Commercial Real Estate dealmaking, Why is sublease surplus/excess single user property the industry’s “red headed stepchild”?

With over 20 years of Texas commercial experience, a glaring, poorly served area is surplus and excess single user properties. This is a big problem for multi-site commercial retailers and the commercial real estate industry has set the bar so low that these commercial retailers have come to expect low (to no) transactional volume. Retailers usually “default” to a large regional to national commercial real estate brokerage house. There are largely 2 ways to dispose of these assets; sublease and outright sale of these vacated properties.

1. Outright sale- This category gets a fair amount of attention; why? Because most of these retail sites are located on at least decent traffic roads so they get a fair amount of buyer interest. Commercial sales are fairly easy to handle and with recent construction the seller’s agent/broker usually has to address very few items; a buyer financing contingency and roof repairs or major MEP(mechanical, electrical, and plumbing) issues. Midlevel to senior agents/brokers are assigned these properties which should make the retailer client comfortable. If it is a portfolio (multiple sites for sale), the high level senior agents/brokers get these deals. Again, the retailer is comfortable but what happens when this retailers portfolio of surplus property includes subleases? Most multi-site retailers will have a mixture of “owned” vacated sites for sale and “leased” vacated sites they want to sublease out to mitigate losses.

2. Subleases- These can be VERY complex in nature and by far the most numerous in the market place of surplus commercial real estate. Assume a property owner leases to a hardware retailer for 10 years and after 3 years the site isn’t working so they hire a broker/agent to sublease it. A sublease will have “restrictive covenants” that the new tenant can’t sell items of a like nature. Think of all of the items a hardware store sells, the universe of potential subtenants becomes very restricted. The compensation for the agent/broker is usually about the same as a direct lease. This scenario becomes more work for the same money. What the commercial retailer does NOT realize is with a national/regional commercial brokerage house they get assigned a midlevel to senior agent/broker. Guess who works on the sublease? Usually a runner/trainee type with little or no experience; the polar opposite of who the retailer needs handling their property. The senior agent/broker becomes the “face man” for the account and gives the retailer asset manager a piece of mind that the situation is in good hands while repeating “these sublease properties take a lot of time to move”. This is malarkey.

Future posts will dismantle the commercial real estate facade in handling surplus property (with a focus on sublease issues) and is a must read for asset managers in charge of disposing of surplus real estate throughout the country. If you have multi-site vacated surplus retail properties and want a proven seasoned dealmaker to exclusively handle these problems for you, visit www.commreis.com. The author of this blog is not an attorney and legal advice is not dispensed in any manner. The author is a licensed Texas real estate broker.

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