Real Estate People Don't Think Like the Rest of Us

About ten years ago, I leased an office/warehouse suite in a building that had five other units like mine. The owner was a local commercial broker that decided he wanted to be a landlord as well. At the time there was overcapacity for units like mine, so I had the pick of the litter. Since I wanted to keep my flexibility for future growth, I only signed a one year lease.

At the one year mark, he comes into my office as announces a 7% rent increase. Without a second's thought, I said no. We stood there looking at each other.

Finally, I said, "How can you ask for an increase when half your units are sitting empty." His reply, "That's the reason. I need more income from existing tenants to make up the shortfall."

Hey, I can get greedy sometimes too, but I was simply amazed by his total lack of understanding of the market. Or irony.

The point never sank in even when he got the same reaction from the other two renters.

I didn't want to move, but went ahead and started looking at other locations in case he pressed the point. He never did. And I continued to lease there for the next three years at the same rate.

I drove by the other day, and he now has two tenants. Plus a "For Sale" sign out front.

One of the most unique features of our economy is that people are pretty honest. They follow the rules and pay their taxes; for the most part. The hassles are so great for noncompliance, however, that it forces most to do the right thing. We are talk about scofflaws, but they are but a small percentage. We exist on an honor system that has worked well to date.

I see a change coming, however.

More and more small businesses are finding the regulations simply beyond their ability to follow. And that only encompasses those that know there is a regulation for something. Current demands for more and more reporting are making the running of a small business nearly impossible to do without inadvertently violating a federal, state or local regulation. Unlike their larger counterparts, a small business simply cannot afford a phalanx of lawyers, accountants and consultants to handle their regulatory concerns. The system is put together to give full employment to these handlers/fixers. When dealing with the EPA, they are astounded when you don’t have one to guide you through the maze.

Will we become like Italy?

Fully 25% of the Italian economy is underground; operating on a cash/barter system away from the prying eyes of the government. On an anecdotal basis, I know of a number of businesses that do this right here in the Heartland. How many contractors have you employed that you paid in cash, and they paid their employees in cash? Was the workplace posted in accordance with OSHA? Did they get their breaks? The list goes on.

With regulations and taxes increasing, this trend is bound to increase. The new Fed mandate to issue 1099’s to anyone receiving more than $600 in a year, will add a mountain of paper that will make compliance enforcement impossible. In each business I've run we've had hundreds of vendors all of whom were well over $600. Many were Fortune 500 companies, not nannies trying to dodge taxes.

When East Germany fell it was because of too much data, not too little. Files on suspected miscreants were overflowing the secret police headquarters. Everyone was a suspect.

People talk about getting money to small business. That’s great. But the real value would be to halt the exponential expansion of regulations.

False Economies

How does closing a Chevy dealership help GM?

Short and long answer: it doesn't. Matter of fact, it probably hurts them more than it could conceivably help. The costs saved are marginal at best. The GM Zone and District managers have one less outlet to call on and support. Small potatoes.

The dealership network for all the car companies is made up of true entrepreneurs. They buy their franchise, buy the cars that sit on their lots, place and pay for all their advertising, staff the sales and service departments and perform every other function that goes into running a business.

Moreover, they compete with other auto brands as well as sister Chevy dealerships. If the culling of the dealership list doesn't really save cost, then why do it? You're not going to move more iron with FEWER outlets.

The reason is simple. To the outsider it gives the appearance of action. See, look we're cutting costs to save the business. The people putting the downsizing plan together don't really understand the dynamic of how cars are sold. The dealers are not GM employees. They are independent contractors that add minimal fixed or variable costs to the mother ship's bottom line.

Rather, dealer survival is the ultimate in marketplace Darwinism. If cars don't leave the lot, they're out of business. Matter of fact, the dealership segment over the last 10 years has undergone tremendous consolidation. The era of mega dealerships, the auto industry's version of the big box, is well underway.

Meanwhile, people are on the street that might have survived if the market were left to decide. The typical dealer employs 100 people. Most of these outlets are in smaller communities. Moreover, the local dealer places local ads, uses local suppliers and supports Little League teams and charities.

I still don't see how this enhances the value of General Motors.