On the show today we have… Managing Commercial Real Estate Through COVID-19 with Tim Shoultz!
Listen on: Apple Podcasts | Stitcher | Spotify
Show Links:
– SMARTCAP Group website
– Checkout Tim’s last podcast with us SIC 107
– Joe Ollis’s podcast with us SIC 65
– Our online meetup/mastermind every Thursday at 11:30am PST
– Signup now for the PNW Big Badass Real Estate Wealth Expo
Show notes for Managing Commercial Real Estate Through COVID-19 with Tim Shoultz!
The Vantastic Life is…
– is in Lake Chelan WA!
We are catching up with Tim Shoultz the CEO of SMARTCAP Group to see how they are handling this Covid-19 changes in the commercial real estate market.
Julie is working, her kids are doing homework, and buddy is sucking on his favorite stuffed animal. And Joe is cranking out work with a lake view.
Julie
Tim, give us a quick recap of SMARTCAP Group and what you guys do.
I don’t like giving referrals to people like contractors, but I don’t mind giving referrals to people like you at SMARTCAP and Spartan Investment Group with Ryan Gibson.
Tim
We are investing in office in core Seattle markets. We are in opportunity, zones with value adds.
Julie
What are you doing with employee safety?
Tim
We hope everyone out there is doing well. WA is doing a great job of doing it right.
We were proactive across the board with a super serious approach. And let’s take some quick measures to safe guard our employees.
All employees have been working from home from the start and we do a lot of things to keep moral up, with Zoom calls and such. We are focused on safety first.
In construction we aren’t fighting to stay open. We have people working from home. Even field guys are doing training from home.
Julie
What is the rule for construction right now?
Tim
We are completely shut down, other than maybe some medical work in the next couple of weeks. For a medical clinic that would help fight the epidemic.
Julie
You would usually have on site people, do you have tenants?
Tim
We do have some tenants that are considered essential.
There are things that we have put on hold or slowed down. Like parking lot sweeping, and things like that.
We are working hard to cut the costs for our tenants.
Julie
What type of employee is having to work right now?
Tim
There are vendors. All of our employees are working from home. Our property manager is going to property walks.
Our typical in-person meetings are happening via phone. We are being extra cautious to keep people safe.
We are doing walk around to look for people doing damage.
We are cutting expenses where we can, but we need to keep the quality for our assets. In the class A sub assets that we are in.
Julie
What about the maintenance things?
Tim
If it’s a safety thing, we are keeping up with that. We are delaying some heating and cooling. From 4 times to 3 times and things like that?
Julie
Are there any line items that you’ve been able to reduces that was positive? Or the biggest impact.
Tim
Landscaping and janitorial slowing down have pretty big impacts. We think we can save 5-10% right now.
We are doing anything to help our tenants survive.
Julie
What about your lenders?
Tim
We started talking with them 2-3 weeks ago, and got a really mixed response.
Heritage Bank is great, and they moved us to interest only for places with tenants, and will re-evaluate in 90 days.
Julie
That’s a great tip for those that are listening. Call your lenders to see what they say.
Tim
Yes. A lot of them are asking if we have stress right now. And we don’t, but we want to be ready, and proactive. By giving them all kinds of info to lay everything out, so that if things change they will help us.
Every single lender has said they will help us out if we need it. Some have been less specific about how they will help, which is concerning, but most have been great.
Julie
Are you getting these responses because of who you are or is this available for everyone?
Tim
Well, we are very transparent with our lenders, and try to help them as much as we can. Again Heritage has been a great relationship, and we share all that we can with them.
Julie
What about with your construction projects?
Tim
We have a lot of cash reserves, so this hasn’t been a problem.
Julie
Do you have any deals that you’re getting into right now?
Tim
We did have a good one in SoDo that we just got 2nd on.
Julie
Have you changed anything with your procedures?
Tim
The biggest is our tenant relief program. How can we protect our assets across our portfolio.
We analyzed every tenant, and marked them green, yellow, red. And started mapping out our program and options.
The 2 trillion stimulus package was still rolling out.
It took about 2 weeks. We will offer relief if tenants need it. It really depends on how they are doing and our relationship with them.
We need to see their decline documents. And we want to help them make it.
Julie
How are they reacting to requests for information?
