JF2140: Unique Ways to Increase NOI with Shopping Centers With Alan Schnur #SkillsetSunday
Alan went from owning apartment buildings and hundreds of homes to now focusing on shopping centers. He decided to sell his portfolio of apartments and single-family homes because of all the work and challenges to scalability. Now he is able to scale and have a model of “set it and forget it” when it comes to dealing with fortune 500 companies and shopping centers.
Alan Schnur previous episode: JF1978
Alan Schnur Real Estate Background:
- Alan has bought and syndicated more than 2,000 units and managed more than 7,000 units
- Owns numerous medical, office, warehouse buildings, shopping centers, and custom builds multi million dollar homes
- Based in Houston, TX
- Say hi to him at www.gr8partners.com
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“For me, shopping centers are more scalable and more of the “set it and forget it” – Alan Schnur
Joe Fairless: Best Ever listeners, how you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast where we only talk about the best advice ever; we don’t get into any of that fluffy stuff. With us today, Alan Schnur. How are you doing, Alan?
Alan Schnur: Hey Joe, I’m doing great. How about you?
Joe Fairless: Well, I’m doing great as well, and looking forward to our conversation. A little bit about Alan – he has bought more than 2,000 units via his company’s syndication platform and managed more than 7,000 units. He owns numerous medical office, warehouse buildings, shopping centers and custom-built multi-million dollar homes, based in Houston. Today, we’re gonna be talking about unique ways to massively increase NOI with shopping centers. So first, Alan, do you want to get the Best Ever listeners a little bit more about your background, and then we’ll roll right into the topic at hand?
Alan Schnur: Sure. Thanks for the background on me, Joe. Again, thanks for having me today. What can I say – I’m a New Yorker, I spend a lot of time in New York. Actually, I worked in the World Trade Center in 2001, and I was fortunate enough to have left the building the day before on a business trip, and that 9/11 event really changed my life in many ways. I worked in the 101 floor, and the company that I worked for lost 700 out of 1,000 people, and I lost 40 out of 44 teammates; spent a week by myself in Portland when I was trapped, trying to figure out what I was going to do next with my life after that event, and it brought me to Houston, Texas. And I stayed in the commodity business for a good 10, 15 years, and I was turning everything around at that time in my life, and I wanted to create multiple streams of income. So I started buying single-family houses. Believe it or not, I bought one a month for ten years straight. So I woke up one day, I had around 150 houses and a successful commodity firm. So I decided to sell the firm, double down on the houses which I did, so I had a few hundred houses, and then by then, the world started to turn; not only with the houses, but in the commercial real estate business around 2010. So I looked around and I saw that apartment buildings were on sale. So for a five year period, every 90 days, me or me in a syndication, purchased an apartment complex, and I woke up five years later and I realized I had around 2,000 apartment units, and I grew out a property management firm too where we managed around 7,000 units and 1,000 houses, and life was good. I was just looking for something a little more easier. Sometimes we get involved in this real estate dream, not realizing how much work it really is.
So I had an epiphany one day; I woke up and I said, “You know what, I want to slow down a little or–” not necessarily slow down, Joe, but figure out how I can scale. It was a little hard for me to scale with the multifamily. It was taking up a lot of my time and the stuff that I was managing. So I sold it all. So I’ve successfully syndicated, founded, started, grew, cash-flowed, held on to, and I bought around $50 million of apartment buildings during the downturn and we sold everything for around $80 million. I took my share and I got into the triple net leasing business, the commercial aspects side of real estate, which I’m sure we’re about to start talking about. For me, more scalable, more enjoyable, I like dealing with Fortune 500 companies, getting leases signed that go for 5 or 10 or 15 years; set it and forget it as much as possible when it comes to real estate. So what can I say? So after I got rid of all the housing, I really jumped into buying warehouses, storage facilities, building multimillion-dollar houses, and most importantly, that’s made the biggest difference in changing my life over the last five years, I started buying shopping centers – don’t believe the hype, ladies and gentlemen – started buying shopping centers; awesome cap rates, even better at borrowing the money, nice good spread there of 400 or 500 basis points, and dealing with Fortune 500 companies where the leases go for a long time. So that’s really a quick background on where I am and where I started, Joe.
