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2007 The Schenk Company, Inc |
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Top
10
Lease
Negotiation |
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&
Site Selection Mistakes |
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Greg Schenk SIOR
The Schenk Company, Inc
1350 W Fifth Ave, Ste 224
Columbus, Oh 43212
614-487-1972
www.irepthetenant.com
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author:
Gregory P. Schenk, SIOR
co-author: Craig
Melby, Sior Broker
http://www.leasesmart.com |
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Dear Valued
Clients,
Thank you
for your time. We want to assist you and your clients improve
their bottom line on leased and owned properties worldwide. We
have record high vacancies in Central Ohio and many areas around
the country! We can help you and your clients take advantage of
that by giving them a no cost overview of their leased or owned
facilities. We can assist them in restructuring or renewing
their lease early to take advantage of this great tenant’s
market or help them with subleases, lease buyouts, sale
leasebacks, 1031 exchanges and acquisitions.
We have
prepared with the following material to help take the mystery
out of site selection and lease negotiations.
We hope
you find it interesting and useful. Additional information and a
full description of our services can be found at
www.irepthetenant.com.
Definitions and other information can be found at:
www.LeaseSmart.com.
With record
high vacancies let us insure your client’s facilities next lease
renewal or relocation is done in the best terms and conditions
for their company. Proper planning will insure this will be
done! If we can be of service to you here and around the
country please let us know!
Sincerely,
Greg Schenk
SIOR
President
The Schenk Company, Inc
“Were our
word is our bond and accountability to the client is everything”
Providing Creative Solutions for your Worldwide Commercial real
estate needs! |
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Providing Creative Solutions to
your Worldwide Commercial real estate needs! |
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The following list of common
mistakes is the result of a survey taken among members of the
prestigious International Tenant Representative Alliance.
Participants drew from an average of well over 15 years of
Tenant Representation experience, representing and advising
national and local commercial tenants with hundreds of leases
totaling millions of square feet. Most major U.S. markets were
included. |
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The main risks to
consider when commencing the Facilities Acquisition Process
(Lease or Purchase) can be broken down to the following three
categories: |
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MONEY
– Were the best possible rate and terms achieved?
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RISK
– This includes the risk of making a bad location
or operational decision,
and whether you have the right lease clauses, which
prepare for future, unknowable requirements such as business
expansion, contraction or relocation needs. |
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TIME
– How much time
is going to be spent on the Facilities
Search and Acquisition process, and what will it cost the
company in terms of lost productivity?
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Information in this guide will
eliminate or reduce these issues! |
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Most Common Mistakes |
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#1 |
Not Allowing Enough Time |
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#2 |
Neglecting Long-Term
Priorities |
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#3 |
Inadequate Representation |
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#4 |
Lease Commencement Date Is
Not Tied
To Building Completion |
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#5 |
Underestimating The Condition
Of The Premises |
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#6 |
Using The Landlord's Professionals |
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#7 |
Misunderstanding The True Space Costs |
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#8 |
Paying Too Much Rent |
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#9 |
Not Enough Landlord Incentives |
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#10 |
No Outside Incentives |
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Other Common Mistakes |
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About The Author |
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#1
Most
Common
Mistake |
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NOT ALLOWING ENOUGH TIME |
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Facility research, property
inspections and comparison analysis can usually be completed in
a week or so by motivated companies already familiar with the
local market. However, those tasks are only the tip of
the “time drain” iceberg, and several commonly overlooked
complications needing to be factored into the relocation
timeline:*
1)
Negotiations with the Landlord and preparation of the lease can
take months.
2)
Once the Lease is signed the interior usually needs to be
finished or renovated, which can take several months.
3)
Before renovations can begin,
building permits need to be obtained which can take up to two
months, and
4)
Before permits can be obtained,
architectural plans must be completed, and may take one to two
months.
If
existing facilities cannot be found which are acceptable, new
construction can easily take 12 months or longer. |
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Bottom line:
6 - 12 months is a good time frame to use when looking for new
facilities, even longer if experienced professionals are not
used to guide the process.
