J Darrin Gross
I'd like to ask you, Jason Aster, What is the Biggest Risk?
In my little space, the Biggest Risk is willful blindness to what you should be paying for your lease. You spend a lot of money and time getting into these major leases, hundreds of 1000s of dollars in legal fees, brokerage millions and brokerage fees depending on what party you are, you know, FF and E fit out for you 200 bucks a square foot a huge amount of money getting into them. I think you mentioned this before. It shouldn't be your duty, if you're going to spend this amount of resource to get into it to make sure you're getting what you're supposed to add of it. So the biggest risk is just being willfully blind and not having an expert. Look at it behind the scenes. The interesting thing about risking our space and kind of in relation to the way you describe your day to day work is is operating expense pass throughs is a risk adjustment. That's what it is the landlords back in the 70s, they just charged rent. Like a lease when you were a kid in an apartment, like you paid your rent, and they factored in some amount into it. And then one day, their insurance policies when there was a fire now the rent another, what do you do? You got to pass it through, you have to shift the risk. operating expense theory is a shifting of the risks that landlords have said, You're backing this up, it's too much risk. look and think about all the things inflation is happening too fast rents not enough, I don't have the ability to Jack my rent though. My insurance policy taxes are going up. Right, the union rebar bargained for something right 32, BJ in New York bargained for better fringe benefits. And now I have to pay that, I have to figure out how to reallocate the risk of operating my building across my tenant that basis because I can't bear it anymore. That's what operating expenses are, they're an adjustment of risk. What's happening now from a risk perspective, other than just please Don't bury your head in the sand, pay whatever the landlord tells you is inflation. How do you avoid inflation? It's hard. And Elise, because least has happened one time and then you sit in, right? In your world insurance, landlords pay a fortune, as you know, for insurance, and they have every right to pass that through, guess what they can't control the cost of insurance. So if inflation increases the cost of insurance or some pandemic increases the cost of insurance or some you know, environmental thing, they got to pass that through. So that's construct that's considered an uncontrollable cost, right landlord can't control insurance, they can't control taxes, they can't really control within reason, the amount of money they spent for utilities. So when you negotiate a lease, landlords will fight as they should, to say, I can't control these these things, we're gonna call them costs, I can't control, you just gotta pay your pro rata share, it is what it is, I'm not going to fluff it up, I'm not going to put a percentage on top of it. So if I pay $1, for insurance, and you have half my building, I'm passing through 50 cents to you. And that's fair. The other bucket of things, all the other things cleaning security, right? You know, certain common use of things that is controllable, who you hire, what rate you pay for it would cost to manage your building is a big number. Sometimes those are controllable expenses. And that's where tenants can start to adjust their risk, including caps to, I guess, Cap inflation, right? If inflation is causing the rise of payroll, payroll is going up in the CPI is going crazy. What do you do? Well, if I think about it in advance, well, you know, inflation is usually around four to 5%. What if I kept kept some of these costs that the landlord can control? Now I'm adjusting my risk, because I don't have to worry that if we hit a hyperinflationary period that I'm ever going to pay more than this 5% cap on these costs. Now these this is only fair to a landlord, if these are costs the landlord can purportedly control. That's the road, right? That's where you need lawyers. How do you argue what's controllable, if I'm a landlord, I would go I can't control payroll, I'm in I'm in a union state. They tell me pretty good argument that I call BS. But you know, if you're a tenant, you're not well represented, you know, you're right, you can't control, right. But there's all these like, really interesting nuances. And it's all about shifting risk. It's all about shifting the risk of operating one way or another. And the bigger the better the tenant, the less risk they're going to assume. And the more they're going to push back on the landlord. And in today's market, landlords are happy to have tenants. So you will see, if you are a company looking to negotiate a lease, maybe you're negotiating a smaller one, but you're still negotiating, you might actually have an opportunity to adjust some of their shifts, some of them it's back to the landlord in the operating costs of us. That's what I would say in the landlords are going to do the opposite. Right, rents are going down in some markets. I mean, I mean, this is insane market, right? You go to the middle of Manhattan, and rents have never been higher commercial office rents. One Vanderbilt Hudson Yards one Manhattan recipe show $250 a square foot people are gobbling it up. Three blocks over on Third Avenue. Can't give it away for free, crazy. So if you're a landlord, and you happen to have great product, you're pushing the rest of your tenant. You want to be in here. If you have a half empty building that was built in 1976, and nobody wants to be there, it's a free for all.