PAWN PREDICAMENT – WHAT’S SO BAD ABOUT PAWN SHOPS?

A recent controversial action of the Crystal Lake City Counsel appears to bar pawn shops from its prime commercial/business district when they voted 6-0 to reject a business owner’s request to locate a pawn shop on Route 14.  This action was troubling to me and apparently a number of people based on the on-line comments in the NW Herald after the infamous vote.

Over the years pawn shops have developed a bad image.  Dingy looking stores charging usurious rates fencing stolen goods is an image that many people conjure up when they think of pawn shops.  The image cannot be farther from the truth.

Recent regulations of pawnbrokers by many states have taken pawn shops out of the back alleys into the higher rent districts.  States have acted to limit the interest rates charged by pawnbrokers for items hocked and forced pawn shops to work with local police to identify pawned items that may have been stolen. In many states every pawn shop in the state is required by law to submit a report to the local police on every pawned item including the serial numbers of the items and the full identity of the customer.  Pawnbrokers have a high interest in taking in as little stolen property as possible since the police can confiscate such merchandise and the pawnbroker has to take the loss.

Pawning has long been a source of capital for people in need as well as a means of financing business ventures.  A typical transaction consists of a potential borrower taking an item of value into the shop.  The pawnbroker determines how much to loan the patron for the item.  Loans are paid out at a rate of about one-third to one half of the price the broker can expect to receive from the sale of that item for a third party during the worst of times.  This business model assures a profit will be made.  With so many people having bad or no credit, pawn shops represent one of the only places they can turn to if they need immediate cash.  It’s a fact, however that four out of every five customers successfully pay off their loan and retrieve the item they hocked.

The National Association of Pawnbrokers reports that there are over 30 million pawn store customers per year and they appreciate this unique form of credit and tend to borrow only what they need (Pawn Industry News-“ Pawn Shops: Economic Barometer?” April, 2009).  Pawnbrokers never require a credit check and never negatively affect a customer’s credit.  Each day, pawnbrokers help families through challenging economic times by providing non-recourse, small dollar, short term loans when they have nowhere else to turn (National Pawnbrokers Association – Industry Overview).

There are between 12,000 and 14,000 pawn shops in the US today according to the National Pawnbrokers Association in Washington D.C.  The business has become so “mainstream” that TV shows like Pawn Stars on the History Channel have captured a wide audience.  Some stores like Pawn America in Madison, WI are as large as 35,000 square feet, taking over a vacant Circuit City store.  According to Growing Bolder Community Newsletter (April 7, 2012) Pawn Stars in now the No. 1 non-broadcast show IN THE WORLD, airing in 150 countries and translated into 30 different languages.

So why has Crystal Lake decided that pawn shops are not suited for their community whose slogan has long been “A Good Place to Live?”  If you do the research, pawn shops are a legitimate business regulated by the State providing a needed service to a percentage of the population who has a need for these services.  These businesses also pay rent to landlords and create jobs.  There are stores that provide pawn service in Island Lake, Algonquin, East Dundee, McHenry, Mundelein and Fox River Grove.  A lack of information and basic fear due to a distorted image of reality are the primary reasons why Crystal Lake City Council has erred in their decision .  I hope they reconsider.

DO BROKERS NEED INCENTIVES?

It is estimated that 99% of commercial real estate brokers are compensated on a commission basis. That's certainly been the case for me for the duration of my 36 year career. If we don't sell, we don't eat. On the surface, that fact would appear to be enough to motivate me to get out of bed in the morning and go find someone to talk to. It has been said that if we are not face to face with a prospect, we are unemployed. Most people don't pursue a career that is strictly commission based because they prefer the security of a weekly/monthly paycheck. That regular paycheck certainly makes it easy to budget and plan your finances. When you know how much is coming in and when it will arrive, there's a warm fuzzy feeling of comfort that comes over you that eventually you just take for granted. Not so for the commission salespeople! We often don't know when or where our next dollar is coming from. What other incentives would a person need to be motivated to get out there and work?
Many successful commercial real estate brokers focus their business model on obtaining quality properties to sell or lease..."listings" we call them. You've no doubt heard the term. I don't particularly like the term..."listing". Sounds like a boat that's ready to capsize. But I have learned to live with it. People hire me and my firm to represent them exclusively in the marketing of their property or asset. I become their agent so this is also called an "agency" agreement or exclusive right to sell or lease. I enter into a listing agreement knowing that there is a reasonable probability that the property will sell or lease at some point during the term of the agreement. That probability depends upon a number of factors, the most important of which is the seller's or landlord's MOTIVATION. If they just want to "test the market", their motivation is low. If they are going to lose the property in a foreclosure if it doesn't sell, their motivation is high. The location and condition of the property are also factors that directly relate to probability.
Successfully marketing the property or space becomes the primary task of the broker. Getting from the listing process to the closing table is the objective because it is only at the closing table or lease consummation that we get paid. We do all our work upfront ("on the come") and get paid only if we are successful. Attorneys don't work that way, doctors and accountants don't either. I hope this isn't boring you...I'm getting to my point. In order to sell or lease a property once, we have to make TWO sales...we have to sell the property to the other brokers and then they have to sell it to their prospects. Leveraging the marketing process by getting other brokers to be aware of, knowledgeable and excited about your property is a huge part of marketing. The other brokers have numerous properties that they can choose to show to their clients or prospects. My job is to get their attention via my marketing program so that they will show yours.
To do this we often need to offer extra incentives. When a seller tries to beat me down and get me to reduce my commission, he isn't thinking about the ramifications of that. Instead of asking me to offer "less" commission to a cooperating broker for the pleasure of showing this one property, the seller should pony up and offer "MORE" than a "competitive" commission as an incentive for a broker to show that seller's property. There, I said it. In other words, you should find a way to appeal to a broker's sense of GREED (brokers are not greedy but they do have to feed their families) to give your property the best chance of selling. A larger than "competitive" commission rate can get the broker's attention. That is what marketing is all about. Some smart sellers offer brokers other "spiffs" to get their attention. I was enticed this week by one who offered me a trip to Hawaii if I leased his 15000 sf industrial condo. You may not believe this but I've had building owners hand me a $50 or $100 bill just to show up and PREVIEW the building at a broker's Open House tour for a group of industrial buildings. They are trying to get me to NOTICE their building above others they are competing with. The strategy works!
Understand that I am not advocating for more of a commission for ME in this discussion. I am suggesting that if you are selling or leasing a property, that you strongly consider allowing your marketing representative to offer a BONUS to the cooperating brokerage community. It is my contention that such an incentive will lead to more exposure which translates to more showings and a faster sale or lease. In a market where supply grossly overshadows demand and showings and offers are few and far between, it behooves all sellers and landlords to understand what makes the world go round in the commercial real estate brokerage business. Providing the brokerage community some creative incentives could make all the difference between selling, leasing or lingering on the market for a long time.

