Oh, yeah, yeah. Because what we, what we'll do is if we're going to give a rent reduction, we'll call it a temporary rent reduction, whether it be six months, a year, two years. And as long as you live up to what that rent reduction is, all is good, okay? Because basically we're trying to allow you to weather the storm, so to speak. And as long as the tale of woe that you tell me as the tenant in these times of distress, like 2008, 2009, with the great Recession, I ended up, I went from being an owner to helping a lot of tenants out, beat up owners, which is a whole other story for another day. But the story that you tell has to sing and dance. But there were landlords out there and they're a national one, and I won't name their name. And they were brilliant because they knew at some point in place and time the market would change. And what they did, they own a lot of shopping centers. What they did is they put in not only that language with what I call teeth, that if you don't live up to this deal, it goes as if back to what the rent was. It's as if we didn't give you a reduction and you owe me that money personally. They put in a provision that we can cancel your Lease on six months notice.

So keep your options open. Give them the reduction.

Yeah, they gave the reduction. And this way, listen, the market's going to get better. So now I can replace you mom and pop tenant with somebody, Lululemon, whoever it may be, someone who's way stronger. So I'm always from the school of. I don't know if you're too young, James, as are you, Christina, but there's this band, Crosby, Stills Nash, and young George Benson, a great guitarist. And I have this theory, and one of them is you never give up love the one you're with, meaning the tenant. The devil you know is better than the devil you don't know. But just a short term period that they're going through this tumult, so to speak, of paying rent. Don't give up on that. Good thing.

I think that's a great point, Larry. You know, there's so much contention in New York City right now between landlords and tenants, and there really does not have to be, you know, this characteristically contentious relationship. You know, at the end of the day, most landlords are reasonable. You know, you think about a phenomenon that was local to New York like the second Avenue subway. Eventually we all knew the subway was going to get built and all those retail stores were going to be back in business. I'm sure this happens nationwide. You have areas of natural disaster where retail tenants are just completely bereft of any ability to make money. The landlord should come in to the best that they can to their financial ability and say, listen, tenant, I'm going to work with you. Why don't you take a 15, 20% reduction now we can tack it on the back end if we have to. Right?

Exactly.

Yeah.

As a tenant, you never want to, you want to, you want to agree to a reduction. If I'm a good boy or girl, I'm going to get that reduction. You don't want to agree, if you don't have to to a deferral. If you as a landlord could get away with the deferral, that's amazing. But it's, you know, it's, it comes down to, you know, you know, you know, the old drive in movie theaters. So to me, having vacant space given the cost is somewhat akin to have, you know, going to one of those old drive in movie theaters by yourself in a taxicab. So for those of you who went to drive in movie theaters, you know what I mean, you didn't necessarily go to watch the movie, but going in a taxi cab by yourself with the Meter running. Oh, you're recently divorced, you're paying for a babysitter for the kids that are home. It makes no sense. It's like you want that cash flow coming in. And if you have a mortgage, you might have a debt service coverage ratio that you have to cover.

So you try A great point. Occupied space, resi or commercial is always preferable to vacant space. Without a doubt, your lender cares too, right? Your lender wants to know if you're carrying several vacant apartments.

I'm glad you brought up the lender's perspective because before you think about cutting that new deal, you might want to see if there's any restrictions on that because your lender might say that you have to keep that rent at a certain level. This has been a fantastic discussion here, and we only have a minute or two left, unfortunately. But I did want to touch on one last piece. And Christina, I know that this was really one of your gifts is the tenant buyout. And sometimes when you get in a situation, rather than going down the path and months and months of litigation and showing up to court, sometimes the easiest thing to do is to make a payment for the tenant. You get the space back right away and it can really be a win win.

What do you think about when you're.

Looking to do a tenant buyout? I know, yes, the world might have.

Just changed a little bit here in New York.

Tenant buyouts nationally may not make much sense, but typically if you have an underperforming lease, an under market lease, and you can clearly get more for the space, you know, you have a couple of bucks you want to put into a renovation to fix up your space and you know that you can improve the space. You may want to consider, or even in the event of a default, you may want to consider. Rather than paying a protracted litigation cost, you may want to go ahead and, and ease the tenant's exit from your property by giving, facilitate, facilitate their move out by just covering their moving expenses, et cetera. There's lots of tremendous success stories with buyouts in New York. That could be a whole other podcast. Giving a tenant a buyout who subsequently was able to live her dream of in vitro and have a baby. I mean, that's money well spent. The tenant was fine, the landlord was fine. It's not all diabolical when you come to, you know, give tenants six figures to vacate an apartment in New York.

I love that a baby was born because of a tenant. We do create life here in real estate. We are making a difference we are making a difference. So, look, we and I like ending on the buyout because that really does assume that you're in a market that's going up and there's other upside. And that's really I know what our listeners and investors are looking for as opposed to the gloom and doom and restructure. But this was a fantastic discussion. It was great to have you all back on the show and hope you would join us again soon.

Thanks for having us.

Thank you.

Appreciate it.

Thank you for tuning in this week to Real Estate Investing live from New York. Please join your host, Jason for another program next Tuesday at 7pm in New York, 4pm Pacific Time on the Voice America Business Channel. All shows are rebroadcast Wednesday mornings at 7:00am Eastern Time, 4:00pm Pacific Time, as well as always on Demand. We'll talk again next week.

SA.