Joe Fairless: So apartment buildings and exiting out along with those homes got you a chunk of change that you clearly had some money going into it in order to buy a house a month for a very long period of time.
Alan Schnur: Well, you know what, I got a little creative at the time, or I want to say early 2000s. You pick up houses for $20,000, $30,000 a pop here in Texas in the surrounding areas. So yes, I did whatever it took.
Joe Fairless: What was the average purchase price would you guess?
Alan Schnur: $35,000 a house. Maybe fix it up for $5,000. I cash-flowed them for a long time for a good decade, and then woke up one day and realized that I’m gonna have to either sink another $10,000, $20,000, $30,000 into each house to bring it up to true market value; these were all rentals. Or — I just started selling them off in tranches, and that’s how I built it. I’d buy ten houses at a time, hard money, borrowed money from friends and family, or money that I was making, do five or ten houses at a time, and then go get some commercial bank loan on those houses. So it’s like the shell game, I kept moving the ball. In this case, I kept moving the same money into the next five or ten houses.
Joe Fairless: Okay, so you sold those and you sold the apartment buildings and you got a chunk of money, and then you went into triple net leasing, which as you said, was more scalable, more enjoyable. The perception that I have, and we’re going to be talking about this, is yes, more scalable, more enjoyable, but less profitable. So let’s talk about that.
Alan Schnur: Okay, so let’s talk about a few different ways of making money in this triple net commercial leasing business. Well, I have a few choices here. You could buy something empty and pay an empty price, if you know what I mean. Maybe buy 10, 20, 30 cents on the dollar, because if it’s empty, there’s no net operating income. So someone’s going to sell it to you per pound, per price. So let me back up a second. So buy an empty warehouse. I just did one recently; I bought a 35,000 square foot empty warehouse relatively really cheap, like 10, 20 cents on the dollar off of an auction, and put a Fortune 500 company in there. So now it’s cash-flowing, it’s got at net operating income… And when you have these Fortune 500 companies and they’re healthy and the piece of real estate’s healthy, you can really start talking about trading that stuff that at a 6, 7, 8 cap rate on the net operating income. So it’s a really great way of getting ahead in life. I can’t specify this enough. If you can take something broken, fix it, put a good tenant in there, figure out how you’re going to cash flow it, and then cap rate it out, you can really be off to the races and running.
Joe Fairless: Someone who’s listening to this thinks, “Well shoot, I have access to auction sites and sale sites, and I see a distressed real estate all the time, but when Alan talks about bringing in a Fortune 500 company, that’s where I have a block where it’s like, well, I don’t know, any Fortune 500 company contact people.” So what are your thoughts on that?
Alan Schnur: I know we have limited time here, so let me move the same example to the shopping centers… Because I find that question posed to me many times in the shopping center business, and it’s really just fear and intimidation. Well, how am I going to fill this spot if the tenant goes out of business or doesn’t pay their bills and leaves? It is quite different than the housing business where we can just stick up a sign and see if we can catch people driving by, which still does work in the shopping center business, but we rely more on national brokerage firms, the Colliers, the Marcus & Millichaps. There are specific firms in your area of town that do nothing but lease. It’s an awesome profession to be in. It pays out 3% to 6% commission on the life of the lease for the broker. So the broker is really incentivized to go out and get a tenant for you, and you’ll also find that a lot of these brokers are representatives of these Fortune 500 companies. So as bad as you want to bring them into your space, they’re looking for your space to create a transaction for both parties and get paid.
Joe Fairless: Okay, so what are some ways to make your space desirable for those types of companies?
Alan Schnur: Let me give you an example. I just got back from ICSC. It’s a shopping center foundation group. It’s a national group here in the United States, but it’s actually worldwide. So there was a few major meetings every year with ICSC, and it’s also nationally. So we just had our Texas meeting literally last week in Fort Worth, Dallas, and what you find is every brokerage shop and every retailer that’s interested in Texas will show up at this convention. And on the second day of the convention, for example, all the retailers actually set up a table; it’s very cool. So you have Starbucks, maybe you have Chick-fil-A, you have a major grocer, you have new franchises that are trying to break into Texas. So they all set up their table, and in this particular situation, there was around 100 booths set up for these retailers. So let’s just say, I have some vacancy here in Texas, which I always have a spot or two for a lease… I literally will walk up with a flyer, say, to Starbucks and say, “Hey, I’m on Westheimer in Houston, Texas. This is my block. This is the specific information about the shopping center. Would you folks be interested in taking a look at it?” and you’d be surprised, they move so quick. They know exactly where they are, they pull up all their data, and you’re probably going to start exchanging some drone footage of the property.
