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For this podcast I sat down with Bruce Hopkins, attorney with Finney Law Firm.  In the podcast Bruce and I discussed how he got started in commercial real estate, how he helps out commercial real estate clients, what commercial real estate investors need to be doing when wanting to buy commercial real estate, commercial real estate leases and more. Watch on YouTube: You can connect with Bruce at Finney Law Firm.
You can connect with me on Facebook, Pinterest, Twitter, LinkedIn, YouTube and Instagram. About the author: The above Podcast “Podcast: VA Mortgages” was provided by Paul Sian. Paul can be reached at [email protected] or by phone at 513-560-8002. With over 10+ years experience, if you’re thinking of selling or buying, I would love to share my marketing knowledge and expertise.
I work in the following Greater Cincinnati, OH and Northern KY areas: Alexandria, Amberly, Amelia, Anderson Township, Cincinnati, Batavia, Blue Ash, Covington, Edgewood, Florence, Fort Mitchell, Fort Thomas, Hebron, Hyde Park, Indian Hill, Kenwood, Madeira, Mariemont, Milford, Montgomery, Mt. Adams, Mt. Washington, Newport, Newtown, Norwood, Taylor Mill, Terrace Park, Union Township, and Villa Hills.
Transcript
[00:00:01] Paul Sian: Hello, everybody. This is Paul Sion, Realtor with United Real Estate Home Connections License in the state of Ohio and Kentucky. And with me today is Bruce Hopkins. We’re going to be talking about commercial real estate. Bruce is a commercial real estate attorney with the law firm. How are you doing today, Bruce?
 
[00:00:26] Bruce Hopkins: Great. Thank you. How about yourself?
 
[00:00:28] Paul Sian: Great. Thank you for being on my podcast. So, let’s let’s start off. I understand you’re in the commercial real estate industry. Why don’t you tell us how you got there and about your background?
 
[00:00:37] Bruce Hopkins: Thank you. And thank you for talking with me about this. I love my job. I love my career. I love my industry. So, this is always a pleasure. And I’ll try to explain why. First, I’ll say that once I learned about commercial real estate, I was never interested in any other industry. Starting with background. I’m a Texan. It starts there. I’m Fort Worth native and I went through the urban public schools in that time there. It was a little bit different from Cincinnati. In the same high school, you’d have the kind of attrition you see in an urban public school. where 1/4 of the people who start in ninth grade don’t finish and graduate. Yet it was the same high school that had calculus to and chemistry, too, so you were mixed with all kinds of people, and that’s been useful my whole life. But in my profession, because commercial real estate involves dealing with everyone, everyone uses commercial real estate. Everyone needs it. Everyone has their own personal motivation for being involved in whether it’s an investor or the people who are creating the value, which are your tenants and their needs, which are very different. And so, having a background with all sorts of people has been very useful. Then in college, I discovered commercial real estate didn’t expect to. I have moved to the Northeastern University or Northeastern US for university, and I got an economics degree. Let me talk briefly about how economics degrees work because it goes straight into my commercial real estate career. One kind of economics which didn’t introduce me interest me was second derivatives and incredible projections of deep math. I wasn’t interested in that. The other side is dealing with how small markets work. If you’ve ever taken even one course in real estate. Your first day, the professor got up and spoke about perfect markets and would say, Well, there’s zero transportation cost and it’s frictionless and for perfect information, infinitely divisible. And then the professor would use real estate as the contrast for each one. Well, there’s zero transportation. The contrast is real estate, because it’s permanent one location and is affected by its surroundings. There is perfect information. Well, in commercial real estate, everything is completely different, and you have to know the specific property. And what I took from that is wow, commercial real estate won’t ever be standardized. And that’s really true. Real estate is always something that is different with every property and every transaction. And even though sometimes the documents and forms are standardized, the properties and the people are not. Then I had the great luck of having a course one night a week taught by the head of planning of the City of New York. This person would take the train in one night a week.
 
[00:03:25] Paul Sian: Very nice.
 
