JF2062: Commercial Real Estate During The Coronavirus With Tim Karels
Tim is the Owner of Falls Real Estate, he owns and manages $15-20M in commercial real estate and has over 9 years of experience. The coronavirus has impacted everyone in the market and today Tim explains from a commercial real estate perspective how he is handling rent collection and making property improvements
Tim Karels Real Estate Background:
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“We have to emphasize with everybody but we also have to remember we have our own investors and mortgages to pay and we should look at how we can work together as a team.” – Tim Karels
Theo Hicks: Hello, Best Ever listeners, and welcome to the best real estate investing advice ever show. My name is Theo Hicks, and today we’ll be speaking with Tim Karels. Tim, how are you doing today?
Tim Karels: I’m pretty good. How about you?
Theo Hicks: I’m doing good, thanks for asking, and thanks for joining us and being willing to talk about what everyone is talking about, which is the Coronavirus. Today we’re gonna talk to Tim about how his business is being impacted by the Coronavirus, and just all things Coronavirus.
Before we get into that, a little bit about Tim. He is the owner of Falls Real Estate, which owns and manages 15 to 20 million dollars in commercial real estate. He has over nine years of experience in real estate investing. Based in Sioux Falls, South Dakota. You can say hi to him at FallsRE.com.
Tim, before we start talking about the Coronavirus, do you mind telling us a little bit about your background and what you’re focused on today?
Tim Karels: Yeah, a little bit about myself – I am born and raised in South Dakota. I’ve been here my whole life, and I absolutely love it here. Our real estate is all focused in South Dakota as well. Right now we’re really just focusing on potentially looking what we can do to improve our properties. It’s really hard right now to look at investing in properties, given the situation that we’re all experiencing… But the labor force is looking for projects and for stuff to do, so how can we use that labor force, often at a cheap rate, to improve our properties, and also try to help the economy and keep people in business.
Right now it’s status quo on the investment properties, but how can we improve those, and focus on how to collect the rent, and the best way to deal with people that might be put into a bad financial situation based on the virus.
Theo Hicks: Perfect. Thanks for sharing that. So before we dive into our tactics, I wanna just set some more context, so people understand what your portfolio is. It’s 20 million dollars in commercial real estate… Do you wanna walk us through how many properties that is, what they are – is it retail, office, medical, multifamily? That way we have a little bit more context, and then hone in more specific questions.
Tim Karels: It’s really just four large properties, mainly consisting of office space. We have some downtown — Sioux Falls is a metropolitan area of about 200,000 people, so it’s not very big, but it’s the largest in South Dakota. We have some loft apartments, we also have some retail, some restaurants, and some event centers.
So it’s a mixture – probably about 75% office and 25% in that specialized retail and apartment and loft. So kind of a mix of basically everything.
Theo Hicks: Perfect. So your two main areas of focus right now are 1) improving your existing properties, and 2) making sure you’re able to collect rent. I actually haven’t talked to anyone who — because most people I’ve talked to are just multifamily… So maybe we can focus on the rent collection part first. Obviously, a lot of retail places are shut down because of the stay-at-home orders and the essential business orders and things like that… So maybe walk us through how you’re approaching collecting rent on your retail properties specifically.
Tim Karels: We’re definitely working with our retailers. The PPP program that’s come out has 75% to be used for payroll and 25% to be used towards rent and utilities. It’s our focus to try to help as many small businesses in the retail sector succeed, as much and long as possible, understanding that we have to keep the lights on and the building at working condition, even if we’re not getting rent, and knowing that we have our own mortgage to pay. So what we’ve been doing is working on a case-by-case basis, giving these retailers some context in the banking world, the financial world, to allow them to apply for the PPP. We’re not really telling them that they should do it, we’re saying “Hey, you have to do this, especially if you cannot pay rent.”
Once they do apply for that PPP — I know the banks had a hard time rolling it out. It sounds like we’ve already hit 250 billion out of the 350 allocated, and by Friday that’s gonna be hit… So if these retailers did get their PPP in, they got funded. We’re working with them on a case-to-case basis on how we can collect rent, while they utilize the ratios that the SBA has allocated for how they can use those funds.
