In this episode we talk about sublease considerations for sublandlords and subtenants amid COVID-19. At 3:18, Dan Marks talks about the changing landscape of real estate following the sweeping rent regulations passed last summer, the world of commercial industrial leasing, and his strategies for success in the competitive market of New York City real estate. 

More information on sublease considerations for sublandlords and subtenants amid COVID-19 available at: https://www.coopersmithandcoopersmith.com/2020/05/11/sublease-considerations-sublandlords-subtenants-covid-19/

                                                                                                                  Transcript

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Hal Coopersmith: Welcome to Broker’s Angle. I’m Hal Coopersmith and in this episode we talk about subleasing considerations amid COVID-19 and our 30 minute or less interview is with Dan Marks who touches on how real estate regulations have affected the market. 

Dan Marks: I think, you know, last June when the rent regulations came through we saw an immediate drop in demand and values for multifamily products. That was an asset class that had traditionally been outpacing almost any other asset class. There were programs in place that allowed property owners to improve their properties and increase rents and really add value to the multifamily stock. When the rent regulations came through last year, it really limited what people could do as far as adding value to their properties, adding income to their properties and put a cap on that and really sort of stopped their ability to make that big add on. 

Hal Coopersmith: But first Broker’s Angle is sponsored by the law firm of Coopersmith and Coopersmith, a boutique real estate law firm practicing in commercial and residential real estate for over 87 years. This of course is attorney advertising, so we are obligated to say prior results do not guarantee a similar outcome. 

Richard Coopersmith: Hal you’re doing a far better job than I am. 

Hal Coopersmith: That is always so kind of you to say, Richard and great to be back in person with you. So we thought in this episode we should talk about subleasing advice for companies as they think about reducing their real estate footprint. First and foremost, it’s about security. 

Richard Coopersmith: That’s right. For either the sublandlord or subtenant’s perspective, the main concern should be about preserving the overlease, especially during this time of heightened risk. So from the sublandlord’s perspective, there should be an increased focus on the security deposit as a letter of credit, which is preferable to a cash security deposit in the event of a subtenant’s bankruptcy. 

Hal Coopersmith: And from a subtenant’s perspective, in the event a sublandlord becomes insolvent, the subtenant should attempt to have a recognition of the sublease from the overlandlord so that they can stay in the premises and pay the same rent under the sublease. But of course with declining rents that may not be possible. So at the very least, the subtenant should have the option to preserve the lease by paying the amount of rent under the overlease. 

Richard Coopersmith: And another item that both the sublandlord and subtenant should think about are operating expenses and services, how services might increase or decrease as a result of COVID-19 and how certain costs for operating the building will most assuredly increase. 

Hal Coopersmith: Of course, there are also considerations for alterations to the space as well, since the current configuration may not match the current needs, and we can make this whole episode about sublease considerations, but instead, we’ll link to our notice about Sublease Considerations for the Sublandlord and Subtenant Amid COVID-19 in the show notes. And with that, let’s go to our interview with Dan Marks. 

Hal Coopersmith: So you’re a Colorado guy and you moved to New York? 

Dan Marks: Yeah, I’m actually originally from a town called Glenview, Illinois, just outside Chicago. But I came here to New York from Colorado. I spent about seven years out in Boulder, got my MBA and that’s where I got exposed to commercial real estate. I was doing a lot of property management, a lot of commercial leasing, industrial retail office. And then at the end of 2011, made the big switch from Boulder, Colorado to Brooklyn, New York. 

Hal Coopersmith: So you didn’t go to Brooklyn for the mountains. How come you moved to Brooklyn? 

Dan Marks: I know, I definitely didn’t. I think Sunset Park is the highest point in Brooklyn and I don’t think there’s any skiing happening over there. I came to Brooklyn, you know, coming from the Chicago area. I think I had sort of an urban mentality in my blood and spent I think as much time as I needed to out in Colorado it’s a beautiful place to live. I had a lot of great experiences, met a lot of great people and got a good degree. But I think when I was sort of staring down my thirties I decided, you know, I wanted to really challenge myself and find a bigger market. And the market that I thought was a little bit more dynamic and I had a lot of friends in New York and they were encouraging me to move here. Like family was encouraging me to move back to Chicago. And I met a lot of people in New York and had the sort of lucky happenstance of meeting Ofer Cohen who started the firm, TerraCRG that I’ve been with since day one. And he really convinced me that while it was nice to have this sort of fancy degree, you’re not really an analyst. You’re not a private equity guy. You’re a sales guy, don’t deny who you are. And, this is a really interesting market. Could be good timing for you to enter. And he was right. You know, the market took a big hit back in 2008, 2009. I wasn’t paying attention then, but by the time I made the decision in 2011 to make that move, the market was starting to shift. Some good things were happening and I wish I would have come in 2010 so I could have caught a little bit more of the upswing in 2011, 2012. 

Hal Coopersmith: But you still got there. What were some of the differences between what you were doing in Colorado and learning the New York market? 

Dan Marks: They’re very different markets and they operate extremely differently. 

Hal Coopersmith: No surprise. 