[00:03:26] Bruce Hopkins: It was wonderful. It was a big class auditorium sized, but he used role playing every two or three weeks and by complete luck the first time he picked me to play the role of commercial lender, and it was for a mall in New York City to be a week later. Well, I took the train down to New York and visited them all and saw that it was closed even though it had been built only five years before. It was the last small in New York ever built without air conditioning. And so, I was able to bring that back to the class and say, Well, I won’t land unless you do air conditioning for them all. And I was off and running the career was as interesting as I thought. In college, I had one paper where I spoke to several dozen merchants in one of the commercial streets next to the university and what made their businesses go and not go. My senior paper was on the major cities of Connecticut, and YH was growing or not. So, you can see I love this, and from the very start, I knew this was what I wanted to do. So, when I moved out into the world, I did not become a lawyer. I never thought I’d be a lawyer. I was a commercial real estate appraiser then, some residential appraisal. I then went on to be a commercial mortgage lender, which grew out of appraising evaluation and understanding the math from economics that wound up becoming being a real estate developer because my, my company also did major development. If anyone is familiar with the one Columbus building in downtown Columbus, across from the state capital, I was the development manager. I was the highest-level team member in the state of Ohio when that was built. That led to my coming down to Cincinnati and working on the team that did not wind up doing Fountain Square West. If some people remember that, but I did wind up on the team that did the Fountain Place and Karoo Tower redevelopment project. At the time, I felt like I wanted a graduate degree to go on, and an N b A would be very interesting, but not pertinent to my love of real estate. Uh, international markets and currency exchanges were not going to be part of my career, and all I did was read long documents. In fact, in the offices of where I worked. I tended to be the person who got long documents, and so I thought, Law school at night, I’ll know my enemy better. I’ll have a graduate degree. And then after I finished law school, my wife and I decided, I guess maybe I will do this lawyer thing, So I did.
 
[00:05:52] Paul Sian: So, from there you got you went into a commercial real estate. I mean, that was your primary. Did you do any other types of law or just dove right into commercial?
 
[00:06:00] Bruce Hopkins: I have never done anything but commercial real estate. If I had to pick between being a lawyer or a commercial real estate professional, I’d be a commercial real estate professional. I spent a decade in the business before I became a lawyer, and that’s how I think of myself.
 
[00:06:13] Paul Sian: So, something you’re very passionate about. So, what are your? What are your typical clients? Who are your typical clients that you’re serving today?
 
[00:06:20] Bruce Hopkins: Since the mid-nineties, I’ve worked almost exclusively on retail and mixed-use projects that have a hard, strong retail component. So, they are, and it’s almost always on the landlord side. There’s one grocery chain that I represent regionally, but it’s mostly landlord work. And so, it’s anyone who invests or owns retailer mixed use retail property. It’s all over the United States. Philadelphia, Baltimore, D. C. Central Virginia, San Francisco, Seattle, Metro L. A. Points in between and entities that own major real estate projects tend to be asset managers handling them on behalf of major pension funds. So often the owner is a pension fund in Alaska or Hawaii or Florida. That’s state employees or state teachers. But the Contact person is the outside professional asset management company they use, and those are professional real estate operators and investment advisors. There are also more regional companies that are investing for their own account that I do a lot of work with.
 
[00:07:26] Paul Sian: Okay, great. And then what kind of services are you providing to these? These clients of yours
 
[00:07:31] Bruce Hopkins: was, you might guess, I see real estate and retail. Real estate is something almost alive, and there’s a life cycle to investment in real estate, including retail. Where you investigate, you acquire lease, you operate, you manage and you dispose, and I do various things within that cycle. But at all times I’m thinking about the entire cycle and the decisions, and the analysis goes into what will happen next. What will happen after that? The ultimate goal of a real estate investor is to get value out using the pitching functions. An example. The employees of Alaska or these teachers in Florida don’t know that they own a part of a particular center. They need to return to pay for their retirement. And so even when we’re talking about a specific lease or specific site plan decision to be implemented by a new improvement or a change in the site plan, the ultimate question is. Are we creating value that, through finance or sale, can be realized so that the investor gets money from an asset they may not even know that they own? It’s dealing with everything that happens in the life cycle of the property in order to create value for the investor. Okay,
 
[00:08:45] Paul Sian: let’s take a look at a lot of my clients are more in the small to medium size, especially in the, uh, whether it be residential or commercial real estate. Let’s take a look at their perspective. What you know, if you let’s say a new client comes to you today. You know they want to buy a local strip mall. You know something small based on, uh, the current, uh, areas a size footprint. What would you suggest to them? You know, I’m your new client here. I want to buy this this strip mall here and, uh, and say in mountain lookout area there. What would you suggest to me?
 
