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Customarily, landlords induce tenants to lease space in a building by offering X months of free rent, as opposed to discounting the actual face rent.
For example, let's assume that the rent for a particular apartment is $3,000 per month or $36,000 per year. Assuming the inducement is equal to one month of free rent, the two logical options are: (1) offer the first month for free and then charge $3,000 for the remaining 11 months or (2) charge $2,750 per month.
Both options equal $33,000 in gross annual rent, but the second option permanently impairs the value of the real estate asset by lowering the overall rent roll on a go-forward basis. So when you capitalize the net operating income of the property, you end up with a lower value. For this reason, option one is the standard approach. You want to offer as much free rent as possible before touching your face rents.
But there can also be local nuances to consider on top of this standard practice. For example, I found this recent tweet from Paul, a multi-family landlord in Los Angeles, interesting. He notes that in rent-controlled buildings in Santa Monica, you also have to be careful not to offer free rent in the first 12 months of a lease. Instead, you need to offer it starting in month 13 or beyond.
His example:
Lease rate of $3,000
Inducement equal to 2 months of free rent ($6,000)
Tenant pays 10 months x $3,000 = $30,000 in Year 1
Apparently, the way Santa Monica looks at this is that the tenant is paying $30,000 / 12 months = $2,500 per month in rent. So, after year one this becomes the Maximum Allowable Rent (MAR) going forward under the city's rent control policies. In other words, the monthly rent becomes the $2,500 number and not the $3,000 number that you thought you had contracted for.
It's an annoying gotcha detail, but it's a meaningful and permanent one until the apartment turns over. Landlord beware. Real estate may be subject to the flows of global capital, but in many ways, it still remains a local business.
Cover photo by Demian Tejeda-Benitez on Unsplash
Venture firm a16z just announced that it will be "moving its headquarters to the cloud." At the same time, it announced 3 new offices in Miami Beach, New York, and Santa Monica. These will be in addition to their existing offices in Menlo Park and San Francisco.
Part of their argument is that hybrid work is weakening the network effects and agglomeration economies associated with being right in Silicon Valley. So they've deiced to be virtual, but still have offices where they can "materialize physically" when needed.
They acknowledge that physical presence is important for developing a company's culture, building relationships, and helping entrepreneurs (their core business).
What's interesting about all of this is that it's further validation for Miami (Beach). Here is one of the most important venture firms out there saying that when they quickly materialize in real life, they want to be able to do that in Miami Beach.
It also raises some interesting questions. Because even if the network effects of Silicon Valley are weakening when it comes to tech, this announcement still speaks to the importance of agglomeration economies. These three new office locations were chosen for a reason.
Bloomberg Businessweek just published this article summarizing the impact that Bird and its electric scooters are having on Los Angeles. Here are a couple of highlights:
- Bird launched a year ago and is, today, valued at around $2 billion.
- The company has around 15,000 scooters on the road in Los Angeles. We already know that this is making some/many people grouchy.
- The cost to rent a scooter is $1 plus $0.15 a minute.
- LA has an incentive program in place that allows Bird to expand its fleet within low-income areas. Still, their scooters tend to be concentrated in wealthier areas of the city.
- Beverly Hills is trying to figure out how to handle/regulate these scooters and currently has a 6 month ban in place.
- Supposedly, you can ride a Bird through West Hollywood but you’re not allowed to park it anywhere.
The company is based in Santa Monica, so it’s not surprising that they have such a stronghold in the LA market. Still, there appears to be a lot of latent demand for this kind of mobility.
Customarily, landlords induce tenants to lease space in a building by offering X months of free rent, as opposed to discounting the actual face rent.
For example, let's assume that the rent for a particular apartment is $3,000 per month or $36,000 per year. Assuming the inducement is equal to one month of free rent, the two logical options are: (1) offer the first month for free and then charge $3,000 for the remaining 11 months or (2) charge $2,750 per month.
Both options equal $33,000 in gross annual rent, but the second option permanently impairs the value of the real estate asset by lowering the overall rent roll on a go-forward basis. So when you capitalize the net operating income of the property, you end up with a lower value. For this reason, option one is the standard approach. You want to offer as much free rent as possible before touching your face rents.
But there can also be local nuances to consider on top of this standard practice. For example, I found this recent tweet from Paul, a multi-family landlord in Los Angeles, interesting. He notes that in rent-controlled buildings in Santa Monica, you also have to be careful not to offer free rent in the first 12 months of a lease. Instead, you need to offer it starting in month 13 or beyond.
His example:
Lease rate of $3,000
Inducement equal to 2 months of free rent ($6,000)
Tenant pays 10 months x $3,000 = $30,000 in Year 1
Apparently, the way Santa Monica looks at this is that the tenant is paying $30,000 / 12 months = $2,500 per month in rent. So, after year one this becomes the Maximum Allowable Rent (MAR) going forward under the city's rent control policies. In other words, the monthly rent becomes the $2,500 number and not the $3,000 number that you thought you had contracted for.
It's an annoying gotcha detail, but it's a meaningful and permanent one until the apartment turns over. Landlord beware. Real estate may be subject to the flows of global capital, but in many ways, it still remains a local business.
Cover photo by Demian Tejeda-Benitez on Unsplash
Venture firm a16z just announced that it will be "moving its headquarters to the cloud." At the same time, it announced 3 new offices in Miami Beach, New York, and Santa Monica. These will be in addition to their existing offices in Menlo Park and San Francisco.
Part of their argument is that hybrid work is weakening the network effects and agglomeration economies associated with being right in Silicon Valley. So they've deiced to be virtual, but still have offices where they can "materialize physically" when needed.
They acknowledge that physical presence is important for developing a company's culture, building relationships, and helping entrepreneurs (their core business).
What's interesting about all of this is that it's further validation for Miami (Beach). Here is one of the most important venture firms out there saying that when they quickly materialize in real life, they want to be able to do that in Miami Beach.
It also raises some interesting questions. Because even if the network effects of Silicon Valley are weakening when it comes to tech, this announcement still speaks to the importance of agglomeration economies. These three new office locations were chosen for a reason.
Bloomberg Businessweek just published this article summarizing the impact that Bird and its electric scooters are having on Los Angeles. Here are a couple of highlights:
- Bird launched a year ago and is, today, valued at around $2 billion.
- The company has around 15,000 scooters on the road in Los Angeles. We already know that this is making some/many people grouchy.
- The cost to rent a scooter is $1 plus $0.15 a minute.
- LA has an incentive program in place that allows Bird to expand its fleet within low-income areas. Still, their scooters tend to be concentrated in wealthier areas of the city.
- Beverly Hills is trying to figure out how to handle/regulate these scooters and currently has a 6 month ban in place.
- Supposedly, you can ride a Bird through West Hollywood but you’re not allowed to park it anywhere.
The company is based in Santa Monica, so it’s not surprising that they have such a stronghold in the LA market. Still, there appears to be a lot of latent demand for this kind of mobility.
According the US Department of Energy, almost 60% of vehicle trips in the US last year were less than 6 miles. And around 40% were less than 2 miles.
So these “last mile scooters” do appear to have a lot of utility. Do any of you regularly use an electric scooter to get around?
According the US Department of Energy, almost 60% of vehicle trips in the US last year were less than 6 miles. And around 40% were less than 2 miles.
So these “last mile scooters” do appear to have a lot of utility. Do any of you regularly use an electric scooter to get around?
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