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*
This assumes the space is not going to be taken as-is, which is
possible, but unlikely. |
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Top
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2nd
Most
Common
Mistake |
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NEGLECTING LONG-TERM PRIORITIES |
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Owners who think only
about solving immediate needs face expansion problems very soon
again! In addition to evaluating short term needs relative to
square footage requirements (number and size of rooms), type of
floor plan (open, private, or a mixture), communications needs,
parking needs, access and security needs, etc., be sure to
factor in long term needs. By obtaining facilities and
lease terms which will allow the company to expand, downsize
or relocate as circumstances dictate, business owners can avoid
the unnecessary headaches, loss of business and costs associated
with relocating. Examples of such important lease clauses
include: |
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·
Expansion right
obligates the Landlord to provide Tenant with more space should
it become necessary.
·
Cancellation right
(commonly referred to as a “kick-out” clause) allows the Tenant
to break the lease under certain conditions such as when the
Tenant needs to expand and the Landlord cannot provide them
additional space on the premises.
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Extension right is
similar to an option, and allows the Tenant to remain in the
premises (a right of first refusal is a type of extension
right).
Sublet
right
gives the Tenant flexibility in that if it must relocate, it may
sublease the space and mitigate the economic pressure. |
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Suggestion: After discussing the company’s
immediate needs and long terms goals with senior management in
all departments, meet with leasing experts and space
planners/architects to determine a) the most productive
combination of office size and layouts (modular furniture,
hoteling, size, amenity requirements, etc.), b) facilities which
are flexible enough to service future needs, and c) certain
lease clauses which will be negotiated into the lease document. |
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Top
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3rd
Most
Common
Mistake |
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INADEQUATE REPRESENTATION |
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Unless someone in the company is already an expert in commercial
real estate, most business owners cannot afford the time
necessary to learn this complicated industry. Lack of knowledge
combined with time pressures can cause unrepresented owners to
a) make location decisions without being aware of ALL the
choices, and b) make costly errors that cut into their profits
and increase their financial exposure
leaving valuable dollars on the table during negotiations to
renew a lease or relocate to lease, purchase or build.
An experienced and specialized Tenant Rep counterbalances the
Landlord’s/Sellers professionals, and will insure that the Tenant
receives the best possible rates, terms, incentives and lease
clause protections. Incredibly, this valuable service may
cost the business owner nothing, since Tenant Reps
share in the Leasing fees with the listing agent and paid
by the Landlord or Seller.
Using the wrong broker may lead to incomplete
information, or conflicting loyalties because of hidden agendas
or Landlord relationships.
Note: Business owners who do not use a Broker will likely not be
aware of all the possible facility choices.
This is because
an experienced Tenant-Rep broker has developed a databank of
every property on the market, an extensive network,
and commonly finds facility choices which are not yet
vacant or on the market.
Suggestion: Tenants should also keep their broker involved in
the expansions, contractions, renewals and extensions that occur
during the lease to prevent uninformed decisions that lead to
lost opportunities.
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Top
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4th
Most
Common
Mistake |
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LEASE COMMENCEMENT DATE
IS NOT TIED TO BUILDING COMPLETION |
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This has been a disaster for many
inexperienced Tenants who found that unexpected delays in the
planning, permitting and construction stages ate into their
rent-free build-out period and caused budget nightmares.
Suggestion:
Tenants should always propose a clause to the lease which
provides for an extension of the lease commencement date if
pre-opening delays are encountered which are beyond the control
of the Tenant. Your professional and a good real estate attorney
can suggest some good lease language. |
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5th
Most
Common
Mistake |
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UNDERESTIMATING THE CONDITION
OF
THE PREMISES |
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Tenants who take a property “as-is”
put themselves at great risk. Even when the space looks fine and
has been previously occupied, building codes may have changed or
the unit’s infrastructure may be broken or inadequate.
Suggestion:
It is best to have the Landlord guaranty the space is up to
current building, fire, safety, zoning and ADA codes. It is also
good to have the Landlord guaranty the condition of the
electrical, plumbing, heating and air-conditioning systems for
the first 90 days (if not the entire term of the lease). |
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6th
Most
Common
Mistake |
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USING THE LANDLORD’S PROFESSIONALS |
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Tenants should use
architects, general contractors and legal counsel under their
control to create and review the various space plans,
specifications, costs and documents. Otherwise, Tenant may
receive inferior designs and/or fixtures that are less efficient
and may dramatically increase yearly operating costs.
