This is Part 4 of a 4 Part Series.
Because this is an active deal, with both an existing tenant and partners, I can’t reveal certain deal terms. However, I will do my best to share what I've learned.
If you missed either of the first two parts, please click below for the appropriate article...
In May of 2017, a tenant at our Rosewood Retail property moved out. Spokane Vitamin Supply had been in the building for more than forty years.
We had only owned the building for seven years, so we didn’t enjoy their entire run of tenancy. The business had changed ownership at least twice. In our records, there was a transfer of ownership in 1993 to Mr. Smith (not his real name). Then in 2015 the business was sold again to the Williams family (not their real name).
Initially, Mr. Smith was going to close his business instead of renew his lease. He was an older gentleman and didn’t actively run the business anymore. He operated the business as a way to keep a couple employees working since they had been loyal to him for so many years. The employees were now ready to retire which would allow him to shutter the business.
I was happy to hear that Mr. Smith didn’t want to renew his lease. I actually wanted the space back for several reasons. First, the vitamin business looked tired after forty years with little-to-no updates and I wanted something modern in our building. Second, their customer base was an older crowd that may have been coming since its early days. They weren’t bringing in any new shoppers and that’s a warning sign. Finally, I was concerned about the competition for the use.
I’m not worried about the barbershop or cigar store at this center. It’s impossible to get a haircut on the internet and the cigar crowd has a loyal, club-like customer base. They like coming into the store, smelling the cigars, talking with the owner or employees and hanging out. Those two businesses are in fine shape. However, Spokane Vitamin Supply faced massive amounts of competition. Not only could you go to GNC and The Vitamin Shoppe, but you could go to Walgreens and Rite-Aid. More so, you could order them from the comfort of your own home on any number of websites.
It only took a couple phone calls for me to find an American Family Insurance agent who wanted to take the space. I thought a national brand on our building would look great as well as that customer base would go nicely with a barbershop and a specialty cigar store.
A few days later, I received a call from Mr. Smith who said he was going to sell his business. This was a surprise and a complete left turn from our initial conversation. He said he’d already located a buyer and the deal was ready to go, pending our approval. The buyers, Mr. and Mrs. Williams, planned to relocate into the region and take over the business. They wanted to negotiate a new lease and he hoped we’d be open to it.
I discussed this with my partners.
The negatives of this new scenario were:
1. We’d continue to have a tired, dated concept in the building;
2. The new owners had no true retail experience.
On the other hand, the positives of accepting them as the new owners were:
1. There were no additional costs associated with the turn-over (no vacancy costs, leasing commissions, tenant improvement costs, etc.);
2. It would be incredibly easy. Just run a credit check, prep a lease and go.
We ran a credit check on Mr. and Mrs. Williams and they came through fine. We quickly negotiated a lease and moved forward.
Less than three years later, what we feared would happen actually occurred. The sales at Spokane Vitamin Supply didn’t warrant continuing the business. Mr. Williams called me and said he needed to get out of his lease. He still had a little under two years left. He was going to sell his inventory to someone in a neighboring city and close the business down.
I talked with him about terminating his lease and paying a fee much like I did in the second article of this series, The Buy-Out or How a Lease Termination Can Benefit You. Unfortunately, he wasn’t in a position where he could pay several months ahead and terminate the lease. He’d rather just continue paying the rent until we found a tenant.
It wasn’t the best solution, but I could hear the stress in his voice. I told him I’d see what I could do.
My investing partner, Kevin, put together a marketing flyer and then put a 4x4 skid sign out in front of the building advertising space for lease. He sent an email blast with the flyer through the local broker network.
I posted the available space on Craiglist which, for small spots like this, has always been fantastic. It only took a couple days and the inquiries trickled in. I immediately toured groups through the space. There were all sorts of concepts considering the space: a couple bars, a personal trainer, a tanning salon, and a Vietnamese restaurant are some that come to mind.
The concept that jumped immediately for the space was a specialty beauty supply company. The owners were a couple retiring from the military and relocating to the area. They had previously lived in Spokane while stationed at nearby Fairchild Air Force Base. While living here, they realized the market needed a specialty beauty supply store focusing on products that catered to the African-American community. I thought it was solid concept and talked several times with them after our tour. I wrote up their offer and presented it to the partners.
What I didn’t realize was that Kevin was working with the local firefighters’ union to relocate their union hall to the building. They wanted more landlord participation with build-outs than the beauty supply company, but the terms were better in both rent and lease length.
I made my pitch for the beauty supply company and Kevin made his pitch for the firefighters. The decision came down to strength of tenant. The argument was made that the union would be the tenant as we could consistently count on rent payments since they’re a government affiliated group. Regardless, I really liked the beauty supply use. They were a very nice couple and I thought their concept would have been a good fit for the building and the community.
In the end, though, I relented and we agreed to go with the union.
Signs of the Times
The lease came together quickly and we hired a contractor who’d worked closely in the past with both of my partners. We walked the property together and explained what needed to happen, both for landlord’s work and tenant improvements.
Since the space had been occupied for forty years, you can imagine that a lot of work had to take place in a 1,200 SF space to make it look modern.
First, there was an old wall unit air-conditioning unit that had been installed in the concrete block wall. Years ago, they had cut out a square out of the block and inserted the A/C unit in. Seriously. The unit had been inoperable for some time and we wanted it gone. It was pulled out and the whole filled in.
The concrete block walls were framed in and drywalled.
The old, exposed steel HVAC ducts were pulled down and replaced with modern spiral ducting.
We went back and forth on the popcorn ceiling. At first, we were going to have it scraped. I was all for it. We even had it tested to make sure that it was asbestos free. (It wasn’t hot – meaning it was free of asbestos) However, scraping the ceiling is a significant cost. Therefore, the firefighters opted to go with black Dryfall paint. With this, a painter can spray paint the ceiling and as any specks fall they will dry before they hit the floor.
One of the wild cards we faced was a roll-up door in the back of the building. Previously, a wood panel had been placed over it and painted to match the exterior of the building. On the inside, a makeshift wall had been built around it as part of the vitamin shop’s office. This is one of those things that occurs and you wonder why it wasn’t done right from the beginning. I’m a big fan of HGTV’s Mike Holmes who always says to, “Make it right.” The previous repair was rinky-dink, but the tenant was in place and fine with it.
However, after they left and we demo’d the space to see what we were working with, my partners and I went back and forth on what to do with it. Should we block it back in or put in a new roll up door? Leaving it the rinky-dink way didn’t make sense. We were going to make it right one way or another.
Luckily for us, the firefighters wanted a new roll-up door. It was the cheaper route and it would be easier to replace than reinstalling concrete blocks.
As you can see, the work came out awesome. It’s a beautiful space now and we’re excited to have the firefighters’ local as part of our tenant mix.
You can never prepare for everything, but it looks like we’re set for some time to come.
Have You Ever Had to Make Up Your Mind?
There’s a great song from the Lovin’ Spoonful about making up your mind between two tough choices. Of course, that song was about love and this situation was about real estate.
We ran though a multitude of prospects and many didn’t fit for various reasons. When we finally landed one, we actually got two prospects which led to the difficult choice of, “Who should we choose?”
We had to remove personalities from it and look at it strictly from the business angle. I really liked the couple I was working with, but the union really was the better, long-term fit.
Real estate is about the long-game and we’re building a business for generations.
It was tough to break the news to the couple that we were going in a different direction. They understood, though, and were extremely nice about it. It was a final reminder of why I liked them so much.