If they haven’t applied, we’re telling them to apply, and if the funding does run out, we’ll have to probably just defer the payments until they can get that PPP. If they’re not gonna apply for the PPP, then unfortunately they’re not gonna try to help themselves. We will probably just gonna have to go through the legal realm of what happens when somebody doesn’t pay a rent.
So we have to empathize with everybody, we have to try to help everybody as much as we can, but we have to also understand that we have our own investors and our own mortgage to pay, so how can we all work together as a team. Usually, it is on a one-by-one case type thing.
Theo Hicks: Thanks for sharing that. That makes a lot of sense. I know that PPP program is very helpful for a lot of people right now. What about office? My wife works for a corporation who has an office in a downtown area, and they’re all working from home… I guess it depends on what type of a renter you have, but it might just be a little bit different for an office; those corporations can just work from home. The company is still making money, so I’m assuming they can still pay rent… But obviously, you would know more than me, so correct me if I’m wrong, if there are any problems with rents. So what types of things are you doing to collect rent on those office buildings?
Tim Karels: For the most part, everyone at the office/individuals has paid. South Dakota – we’re one of eight states that don’t have a shelter in place order. Now, the city of Sioux Falls – I don’t know if you just saw on the news; we have the Smithfield Pork Processing Plant, which has now become the number one hotspot for Coronavirus sources in the nation… So our mayor and the city council is trying to put together a stay-at-home shelter ordinance for the Sioux Falls city ordinance.
So the economy here was very strong; the offices that we rent out, those companies were all very strong, so I think in the short-term they all had cash reserves to pay for the rent. They too can apply for the PPP program. They don’t rely on foot traffic nearly as much as the retail, the restaurants, and bars, and event companies and whatnot… But how this is different from the financial collapse is that every business is getting affected. Some of them are reaping the benefits, for example exercise equipments at home, beer sales, distribution sales, liquor sales are going through the roof. If you look at even smaller things, such as planning events or wedding and all that stuff are going through.
So there are some offices that might be semi-retail that are struggling, but I think overall, they’re gonna be fine. They’re probably not gonna make nearly as much money, but I think that they’re gonna be fine, given that they can also apply for the PPP, and that it’s not affecting them like some of these retails, that literally overnight went from 100% full-blown/let’s go/balls to the wall, to they lost 90% of their business in 12 hours. It’s just crazy.
Theo Hicks: Yeah, totally. I figured that’d be the case, where retail would be a little bit harder hit than office. I guess depending on the retail too, because as you mentioned, if you were renting to a liquor store, then they probably have no issue; maybe you can ask for a little bit more rent from them, or something. [laughs]
Something else you mentioned too that I really like, and it’s funny, actually my mom was talking about this stuff – what are you gonna do during this time to improve and come out the other side better… And you mentioned that one of your focus, since obviously acquisitions are slowing down – what can you do to improve your existing portfolio. So you’ve got office, retail, apartments… You can either go one by one, or just overall improvements you’re making. Give us some examples of things that you’re focusing on right now to improve your current portfolio.
Tim Karels: Like I said, we have some exercise rooms and facilities in some of our real estate, and people are feeling uncomfortable going out to exercise facilities that are off-site, and they might even feel uncomfortable going here, but we do have our cleaners go in… So we’ve been buying new equipment; if there’s some shoddy or old equipment, we’ve been replacing that… We’ve been looking at what type of things that will bring some more bang to the buck.
It literally could be just simple things, such as painting, things that you don’t need to bring in a whole crew, because — keep in mind, we don’t have that shelter in place quite yet, so business that are deemed not essential still can come in to work. So we are trying to keep our tenants as comfortable as possible by not bringing in a whole crew, and demolishing and putting up new stuff… But if we can paint, replace countertops, replace flooring, elevator panels, the equipment rooms was a big one… And just stuff that will make a small difference and make the tenants maybe feel a little bit happier, knowing that we’re not bringing in a whole crew to do it and risk their health.
Furthermore, there’s people out there looking for work. I’ve just had my HVAC system go out in my house, and I called an HVAC company because it’s 28-30 degrees out at night, so we still needed some heat… And I had a guy come in 15 minutes and he basically just said “We’re sitting on our butt, we’re looking for work. If you need some stuff to get done, now is the time, because we can probably get you a good deal, at least on the labor side of stuff.” So I think it’s those kinds of improvements that you can look to do without jeopardizing much health for your tenants.
