The longer I’ve been in the real estate business the more amazed I am at the number of real estate investors that just don’t get it. They just don’t understand that in order to maintain their real estate investment’s cash flow and increase its value over time they must reinvest into their property. Certainly, it goes without saying that they must make the repairs that are needed because of day-to-day wear and tear, but they also must make the capital repairs and replacements that extend the life of their property.
I was recently contacted by an owner of an office building who was experiencing high vacancy on his class “C” building and was looking for answers. During our conversation I discovered that he’d purchased the property within the last three years and it was fully occupied at the time of closing. To reduce expenses he had chosen to self-manage the property and perform any maintenance needed himself. As a busy business executive he found little time for tenant relations, day-to-day maintenance or paperwork. Within a very short time his property began a downward spiral that continues today.
The decline started when the owner didn’t have time to pick up and maintain the exterior landscape and parking lot. Soon he was even further behind and the hallways and restrooms went unattended. Trying to recover from these deficiencies but still keep expenses down he hired a family friend to provide janitorial and porter services. When this individual didn’t perform as expected, the owner didn’t complain for fear of damaging a personal relationship. Because the owner didn’t have time for tenant relationship building he wasn’t aware that the tenants were becoming upset by the building’s appearance. The tenants tried to get the owner’s attention by delaying or not paying rent. Too busy for paperwork the owner didn’t notice the lack of revenue until there weren’t adequate funds to pay the mortgage some months later. Still wanting to keep expenses down and at this point really needing to, the owner enlisted the aid of one of a family member to get the paperwork in order. When this individual started knocking on doors to collect rent it was discovered that some of the tenants had already vacated the building. Promises were made to the remaining tenants but because the family member lacked experience these promises went unfulfilled and more tenants vacated the building.
The owner was now desperate to find a way to recover from his mistakes. He wanted to employ Katchen Company to provide property management and leasing services. I told him I would only take on the project if he was ready to invest into his property. Walking the property with the owner I pointed out over fifty maintenance issues that needed immediate attention. These issues needed to be addressed to maintain the few remaining tenants but also to create “curb appeal” to attract new tenants. The owner agreed that the work needed to be done, but he was still concerned about keeping costs to a minimum. He asked that he be able to bring in some people he knew to do the work. I agreed to give him the opportunity to get the work done for less but stipulated that it be completed in one week. If the work was not completed I’d bring in a team of my vendors to get the work done.
The owner, his family friends and family members all had the best intentions but lacked the skills needed to manage and maintain the property. There was no sense of urgency to get the job done until the property was experiencing substantial financial stress. Even with a shrinking cash flow from the few tenants that remained the owner was still trying to keep expenses down by utilizing friends to perform the needed maintenance. Needless to say, the owner’s friends didn’t come through and I had to bring in my team of approved vendors to perform the required repairs. Even in the face of eminent disaster the owner was still trying to “Po Boy” the property. I like this owner and his family and have committed to help them turn their property around. It will require a considerable amount of patience from me and an equal amount of latitude from the owner as he adapts to a new operating strategy.
There is a real lesson to be learned in this story. While an owner can save money by performing the property management and maintenance themselves, they must have the time available and skills to perform the required tasks. If they don’t have both available, an owner should enlist the aid of a professional. After all, “Po Boy” is the name of a sandwich, not the operating strategy for commercial real estate.
CEO, Employing Broker
Katchen Company, founded in 1962, is an integrated real estate company with its corporate headquarters in Lakewood, Colorado. The company offers real estate development, redevelopment, property management, brokerage, consulting services, construction oversight and maintenance services to individual and institutional real estate investors throughout the greater Denver metropolitan area with satellite offices in Chicago, Las Vegas and Miami market areas.
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