In this episode, we are joined by commercial real estate broker Stephen Holley. Stephen shares the intricacies of commercial real estate leasing, from finding office space to understanding lease structures. Tune in as we explore negotiation strategies for tenants, different types of landlords, market trends, and more! Whether you are leasing your first office or considering buying, this episode will help you make informed decisions in the competitive commercial real estate market.
Listen to the full episode using the player below, or by visiting one of the links below. If you have any questions or would like to learn more, email us at info@byrdadatto.com.
Transcript
*The below transcript has been edited for readability.
Intro: Welcome to Legal 123s with ByrdAdatto. Legal issues simplified through real client stories and real-world experiences, creating simplicity in 3, 2, 1.
Brad: Welcome back to Legal 123s with ByrdAdatto. I’m your host, Brad Adatto, my co-host, Michael Byrd.
Michael: Thanks Brad. As a business and health care law firm, we represent clients in multiple business sectors, especially health care. This season we are diving deep into the exhilarating and terrifying process of opening a business. Our theme this season is, Starting a Business.
Brad: Yes. And now, Michael, starting a business is just one season of a business. What are the other seasons?
Michael: Well, as we’ve discussed with a little more detail in prior episodes, there are four seasons of a business and we are going to dedicate an entire podcast season to each season of a business. The four seasons are the Building Seasons, so starting a business; the Operating Season; the Scaling Season; and [00:01:00m] the Buying and Selling Season.
Brad: Awesome. Well, today we have a guest who might be the first person, outside of you and I, who we actually decided to tell that we were going to start our own firm. So he truly is an OG, played a part in helping us find our home for ByrdAdatto. But before we bring him on, we’re just coming off the big game weekend, Michael.
Michael: For our audience, Brad’s referring to the Super Bowl that was playing in Vegas this past Sunday.
Brad: That’s correct. I think, Michael, should we discuss the game?
Michael: Well, Brad, as much as you and I would like to shift this to a sports talk show, our fans are not here for this content. I use the word ‘fans’ very generously. Let’s stay in our lane and stick with the law.
Brad: Fair. But it got me thinking about the Super Bowl and how something can grow from almost nothing to one of the biggest events in the world. And according to Sports Media Watch, Super Bowl ratings date back all the way to the very first game in 1967.
Michael, do you know [00:02:00m] how many people watched the Packers play The Chiefs in the first Super Bowl game?
Michael: 1 billion.
Brad: That’s a little high there, buddy.
Michael: One?
Brad: A little more than that. So we’ll go somewhere in between, like The Price is Right here. But strangely, the very first Super Bowl, which is really interesting, was broadcast simultaneously on both CBS and NBC. And collectively, 51 million people watched it. So you are a little high on the billion. Do you know what the lowest rated Super Bowl is? And you can’t guess this year because the ratings have not officially been released.
Michael: That’s easy. It was Saints vs. Colts.
Brad: Oh God, you had to go there. That would be incorrect, again. At least you’re consistent. That would be Super Bowl III 1969, only had a 36.9 rating which apparently is bad for Super Bowls. Interesting though, the average number of Super Bowl audience now is over 110 million – so, not a billion, Michael, with a lot of people now – tens of millions streaming it. So let’s talk about a little bit more Super Bowl talk. [00:03:00m] Have you actually ever been to a Super Bowl game?
Michael: I have not. I really wanted to go the one time it was in Dallas. I don’t know if you remember that.
Brad: Yes.
Michael: That was one of the times it snowed in Dallas and no one knew what to do at that time. So we did not. The tickets were way too expensive, considering I had no interest in the participants.
Brad: That’s true.
Michael: How about you?
Brad: Well, as you probably know, I did attend when the Saints went. And for those who don’t…
Michael: Wait, the Saints went to the Super Bowl?
Brad: Yeah, they did.
Michael: Oh, okay.
Brad: And for those who don’t know, the Saints actually won it. But believe it or not, that was not my first Super Bowl that I attended.
Michael: Oh, you went to that first one in ‘67?