Tim
It depends. We have some non sophisticated tenants that think we are the bad guy, and we have sophisticated tenants that really understand it.
Julie
There is this them vs. us topic going on with tenants vs. landlords, and they is very dangerous.
We need to not have this happen.
Let’s work together. For example, I’ll give you 50% off if you pay your 50%.
This could turn into a big problem if we don’t take care of it.
Tim
We’ve had some well capitalized tenants that have tried to strong arm us a little bit. And we tell them that we need to only be helping our tenants in need.
Julie
As far as reporting goes… is there a way to instead of giving a rent reduction… when you’re giving concessions to take it off the triple nets first.
So it can be tracked separately but not how the P&L reads?
Tim
I think it’s a non issue in this environment.
Julie
But it could be a mess later on, right.
Tim
It could be.
The way we do that is we are discounting rent first and keeping triple nets. We do a full billing and then note the discount.
Everyone is going to look at this like…
I have a building from 2010 that’s shutdown. And we will look back and see that we helped them.
Julie
Maybe we need to look twice at taking the forbearance on your mortgage. Some lenders are making you testify that you didn’t take any forbearance.
So don’t take it if you want to protect your borrowing capacity.
I don’t know if they will affect borrowing capacity later on…
Tim
It’s a great question. The question is… will the risk profile, will this all change. With the globalization of the world.
Julie
What if you just shift to interest only, when you borrow money will there be an extra half a point or overlay in the future…
Tim
I think the chances of that are low. I talk to a lot of the larger lending institutions regularly and they are pushing everyone in this direction.
So, I think this risk is low.
Julie
If you have tenants on different lease terms, is there a pecking order on their relief?
Tim
Absolutely! We have a couple of big building with 1-3 tenants that will cover a lot of the debt service ratio. And we have to look at them first.
Julie
What the eviction situation in commercial real estate?
Tim
On our portfolio there is nothing yet. We don’t own anything in Seattle proper. So it’s not currently effecting our property.
Seattle is the leader in that from our local economy standpoint. They are being more strict with residential.
It’s yet to be seen if the tenants will have to repay their missed rent in the future. We’ll see what happens.
Julie
We are doing every Thursday online meetups to keep a pulse on the market. Join us on our meetup.com/seattleinvestorsclub page.
What about new deals?
Tim
We are kind of unsure. There’s a significant amount of capital on the sidelines right now. And there’s a chance that a lot of these groups come through stronger.
Julie
Trying to figure out the renewals on this is going to be tough!
Tim
Right! Listen to podcast for examples.
I think that rental rates have to go down at some point. It will be interesting to see what happens within the Bellevue corridor.
Julie
How long are the loan terms that you put on, 10 years maybe… anyone that has a loan renewal coming up… that’s where you’re going to get pinched.
Tim
We will do a 5-6 year with a floating rate. So we get 3-5 years of safe guards.
Lending is hard right now. Lenders don’t know how to lend in this market.
Julie
It’s crucial for people to pay attention to when loans are maturing. So you don’t have 30% of your leases renewing in the year that you need to renew your loan(s).
Tim
We look at buildings that won’t work because the tenant is renewing when you have to renew your financing.
Julie
Huge points!
We are glad to have you guys as partners to listen to how great asset Managment works.
Time to start listening to SMARTCAP due to their level of due diligence and asset management.
Tim
The parting words that I would have. If we all bleed a little bit we have a chance of all coming out of this together.
We can all come out of this intact.
Julie
Do you have someone on your team that can help get someone financial assistance?
Tim
We haven’t gone as far as counseling but we are helping all tenants that come to us.
We are pushing people to get the government relief that is available.
Julie
Are you issuing lease amendments?
Tim
Yes. It’s a 2-3 page amendment and they do need to apply for relief. We have the option to claw back some of that relief. We also require monthly info on how their business is doing. Then they have a period of time that they can pay back the relief if they get government help.
Julie
All good stuff Tim!
Anything else that you want to add?
Tim
No, I think this is great that you are doing this. We are doing great as a company right now, and hope that we come out of this just as good!
Julie
Thanks Tim!
Let’s remind you to join us on our weekly Thursday meetup. There’s no topic and it’s been fantastic!
And I don’t think we’ll stop this.
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