Q: How do you break into the Aspen commercial market? It seems like you have to have an “in,” or be a major national brand to have space in the downtown core.
Mercatoris and Mercatoris: That is a good question! The Aspen commercial core tends to play by its own rules. If you try to compare it to or measure it by any other commercial market you might drive yourself crazy. I would say the first thing is bring your checkbook, and then make sure you know somebody that is connected to the core.
Q: What do you mean by that?
M&M: Well first off, much of the property in the commercial core trades off market. This means it was never listed publicly in the first place. It takes an experienced broker with deep connections to know who is thinking about buying and selling to learn who may have some space available and what businesses are looking to shuffle and why.
I was very lucky that Krista Klees paired me with Bob Langley, who has been in Aspen commercial real estate for 30 years. He has those deep connections. On top of being a walking Rolodex of connections, Bob’s first instinct is to offer help — which in my experience can be a rare quality in the Aspen real estate business.
Q: Now if we are getting technical … to ascertain how Aspen plays by its own rules you have to look at the numbers.
M&M: The simplest way to value commercial real estate is by its capitalization rate (CAP). CAP rate is a measure that investors, banks and commercial brokers use to measure the performance of a property. It is basically a return on investment (ROI) from a property. For example: If you were to pay cash for a property, your return on that investment would be the rent you collect — expenses to run the property equals profit.
To keep it simple, let’s say you bought a property for $1 million and your total rental income is $100,000 a year. Your expenses to run the property are $20,000 per year and this leaves you a profit of $80,000. $80,000 divided by your initial $1 million cash investment gives you an 8% CAP rate. CAP rates can help people in the commercial world compare one property against another as investment potential. Average CAP rates can differ across different regions in the country depending on the economic performance of the area. In Aspen our CAP rates are much lower, so investors usually expect a lower return on their investment in our area.
Q: Why would they do that?
M&M: Well, Aspen happens to be one of those places where there’s limited space. And scarcity can create demand. People come from all over the world to be a part of Aspen. They realize how special it is here. Our commercial core is only eight blocks long by eight blocks wide. Surrounded by mountains on all sides and with healthy restrictions on development in the downtown core, people see this as a finite asset. They know the value isn’t going to go down. Investors know they’re not going to make more of it, so they’re willing to pay a premium for it.
Q: So how does that affect people wanting to lease a space in the downtown core?
M&M: Any investor/landlord/entrepreneur is going to want to see a return on investment. So as the value and prices of buildings go up, rents go up with it. That’s just the way it is. Now any tenant/entrepreneur needs to keep that in mind and make sure they’re selling a product that can help them keep their rents in line while making a profit. That may mean and generally does mean we have to charge a premium for goods and services in Aspen.
Q: Can businesses survive and thrive as these values keep increasing?
M&M: Yes, both landlord/entrepreneurs and tenant/entrepreneurs need to be realistic. As a tenant/entrepreneur, you need to know what you can afford in rent as a percentage of your sales. If a particular space does not fit in that model then it’s not going to work — period. And, landlord/entrepreneurs also need to understand if you buy a building with a business that serves hamburgers or inexpensive goods in it, you may not be able to get what you want in rent. It can be frustrating on both sides. So, everyone needs to go into it with open eyes.
But this is also where it gets fun. I hear brokers and investors talk about “sophisticated capital,” and I just want to shake my head. Capital or cash can be very “sophisticated,” but at the end of the day there are only 100 pennies in a dollar which translates to 100% top-line income.
Using the property above for example, and since I am a “restaurant dork,” at heart, we will use typical restaurant percentages. Which as a rule of thumb are, out of 100% of income you will spend 30% on food and beverage, 30% on labor, about 8% on rent and 12% on everything else. If you do all of this correctly you make 20% on the bottom line, or 20 pennies out of $1.
Now assuming your business does $1 million in sales, 8% of that would be $80,000 per year. You would be able to afford the rent the landlord/entrepreneur wants to make. In this scenario everyone is happy. Where we run into trouble is when a tenant/entrepreneur signs a lease on a space that they can’t afford. This is not uncommon because a new tenant/entrepreneur generally thinks there is no way they can fail. Trust me, I speak from experience here.
If both tenant/entrepreneurs and landlord/entrepreneurs went into the situation with their eyes open and clear understanding of the “what-if scenarios” — you would see less of these conflicts. That would lead to more profitable and sustainable relationships and in turn a healthy and stable commercial core.
Mike Mercatoris, a former serial restaurant entrepreneur in the Roaring Fork Valley, and Bob Mercatoris, a 30-year commercial real estate veteran who moved to Aspen because it was one of the few places in the world where he could study at a monastery and play rugby, formed the Slifer, Smith & Frampton Commercial & Entrepreneurial Division. Contact Mike at 970-618-7092 or Bob at 970-948-0001.