November 29, 2018

Dear Business Owner: The Circus Stays in Town

Dear Reader: These ‘Business Owner’ segments illustrate how real life commercial real estate challenges result in win-win solutions…even when the going gets tough!

Dear Business Owner,

Sometimes running a business is like running a three-ring circus. Relocating an established company involves assessing the current business strategies while defining the company’s future.  Such is the case for The Circus School that teaches all age kids, circ du sole like acrobatics. 

Buried in the middle of a light industrial park, The Circus School has limited visibility and is difficult to find. Their unique program draws a crowd, but they also use target advertising, and of course, word of mouth. After three years, the circus school morphed into complementary smaller businesses such as birthday parties, special events and production. However, despite their success, enthusiasm from students, and newly defined profit centers, the school isn’t meeting their financial goals. They desperately need a new location with higher visibility.

Enter the Broker

I jump slightly when the light tap of a finger graces my shoulder as I stand in line to order lunch at Flower Child, a local hipster luncheonette. “Oh! Denise, hi!” I inadvertently exclaim and shake her hand.  “How are you?”

“Imagine running into you here, you’re on my list to call. If you’re not meeting anyone, let’s have lunch.” Denise’s high energy drives the moment.

“Sure, but only if it’s on me.” I smile at Denise and greet the cashier. “Hi, we’ll have two Rebel Wraps and green tea lemonade.” I slip her a credit card. Denise’s a past client and it’s only right I should pick up the tab. 

The Circus School

We settle into our table and Denise leans in close, “Remember my friend, Bobbi, I was telling you about with the circus business? She needs your help, or I fear her company is doomed and my kids love her afterschool program.” Denise can be dramatic. “Bobbi’s lease is up for renewal and she can’t afford the new rate. How is she going to stay in business? What a shame for all the kids if the circus closes. Can’t you help her? You got me a such a good deal…”

I put the brakes on with the raise of my hand, “Not to be a downer, but remember, we bought your place in the downturn when prices were low. It’s the opposite market now.  Inventory’s low, and landlords are in the driver seat.” 

“I’ve lost my appetite. The thought of the circus going out of business turns my stomach.” Denise bewails. 

“Not me, I’m famished.” Between bites I say, “I’ll call Bobbi, look at her space, hear what her objectives are and see what I can do.” With that, Denise texts me Bobbis’ contact info. Her mission secure, she bites into her Rebel Wrap and our conversation shifts. 

The Stand

The next day Bobbi introduces me to the circus business. We walk through the stand, the home of the circus. Colorful silks, thick ropes, bars and hoops hang from the twenty-four foot ceiling. Strong iron beams sustain the flying apparatus.  The silks and ropes are anchored into a ten-inch cement slab. My experienced eye knows only a few warehouses in town can accommodate the circus use.

A thorough survey of the space confirms my suspicion; the circus space is underutilized. If Bobbi reorganizes the flow of the business, she may be able to cut her square footage reducing her rent.  Will it be enough to justify a move and balance the books?

Real Time Market Conditions 

Bobbi’s informs me her current landlord wouldn’t renew the lease long-term because he knows, with a little effort, he can secure a higher paying tenant.  Other tenants in the building are paying $3 a square foot (SF) more per year. 

Fortunately for Bobbi, she is an ideal tenant who pays rent on time and asks for little. The building owner likes her business model and wants to help, if only by not raising her rent until she relocates. 

Graciously the landlord allows Bobbi to stay on month-to-month.  This means that with a 30-day written notice from the landlord, Bobbi must vacate the premise. This is scary because, the circus rigger needs 30 days to install the equipment per OSHA standards not including any interior renovations.  

A Needle in a Haystack

After four separate property tours, it’s a blowdown. In circus lingo, that’s a genuine disaster; we can’t find a warehouse space that works. Both time and economics are up against the circus.

“Andrea!” Bobbi calls ecstatically, “I found the perfect space. It’s right next to the rock-climbing gym with over 2,000 members of all ages, has great visibility unlike my old space, and high ceilings. This location is a straw house, for sure!”

“A what?” I ask.

“A straw house. It’s a circus term for a sold-out performance where straw is spread on the ground for extra spectators to sit. We’ll have a student waitlist at this location!”

Of all places, Bobbi discovered the ‘off-market’ warehouse space from her church newsletter letter.  As brokers, we’re not always the one to find our client the space they need. It’s a team effort on everyone’s part to find an ideal location. 

The Tour

Rachael chooses a suite with a full kitchen and a 600 square foot bonus mezzanine.  In total, the space is 3,200 SF yet she will pay for only 2,600 SF.  The bottom floor will house The Circus School; the mezzanine is perfect for storage and homeschool students to study.

A Frayed Rope

Bobbi’s offer to lease the suite is accepted after a few rounds of negotiations and she provides the new landlord her financial information. The landlord agrees to pay for the tenant improvements (TI’s). A landlord will pay for some, or all, of a tenant’s renovations based on their financials. 

The new landlord calls, “We really want the circus as neighbors, but we can’t agree to pay for the TI’s because the risk is too high. She’ll have to fund her own renovations.”

The circus doesn’t have extra resources for TI’s, yet I can’t tell this to the new landlord. It will kill the deal. My heart pounds loudly in my chest.

Years of experience enable me to pull a rabbit out of a hat, “Bobbi’s been a valuable tenant at her present location. What if her current landlord writes a reference letter stating this? Wouldn’t that reduce your risk substantially, knowing that she always pays in full, on time?”

“Well, yes. Given her financials circumstances, I don’t know how she’ll get the recommendation; but if she does, we’ll pay for the TI’s with a personal guarantee.”

Bobbi secures a letter and we focus on the next hurdle; the occupancy date.

The Wildcat 

Lease terms are agreed to and the move-in date allows time for TI’s. Bobbi signs the lease and returns it to the new landlord for signature in good faith.  Respectfully, she provides her current landlord a 60-day written notice to vacate.

As Bobbi’s advisor, I want to make sure the circus doesn’t have to move out of their current space before they can occupy the new space. If we could even find Bobbi a short-term location, this would result in moving twice and lost income. This is out of the question.

I follow up with the new landlord the next day, “Am I hearing you clearly, you need to amend the circus occupancy date because your current tenant needs another thirty days to move out? Their new building isn’t ready?”

“Yes, I …” replies the landlord.

I mumble to myself.  Really? You’re pulling a circus wildcat, a last-minute change?  Out loud I say, “You’re kidding, right? The circus has already given notice and if we can extend at their current location, it means an additional $1,000 in rent. Will Bobbi get a rent credit for the inconvenience if we can extend?” 

The Final Act

After much deliberation, Bobbi’s current landlord agrees she can stay another thirty days. Additionally, the new landlord provides Bobbi a rent credit.  

Name of the Game

$$$ Tip: Bobbi and her tenant rep reevaluated the circus’s space requirement and downsized the business saving the company significant money each month.

Business Owner Tip:  A strong relationship with a past landlord can establish credibility with a new landlord in the form of a reference letter of good standing. 

Victory Points

  1. Bobbi’s past landlord wins because he has ninety days to secure a new tenant.
  2. Bobbi’s new landlord wins because he won’t have any downtime for a paying tenant.
  3. Bobbi wins because the circus’s synergistic location is a turnaway, in circus lingo, a sold-out show.  Or in her case, sold-out classes, from the get-go.

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