Brad: Ha. I’m not as old as you. No, actually my first one was in 1981 when the Raiders defeated the Eagles.
Michael: Okay. Well, why did you go to that game? Because I know you’re not a Raiders or an Eagles fan.
Brad: This is correct. It happened to be in New Orleans in the Superdome and my dad got some tickets from a friend, so we went.
Michael: [00:04:00m] Okay, well, fair enough. What does Super Bowl talk have to do with our guest today?
Brad: Well, when I was preparing for today’s show, I started thinking about today’s guest. He was a D1 college quarterback, so I’m sure he would be happy to join us in football talk on our new sports podcast and he could be our first guest.
Michael: Well, maybe so. And we know his son’s going to follow in father’s footsteps and play football at the next level. So maybe we…well, that’s not starting a business, I don’t think. Well, let’s just bring him on.
Brad: Okay.
Michael: So, joining us in studio today, and a second time guest, is our friend Stephen Holley. Stephen graduated from the United States Naval Academy in 2000. He graduated Basic Underwater Demolition, SEAL Class 234, and served as a Navy SEAL Officer in SEAL Team Five for five years and completed four deployments to Iraq and Southeast Asia. Following [00:05:00m] his military service, Stephen continues to be a leader in the Dallas-area by co-founding Carry the Load with fellow Navy SEAL Clint Bruce. Stephen and Clint actually joined us on our podcast for a Memorial Day Special to discuss Carry the Load. He has been recognized by the Dallas Business Journal through the 40 Under 40 award and has received the Dallas Foundation’s Good Works Under 40 Award. I’m pretty sure neither you nor I got either of those, Brad.
Brad: No, I did not.
Michael: He is the founder of Holley and Company Real Estate. It’s a commercial real estate brokerage specializing in office tenant representation in Dallas, Texas, and he’s otherwise a really good dude.
Brad: This is true.
Michael: Stephen, welcome.
Stephen: Thank you both for having me. Quite the introduction.
Brad: Yeah. Well, now that we’re having a sports podcast, we have the first major important question to ask you. Did you ever play in a Bowl game for Navy, or did you ever attend a Super Bowl?
Stephen: [00:06:00m] I’ve never attended a Super Bowl. In my freshman year at Navy, again I was a scout team quarterback that year, but I made the travel squad and went to the Aloha Bowl.
Brad: Oh, nice.
Stephen: In Honolulu, and sit on the sideline but watch Navy beat Cal. In fact, a very heavily favored Cal team at the time who was coached by Steve Mariucci.
Brad: No way.
Michael: Wow. That’s really cool.
Brad: This is a great sport pod… We should stick with the sports podcast, or should we go back to why, or actually the five people listening to us, are here.
Michael: We probably should go back to why we’re here, but I have so many follow up questions.
Brad: Okay. I know. That sounds awesome.
Michael: That’s really cool. So let’s jump in. Let’s talk about Holley and Company Real Estate and your client base. Talk to us about your business, who you serve, and just give our audience an [00:07:00m] introduction.
Stephen: You bet. Holley and Company Real Estate is, like you said, a commercial real estate brokerage firm that focuses on office tenant representation. And obviously, I’m lucky enough to have ByrdAdatto as a client of mine. ByrdAdatto is very indicative of my client base, a lot of law firms, professional service firms here in Dallas, and I essentially help companies when it comes to their office leases.
Michael: Are they all as demanding as Brad?
Brad: Don’t answer that question.
Stephen: Not nearly. ByrdAdatto is very indicative. Helping folks with their office leases, whether that’s an expansion, a contraction, an issue with their landlord, evaluating new options, new buildings, you name it. If it has to do with your office, [00:08:00m] with your real estate, whether it’s a lease or a purchase, it’s things that I get involved with.
Michael: That’s awesome.
Brad: Well, this season, as you heard, Stephen, we’re really focusing on starting a business. And from the commercial real estate side, when one of your clients walks in and says they want to start a business, what would be one of the first questions you’d ask them?
