Keith Felix Discusses Commercial Real Estate and What You Need To Know When Buying a Commercial Property
February 20, 2018
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Erik Wolf: It is time again for my six favorite words which are Denver Executive Association Trusted Advisor Podcast. Twice every month, me and 30 of Denver’s top business leaders break bread together at our not quite top-secret clubhouse above the University of Denver’s NCAA championship hockey arena. We talk, we share knowledge, connections, and business. Twice a month, I get to interrogate one of my fellow DEA members on this podcast and share the recordings with you at Denverexecutiveassociation.com. My name is Erik Wolf and I’m with the digital marketing agency, estound. We serve small and mid-sized businesses in Denver and around the world with websites, Search Engine Optimization, pay-per-click, marketing automation and lots more. My guest today is Mr. Keith Felix of Colorado Broker LLC. Keith is an Indiana native and a graduate of Purdue University with a degree in mechanical engineering technology. But it seems that Keith’s true calling was in real estate and he has been a top commercial real estate broker here in the front range since moving to Colorado in 1999. He spent the last nine years running his own independent brokerage company where he continues to build a loyal clientele. Welcome to the podcast, Keith.
Keith Felix: Thank you, Erik, it’s good to be here and I appreciate your invitation.
Erik Wolf: So let’s get into it. You started in engineering and you ended up in real estate. How did that happen for you?
Keith Felix: Well at the time that I graduated in engineering, engineers just were not in demand due to some economic situations and changes in the business environment at the time. So I actually went back to my own hometown and went into building property, building buildings, and so in the construction industry for a year or two. Then in 1975, I joined my father’s firm, a segue way into the real estate business with him. He had a small independent real estate company and was successful at that and continued with him for a number of years. In 1983 then I wound up becoming president of the company and later affiliated with Coldwell Banker Residential Affiliates. So we were at that time primarily a residential firm but we also did some commercial work too in terms of retail industrial properties and some office. We did a little bit of leasing, more brokerage at that time than we did leasing and I liked the aspects of that. It was different from the residential side and for many years wanted to focus more on that commercial side of the real estate business. So in 1999, wound up selling that business and moved out here to Denver. It was just a business choice and a lifestyle choice and Denver had a great commercial market at the time and still does. And so I joined a local boutique firm called Dunn Commercial Real Estate and I was with them for about nine years. They had some really great brokers on staff. Taught me a lot of things about the business and back about nine years ago, decided to go back on my own and form my own independent company. And so it made it kind of full circle, back to being an independent real estate broker again but with that specialty in commercial real estate.
Erik Wolf: Very cool and the commercial thing is definitely an area where you really need an expert for a lot of reasons and you know the leases are different, the terms are different, there’s a lot of stuff that goes into it. But if you wouldn’t mind. Talk to me about your current company and who you work with and what you look for in a great customer.
Keith Felix: Sure. Well, we work primarily with people who have a commercial real estate need, focusing primarily on retail property and office properties. Sometimes that need can be for a mixed-use type of property such as a retail or office building with a retail component, I should say. Or flex property that can be a mixed use of office and warehouse or industrial type of need and this could be for leasing the property, for landlord to tenants. It can be for working with tenants who need to find the right property and the right space for their business need. Also, have worked in 1031 exchanges and investment real estate. And so that’s where we focus.
Erik Wolf: Very cool, very cool. What’s one thing that a lot of people just don’t know when you first talked to somebody and they’ve never done this before? What’s one thing that a person just completely doesn’t realize about buying or leasing commercial real estate?
Keith Felix: Well you know there is a complexity to it. You know with residential property, it’s pretty plain and simple, pretty straightforward. With commercial property, you’re going to go into a lot of things like location is always a key factor, functionality, physical condition. Are there hazardous environmental concerns that need to be accounted for? How about zoning? How about the intended use of the property
Erik Wolf: That whole triple net thing can make your brain bleed.
Keith Felix: Exactly, exactly. When you’re talking about leasing, there are several different types of leases that are out there in terms of, is it what we call a gross lease where everything is included? Or is it a triple net lease where you’re basically paying on a basis of base rent plus then you get all these pass-throughs from the landlord such as common area maintenance charges, taxes, building insurance. The list goes on and including maybe even management fees. And that can get very confusing to most people who have never been around that before. What do you actually ultimately end up paying for that space? What is your occupancy cost going to end up being? And I help people wade through all of that.
Erik Wolf: This one’s going to be a softball. I know that there are a lot of folks that I know that actually swear by you so it shouldn’t be hard for you to find a good hero story about how you took one of those people who was trying to figure it out and help them out of a tough spot and got them what they needed.
