Small businesses generate about 50% of all US Economic activity. Many of these businesses lease real estate and, as small businesses, lease from landlords who, themselves, are small businesses. As a target market, small business represents a vast opportunity for real estate entrepreneurs. So how do landlords treat these tenants? Landlords fall into two categories: The “Cynical Economic Egoist”, and the “Practical Economic Altruist.”
The “Cynical Economic Egoist”
Cynical landlords are transaction oriented. Relationships mean little and they’re out to make a killing on every deal. They expect the world to serve their needs. They’re quick to seek concessions and ask for favors while accepting no commitment to reciprocate if circumstances change.
Cynical landlords have contempt for their tenants. This type of landlord follows a “do-unto others-before-they-do-it-to-you” attitude. They intentionally do the wrong thing—sometimes with adverse effect on safety or security—to bolster profits. They lease properties based upon deal economics. They care little for who their tenants may be or how one tenant may impact other tenants. Their only concern is maximizing rent and occupancy. They are in the tenant deception business. They attended the WC Fields school of business, “Never give a sucker an even break.”
The cynic’s business model has worked for many people: They buy a property, maximize non-recourse leverage, and—with aggressive cost cutting and no capital investment—they recover their initial equity investment in three to five years. After recovering initial equity, every new dollar is pure profit. Thereafter, they continue raking in the dollars with minimal investment in the property.
Time works against the cynic. Over time, deferred maintenance grows. The property gets shabbier, rents drop, vacancy increases, and the project’s economics fail Still, with the initial investment recovered and a non-recourse loan, the cynic controls an asset with no “skin the game.” The property’s shortfalls are now the lender’s or someone else’s problem. Upon a default, the cynical owner has the option to either walk away or renegotiate the loan. A successful loan restructuring or DPO starts the cynical cycle anew. The cynic reacquires the property, throws on some lipstick, and returns to deferring, deceiving, and diminishing.
Remember, however, that buildings don’t move, but tenants move all the time.
The “Practical Economic Altruist”
Practical landlords understand that leasing drives property values. And leasing requires tenants. These landlords create a “home” for tenants and their guests. They manage the tenant mix to minimize competition among tenants while creating synergies to help tenants grow their businesses. Within budgetary limits, they try to do the right thing to enhance the tenant experience, taking measures to create safe and comfortable environments. By managing the property to better suit tenant needs, the property projects better value.
Practical landlords are in the tenant satisfaction business.
The practical landlord’s business model is more complex. Balancing reinvestment needs with competitive investment returns is a challenge. And by investing fresh capital for improvements, this landlord continues to have “skin in the game.” Continued capital investment motivates ownership to protect properties.
But the practical landlord is working towards a different outcome. The practical landlord creates value by creating a positive reputation among tenants, brokers, and the community. And as tenants perceive value, the property remains leased over the long term and generates good cash flow. Assuming the property is not overleveraged, it is better positioned to withstand market downturns. The practical landlord creates generational properties that build wealth over time.
The practical landlord makes relationships, not deals.
The Moral of the Story
The cynical landlord has no attachment to a property or the community. Their projects do not contribute to the neighborhood. Their business model is driven by “taking out” without “putting in.” These are the guys who might show up at a potluck with just a fork. As long as they can sleep at night, they can make a decent living by destroying buildings and neighborhoods.
Practical economic altruism, however, recognizes that we live in an interconnected society. It is an understanding that we are better off working cooperatively, seeking win-win outcomes. Accordingly, the practical landlord is invested in both the property and the community over the long term. These are the owners who become catalysts for additional, positive redevelopment within neighborhoods. Although it takes time, they see greater value in growing alongside tenants and communities.
It is our responsibility to be a practical property owner and manager. We have an obligation to build something of value during our short time on earth. Not only does it make us feel good about doing business, but—it’s PROFITABLE.