Leasing 101 - Part 6

6) Operating Expenses: Management matters

• Before you sign a lease, have your broker ask to see a copy of the expense statement from the previous three years.
• Have expenses been increasing from year-to-year?
• If so, find out why?
• Ask to see an operating budget for the current year.
• What is the CAM or Load factor for the building?
• How does the Landlord define operating expenses?
• Who manages the building?
• What is the management company’s reputation?
• Have you talked to existing tenants about the building’s management?
• A building that is poorly managed is a bad building.

Market Musings

The two most recent office sales in my market area both sold at a 40% discount to their original asking prices.

The first building, located in Nashville's Music Row submarket, was originally put on the market at $2.5 million or $198 per building square foot. From 2005 - 2007 it was very common for Music Row commercial buildings to sell anywhere from $200 - $300 per building square foot.

The building sat on the market for nine months and finally sold for $1.425 million or $115 per building square foot. The sales price represented a 42% discount from the original asking price.

The second builing, located in Nashville's SoBro district, was originally put on the market for $675,000 or $194 per building square foot.

The building sat on the market for nearly 24 months and finally sold for $403,500 or $115 per building square foot. The sales price represented a 40% discount from the orginal asking price.

An owner recently chastised me for sending out information stating that property values had dropped by as much as 40% in some instances.

I certainly understand the idea of a self-fulfilling prophecy and the need for positive thinking. However, I also understand the idea of knowing your market and studying your market.

Property values may rise 20% by next summer or they may drop another 10%. I don't claim to predict the future, but I do think it's a broker's job to know and study the market and communicate his knowledge to people he wants to influence.

As Warren Buffett said about good news and bad news: "Always give bad news immediately. Good news typically takes care of itself."

Big Jim Boss

You don't tug on Superman's cape

You don't spit into the wind

You don't pull the mask off the old Lone Ranger

And you don't mess around with Jim, da do da do...

I think Jim Croce forgot to mention one thing you should never do: Miss anything written by Michael Lewis.

Michael Lewis, best selling author of Moneyball and Blindside, is one of those rare intellectual talents that can make any subject he writes about interesting. I still contend the article Lewis wrote about his high school baseball coach, Coach Fitz, for the New York Times Magazine is one of the best articles ever written on any subject.

Lewis' latest piece, entitled The Man Who Sank the World's Economy is a fascinating study in finance, human folly and human vanity.

The piece focuses on A.I.G. Financial Products division and how one man, Joe Cassano, who ran A.I.G. F.P., helped bring the financial world to its knees.

I want to specifically point to two parts of Lewis' article.

The first is financial:

In a normal economy, when interest rates rise, consumer borrowing falls - and in the normal end of the U.S. economy that happened: from June 2004 to June 2005 prime-mortgage lending fell by half. But in that same period subprime lending doubled - and then doubled again. In 2003 there bad been a few tens of billions of dollars of subprime-mortgage loans. From June 2004 until June 2007, Wall Street underwrote $1.6 trillion ($1,600,000,000,000) of new subprime-mortgage loans and another $1.2 trillion ($1,200,000,000,000) of so-called Alt-A loans - loans which for some reason or another can be dicey, usually because the lender did not require the borrower to supply him with the information typically required before making a loan.

The second is psychological:

The problem is that they (his subordinates) knew him (Cassano). Andy they believe that his crime was not mere legal fraudulence but the deeper kind: a need for subservience in others and an unwillingness to acknowledge his own weaknesses. "When he said that he could not envision losses, that we wouldn't lose a dime, I am positive that he believed that," says one of the traders. The problem with Joe Cassano wasn't that he knew he was wrong. It was that it was too important to him that he be right. More than anything, Joe Cassano wanted to be one of Wall Street's big shots. He wound up being its perfect customer.

Numbers matter. Spreadsheets matter. Formulas matter.

But so does leadership, psychology, and the vanity of human wishes, wants, and desires.