Stephen: What’s your tolerance for pain? Your pain threshold? I say that a little bit tongue in cheek, but that’s probably the first question that goes through my mind. I don’t want to burst anyone’s bubble right away, but having started a couple of businesses, having seen both success and business failure personally – and I know we’ve talked about this collectively in years past, but starting a business is one of the hardest things you can do. It’s one of the most rewarding things you can do. But there’s a lot of things to think about when you’re going down that road. And [00:09:00m] one thing that I love about what you guys have done is, obviously you guys had a professional relationship prior to starting this firm, you had a friendship prior to starting this firm, but one thing that I envy there is having a partner because what I tell people is there’s nothing like being able to look at someone in the eyes when you’re getting your teeth kicked in proverbially. And that always happens. All businesses go through struggles. So again, that would probably be my number one piece of advice is who do you have around you that can help you weather those storms that will be there inevitably.
Brad: Yeah. And I’m just going to jump back. Was starting a business scarier than the Buds training?
Stephen: Yes.
Brad: And why?
Stephen: Absolutely. [00:10:00m] The whole SEAL Buds training, all of that is…and I had a great friend who went through that training who is now a very successful entrepreneur having started and sold a number of different companies. One of his pieces of advice very early on was, “Hey, you can’t budge your way through this,” meaning you can’t just put your head down and physically take it, which you could in Buds, just don’t give up. In business it’s a little bit different, it’s being able to solve problems. So yeah, starting a business was a lot tougher because I didn’t know what I didn’t know, and there was a lot to learn as I went down that road.
Michael: It’s kind of relieving to hear because I definitely could not have Buds my way through it if that were an option.
Brad: I know. I could have done like the first three seconds of Buds [00:11:00m] and then they’re like, “Wait, where’s the bell again?”
Michael: So I’m curious too. So your role these days in commercial real estate is helping people find their space, yet you have this very real experience being in their shoes. So does that affect how you talk to them about what their space needs are, for example, when they’re looking to start?
Stephen: Yes, somewhat, because it’s all things that I evaluated. Again, I think a lot of the discussion around space needs depends on the type of business. Obviously if you’re a professional services firm, your space needs early on and a year or two into the business, are going to be vastly different from someone who’s an e-commerce firm who’s either manufacturing or storing and distributing a product. So, all of those things factor in. But yeah, my personal [00:12:00m] journey definitely affects the way that I give advice to other people.
Michael: And I guess my follow up question is you have a client that you know or a friend that’s talking about starting a business. When should they start thinking about the commercial real estate side of things?
Stephen: They should start thinking about it from day one. But again, going back to the type of business. In today’s world, very flexible with what you can do. As a professional service firm, you can work out at your house. You can go get some coworking space. There’s a myriad of options that allow you to scale different services accordingly until you have 1, 2, 3, 4, 5 people around you. So, you should think about it from day one and be planning for it with, in my opinion, certain business thresholds that you hit from personnel and [00:13:00m] a revenue standpoint, things of that nature. But again, whether you’re an office from your house or not, you need to be planning for it.
Michael: Awesome.
Stephen: If you’re going about it the right way.
Brad: Yeah. And that makes me think about those who do say, “Yes, Stephen, I’m going to go forward. I want to take on this such and such space.” When you’re advising them, what are you seeing right now in the market as far as like, “Yeah, this place is going to have to be updated. You’re going to need to block out this much time before you can get in there right now…”
Stephen: Yeah. Typically, in a commercial lease, what most people don’t realize is, having worked for a very large brokerage firm and representing a number of Fortune 500 companies, those for an office lease and a couple hundred thousand feet, or I think the largest ever worked on was just shy half a million feet, but those searches and that process is years. [00:14:00m] One in particular I started working on five years prior to a lease expiration.
Brad: Wow.