[00:09:16] Bruce Hopkins: First, investigate the credit worthiness of the people who are going to provide the in-perspective income stream. And that’s the one thing I don’t do. I try to make sure that that’s something that you’ve affirmed to me that you’ve done. But I don’t get involved in your business analysis, but please do it. But what I can help with ultimately is that you think you project what the funds out of the property will be. My most important job is to help you evaluate what might prevent receipt of those funds. You project a return. You’re making an investment in a price based on it. But what could happen where somebody doesn’t have to pay you or that something goes wrong and something is terminated that you anticipated? So, it is the risks and commercial real estate. There are always risks that Oh, if this happens or if that’s violated or this condition occurs, the income stream might be interrupted. The occupant who’s supposed to pay it might leave. And so, we together look at the aspects of contracts and retail. Often, they would be co tendencies. You may have heard of where, if there’s a particular tenant in the shopping center that’s a grocery store, then other tenants might say, if there’s no grocery store for six months, I’ve only paid half rent. Or if you ever permit a building in this area that interferes with my sight lines, then I can terminate my lease. All of those things will impair your income stream. But there’s a second level because the analysis is not. If this went to a lawsuit, who would win? Because that does the investor no good in practice at the time of investment events, which are loans or sales, the purchaser or the lender requires that you get an estoppel certificate, an agreement from each existing tenant that the leases enforces, that they owe the money well. They have some grievance with you as a landlord, even if they might not win in court if they turn in an estoppel certificate. That says, we think we don’t really owe our rent because the landlord made this lease and we think it violates our lease. You don’t have time to go through a two-year trial. You’re not going to spend the money for a two-year trial. You might have just lost your deal or the person who you’d like to give you money is going to give you less. So, it’s not a question of going through the documents and contracts and saying Who would win? The question is much more strict. It is what would create a claim by a tenant or occupant that they don’t know the full amount. So that’s the main thing that I can do for a client. What I also would encourage the climb to do very much is go see the property. No, it well remember my anecdote from college when I went down to see them all in New York and I saw that it was an air conditioned Well, that’s pretty glaring. But if you’re an investor and you’re walking around the property and you’re thinking, well, I look at that condition, and it’s clearly not being maintained, right. I’m going to do it better. You should instead assume under the budget this property owner has, they can’t afford to do it. They see it, too. So, if I really care about improving that condition, I need to add more. Maybe I might need to add a maintenance man to my staff. Think of it that way. Think about the property critically and slowly to figure out what will change your investment.
 
[00:12:40] Paul Sian: You had mentioned credit, credit worthiness, and that’s something that I understand you don’t do. But are there resources or, you know, is that something from the residential perspective? We just look at the tenant’s credit score. We look at tenants, bank accounts, their residential history. Have any predictions on the record? Is there something similar like that for commercial tendencies?
 
[00:13:00] Bruce Hopkins: It depends. Whether the tenant is publicly traded with large asset size is a large proportion will be publicly traded, and even those that are large tenants that are privately held usually can provide you with some letter or provide you with some assurance that all the stores held under that trade name are owned by the same entity. It’s more work and less reliable when you’re dealing with local tenants. But there are credit reports. Of course, useful can be litigation history because that tells you both have people, had a trouble with them, and maybe will they be a litigation risk for you. So, it’s worth checking that there are companies that for the low hundreds of dollars or mid hundreds, and if it’s complicated, maybe four figures, but not heavily into the thousands that can do a little more basic financial report and can give you some more detailed information about the size of transactions they seem to have and where their financial relationships are out of all that. Plus, when you’re dealing with a small owner, what you can ask for is the tax return, or at least a page that shows the adjusted gross income. And so, they’re probably being honest with the government about that. That might be reliable for you. So, nothing that’s particularly perfect. But a lot of things that will give you a sense.
 