Dan Marks: I will say that every step of my career, and I think everyone’s career, you learn certain things at different times, and I learned a lot about how to negotiate leases, how to read contracts, how to understand what people were looking for, what drove people to make decisions, how to sell people on real estate, why location mattered, building features matter. And through my property management, I learned how buildings actually worked and CAM and really the lingo. So I was able to translate a lot of the real estate experience from Colorado to New York. The dealmaking was very, very, very different. This was a much faster pace, much more aggressive, way more competitive market. And I don’t think I was really prepared that when I first got here. 

Hal Coopersmith: And so how did you adjust and what’s an example of how it was more fast paced? 

Dan Marks: I kinda had to fake it until I made it honestly. You know, I just, I got here and I remember I was doing a property tour and one of the guys said, well, how many offers have you received on the property so far? And I’m very honest, almost to a fault. And I think I said three or whatever the number was. And Ofer was with me on the tour and after the tour he said, listen, this is New York City. You don’t have to lie to people, but you don’t have to tell them three. You can say quite a few. A handful, you know, I mean it was, it was just sort of a different way of positioning yourself in the market and you know, multiple bids coming in and people touring and the negotiating styles, I mean this is like the major leagues and it was really eye opening and it was like, okay, I have to adjust the way that I’m messaging myself and the way that I’m speaking to people and positioning our properties and really learning from scratch what it takes to actually sell a property in this market. In Colorado, you could do due diligence on every single deal. In Brooklyn at the time, due diligence was a four letter word. We were not getting any due diligence. So I remember somebody made an offer early on and there was 30 days of due diligence, that seems reasonable and Ofer again over my shoulder says, no, this is New York City, this is Brooklyn, New York. They’re not getting due diligence. They can do it before they signed the contract and that’s the way this deal is going to go down. And I’m like, well that doesn’t seem fair. He’s like, get with it. This is the way this market works. Like, okay, lesson learned. 

Hal Coopersmith: So I really like the contrast between the two markets. But one of the things that you said is honest to a fault. And so how did you kind of toughen up and be honest while still not being too honest or honest to a fault? 

Dan Marks: I think, you know, you sort of walk, sometimes you walk a fine line as a broker, you know you have to keep in mind you’re representing the seller or the landlord and you want to make sure that you’re keeping the process really competitive whether it’s a buyer or a tenant and you can still be honest with people without showing all of your cards. And I think that you have to just sort of learn how to position the property, learn how to talk to people. And you don’t have to lie to people. You can still be honest with them, but you don’t have to give them all of the information because you know, that’s your leverage. That’s what you’re going to try to hold on to, to try to get a deal done. When I was in Colorado, I wasn’t doing as much deal-making because I was doing property management and I was doing different sort of jobs. Here I was a hundred percent commission, it was all selling properties and so it had to be able to sort of change my attitude and change my messaging in order to really convey that. 

Hal Coopersmith: You mentioned early on that you miss part of the upswing. How do you see the Brooklyn market, which is something that you specialize in now and how is that market doing? 

Dan Marks: Yeah, I mean TerraCRG, the firm I’m with is an only Brooklyn commercial real estate firm. We do sales and leasing. 2010, the year before I got into the market, the commercial sales market was a billion dollar market. By 2015 it was almost a $10 billion market. And just this last year we released our report. It’s around five and a half billion. And so I got here during that run-up. We went from like a billion just a few years earlier to five years later, it was almost 10 billion. So I was right at the beginning of that run up. And I don’t think I had anything to do with me. It was just sort of lucky timing. Right. But in the market now.. 

Hal Coopersmith: You mean you didn’t add $9 billion worth of value? 

Dan Marks: I don’t think so. Maybe. Maybe. I don’t know. I don’t think so. But I will say, I’d say the market is healthy. I think there are a lot of political winds that are scaring a lot of people. But in general, you know, a $5 billion market stacks up against a lot of other markets around the country. You know, Chicago is about that same size as this market and we’re just talking about Brooklyn here, not in New York City, you know, so there’s still a lot of opportunity. I think in Brooklyn, people are still moving there, there’s still a lot of development, a lot of growth. There’s a lot of exciting things happening there. 

Hal Coopersmith: And where are the opportunities? What are tenants and landlords trying to do to position their properties? 

Dan Marks: So I’ll, I’ll say I can speak really intelligently about the commercial industrial sales side. You know, I lead an industrial sales commercial sales team and that is definitely the hottest asset class I would say in New York City, regardless of borough, not really Manhattan as much, but the outer boroughs is really strong demand. And you know, we did a couple large deals with Prologis last year. The first deals they’ve ever done in Brooklyn, they weren’t the only bidder on these sites. I mean these are very aggressive bidding processes, competitive processes and they’re really looking for scale. By and large, they’re looking for properties that have buildings and they’re looking for properties that have land because they’re really trying to cater to the e-commerce boom. And if your property has good industrial features and it has good land for off street parking, that site is going to go really ultra aggressive into the market. And you know, the things they’re thinking about are, and it’s not necessarily just the Amazon’s of the world, I mean there’s a lot of companies that support these bigger companies and there’s a lot of laser ship type companies and sprinter van sort of to help with that last mile and the population is so dense here in New York that these people, these investors will look for properties that maybe aren’t as ideal as they would find in places with more land. So they have to get a little bit more creative in how they design them and how they market them to potential tenants. Obviously talking about tenant improvements and trying to figure out how they’re going to try to take these old warehouses and position them in a way that these tenants can actually make them work. I think that’s, you know, that’s probably one of the biggest challenge that they have. 