Stephen: And I would tell you the average process, you want to be well in excess of – well I would say about a year out is the appropriate time, because by the time you start evaluating options, and again, I’ve done it in as little as 30 days. But the challenge there is the less time you have to go through a legitimate process, the less leverage you have. So to go through a market process, I’ll say for the average company that’s about a year long process. That gives you the most amount of leverage to go through the steps, to evaluate your options. And once you pick a horse there, it allows you to go through the proper time for design and build out and all the things that [00:15:00m] most people don’t realize as far as timing and permitting. And you guys are well aware of some of the issues that you can get and the long lead times that you have. Again, you just want to allow for ample time for all of those, because again, the more condensed your timeframe is, ultimately, less flexibility and leverage.
Brad: Yeah. And that makes me think of that 30 day person that had to be a panic monkey of just trying to find just a place to hang a shingle that day.
Stephen: Luckily we were able to thread the needle and we found some second generation space that had just been built out and it worked.
Brad: That’s got to be unusual. So thinking back to other traps that you see people get into when it comes to the commercial real estate, obviously timing being one of them, what are some other traps that you can think of that when you’re starting a business you should be wary of?
Stephen: Obviously, I think timing’s a big one. Understanding the different type of lease structures that are out there. You know, [00:16:00m] the Dallas office market has a… traditionally there was a gross, this is going to be scientific to most people, but a gross net of e lease structure. Today there’s a gross net of e and there’s triple net lease structures. All of those have different nuances to them. I think a lot of people just think about, “What’s my all in rent number monthly?” “What’s the number and where am I writing a check?” But there’s a laundry list of issues as it relates to operating expenses and how those are treated and the growth thereof, and what you get billed for and your ability to reconcile those, and your expansion rights and how you go about negotiating those. And again, the list can go on and on. I don’t want to bore anyone to death but sitting down and at least having an understanding of what those are on the front end, again, just gives you more flexibility down the road.
Brad: When it comes to landlords, do you prefer having a landlord that owns their [00:17:00m] own building versus a landlord that’s in a more sophisticated management company?
Stephen: I typically prefer the more sophisticated landlord, generally, the easier the process just because of the number of reps that they go through. And they understand what you’re trying to do. I don’t know if…
Brad: No, that was our experience too. A lot of times when it comes to negotiating a lease, the landlords that own their own property fight you on every little nickel. And they don’t understand certain aspects when you’re dealing with more sophisticated…
Stephen: Yeah. With a more institutional profile, again, their experience tends to be a lot broader, a lot more vast, and they understand the intricacies of that process. Again, your building is one asset [00:18:00m] of probably many, and there aren’t a whole lot of personal feelings that come into play there.
Michael: Right. Cool. Well, let’s shift. I would love to hear your perspective on the difference between renting a commercial property and buying it.
Stephen: Again, I think it comes down to the business. It comes down to are you carrying inventory, not come down to how you’re taxed – all things that a CPA will be able to help you evaluate those decisions. But I would tell you most companies early on would want the flexibility of leasing your real estate, so that allows you to scale quickly. And again, just provides a lot of flexibility. But a lot of companies will get to a point where they’ve scaled to their certain point, their [00:19:00m] footprint is a known commodity at that point where, depending on how they’re taxed owning their real estate, makes the most sense. It just kind of depends on the company.
Michael: Is it easier, and this may be a loaded question, but it popped in my mind. I think you used the word flexibility – if you outgrow your space in a lease situation, is it easier to move and sublease versus, I guess if you outgrow a space that you own? I don’t know what your options are.
Stephen: Yes. I would tell you there’s more flexibility in subleasing space and going elsewhere. Again, it all depends on the space you’re trying to sublease, the quality of the space. There’s a lot of different factors there. But again I think at least all things being equal, will give you the greatest amount of flexibility.
Michael: Well, our favorite thing to say to people is, “it depends.” So you’re [00:20:00m] speaking our language.
Stephen: Everything depends.
Michael: Right.
Brad: You’re talking about different types of buildings. So someone will say like, “oh, I’m going to show you this particular office space and it’s an A plus, or I’m going to show this office space and it’s an A.” What should they be expecting when someone gives them those type of ratings for a building?