[00:14:23] Paul Sian: Okay, that’s great. Great insight. Let’s look at some of the ways that the new investor can protect themselves legally, you know, in addition, to speaking with a commercial real estate attorney. What are some tips that you can give to that person you know prior to speaking with an attorney? But, hey, here’s some. Here’s some ideas here some ways that you know you can make sure you’re less likely to get sued or you’re less likely to find yourself in court or some other issue
 
[00:14:50] Bruce Hopkins: or another. Well, mostly real estate agreements are not binding. I’m both there in writing, and they’re signed by the people who are going to be sued by you if you’re going to be sued. It’s a little bit different and in this way, slightly safer than some other types of commercial activity, because unless you put it in writing and signed it, typically a court will not charge you with, say, having contracted to buy real estate. But what’s the one thing you might sign before you see your lawyer? That’s your letter of intent. So, the one thing I would plead that people do is make sure that letter of intent is non-binding. It says it’s nonbinding. If there’s something in it that’s binding like confidentiality, make it clear this paragraph confidentiality is the only binding aspect. And so, I’d say, don’t sign anything that’s binding. And if you’re asked to sign some sort of term sheet or a letter of intent, make sure it has a very clear statement. It’s not binding. If you do that, then you’re unlikely to be in legal trouble before you get to your lawyer.
 
[00:15:55] Paul Sian: Yes, that’s true. Switching gears here slightly from the residential perspective. In terms of when you’re going from buying a house, you know you make an offer, you do your inspections. You wait for the lender to do their appraisals, then get towards closing with the title company. How is that similar or different? On the commercial side,
 
[00:16:16] Bruce Hopkins: it’s similar in terms of everything you do. It’s simpler in terms of some things you don’t do, but you do still have to investigate. And while the items you’re discovering are smaller in scale, they are far more important to you. If you see some height problem on a stairwell in a house within your budget, that’s probably structural and unfixable. We’re with a larger investment. You can say, Well, I’m going to have a X $1000 contingency to fix things around the property and minor things you see you can assume are fixable, whereas the house more attention to detail. One thing that I think people don’t do is ever look at their real estate contract, and I understand that those are preprinted forms, but the items that aren’t preprinted or that our numbers and our preprinted are worth remembering. It’s very important, so simple to know. When does your contingency period start and end? You made your concern, and talking with a lawyer on air is to hear how you’re legally can be protected. Make sure you know your dates and don’t miss them. If you think you need to get out by a certain date, start all of your investigations early so you can be done by the date involved. Obviously, title is usually not a problem in real estate, but I actually have seen a case where someone bought a property that was subject to, uh, forestry easement for the owner next door and thought nothing of it. But they didn’t read the details of that and see oh, the forestry. Cheeseman extended this far, and it prohibited decks, and they were constructing a deck and they had to stop and rip it out. So, if there’s anything unusual at all in your title that looks like it affects what you can do inside the four boundaries of your property, don’t just say, Oh, that’s probably standard. Read it.
 
[00:18:11] Paul Sian: Yeah, we read it. And time is of the essence. That’s what a lot of attorneys will talk about. Let’s go talk about a little bit, uh, commercial leases. I mean, quite different than the residential leads in the residential lease you’re looking at, you know, one-year lease. Sometimes paying utilities, sometimes not paying utilities. You know there’s certain things landlords cover. There’s a lot of laws that cover residential leases versus commercial leases from my understanding What? What can you share with us about that?
 