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7th
Most
Common
Mistake |
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MISUNDERSTANDING THE TRUE SPACE COSTS |
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Business
owners who are inexperienced with commercial real estate are
often unable to perform true “apples to apples” analysis when
comparing different facility choices. It can be complicated,
even for the pro, to compare the different lease types such as:
Full Service, Gross, Semi-Gross, Net, Triple Net, etc.
Additionally, each Landlords interior finish levels, Tenant
Improvement (TI) contributions, lease incentives and a myriad of
other factors need to be part of the comparison equation.
This confusion
leads many owners to make less than optimum decisions. |
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8th
Most
Common
Mistake |
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PAYING TOO MUCH RENT |
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Companies which do not obtain
accurate, current market research may pay too high a rental
rate. Landlord “flexibility” changes constantly depending upon
many factors including current occupancy rates in both their
building and the competition, lease length, tenant’s use,
parking requirements, financial strength of tenant, etc.
Negotiations are especially
important with lease renewals, since Landlords are most
competitive when the space is placed on the open market.
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Top
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9th
Most
Common
Mistake |
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NOT ENOUGH LANDLORD INCENTIVES |
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Due to a lack of
experience, Tenant did not obtain as many incentives as they
might have been able to negotiate. Typical incentives include
periods of free rent both before and after lease commencement,
discounted rent for various time periods, Landlord contributions
to tenant’s build-out costs, landlord improvements to the space,
limits on future rent increases, etc. |
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10th
Most
Common
Mistake |
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NO OUTSIDE INCENTIVES |
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When a company relocates it may be
possible to obtain substantial economic incentives from local
government. These incentives include tax rebates, relocation
assistance, payroll subsidies during employee training,
infrastructure improvements and others.
Many times the
statutory incentives can be negotiated up very substantially,
and an inexperienced company may leave millions of dollars on
the table.
Suggestion: Use an
experienced “location analyst & incentive negotiator” to make
sure you obtain the best incentives possible. |
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Top
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OTHER COMMON
LEASE NEGOTIATION & SITE SELECTION MISTAKES |
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TENANT PERFORMS THE BUILD-OUT |
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It may be
better to have the Landlord perform actual build-out work, so
that unexpected problems or delays will be the Landlord’s cost.
When it is appropriate for the
Tenant to perform the build-out, have the lease provide for an
extension if delays are encountered which are not the fault of
the Tenant, and extra Landlord monetary contribution if
unexpected repairs are required (termites, code violations,
etc.). |
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NO LIMIT ON PERSONAL
GUARANTY |
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Many times it is
possible for the Personal Guaranty to expire “x” months after
lease commencement, or provide a specific dollar amount of
guaranty. Although not as beneficial, it may be possible to use
an “Evergreen Guaranty” which provides that Tenant will
personally guaranty a set number of months or years, commencing
upon default by Tenant. Your professional will know what is
typical for your market. |
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LIMIT ON FUTURE
FLEXIBILITY / COMPANY GROWTH |
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How fast is the
company going to grow? Will it be necessary to downsize? How
likely is a new partner or merger? These situations, and
more, indicate the Tenant’s need for as much flexibility as
possible. Tenants should work with experienced professionals to
insert language into the lease which will allow a cancellation
or modification of the lease under certain circumstances.
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LIMIT ON FUTURE
FLEXIBILITY / PRODUCT GROWTH |
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Will the company want
to carry a new product line or install a new technology? Will a
neighboring Tenant vacate (or move -in) which impacts the
business? Tenants should be cautious with their “Use Clause”
since these clauses can be very specific as to what goods and
services the Tenant will provide, and may prevent a Tenant from
offering a very lucrative product or service in the future which
has not yet been invented! |
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CHOOSING THE WRONG
LOCATION / TURNING MARKET |
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Tenants who do not
know the local market may locate into a declining area, making
it impossible to hire and retain the highest quality employees.