For example, I had a very successful meeting with Little Caesar’s pizza. I recently bought a shopping center here in Pasadena, Texas, and it comes with an outparcel, which is another way of making money with commercial real estate and shopping centers. This outparcel was a bonus when I was buying the shopping center.
Joe Fairless: For anyone who’s not familiar with an outparcel, what is it?
Alan Schnur: Sure. An outparcel is a piece of land. Maybe it’s like an outlier in your parking lot, or maybe even take a piece of your parking lot that backs up to a major road, and that’s exactly what this situation was. It backed up to the corner of the shopping center where two major roads intersected. So if you see me here holding my hands or if you’re listening, just picture yourself, you have a parking lot and two major roads meeting and you own the parking lot. Well, you literally can take a piece of that parking lot and build an outparcel, build a pad site for some retailer to come in.
I’ll give you even another example. I recently did this with Krispy Kreme Doughnuts and another shopping center that I have in College Station. It’s a TJ Maxx shopping center, but what’s really cool is the parking lot is huge, and we took a portion of the parking lot that lies up to this road, and we did a 20-year land lease with Krispy Kreme’s. So we took the outparcel, we just took 40 parking spots that nobody was even using, and we just built up a square, if you want to say that, and a foundation, and Krispy Kreme Doughnuts came in, they built their own structure, they’re running their own business, under the intention that we signed a lease for 20 years at $8,000 a month, with me as the owner of the property, sure. So they’re fully responsible for everything.
Joe Fairless: So monetizing 40 parking spots that you weren’t getting money for anyway, and people weren’t parking their cars anyway unless it was probably some overnight people who weren’t permitted to be there.
Alan Schnur: And let me break it out into money. What that really means by taking that 30 or 40 spaces, which was bringing in absolutely no income into the shopping center; $8,000 a month, I don’t have to take care of their property, times 12 months is $96,000, and this is trading at an 8 cap, which is high, so 0.08– I don’t have my calculator, I’m gonna say it’s around $1.2 million of value we just added to the shopping center just by creating an outparcel in a parking lot, by a busy road. And that’s another way how you create value and money in retail shopping centers.
Joe Fairless: What type of approval process is typically required to get an outparcel?
Alan Schnur: Well, first of all, if you’re the owner of the shopping center, you have to make sure that you do have the approval; you have to look at your leases. For example, I have another shopping center that has a specific national chain doctor’s office in it, and it specifically says, “You cannot block our view from the street.” So you really have to look at the easements and you have to look into the leases and you have to work with your attorneys. So for sure, I’m gonna abide by the lease and play by the rules and not put something up in front of that doctor’s office, but just maybe 100 feet down or 200 feet down, I can. So you just have to check your P’s and Q’s and see what you can do and what you can’t do, and all the leases.
In this particular situation, it wasn’t really blocking anybody. It was just a far off, distant hard corner. Back to the Pasadena, Texas example that we started talking about with the Little Caesars – so I’m pretty excited, because Little Caesars, that will easily generate $9,000 a month on a land lease, and they’re talking about $1.5 million in valuation just on the outparcel there. So again, outparcels, great advantage, great opportunity to create extra income for your shopping centers.
Joe Fairless: Okay, so outparcels is one. What are some other ways to increase NOI with shopping centers?
Alan Schnur: Well, when I buy shopping centers, I’m really looking for a 20% vacancy or even more, 30% vacancy, because they really trade on a true net operating income number. So if no money’s coming in for the spot, then you shouldn’t be paying for the spot, and that’s how I run my business here at GR8 Partners.