Keith Felix: Well sure. I’m sure there are several examples that I could pull up but I guess the one that runs top of mine was one within the last year here. The seller client had agreed to sell his property on terms proposed by an intended buyer through another broker representing that buyer. And the terms seemed to be acceptable to my seller. They were certainly on market and everything. But after going through all of the due diligence that’s involved, the loan process, the appraisal, the buyer’s appraisal came back short of the actual contract purchase price. And my client decided, against my advice, to just go ahead and accept the lower appraised value, change the contract to that amount, and then move forward because he wanted to get to the closing table. So about five days before we were supposed to go to the closing, we had a callback from that buyer and that buyer’s broker, I should say, and found out that they were changing horses in terms of lender and loan because of changes in that buyer’s particular financial circumstances. And so here we were, five days prior to the time we were supposed to close, and it looked like we’re going to have to write up a whole new contract, change lenders, and wind up with a delay on the closing. And the buyer wanted us to stay at that appraised value from the prior appraiser. And I discussed the situation with my client, explained to them that, “You’ve kind of got the upper hand here.” That particular buyer, his earnest money was in jeopardy at that point because we were past all of the due diligence deadline dates. So my recommendation to him was that, ok well, do as you want with a new lender, with a revised contract, and take our chances with a new appraiser again, kind of spin the barrel on that one again. I said we need to go back to the original contract price and he agreed with me on that. And so after signing a new contract, the new appraiser came out, appraised the property at the value we needed which was the original contract purchase price and we wound up closing. And you know that seller, my client was very happy because it was a substantial difference that he wouldn’t have seen walking away from the closing table had he agreed to what the buyer was proposing.
Erik Wolf: Now do you often see big swings like that, between if a property is appraised twice that you would get wildly different amounts?
Keith Felix: It’s not uncommon. Appraisers are basically like anybody else they have their opinions that they arrive at and that’s all it is: it’s an opinion of value based on that person’s experience.
Erik Wolf: Because it’s fairly subjective. I mean I’m sure that there are guidelines and things like that but at the end of the day, it’s this person making a judgment call right?
Keith Felix: Correct. It’s not an exact science. There’s a little bit of art to it and adjustments are made for differences in properties. It’s hard to actually zero in on some of those adjustments at times. And in this particular case when I looked at that first appraisal, I could tell right away because I have done appraisals in the past, that there were some real errors made in terms of judgment on the adjustments in value from the comparable properties to the subject property. I pointed those out to my client. And he understood where we were coming from on that, and where I was coming from but he decided you know what I’m just going to go forward with what we have because I want to get this job done. The second appraiser I think did it correctly and that’s how we came to the value that we did.
Erik Wolf: Not to beat a dead horse but I’m interested. So let’s say that you get an appraisal and it is just wildly different from what you’re expecting and what you believe the market is, is there any recourse for that if you’re a seller?
Keith Felix: It’s very difficult to get that appraiser to change their value. You’d have to point out some real major flaws in the appraisal report and try to get a re-evaluation done. But most appraisers are not going to do that because they don’t like to be second-guessed and the appraisal industry is very heavily regulated as well. Your best bet might be to say to the intended buyer that hey look, we’re not going accept that report, we’ll come to a compromise, the buyer could come out of pocket with more money at the time to go to closing, or they could even change lenders and get a whole new appraisal report done.
Erik Wolf: So this wouldn’t be a trusted advisor podcast if I didn’t ask you for some advice. I’m going to go ahead and do that. What’s one quick tip that you would give to somebody who’s looking to hire a commercial broker for the first time?
Keith Felix: Well there’s probably more than one quick tip I would give and that would be to take time to vet the broker that you’re going to use, ask for references from clients of his. Make sure that he’s had time in the saddle, he or she, in the commercial real estate brokerage business. And in that specific property type that you are looking to lease or purchase, whatever. Make sure that they’ve got access to today’s technology and tools that are needed for the job. And above all, I think to make sure that that broker places his client’s needs above everything else, put them first and foremost. And also I would say going along with that just having an uncompromised level of integrity. If you’re going to use a broker that’s newer in a business just make sure that they’ve got a good mentor in place who’s going to work with them and work with you all the way through the entire process. And also don’t base your decision on company size or the perception of company size. There are national and multinational companies out there but there’s also local firms and independent brokers. You’ve got to figure out which one is the right fit for you. They each have their place in terms of needs for the client.
Erik Wolf: Well that’s that is good advice. I’m glad I asked.
Keith Felix: Certainly.
Erik Wolf: Well Keith I want to say thank you for joining us I really enjoyed our chat and would like to thank everybody listening to the DEA Trusted Advisor Podcast. We’ll see you next time.
Keith Felix: Thank you very much!
Erik Wolf: Thank you