Chicagoland Industrial Market Update

To put things in perspective, the Chicago industrial market has 1.1 BILLION square feet of industrial/distribution space.  Of that amount 112 million square feet or 10.6% is currently vacant.  This is the lowest vacancy rate we have seen since 2008 when the rate was 10.3%.  33.5 million square feet of industrial space was leased in 2011, slightly up from 32.8 million square feet in 2010. Clearly we are crawling from the wreckage as 2012 appears to be picking up steam.  9.1 million square feet of industrial space was absorbed in the 4^th quarter of 2011, the largest amount in 6 years!

Some of the forces at play that are driving the increased demand for industrial space are related to the trend toward buying more and more products on line.  Cyber Monday, online retail’s counterpart to Black Friday (where sales take place in “Brick and Mortar” store locations) rose 22% in 2011 setting a record as the biggest online shopping day in U.S. history.  Sales were $1.3 billion vs. $1.0 billion in 2010.  It has been predicted that as much as 30% of all retail sales could be completed over the internet by 2020, roughly double the current level.  The point of this major buying habit trend is that the online shopping world will create greater demand for large warehouses by many retailers.

* Credit to Pat Gallagher of the Alter Group whose article in February, 2012 issue of Heartland Real Estate Services who provided all the above stats and data.

Shame on Elgin!!

Elgin had made it on our list of business unfriendly towns.  Marc Mylott, Director of Community Development found a way to make a sensible deal crash and burn when they denied a swimming pool contractor the right to purchase and occupy a metal building on 6 acres out in the country when their zoning code specifically lists "contractors office and equipment areas" as a permitted use.  His narrow interpretation of the definition of contractors office caused a $300,000 deal to  vanish in thin air.  No attempt  was made to try to find a solution which is where I have my real problem.  Elgin, the "City in the Suburbs" is Chasing Business away.  That should be their slogan.  Shame on Elgin!

IDOT PLANS ROUTE 31 EXPANSION

Last week I attended a show and tell by IDOT held at the City of Crystal Lake. IDOT has aspirations of widening Rt 31 from Rt 176 all the way to Rt. 120. As I studied the plan, it became clear that all they were going to do is add a turn lane on this major North-South artery. I filled out a feedback form that asked why they weren’t talking about a 4 lane highway with a turn lane. They apparently have no plans to actually do the work til after 2017 but will be considered for future proposed highway improvement programs subject to funding availability and project readiness. I had the feeling they were just making the people of McHenry County feel that our tax dollars were possibly going to put to use for our benefit sometime in the next century…maybe. It is astounding that they would do all this work and research and have no clue as to when they might actually be able to deliver a product. That’s government for you! What is your opinion?

HUGE CHANGE BREWING FOR LEASE ACCOUNTING

The Financial Accounting Standards Board (FASB) is a private sector group that makes the rules and reporting standards for accountants. It seems they have been busy trying to figure out a way to make life miserable for companies with commercial leases. Currently, leases are off balance sheet items, appearing only in footnotes to the financial statements, if at all. The FASB is proposing to change that so that operating leases, which includes most real estate leases, that will treat leases as if the company had purchased and financed the leased asset. They will require the lease to be set up as an asset called a “right of use asset” and will require a corresponding liability related to the rent payments and any direct costs such as brokerage fees. An article in the June issue of Realtor magazine by Marc Betesh (page 22) talks about this as if it is likely to be enacted this year and go into effect next year. Maybe this is a good thing and will cause more people to buy rather than lease. Any thoughts?

Local Chicago construction contracts are up 14% so far in 2011!

Crains reported on 6/6 that local contractors and architects “are enjoying a modest uptick” in activity and they couldn’t be happier.  Of course they aren’t sure if it will continue.  Health care is one of the brightest spots on the local construction scene but the apartment sector is gathering momentum while institutional work for colleges and some commercial and office work is showing evidence of an uptick.  This news seems to dovetail with what our office is seeing – more calls, more showings, more offers, more accepted contracts, more closings ad lease consummations.  We’re not celebrating yet . . . how do you see it?Crains reported on 6/6 that local contractors and architects “are enjoying a modest uptick” in activity and they couldn’t be happier.  Of course they aren’t sure if it will continue.  Health care is one of the brightest spots on the local construction scene but the apartment sector is gathering momentum while institutional work for colleges and some commercial and office work is showing evidence of an uptick.  This news seems to dovetail with what our office is seeing – more calls, more showings, more offers, more accepted contracts, more closings ad lease consummations.  We’re not celebrating yet . . . how do you see it?