Hal Coopersmith: And so what are you seeing for tenant improvements is the landlord doing the work? Are they expecting the tenant to do the work? 

Dan Marks: It’s hard for me to say. I would say that the landlord I think is trying to get these buildings to a sort of a, not white box, but sort of base features: level floors, Trying to get the roofs in great condition if not raise them to some extent, putting in overhead doors and getting good access, but once they can deliver those base features, then the tenant then would take over. From that point we were growing our industrial leasing team and we’re hiring for that now, but most of our expertise on that side has been on the sales side. 

Hal Coopersmith: Anything else you see happening in the Brooklyn market that people should know? 

Dan Marks: Yeah, I think, you know, last June when the rent regulations came through, we saw an immediate drop in demand and values for multifamily products. That was an asset class that had traditionally been outpacing almost any other asset class. There were programs in place that allowed property owners to improve their properties and increase rents and really add value to the multifamily stock. When the rent regulations came through last year, it really limited what people could do as far as adding value to their properties, adding income to their properties. And it put a cap on that and really sort of stopped their ability to make that big add on. But expenses continue to go up without any cap. And so investors basically said, so I’m going to buy an asset that increases expenses every year, but I’m going to be limited in how much I can actually increase my rents. And you know, that’s not a really good value proposition for me. So I’m either not going to be investing in that asset class right now or I’m going to be chasing a much higher cap rate. So instead of paying sub five, now I’m going to be paying north of six or seven in order to adjust for a potentially depreciating value over the next few years until something gets figured out. So we’ll see how it plays out. You know, we’re, we’re a nimble firm in the sense that we can change our strategy and the types of assets that we’re going after you know, in a day. And so our multifamily teams are really focused on less regulated type apartment buildings and have been successful in that side of the business. But yeah, I mean got great benefits are coming up on the, on the leasing side. We’ll see if that benefit gets extended. That’s a really important thing for the leasing side of the business. The Affordable New York Act for the residential development side of the business is coming up in a few years. I mean these are critical incentives to continue to entice companies to move to Brooklyn, to move to New York City to develop in our markets and without them you’re not just disincentivizing people in New York City. I mean people are just going to go to other cities. This is, you know, this is a great city and I love it. My family lives here and I’m really glad I chose to move to Brooklyn, but some people are just saying to us, you know what, there’s too many regulations. We’re having a hard time wrapping our head around this. We’re not sure when, we don’t necessarily see an end in sight and we’re going to take our investment dollars and put them in another market for now. And as a broker in this market, you hate to hear that because we think this market has so much to offer, but we also are realistic that the government has to allow certain incentives and programs to make sure that people are able to, you know, these are for- profit companies and so if they can get a better profit someplace else, they’re going to go someplace else. So yeah, we’ll see how the political landscape sort of shakes out. 

Hal Coopersmith: Certainly as a lawyer, and we talked about this before the interview, there are a lot of regulations that I’m familiar with that have affected real estate and will continue to affect real estate. But before we wrap up, I do ask this question to everyone who’s been a guest. One piece of advice that you’ll give to other brokers and you can’t say honest and you can’t say being too honest because we already talked about that. 

Dan Marks: Fair enough. Okay. Maybe it’s a two part answer. I think reputation is key. It’s one of those things that takes a lifetime to build and it takes sort of a moment to destroy. And so I think as a broker, you know, we have sometimes a bad reputation in the market and I think that you can change that as a broker, you can change that just by dealing with people honestly and fairly every single time, no matter the circumstances. So I think that’s one key part. I think the other part is, and I had learned this the hard way, which was, you know, I came into a new market, I knew nothing about it and I had to work really, really, really, really hard, harder than I even knew I could. And I made the smallest amount of money I’ve ever made in my life, even the first job out of college. And so you have to have that sort of ability to balance really, really hard work and not making any money and the patience and persistence to be able to keep grinding, keep working towards that success. Because if you give yourself enough time and you work hard enough, there’s nothing that makes me any more special than any other broker in this market except for the facts. When I first got here, all I did was I worked really, really, really hard. And I believed that if I put in the long hours that I put in the time and went to the networking events and read all the articles and did all that kind of stuff, that I could learn more than people and I could add value to my clients and over time it’ll work. But you have to have that, that long view that, that patience in order to get there. 

Hal Coopersmith: Well, that is a great note to wrap things up on. Dan Marks thank you for being on the Broker’s Angle. 

Dan Marks: Thanks for having me Hal

Hal Coopersmith: That wraps up our interview with Dan Marks. For more visit brokersangle.com or follow us on social media @brokersangle and please feel free to email us at angle@brokersangle.com