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Landlords Move Into Other Services

Real estate: Property owners find new sources of income by selling Internet access, cable TV, advertising space.


What's a landlord to do if he can't raise rents? Try to sell tenants something else.

Commercial property owners are creating new income by selling travel and phone services, Internet access and cable television to the tenants in their apartment, office and retail buildings.

And they're charging other marketers the right to sell, or at least advertise their goods and services, to the same captive group of workers and residents. As one analyst puts it, property owners are beginning to consider themselves "gateways to consumers" rather than mere owners of bricks and mortar.

"They're thinking more like a traditional operating business rather than a collector of assets," says Craig Leupold of Green Street Advisors, a Newport Beach-based real estate research firm.

Leading the charge are the country's largest landlords--many of them publicly traded real estate companies--which possess hundreds of buildings and a lot of bargaining power.

Giants such as mall owner Simon Property Group, apartment operator Charles E. Smith Residential Realty and office landlord CarrAmerica Realty say fees for these services, although still a tiny part of the bottom line, are growing at a much more rapid clip than revenue from their primary leasing business.

Executives of CarrAmerica say they expect these ancillary services to make up almost 15% of its bottom line in the third quarter, a big leap from just 4% at the beginning of the year. Simon expects revenue from its marketing efforts to reach $20 million.

But real estate brokers say landlords should exercise caution in selling outside services to their tenants. Most companies don't need their landlords' help to cut a deal with vendors, and too much on-site marketing could be an aggravation rather than assistance.

Although current regulations prevent real estate investment trusts from deriving more than 25% of their income from sources other than rent and mortgage interest, most say even a nominal amount of additional revenue could mean the difference between surviving and thriving when real estate markets cool down.

"Now that the acquisition story for real estate and REITs has changed, clearly there is a premium on internal growth," says Steven Wechsler, president of the National Assn. of Real Estate Investment Trusts, an industry trade group.

Apartment owners were the first to begin exploring ways to squeeze more money out of their existing properties. Beginning in the early 1990s, they began demanding fees from cable and phone companies for the right to sell basic service to its tenants. They also began breaking out parts of each residence to lease separately, such as garages, furniture, microwaves, laundry machines, extra phone lines and Internet service.

Charles E. Smith even reversed the long-established practice of demanding a security deposit. In lieu of a deposit, the East Coast owner of 60 large apartment buildings now requires a nonrefundable "move-in fee" from new residents, which can run as high as a few hundred dollars. "A good share of customers look at deposits as money they will never see back," says Matthew McCormick, Charles E. Smith senior vice president. Although the company may lose some money on tenants who have been especially rough on an apartment, McCormick says, the landlord generally comes out ahead at least a hundred dollars per tenant with the new system.

Partnering With Giants

But analysts say the real estate company making the most money from its customers is Simon, the country's largest mall owner.

The company began trading on its large size last year, selling marketers access to the millions of shoppers who crowd its more than 200 malls from Laguna Hills to Long Island.

Through a new subsidiary called Simon Brand Ventures, the retail landlord struck a deal with Pepsi-Cola Co. last year, selling the soft-drink giant the exclusive right to dispense beverages from vending machines at its malls. In recent weeks, it also has allowed the company to set up promotional areas, complete with mini-putting greens, to debut Pepsi's new soft drink aimed at men, Pepsi One.

Simon also has taken a cue from stadium operators, selling advertising space within the walls of its huge centers. In recent weeks, Simon cut a multimillion-dollar deal with JCDecaux of New York, a maker of advertising street furniture, to lease space on benches and structures housing automated teller machines, directories and phones within Simon's malls.

Other ongoing ventures include a deal with Microsoft Corp. to provide mall shoppers with Internet access and a copy of its Internet Explorer software, and a credit card partnership with Visa. This credit card pays rebates in the form of gift certificates and allows Simon to monitor buying patterns and tailor promotions for specific customers.

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