A.I.G. F.P.'s collapse ultimately came down to the numbers, but the numbers were driven by men like Cassano, whose megalomania blinded them to the reality that their seemingly impenetrable financial system was really skating along on extremely thin ice.

Timeless Marketing & Sales Lesson #7

Want to know the most important and powerful marketing phrase of all time?

The most important and powerful marketing phrase of all time is “Let me tell you a story.”

Edward Bernays, nephew to Sigmund Freud and one of the founders of public relations, once said, “Don’t send out news releases, send out news stories.”

How did Jesus Christ go about teaching his disciples and followers? Was it through a corporate memo from the big man upstairs or was it from Parables and stories that ring as true today as they did when the carpenter from Nazareth told them some 2,000 years ago.

When we were all children, we lived for story-time. Stories captured our attention and ignited our imaginations. Stories were how we learned about so many different aspects of life. Stories were how we were persuaded to do and believe certain things.

Now that we are all grown up and have become successful business people, we often believe we are too mature and sophisticated for stories. We want our friends, families, colleagues, and peers to perceive us as big and tough business people, not kindergarten teachers. “Don’t tell me a story. Just give me the facts and figures.”

In many ways, we have all turned into Joe Friday. “Just the facts ma’am. Just the facts.”

The more I study I adult behavior, the more I realize we were all better off when we thought like children.

The reality is your friends, families, colleagues, and peers don’t want to be treated like robots, who simply input and process information. They want to be treated like children. They want to be told stories about your product, service, and company. They want you to capture their attention. They want you to ignite their imagination. They want a good reason to believe in your product, service, and company.

Story telling has always been and will always be the most important marketing medium in the world. If you ignore it, people will most likely ignore you, your company, and your product or service.

If you need to retrain your adult mind and relearn the art of storytelling, here is a great article marketing guru Seth Godin wrote for Ode Magazine (emphasis mine):

Great stories succeed because they are able to capture the imagination of large or important audiences.

A great story is true. Not necessarily because it’s factual, but because it’s consistent and authentic. Consumers are too good at sniffing out inconsistencies for a marketer to get away with a story that’s just slapped on.

Great stories make a promise. They promise fun, safety or a shortcut. The promise needs to be bold and audacious. It’s either exceptional or it’s not worth listening to.

Great stories are trusted. Trust is the scarcest resource we’ve got left. No one trusts anyone. People don’t trust the beautiful women ordering vodka at the corner bar (they’re getting paid by the liquor company). People don’t trust the spokespeople on commercials (who exactly is Rula Lenska?). And they certainly don’t trust the companies that make pharmaceuticals (Vioxx, apparently, can kill you). As a result, no marketer succeeds in telling a story unless he has earned the credibility to tell that story.

Great stories are subtle. Surprisingly, the fewer details a marketer spells out, the more powerful the story becomes. Talented marketers understand that allowing people to draw their own conclusions is far more effective than announcing the punch line.

Great stories happen fast. First impressions are far more powerful than we give them credit for.

Great stories don’t always need eight-page color brochures or a face-to-face meeting. Either you are ready to listen or you aren’t.

Great stories don’t appeal to logic, but they often appeal to our senses. Pheromones aren’t a myth. People decide if they like someone after just a sniff.

Great stories are rarely aimed at everyone. Average people are good at ignoring you. Average people have too many different points of view about life and average people are by and large satisfied. If you need to water down your story to appeal to everyone, it will appeal to no one. The most effective stories match the world view of a tiny audience—and then that tiny audience spreads the story.

Great stories don’t contradict themselves. If your restaurant is in the right location but had the wrong menu, you lose. If your art gallery carries the right artists but your staff is made up of rejects from a used car lot, you lose. Consumers are clever and they’ll see through your deceit at once.

Most of all, great stories agree with our world view. The best stories don’t teach people anything new. Instead, the best stories agree with what the audience already believes and makes the members of the audience feel smart and secure when reminded how right they were in the first place.