[00:18:40] Bruce Hopkins: Well, that’s the I would first agree with you about residential, especially multifamily residential. It’s not that single family residential is heavily regulated, but for an investor, you’re probably unless you are a home renovator yourself. You’re probably looking at investing in multifamily to get scale and multi Family. Residential is very heavily regulated, both at the state level, and it’s different in every state and at the federal level. Commercial real estate outside of multifamily is typically mostly unregulated, so that’s a significant difference. The laws that govern commercial real estate typically have more to do with land use. And if you are not going to change the use, then usually there’s not a great deal of law that comes into what a property can or can’t be used for. But terms that do get thrown around in the commercial real estate world are some terms that everybody uses, but nobody quite knows what they mean. And they are terms that lawyers use. Let’s use a great example going back to a letter of intent. It’s very common, particularly in a retail, sometimes industrial, sometimes office to see the phrase triple net Well. It’s a good, useful phrase, but lawyers don’t use it because it isn’t well defined. Triple Net has a concept that’s clear and widely understood, which is the idea that costs are passed through to the tenant taxes, insurance costs of maintaining the property. And that makes sense because the market has learned over decades that the tenant will wind up paying less, and yet the landowner will wind up with less risk. If the actual costs are simply passed through, it might seem simpler to say, Well, we’ll just pay you a fixed amount for, say, common area maintenance. But when that happens, experience over decades has been. The landowner wants to charge a premium and always does because this is an investment for them, and they must protect prudently the investment income so they want to cushion from unexpected shocks. That means the tenants paying more overtime than they would otherwise. But what is included in Triple Net is open to negotiation and is different in many deals. For instance, taxes and insurance are pretty objective and pretty uncontrollable. So often taxes and insurance are simply passed through without any question but for operating costs. If it is a property that has staff, what personnel are included or excluded? Is there a management fee? Is there an administration fee? If there’s capital expenditure, is it allowed? Is it advertised over the life of the expenditure? Is it done in one-year lump sum, which can be a nasty shock for a tenant? Our marketing costs for the property included in common area are decorations cost, so triple net is a great way to get through a letter of intent. But for a commercial property, you’re probably going to need to think carefully about the operating costs passthroughs once you get to an actual lease.
 
[00:21:49] Paul Sian: So that would be part of your due diligence to if you get existing tenants into property, you’re considering just looking at the leases. What did they say? What are the tenants paying and what is the owner responsible for paying?
 
[00:21:59] Bruce Hopkins: Absolutely. If you have plans to renovate your center and you think you’re going to do a lot early on, do the leases allow you to pass through capital costs, like redoing the parking lot or re landscaping? And if so, are there caps on how much can be included in each year? You might plan your budget and your schedule based on what allows you to pass through the costs. Okay,
 
[00:22:24] Paul Sian: moving on to property management, you know, comparing again. The residential property management on residential side is pretty heavy regulated, and there’s a lot of state laws a lot of, uh, you know, just going back. Similar with the leases for residential, there’s a lot more regulation. How does that compare on the commercial side?
 
[00:22:41] Bruce Hopkins: There are very few regulations that apply. There are always employment type regulations and the things that apply to operation of any business but particular custom to commercial real estate. Really not. The practicalities of management for commercial real estate really instead, vary with who comes to the property and how often do they come. If it’s the general public, whether it’s multi family, residential or whether it’s commercial retail, that’s going to have a lot more management variables than a property that is the other extreme. A single occupant, industrial or office property not open to the public. The tenant just shows up for work there every day and utilizes it for their business. But nobody else comes. The amount of complexity explodes, the more people are involved. If it’s multiple tenant and then particularly of members of the public, come at that point. Are you employing a management company? Are you employing leasing company? Do you have multiple vendors you’re working with for various services? So, the property condition also becomes a question of risk when the public is coming as to who is responsible for what in general, all risks associated with normal operation of commercial real estate can be insured. But to the insurance coverages of landlord and tenant fit together. And are they all together a seamless web? If there’s a problem, will there be dispute in this area Typically, sophisticated properties often take this away from the lawyers in terms of the actual coverages and simply have the risk manager and advisor. If it’s a third-party insurance broker, someone in house work together directly to agree. Here’s what the coverages will each maintain, and this is who will be primary and hand that back to the lawyer. The lawyers are still asked to resolve concepts like indemnity that are a little more legal and that I won’t dive into today. But in general, the insurance pros can solve the basics of who covers what and what coverages will be carried without needing the lawyer to write all that down or spend time on it.
 
[00:24:54] Paul Sian: So that’s another. Keep growing team members, the insurance person to kind of bring on your team attorney, your lender. If you’re financing the deal as well as an insurance person, they’re all great tips and the great conversation. Any final thoughts? Bruce.
 
[00:25:11] Bruce Hopkins: Well, I was right. I have been doing this for many decades and it still is different every single day.
 
[00:25:20] Paul Sian: Great. Thank you for being on.
 
[00:25:21] Bruce Hopkins:  Thank you.