Let me give you a real simplified way of understanding this. When I was starting out in shopping centers, I like to start off small and then work my way up big. I started off buying around 10,000, 12,000 square foot shopping centers, and let me just keep the math easy. Let’s just say there’s six storefronts, and say they’re 2,000 square feet apiece. The first shopping center I bought was 50% vacant. So I had three tenants, 2,000 square feet apiece. So I bought that shopping center for around a million dollars. I put 30% down, so call it $300,000 down, and I valued each slot at $333,000 apiece, just simple math here. So that’s the million dollars that I paid. I hired a leasing agent, the same way I just explained it a few minutes ago. Over a 12 month period, we found three more tenants, and not only did we find three more tenants, we found national tenants. So we went for the mom and pops, who may be a pizza place or a dry cleaners, to an AT&T. We put in a national hearing aid company, and the third one I believe, was a Taco del Mar. So now I’ve got six tenants, and one side of the shopping center is worth $333,000. The other three slots are going to be worth $333,000. So all of a sudden now, on an NOI number, not only did I just pay a million dollars for the shopping center, but I doubled the value of the shopping center. So now it’s worth $2 million, and I actually did do that and I actually did sell that. So that’s a way of filling up your shopping centers and making extra money by filling up your vacancies. Makes sense, right?
Joe Fairless: It does make sense. Why wouldn’t other people do that who were competing for the same property?
Alan Schnur: I have this philosophy, the evolution of a real estate investor, a little older and wiser, just recently turned 50 and been doing this for 20 years, and I went through the same processes as every body. I started buying the houses, I started buying the apartment buildings, and then I started buying the triple net leasing stuff. Everyone wants to go through the pain, they feel like they’re not ready or they’re intimidated about filling up their shopping centers, but I can tell you, here in Houston, having a lot of property management experience, the average C Class apartment building will turn 60% to 80% every year or you’re going to lose your tenants. To me, that’s more scary… The credibility of the tenants and not paying their bills and things breaking, compared to why not do the shopping centers, why not do the triple lease? The money’s more dependable. If something breaks on triple net lease, the tenant’s paying for it. If taxes go up, the tenant’s paying for it. If insurance goes up, the tenant’s paying for it.
Joe Fairless: I think the hesitation that most people have is, one is just becoming familiar with how to assess opportunities with shopping centers, how to run the numbers, what pitfalls to look for and just the learning process, but then combine that with the second thing, which is, I just don’t know if I can find quality tenants or enough of them because I personally don’t know business owners who would rent from me. Whereas I know that apartment owners don’t think “I’m buying 100 unit property, so I know 100 different people who would rent from me.” I mean, clearly, that would be a ridiculous thought process, but I feel like that’s a mental block for people outside of just learning the process and learning how to do it. It’s just, are there really enough tenants to rent my space if the space is currently vacant already?
Alan Schnur: Yeah, I hear you. I agree with you, 100%.
Joe Fairless: I’m not saying that’s a legitimate reason. I’m just saying those two reasons combined are what allows you to buy more property.
Alan Schnur: Here’s what I’d say to that to help someone get over the fear, or to answer that question. The first thing I would say is, look, there’s a lot more building going on when it comes to apartment buildings and housing right now than retail shopping centers. We went through this lull over the last five years in retail shopping centers. Another reason why things weren’t being overbuilt. Ask yourself a question – when you’re driving down the road right now, how many vacancies do you actually see in shopping centers? We don’t see too much here in Texas right now. So part of the argument would be, there’s a lot less space available to build shopping center strips on roads. Every other block has a new 300-unit apartment building here in parts of Houston, Texas. So when I’m buying shopping centers, I’m looking for core areas of a community, I’m looking for density, where there’s a lot of population, and I’m looking for a high car traffic count. So you can just think of those three things that I just said.
Joe Fairless: How do you quantify those three things?
Alan Schnur: Well, I quantify it– when I’m looking to buy a shopping center, I like to buy shopping centers that have 30,000 to 50,000 cars going by every day. I like to buy near a hard corner where it’s just absolutely buzzing in traffic like you wouldn’t believe it. I like to buy shopping centers where there’s so many people you can’t help but do your dry cleaning there, or go food shopping there or stop off and pick up a Starbucks.
Joe Fairless: How do you quantify that third one – the so many people part?