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CHOOSING THE WRONG
LOCATION / PENNY WISE AND POUND FOOLISH |
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Retail tenants who
choose locations in unanchored properties to obtain lower
rental rates. Traffic and subsequent sales volumes are dismal,
and tenants fight a loosing battle. |
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HAMSTRUNG BY
YESTERDAY’S TECHNOLOGY |
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The office building
is not set up with the newest in telecommunications and data
cabling, such that Tenant cannot benefit from today’s
technology. Business is lost to competitors which can offer
better service to clients. |
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TAKE TOO MUCH SPACE
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Tenant did not use
their own space planner and leased offices which were too large
or had an inefficient floor plan. |
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SPACE WAS MEASURED
INCORRECTLY |
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Tenant did not verify
the Landlord’s dimensions and figures and paid rent on “phantom”
space. |
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UNNECESSARY SECURITY
DEPOSIT |
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Landlord asks for
Security Deposit as standard procedure, but does not require one
depending upon Tenant creditworthiness and/or build-out
requirements. |
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NARROW SEARCH
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Tenant limits its
geographic area of interest too severely, and does not complete
adequate market education resulting in lost opportunities. |
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HOLD-OVER PENALTY IS
TOO HIGH |
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Standard hold-over
penalties in first draft lease agreements are typically far
higher than necessary. |
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NOT REVIEWING THE
LEASE OFTEN ENOUGH |
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Tenants miss
notification dates, resulting in automatic renewals, loss of
option period, or other penalties. |
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POOR DESIGN |
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Tenant made poor
choices during interior design stage because of focus on “least
initial cost” instead of “lifetime operating costs”. Many times
upgraded lighting, windows, insulation, etc. can make very
dramatic improvements in employee productivity, operating costs,
and business security. Your professional should be able to
discuss the latest in facility design, materials and technology |
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POOR PLANNING |
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Natural catastrophe
occurs and electric power is lost for an extended period of
time. Tenant is out of business, and loosing clients at a rapid
rate. Proper planning and/or design can eliminate potential
business disasters. |
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Make your
life easier, call:
The Schenk Company, Inc
Central Ohio’s Exclusive Tenant Representation Firm
614-487-1972
Worldwide Commercial
Tenant/Buyer & Investor
Representation Specialists
SAVING
BUSINESSES TIME & MONEY, AND PROTECTING THEIR INTERESTS
www.irepthetenant.com for information and recent letters of
recommendation
E Mail:
greg@columbusofficespace.com |
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Top
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About the Author
Gregory
P. Schenk, SIOR |
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Holds the top
designation available in the commercial real estate industry:
Specialist, Industrial and Office Real Estate (SIOR)
designation. |
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Founder of Central
Ohio’s only commercial real estate firm specializing exclusively
in Tenant/Buyer-Representation – no other firm in the area does
so. |
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Creator of ”The Schenk Company’s “Competitive Edge” seminars
and courses on exclusive tenant representation and Corporate
Service which were certified for continuing education in Ohio
and many other articles which have appeared in national
publications. Speaker for the Ohio Society of CPA’s on the state
of the commercial real estate market, and to the Columbus
Medical Association. Featured speaker at many National SIOR
conferences cities nationally! |
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2006 Micro Entrepreneur of the year award winner for real estate
in Central Ohio |
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Featured Fastrac Magazine Entrepreneur May 2006, |
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Two time nominee small business
person of the year Columbus |
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Featured in Costar Magazine Top Power Broker 2004, Midwest Real
Estate News 2003 & 2002 top 50 broker in the Midwest, The
Columbus Dispatch February 2002, CEO Magazine on 131 Exchanges
February 2002, Fastrac Magazine’s October 2001 edition on a
fast Growing successful firm that gives back to the community. |
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Creator of
www.irepthetenant.com web site which gives clients an up
to date history of The Schenk Company’s services, clients,
letters of recommendations. |
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Instructor for numerous real estate investment and brokerage
courses and has been certified by the Ohio Real Estate
Commission, qualified to teach their continuing education
classes. |
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Member: Society of Industrial
and Office Realtors
Ohio State University & Evans Scholar
Alumni Assoc. |
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Twenty years of experience in commercial real estate and has
owned, managed, leased and/or brokered millions of square feet
of office, retail and industrial properties as well as
investment acquisitions. |
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BS Degree in Marketing from the
Ohio State University.
Evans Scholar recipient. SIOR
certification & CCIM classes |
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Past clients include: over 500
clients over 20 years including many Medical practices,
ITT, Northwestern Mutual
Financial Services, Fresenius Medical Care, Grange Insurance,
Children’s Hospital, Progressive Medical, American Express,
Franklin University, First Watch, private investors. See client
list on website! |
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PH: 614-487-1972 FX:
614-635-3442
E-mail:
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