Timeless Lesson: Tell stories

Why Incentives Matter

I came across this wonderful parable from Matthew May's blog:

An old woman lived alone on a street where boys played noisily every afternoon. One day, the din became too much, and she called the boys into her house. She told them she liked to listen to them play, but her hearing was failing and she could no longer hear their games. She asked them to come around each day and play noisily in front of her house. If they did, she would give them each a quarter. The youngsters raced back the following day, and they made a tremendous racket playing happily in front of the house. The old woman paid and asked them to return the next day. Again they played and made noise, and again she paid them for it. But this time she gave each boy only 20 cents, explaining that she was running out of money. On the following day, they got only 15 cents each. Furthermore, the old woman told them she would have to reduce the fee to a nickel on the fourth day. The boys then became angry and said they would not be back. It was not worth the effort, they said, to play for only a nickel a day.

This parable reminds me of what Charlie Munger once said about incentives:

......Another thing, perverse incentives. You do not want to be in a perverse incentive system that’s causing you to behave more and more foolishly or worse and worse - incentives are too powerful a control over human cognition or human behavior. If you’re in one, I don’t have a solution for you. You’ll have to figure it out for yourself, but it’s a significant problem.

Leasing 101 - Part 5

5) Rates: Never what they seem

• Net vs. Gross vs. Modified Gross Rates: What’s the difference and why does it matter?
• What does the rate include? Taxes? Insurance? Operarting Expenses? Etc.?
• What doesn’t the rate include? Taxe? Insurance? Opearting Expenses? Etc.?
• Are there annual bumps in the rate? If so, are they at, above, or below market?
• What is the rate on any option included in the lease? Has it been pre-neogiated or is it to be determined at the time the option is exercised?
• What is the rate on holdover rent?

Far too often, tenants get caught up in comparing price per square foot withotu considering if they are comparing apples-to-apples or apples-to-organges.

The first question to ask after a rate is quoted is "What's included or not included in that number?"

Randomness

Please read this fascninating piece from the July 3rd Wall Street Journal by Leonard Mlodinow, professor of randomness at Cal Tech.

This is an extremely thought provoking article, and I believe it gets at the heart of how we get oursevles into our current financial mess.

Here is an excerpt from the article:

In sports, the championship contenders are usually pretty evenly matched. But in baseball, even if one assumes that the better team has a lopsided 55/45 edge over the inferior one, the lesser team will win the seven-game World Series 40% of the time. That might seem counterintuitive, but you can look at it as follows. If you play a best-of-one game series, then, by our assumption, the lesser team will win 45% of the time. Playing a longer series will cut down that probability. The problem is that playing a seven-game series only cuts it down to 40%, which isn’t cutting it down by much. What if you demand that the lesser team win no more than 5% of the time—a constraint called statistical significance? The World Series would have to be the best of 269 games, and probably draw an audience the size of that for Olympic curling. Swap baseball for marketing, and you find a mistake often made by marketing departments: assuming that the results of small focus groups reflect a trend in the general population.

We find false meaning in the patterns of randomness for good reason: we are animals built to do just that. Suppose, for example, that you sit a subject in front of a light which flashes red twice as often as green, but otherwise without pattern. After the subject watches for a while, you offer the subject a reward for each future flash correctly predicted. What is the best strategy?

A nonhuman animal in this situation will always guess red, the more frequent color. A different strategy is to match your proportion of red and green guesses to the proportion you observed in the past, that is, two reds for every green. If the colors come in some pattern that you can figure out, this strategy will enable you to be right every time. But if the colors come without pattern you will do worse. Most humans try to guess the pattern, and in the process allow themselves to be outsmarted by a rat. (Those trying to time the market lately might wish they had let the rat take charge.) Looking for order in patterns has allowed us to understand the patterns of the universe, and hence to create modern physics and technology; but it also sometimes compels us to submit bids on eBay because we see the face of Jesus in a slice of toast.

Scratching Hogs

This story, from the book My Voice Will Go With You: The Teaching Tales of Milton H. Erickson, contains one of the best sales tips you will ever find.

