Don’t you just hate when this happens to you? Your tenant has vacated and now you launch into the cleanup. You know, the standard stuff, like the removal of enough dirt to total $300,000 in disposal costs. Wait. What?
That’s right. Chances are, if you’re an office property manager, it’s inconceivable (we hope) that things could ever get that bad. But, that’s exactly what can happen—and did—at one industrial property. Just ask Carlie Stogis.
The Rosemont, Illinois-based general manager for JLL was dealing with a tenant that offered indoor dirt-bike trails. Well, at least the trails were indoors until ATVs started crashing through the walls. To make matters worse, the tenant breezed through its two months of free rent with no insurance or bank credit and ultimately vacated without saying a word. (Please note: Stogis wasn’t involved in the background checks.) When the exhaust smoke cleared, the cleanup bill tallied $8 per square foot (psf)—on a lease rate of only $3 psf.
It’s a simple fact that industrial properties take more of a beating than office assets, a truth that, one might think, would be reflected in the language of the lease. But, not all leases are created equal, and they are subject—even after signing—to interpretation and, ultimately, the willingness and ability of the tenant to play along. At the end of the day—or, more appropriately, at the end of a lease—a triple-net arrangement provides no greater protection against a tenant’s laziness.
Leases also are subject to situational variations. Yes, "broom clean" is the norm, but as Stogis points out, "That can be a pretty gray area and subject to interpretation." For a manager representing a third-party logistics company, it’s even dicier, and the language from lease to lease "varies significantly, and it doesn’t always come down to the tenant having to pick up the costs," adds Stogis. Especially when they skip out.
TIME & TIMING
But, that doesn’t mean it’s any easier for direct owners either. "We really want our tenants to take care of cleanup," says Lisa Krumwiede, LEED GA, director of Property Management for Liberty Property Trust in nearby Elk Grove Village, Illinois. "Does it always happen? No."
There’s a balance that has to exist, an understanding between tenant and manager. On one side, there’s the hoped-for necessity of having the tenant shoulder whatever burden the lease specifies. On the other is client relations.
A lot of times, says Krumwiede, as a tenant nears move-out, cleanup might actually be getting done, but not in the preferred time frame of ownership. "In some cases, there are bigger items that they may not be able to get done before they leave," she says, "and we work with them and allow them to get it done even after their vacate date, especially if they’re paying for it directly." This can include such big-ticket items as dock levelers and doors, as well as heating, ventilating and air-conditioning (HVAC) repair. "A dock leveler can take six weeks to order. We let them come in and get it done because, frankly, we don’t want to pay for it," explains Krumwiede.
That balance also includes large national tenants with which senior management wants to maintain a relationship. Short of a flagrant disregard for whatever the lease implies, those client relations carry large downstream weight. Krumwiede reports of times where the needs of her property gave way to the greater good of her company upon appeal to a higher authority.
OF CATS & MICE
"My goal is to part company with a tenant so they want to come back," says Harold Campbell, RPA, managing principal of Harold Campbell, LLC, in Princeton, New Jersey. "But sometimes, it’s just not possible. I’ve had problem cases where they fell behind in repair and maintenance obligations and we had to chase them during their tenancy—despite the months of heads-up we gave them. It became a cat-and-mouse game. We ultimately parted ways, and they knew they weren’t going to see their security deposit again. But, as often as possible, we really try to partner with our exiting tenants."
And, therein lies clues to a win-win relationship: one that leaves all parties smiling and the industrial space presentable for the next tenant. Despite lease language, everyone we spoke with for this article indicated an additional necessity: Stay on top of your occupants.
"Our goal with tenants—especially those who might already be struggling to keep their space clean—is to make sure we get in front of them sooner rather than later, so we can set expectations accordingly," says Krumwiede. In fact, she has a ″90-, 60-, 30-day rule." Ninety days before move-out, the tenants get a basic housekeeping checklist, with the promise that Krumwiede will return in another 30 days.
"We show up again 60 days out and ask how far they’ve gotten," she notes. A team comes with her, including the leasing broker and vendors to inspect HVAC, doors, plumbing and all other mechanicals, "so they can get their eyeballs on the space and see what needs to get done in order to make the space market-ready."
The 30-day visit is the brass-tacks meeting. "We present our bids and quotes from the vendors," she explains. "Hopefully, they’ve done some of the other checklist items and we tell them they have 30 days to get done whatever remains," carving out those items that demand a long lead time.
"The biggest thing you can do is be very proactive," agrees Stogis, "and communicate throughout the term of the lease what the expectations are. We have a couple of tenants that really do handle all of the exterior and interior upkeep, but we still try to get before our tenants on a quarterly basis, and, at the very least, we’ll do annual inspections and point out what’s not being maintained. They can take care of any issues or we can and simply bill them back. Most tenants are okay with that."
Stogis also is a big believer in documentation. This includes pictures of the space at the time of move-in. "There might be restoration language in the lease, but, as we said, that can get a little sketchy…if you don’t have the proper documentation, you don’t have a leg to stand on," she cautions.
"My mantra is: Protect the asset, manage the risk and improve current financial performance," says Campbell. Like Stogis and Krumwiede, he communicates often to get tenant buy-in to the first point. He accomplishes the second by keeping an eye peeled for those conditions that "could end up creating a worst-case scenario," such as the tenant relationship going south. Finally, he watches over the financial picture by ensuring every cost is accounted for—and preferably paid by the tenant.
WALK & TALK
To find your spaces trashed is, at the very least, annoying. At the most, it can be the stuff of a lawsuit. Either way, it’s also largely avoidable. "Recognize the problem tenants early," urges Krumwiede. That’s one of the benefits of open and ongoing communication, she notes. "Walking the space, you’ll know if they don’t care about it or they never had a cleaner come in. That’s why you start the move-out process early."
Is it foolproof? No. Does it help? Yes, in more ways than one. "Sometimes," Krumwiede points out, "starting the communication early triggers conversations with the brokerage team, which allows you to do a renewal. More than that, sometimes in the renewal process you can get things done that they had neglected and get the building’s deferred maintenance corrected. It’s not ideal, but you may head off a much bigger problem."
The more-flies-with-honey approach is always better than hashing issues out in court. And, while there are always exceptions, most tenants—larger ones especially—do get it and do display the sort of fiscal responsibility that works for goose and gander alike. In those cases, there’s much to be said for the power of a lasting relationship.
Or, as Campbell puts it: "As they’re driving off in the sunset, I want them to feel like they should come back."
ABOUT THE AUTHOR: John Salustri is editor-in-chief of Salustri Content Solutions, a national editorial advisory firm based in East Northport, New York. He is best known as the founding editor of GlobeSt.com. Prior to launching GlobeSt.com, Salustri was editor of Real Estate Forum.
This article was originally published in the April/May 2019 issue of BOMA Magazine.