Stephen: You know, different people in the market will give buildings different ratings and criteria. And what is an A to some people may be a B plus to others. Again, it all depends. That’s the magic word here. But generally, in this market you’ll have what people would refer to as AA product. I would tell you that’s new product, brand new product that’s either coming out of the ground or just coming online in a hot submarket that commands the highest amount of rents. It also will be the most amenitized. And [00:21:00m] from a building perspective, construction, it will have all the latest and greatest systems. And being post COVID, a lot of those have to do with health and safety and all the things that became talking points that really never were prior to the pandemic.
Brad: That doesn’t make sense. Which I guess since we’re talking about post COVID, we’re 19 months past COVID now and moving into 2024. What do you see going on with the commercial real estate? Is it growing? I mean, work from home? What are you seeing or hearing from others?
Stephen: It depends.
Brad: Michael, you should have never taught him that word.
Stephen: Here’s what I’ll say – you look at the headlines today and record amount of sublease space in some markets, people not returning to the office as quickly [00:22:00m] as everyone anticipated. It all depends on the building. And what I would tell you is what we’ve seen post COVID – if I were to give you a blanket statement – is, there has been a flight to quality. Good buildings that have good amenities. And again, these are all companies that, for the most part, are competing for workers. So those that have great locations that allow great access, great amenities, and a building that allows people to not only recruit and hire, but retain talent, those are the ones that are going to win. I think a great example is, you look at downtown Dallas, in the core of Dallas, some of those vintage early eighties and nineties buildings that are south of Ross Avenue, a couple of blocks, a lot of those conversations today are what I call office to conversion and condos. How [00:23:00m] are those ownerships converting those to meet today’s demand? So again, I think it comes down to where you are, where you’re located, the type of building you’re in. But if you’re in an older vintage building, you probably have some issues that you’re trying to figure out.
Brad: Vintage is such a kind word to say. This building is trash, but vintage is nice. So someone’s sitting here listening, going, “okay, what should I be looking for?” So when you say amenities; like restaurants, and workout facilities, and concierge, that’s the kind of stuff that you’re seeing in these AA or these new builds now.
Stephen: Yes. Restaurants, fitness, proximity to public transit – be it DART, rail bus service. For places that can be – I don’t want to say modular, but the ability to flex [00:24:00m] to a specific company’s changing needs, whether that’s modular furniture, modular walls. Being able to reconfigure space as their business changes. And again, I think you guys know this. Generally, when you walk into a building and you sign a lease, you’re looking at least a five year commitment. That’s a big time horizon for most folks. So again, the flexibility for that space to grow with you as you mature and your business changes, and maybe you got more people. A law firm’s great in the sense that the majority of your folks are looking at probably officing and hard wall offices, whereas other companies might have the majority of their people in an open office architecture. So again, it just goes back to flexibility and meeting a specific company’s needs.
Michael: [00:25:00m] Well we, believe it or not, are out of time. That time flew through. We’re so grateful that you joined us today, Stephen. What we’ll do next is we’ll go into a commercial, and on the other side, we will make fun of Brad for being vintage and maybe talk a little legal talk.
Stephen: Perfect.
Access+: Many business owners use legal counsel as a last resort, rather than as a proactive tool that can further their success. Why? For most, it’s the fear of unknown legal costs. ByrdAdatto’s Access+ program makes it possible for you to get the ongoing legal assistance you need for one predictable monthly fee, that gives you unlimited phone and email access to the legal team so you can receive feedback on legal concerns as they arise. Access+, a smarter, simpler way to access legal services. Find out more, visit byrdadatto.com today.
Brad: Welcome back to Legal 123s with ByrdAdatto. I’m your host, Brad Adatto, with my co-host, Michael Byrd. Now Michael, if [00:26:00m] you don’t remember, this season’s theme is starting a business. And really, this whole season we’re really camping out on this. There’s a lot of things that happen when you start a business.
Today we had good friend of ours, a commercial real estate agent, Stephen Holley come join us and he gave some great tidbits, not only about the things to consider when you’re starting a business on the commercial side, but just in general of being someone who – like he is – who’s a serial entrepreneur starting businesses and the risk associated with that in general. He started talking about different types of contracts and aspects of an agreement that you need to think about.