One summer I sold books to pay my way through college. I walked into a farmyard about five o'clock, interviewed the farmer about buying books, and he said, "Young fellow, I don't read anything. I don't need to read anything. I'm just interested in my hogs."

"While you're busy feeding the hogs, do you mind if I stand and talk to you?" I asked.

He said, "No, talk away, young fellow, it won't do you a bit of good. I'm not going to pay attention to you; I am busy feeding the hogs."

And so I talked about my books. Being a farm boy, I thoughtlessly picked up a pair of shingles lying on the ground and started scratching the hogs' backs as I was talking. The farmer looked over, stopped, and said, "Anybody knows how to scratch a hog's back, the way hogs like it, is somebody I want to know. How about having supper with me tonight and you can sleep overnight with no charge and I will buy your books. You like hogs. You know how to scratch 'em the way they like to be scratched."

Outliers by Malcolm Gladwell

Here is a recent review I wrote of Malcolm Gladwell's latest must read book Outliers:

Natural talent: We hear the phrase spoken often about composers like Mozart, computer programmers like Bill Joy, software geniuses like Bill Gates, and musical groups like the Beatles. We cannot all expect to be as successful as the Beatles or Mozart because we were not born with their natural talent. Or at least so go the musings from the peanut gallery of the less-than-successful.

In his latest book, Outliers, Malcolm Gladwell, bestselling author of The Tipping Point and Blink, shatters many popular notions about success and proves again why he is one of the most interesting, intelligent, and talented writers of our time. Gladwell’s book helps readers understand what an outlier is—a value, observation, event, etc. that is numerically distant from the rest of the data —and why outliers matter.

In Outliers we get what business books should really be like; part psychology book, part business book, part history book, part sociology book, and part anthropology book. You don’t have to worry about going cross-eyed from reading too many business buzz words or meaningless platitudes. Outliers is chock full of amazing, interesting, and educational lessons about opportunity, success, and failure.

One such lesson is the triumph of hard work over natural talent. Gladwell demonstrates that bands like the Beatles, programmers like Bill Joy, chess prodigies like Bobby Fisher, and billionaire software gurus like Bill Gates didn’t achieve success because they were talented. They achieved success because they were talented and willing to apply 10,000 hours of practice to their respective crafts and trades. “Practice isn’t the thing you do once you’re good. It’s the thing you do that makes you good.”

To illustrate the value of the 10,000-hour rule as he calls it, Gladwell introduces readers to some interesting history about the Beatles. What most people don’t know about the Beatles is that they perfected their craft playing seven days a week for eight hours at a time in front of live audiences in strip clubs in Hamburg, Germany. Over a two-year period from 1960–1962, the Beatles played 270 nights in strips clubs throughout Germany. By the time they had their first bout of “real” success in 1964, they had played 1,200 times together as a band. The Beatle’s success is more a result of their hard work than their natural talent.

But Gladwell doesn’t stop there. He challenges our notions of success in every chapter with questions like: Why are so many of Canada’s elite amateur hockey players born in January or February? Why of the seventy-five richest people in human history are fourteen Americans born within nine years of each other? Why is the smartest man in the world (at least according to his IQ) living on a horse farm in Northern Missouri writing a book on the theory of everything no one cares about? What does rice farming have to do with being great at math? Why are there so many family feuds in Kentucky? Why are so many of today’s top Wall Street law firms run by people of Jewish descent?

If you think these questions are intriguing, wait until you read the stories that accompany them.

This book will amaze you, frustrate you, inspire you, and leave you wanting more. But, most importantly, it will help you understand the roots of and pathways to success. Here’s a hint: it’s not just about natural talent. And isn’t that good news for us mere mortals?

Montier on Impediments

I just got through reading the slides from a recent presentation given by James Montier.

I was really struck by what he called his Five Impediments to Recognizing Predictable Surprises. The five impediments are:

1) Over-optimism

2) The illusion of control

3) Self-serving bias

4) Myopia - nearsightedness

5) Change Blindness - phenomenon that occurs when a person viewing a scene apparently fails to detect large changes in the scene