Theo Hicks: Okay. Is there anything else that you wanted to mention as it relates to the Coronavirus and your business, before we move into the lightning round?
Tim Karels: I don’t think so. I think it’s interesting, because most financial institutions when it comes to mortgages that are due – I think if you’d have someone have good relationships with them and you are struggling with cashflow, a lot of the institutions will hopefully do an interest-only, or maybe defer some payments or move them to the end of the loan… But I really think it’s important that landlords do work with their tenants as much as possible.
I see some tenant strikes going on in the bigger cities, but I also see some landlords that send out unreasonable letters to their tenants… And I just hope that as Americans we see the bigger picture; we know that we’re all struggling, so how can we help each other, and what can we do?
On the residential side, I think the government is taking care of most people, whether you agree with it or not… But with that being said, there’s still gonna be independent contractors or people that own small businesses that haven’t got the PPP, or they’re a seasonal business and they can’t get what they need, that are still gonna need to be worked with.
So I just hope that other landlords have the passion to work with these tenants, but I also hope that tenants don’t always [unintelligible [00:13:36].21] tenant strike, and hurting landlords that are providing housing, and trying to help people with their businesses, and stuff like that. That’s really all I had to say, and hopefully we can get through this together.
Theo Hicks: Absolutely. Okay, are you ready for the Best Ever Lightning Round?
Tim Karels: Yes, sir.
Theo Hicks: Okay. First, a quick word from our sponsor.
Theo Hicks: Okay, what is the best ever book you’ve recently read?
Tim Karels: There’s a book called The Richest Man in Town. It’s actually written by a guy from Brookings, SD. An individual that worked at Walmart his whole life, who absolutely wasn’t rich, but had the best personality… And it’s changed my life, and it made me look and be more humble.
Theo Hicks: If your business were to collapse today, what would you do next?
Tim Karels: Probably go camping for a month, and just let my mind get clear. I’ve worked hard, and hopefully it doesn’t collapse, but I also deserve a break, I think.
Theo Hicks: Do you go camping in South Dakota somewhere?
Tim Karels: Probably I have to because of the restrictions, but it’s a little cold. So if it collapsed today, I’d probably wanna go somewhere down South.
Theo Hicks: What deal did you lose the most money on, and how much did you lose and what lessons did you learn?
Tim Karels: Probably just trying to get into the house flipping. I didn’t really lose that much money because of the appreciation that houses had, but when you put in your time and effort on it, and you have to pay your property taxes back, pay a real estate agent back, pay short-term capital gains… I looked at the amount of money I was making versus the time I spent, and it’s “What can I do better and become more efficient?” To be honest, it scrapped the whole idea altogether. I think because I learned from it quickly, it saved me tons of money in the long run.
Theo Hicks: And then lastly, what is the best ever place to reach you, and anything else you wanna mention before we wrap up?
Tim Karels: Just my website, www.fallsre.com. Fill out a Contact form if there’s anything to talk about. I don’t know, I just like talking to other people about the investing world. I own a couple other businesses too, and I just kind of like to stay in touch with everybody about anything business. So if there’s anything to talk about, feel free to contact me. If you’d like to have a phone call or if you’re in the area when this whole thing gets done, have a coffee or a beer or something.
Theo Hicks: Alright, Tim, I really appreciate you coming on the show today and being willing to talk about the Coronavirus and how it’s impacting your business. To just quickly summarize what we’ve talked about – your portfolio consists of mostly office. We’ve talked about how most people have been paying their rent; office is not gonna be as impacted as retail is. You kind of walked through what you’re doing on some of your retail properties, which is mostly asking and telling your tenants that “Hey, you guys need to apply for this PPP program, so you can use 25% of that loan to pay for your rent and utilities.”
I also really liked when you talked about how you’re focusing on how to improve your existing portfolio during this time, as opposed to just writing it out, not doing anything. You basically mentioned that you’re trying to do things that make a small difference and make your tenants happy, not having to bring in a full crew to stress them out about potentially catching the Coronavirus.
So again, I really appreciate you coming on the show. Best Ever listeners, as always, thanks for listening, stay safe, have a best ever day, and we will talk to you tomorrow.
Tim Karels: Thanks. You have a great day, too.
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