One of the things he talked about was you think you’re signing a lease and the lease says this is how much you have to pay per square foot. And you don’t realize that there’s triple net leasing, which means that that’s just a piece of it and that it can go up or down, generally up, based on other expenses and taxes associated with the building. So what you want to do if you are signing a lease, spend some time [00:27:00m] understanding what that cost looks like and then spend more time asking for more information from the landlord. “How often does this come out? When does it come out? What are you expecting as far as increases in this triple net?” So just spend a little bit more time doing your own due diligence because once you sign that it’s in the contract, you don’t realize you could get hit. But there’s some other things in contracts you should consider also Michael, besides just that aspect of a contract.
Michael: Yeah. I think all of us think in simple terms, when we’re thinking about starting a business, we’re thinking about the space we need. We’re like, “Well, how much space and what’s the rent?” That’s kind of where your brain wants to naturally go. And don’t get me wrong, those are really important. Having a broker help is so important for some of these nuances that you just mentioned. It’s a lease, it’s a legal document, and there are aspects to it that you want to watch out for to protect yourself. So [00:28:00m] one concept that can show up in a lease is a requirement for a personal guarantee. If they ask for that, understand that means that you as the individual entrepreneur are personally saying, guaranteeing, that this rent will be paid.
So if the business fails and you can’t pay the rent every month, they can come after you as an individual. And this varies market by market ,about whether you’re in a market where everyone signs personal guarantees or in some markets you don’t. In other markets it’s kind of in between. It can depend on your particular negotiating leverage and the how. If you’re starting a business, you’re more likely to be asked to sign a guarantee. So understanding, especially if you have partners, who all has to sign off on that. Stephen talked a lot about [00:29:00m] flexibility. I’m saying this as a business owner. When you start a business, you don’t really know what your future space needs are going to be. And no matter how much you plan, that’s going to change. We’re really bad at planning that because we outgrew our five year plan in two years pretty routinely.
Brad: I blame you for that.
Michael: Yes. It is.
Brad: You need to plan better.
Michael: Okay. Well, having flexibility in your lease can become really important. And thankfully, Stephen helped us get that even when we didn’t really know how important that would be. So that might look like an option to take over the space next door. Or sometimes you’ll hear the term ‘right of first refusal’, so if there’s some empty space that someone’s about to come in to, you could have the right to say, “No, I’ll take it at whatever those terms are.” So there are some important considerations from just negotiating the legal documents that could ultimately [00:30:00m] pay off down the line.
Brad: Yeah. And on that note, I think a really important element is if you think you will be going growth mode, not only do you need to ask to negotiate the right of first refusal, see if you can lock in the rates for a certain timeframe. That if you do get it within that timeframe, the rates are locked. But Michael, I think that’s all the time we have. Any parting words for our audience today?
Michael: Well, I was encouraged that you don’t have to become a Navy SEAL to start a business, but also discouraged that was easier than starting a business. But I really loved hearing Steven’s perspective. The bottom line is the real estate is going to be one of the biggest overhead items that go into most small businesses, new business, and so you really want to hone in on these issues.
Brad: Absolutely. Well, Michael, next Wednesday we have our good friends, Dr. Steven Camp and Sara Camp joining us to discuss them starting a medical practice.
Outro: Thanks again for joining us today. And remember, if [00:31:00m] you liked this episode, please subscribe, make sure to give us a five-star rating, and share with your friends.
Michael: You can also sign up for the ByrdAdatto newsletter by going to our website at byrdadatto.com.
Outro: ByrdAdatto is providing this podcast as a public service. This podcast is for educational purposes only. This podcast does not constitute legal advice, nor does it establish an attorney-client relationship. Reference to any specific product or entity does not constitute an endorsement or recommendation by ByrdAdatto. The views expressed by guests are their own, and their appearance on the program does not imply an endorsement of them or any entity they represent. Please consult with an attorney on your legal issues.