Alan Schnur: Okay, so we call that population density, and there’s plenty of services out there. I use CoStar a lot, and we’ll get a one-mile radius, a three-mile radius and a five-mile radius of houses. So we’re looking for a good 30,000, 50,000, and even goes up to — a five-mile radius, we’ll go up to 50,000 people. So you want to have a lot of people if that’s the business you want to be in.
Joe Fairless: For the one mile radius, what’s too low?
Alan Schnur: Well, you’ve got to be careful with the one-mile radius because there’s day time population. Maybe there’s an area that you’re thinking about where people drive to work and that’s what people do; they work in that area, and then there’s households and there’s household incomes. So the daytime population is important. I just finished doing an analysis on a property in California. The daytime work population was 200,000 people, but only 25,000 people live in the area. So you’ve got to take that into account, who are going to be your tenants. You’re probably going to do a lot of restaurant business, maybe fpr lunches where people are going to go eat and drink coffee, as opposed to maybe you don’t want to put a grocer in that area; and then you do want to look at the household income.
What we focus on at my firm is we’re really buying shopping centers, Class C and Class B. We’re really looking for the household incomes are anywhere from $40,000 to $75,000. We like the discounters for tenants. Some of the tenants I have, for example, are TJ Maxx or a dry cleaners or a grocers or an AT&T or T-Mobile, something where people have to go to this neighborhood center to do their business.
Ask yourself a question, Joe. How many shopping centers will you stop off at in one day? People say it’s a dying business, but there’s people that just absolutely want the experience of shopping. There’s people that have to go and drop off their dry cleaning. Even doctors and dentists, they’re moving out of medical buildings and they’re setting up their cosmetic dentistry in a shopping center strip or an ER clinic, setting up in all these shopping center strips. So again, these neighborhood centers that our people are always going to be drawn to; they just have to, they can’t live without it.
Joe Fairless: Anything that we haven’t talked about that you think we should before we wrap up as it relates to increasing NOI with shopping centers?
Alan Schnur: So another thing that’s really cool about shopping centers is rent bumps are built into the leases. It’s really common. Let’s say I’ve got Starbucks. It’s really common for their rent to go up 1% to 3% every year, and most likely you signed a five-year lease with them. So you’re looking at a 15% increase over the life of that five-year lease, which, when you’re working out your NOI numbers, that’s a huge increase. It’s not that hard to just buy, hold and bank off of rent bumps, and turn around and make 50% on the shopping center when you sell it a few years later; and then of course, we’re always looking for cap rate compression. Maybe bring in some better names, like I mentioned earlier.
We’re in a situation right now, where we have a 40,000 square foot grocer paying a rent rate that’s so low, it’s ridiculous, and they’ve been there for ten years, their options are up and now we’re talking to national names right now that will pay triple the price. So just by going from 50 cents a square foot to a buck 50 a square foot, you literally can increase the value of your shopping centers by millions of dollars.
Joe Fairless: What a fun conversation. I love talking about stuff that I’m not currently focused on, with people who are, and hearing about your approach. So, Alan, thanks for talking to us not only about ways to increase NOI with shopping centers, a couple of examples, building outparcel, have those rent bumps built into the leases, but then also what you look for with shopping centers, and you gave four things – 30,000 to 50,000 cars driving by, having it on a corner, having a population density that fits what you’re looking for and pay particular attention to daytime work population versus people living there, and then the household income being about 40k to 75k, plus the other stuff we talked about. So I really enjoyed it, Alan. Grateful you were on the show, and I hope you have a best ever weekend. Talk to you again. Oh, wait. Actually, last question. How can people learn more about what you’re doing? I apologize for forgetting that.
Alan Schnur: Listen, we syndicate. We have lots of partners in our deals, and you could find us at gr8partners.com. There, you can find our portfolios and what we’re up to and read about us. We’re always looking for new partners. We’re always looking to share what we know, and that’s one way of reaching me.
Another way to reach me is I have a book out, it’s on Amazon. It’s called the Cashflow Mindset. It’s really about lots of stories that we talked about today and ways of making money in real estate, the cashflow mindset. It’s also on audible.com. And I always do this, people think I’m crazy, but my phone number is 713-503-5908. If you’re interested in getting involved in commercial real estate, send me a text.
Joe Fairless: Alan, thanks for being on show. Have a best ever weekend. Talk to you again soon.
Alan Schnur: Bye, Joe.
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