Failing Forward: What I Wish I Knew Then…
KC Road Shopping Center: The Money Pit
Failing fast, failing forward, and learning from others failures has been critical to my growth as a business owner and real estate investor. This is the first in my series on Failing Forward, and I hope you walk away with some great strategies (or pitfalls to avoid).
I started my career as a retail broker, and as such, I expected to grow my business into a portfolio of shopping centers. The first center we acquired in 2006 was an epic failure on many levels, and today’s lesson is about the importance of site visits and walk-throughs of ALL suites.
KC Road property was a small strip center with first floor retail spaces and lower level (i.e. basement) space below. Each of the basement suites had a storefront entry, and a side-stairwell with a drain outside the door. We purchased the center 95%+ occupied, and one basement space included a 15 year lease with a national insurance company who used the space as a “back up” emergency center. In other words, it was fully furnished and had redundant computer systems in case of a natural disaster, or emergency closing of their main office. No employees were on site, but they were responsible to “maintain” the premises.
That summer, the drain outside of their stairwell was covered in debris, and after heavy rain, water seeped into their space under the doorway. Since no one was onsite, no one noticed that the HVAC system was also down, and that mold began to grow quickly inside the space. 45-60 days later, it was identified, and by that time, the entire 5,000sf was covered in mold – particularly the cloth cubicles, cloth chairs, carpet, walls, etc. This could have been caught earlier had we been regularly walking each suite in the property during site visits.
This is where your attorney’s 50 page lease templates come in handy. It was ultimately confirmed that this was in fact due to the Tenant’s neglect, and it was therefore their responsibility to repair. Major Win? Not so fast…the Tenant required a lease termination in exchange for funding the cost of the repairs, claiming that the space was no longer suitable for their use. The 15 year basement lease was immediately terminated in exchange for the funding of $75K+ in damages. This, along with additional vacancies caused by a challenged retail environment in 2006-2007 left us with a 65% vacant center at the end of our first year of ownership.
How did we overcome this challenge? Stay tuned for the next chapter – Churches save the day in a failing retail environment.