In commercial property investment, the devil is in the details: Case study of a Berlin supermarket
The skills required for effective commercial real estate management span far beyond rent collection and such menial tasks as routine repairs and tax reports. Unforeseen events are bound to occur, and when they do, if not properly dealt with they can result in extra expenses, reduced profits and the loss of tenants.
Read on to learn from Germany-based Tranio analysts about how to navigate these and other risks, based on their own experience managing a supermarket property in Berlin.
Tranio’s newest niche: supermarket property management
In 2019, we helped our client Max select and purchase a commercial property in Germany. We settled on a retail space on the ground floor of a residential development in the Tiergarten district. The space, which include a 1,625 square meter retail area and a parking lot, had already been leased out to Germany’s largest grocery chain EDEKA for a 15-year term, a term that had started just a few months before Max’s purchase.
Grocery stores are income-generating and tend to be reliable tenants. Even in COVID-stricken 2020, a period during which retail rental rates in Europe fell by an average of 0.3%, rental rates in the grocery segment increased by 1.3%.
Familiar with our industry experience and commercial real estate success, Max asked Tranio Berlin to manage the property for him. Tranio quickly discovered that this role would require more than the usual property management workload of bills, taxes, maintenance and repairs. The key complication with this property involved the homeowners association (HOA) comprising the residents of the 90 apartments above the supermarket.
Negotiating with the HOA required a combination of diplomacy and cultural sensitivity, as the building’s residents hailed from many different countries, including Russia, China and Norway. It also required us at times to stand up for our client, when initiatives undertaken by the HOA were at odds with the commercial interests of the supermarket. And when diplomacy didn’t work in certain rarer instances, our property-manager role led us into successful litigation.
Winning against the HOA in court
In early 2020, the HOA members voted to amend their charter so as to extend the building’s quiet hours. The new rule would have forced the supermarket to curtail its operating hours.
When our attempts to amicably negotiate the issue with the HOA failed, we worked with our legal team to litigate the case. The court held in our favor, finding that the building's quiet hours should align with those upheld across Berlin; i.e. 10pm to 6am daily. This proved to be a broader victory for us as not only was this issue resolved, but the HOA began to take our client’s interests more seriously after that.
Joining forces with the HOA board
In 2020, a member of Tranio’s Berlin team joined the HOA board as a representative of our client. By doing so, we have been able to participate in HOA voting with full rights ever since.
The HOA meets quarterly for formal, decision-making meetings, and deals with sudden or urgent issues during ad-hoc meetings, which typically take place several times a month either in person or online.
Streamlining operating expenses
Real estate owners in central Berlin do their best to maintain and improve upon their properties. On the residents’ initiative, facade work was completed in 2020 and the relevant costs were apportioned among the owners in proportion to the floor areas of their apartments. We persuaded EDEKA to cover a portion of those costs as the supermarket also stood to benefit from improvements. As a result, we decreased Max’s contribution to the facade work by 40%.
The savings didn’t stop there; in 2020 we conducted an audit of the HOA’s 2019 maintenance, repair and utility payments, during which we discovered uneven expense distributions. Our findings resulted in Max recovering nearly 50% (14,000€ out of 30,000€) of what he had spent in these categories.
Defending the supermarket’s right to a parking lot
Tiergarten is a bustling neighborhood with inhabitants from all walks of life. One unfortunate side effect of this was the persistent presence of petty criminals in common areas, including the parking lot adjacent to Max’s supermarket. In an effort to cut down on unsavory incidents, the HOA wished to close the parking lot to everyone except residents. This move would have proven inconvenient to EDEKA’s customers, ultimately jeopardising its continued tenancy.
In talks with the HOA, we made clear that limiting the parking lot to private residents only would violate Max’s interests; after all, he owned 13 of the building’s 30 parking spots. Having already lost to us in court once, the HOA appeared to be aware that negotiation would be a better option.
We agreed that a ticketed parking gate system would be installed. When some residents at the meeting suggested that Max should pay for this improvement because “Russians have a lot of money,” we managed to reason with them. Ultimately, the gate system was installed in 2021, with costs allocated proportionally among parking-spot owners.
Reducing equipment-repair costs
As Max’s trusted property managers, we are currently in the process of resolving two pending issues.
First, the parties have not yet signed a comprehensive agreement on the supermarket’s mechanical, electrical and plumbing (MEP) systems. This is because the developer is currently eliminating ventilation, engineering and other defects, which will ultimately result in reduced repair costs. We have agreed upon due dates for this work and are actively monitoring their progress.
Second, we have not yet insured the supermarket’s equipment as the developer has yet to divide the premises and the furniture, fixtures, and equipment (FFE), a required step in the equipment-insurance process. We are currently working with the developer’s legal team to draft these documents, and expect to be fully insured by the end of 2021.
The successful resolution of these issues will protect Max against FFE repair costs for years to come.
When a management company plays an active role in the operations of a property and builds amicable and effective relations with neighbors, tenants and the developer, this helps to limit costs for the client, both in terms of money and time.
Max, who will earn a 3.8% net yield after deducting operational expenses and Tranio’s commission fee, is more than satisfied with our management.