Are asking prices obsolete in this crazy real estate market?

Asking prices. Pay me this and we’ll make a deal. Easy? Not so fast.

In our hyper-inflated industrial real estate market, every COMP is a new high watermark. Demand for manufacturing and logistics buildings outstrips supply. Read: There is approximately three to four times the number of buyers than there are sellers. Is this scientific? No. Strictly anecdotal from my experience this year and the last six months of 2020.

Therefore, sellers are counseled to proceed cautiously lest they leave shekels on the sideboard. One way to accomplish this is to enter the market un-priced. The traditional back and forth of a negotiation – offer, counter, counter, strike – is history. What’s replaced it is akin to the old adage of “bring me a rock.” Yes, that’s indeed a rock. Now, bring me another rock. Once referred to as “countering oneself” – a no-no – is now quite common.

Here is the typical cadence these days while representing a buyer. We scan available inventory that meets the buyer’s parameters. If there is one match, you’re lucky. Two or three? Jackpot! You then check with the seller’s broker to confirm availability and touring protocol. Ooops. Sorry, we’re under contract. No, that sold last week. Nope, the tenant renewed.

Our system is quite archaic compared with our brethren in residential sales. Yes, we must call – quite inefficient – brokers to verify info. Realty boards streamline this with their levels of availability – active, active pending, active, contingent, etc. But there’s no such luck in our world. Commercial real estate is not under the same purview.

But, I digress. Back to the search. Faced with limited or no avails – now what? Well, we then scan the list of buildings available for lease. There might just be a seller hiding among the lease listings. You must filter out the “portions” of larger buildings as a buyer would have to buy something much bigger and factor out the owners who are atypically sellers. Hop on that phone and dial your fellow agents. Ok, cool. You found a possibility.

A proposal must check ALL the boxes – price north of where the last sale traded, superior financial qualifications, very few – if any – contingencies, quick close, large deposits, a bit of pixie dust, a hope and a prayer. Frequently, the off-market Hail Marys are dropped in the end zone. No score as the time expires.

But, you still have the buyer. Now what? Hand to hand combat. You pull a list of everything – vacant or occupied. Put together a nice letter outlining your need and be very specific. Send them to the owners. You might just hit pay dirt.

So, are asking prices obsolete? It would certainly appear so!

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104.

 

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Saying goodbye to a real estate legend

The commercial real estate industry lost a lion this week. Bill Lee died April 5, surrounded by family. We are deeply saddened by our loss but grateful that Bill suffers no more and is with the Lord.

Many of you knew Bill, transacted deals with him and had great respect for his business prowess. In honor of the life Bill led and the impact he had on our business, I revived a column I wrote in 2019 in his honor. Rest well, my friend!

While at a real estate summit in Las Vegas a few years ago, I re-connected with Bill. It was so great to see Bill and spend some time with him. Bill, unfortunately, had been absent from recent summits. And while I missed him, the cool thing was, it felt as though we talked weekly. Bill was legendary, but how did he become a legend? My thoughts …

Bill observed a problem. He was the top guy at Grubb and Ellis before Nixon was a crook. He was the most competitive guy I’d ever met. But, Bill realized that intra-office competition was wreaking havoc on the greater good of the office.

He tells it like this. “I had a 30,000-square-foot listing. A competitor in the cube next to me had a 30,000-square-foot occupant requirement. I didn’t tell him about my listing because I didn’t want him to get part of the fee. The culture of the office dictated that approach.”

Bill later realized the “company” suffered and created a platform that used profit-sharing and rewarded cooperation while still encouraging competition. This was heady stuff, folks. Talk about disrupting the way in which commercial real estate is brokered. WOW!

Bill had the courage to change. Great, there was a problem. Now, Bill had to convince some fellow brokers that change was the key to their collective future. Getting brokers to change anything is tantamount to separating conjoined twins.

But, Bill, ever the persuader, convinced a small band of brothers to follow him into the cooperative abyss. John Matus, John Sullivan, Mel Koich, Larry O’Brien, John Vogt, Tom Casey, Dennis Highland, Len Santoro, Bart Pitzer, and Bill’s college friend, Al Fabiano, heeded the siren call and left the building.

Bill had a tireless vision. One of the other old-timers and I were marveling at how those 11 guys, in an executive suite in El Toro, created a company that now boasts 65 global offices, close to 1,200 agents, billions in revenue, an international presence, coast to coast visibility, and the best place in the world to transact commercial real estate. Period!

I asked Bill if he ever, in his wildest dreams, believed the company would someday be this big. He looked at me rather puzzled and said, “Of course! Once we got your Orange office opened, I knew we were on our way to becoming an international company.” Talk about tireless vision.

Bill got out of the way. At a certain point, Bill realized that for Lee & Associates to grow, he needed to step away and let the eaglet fly. Knowing Bill as I do, this was warranted but was the toughest thing for him to accomplish.

Bill along with Craig Coppola, a recent William J. Lee lifetime achievement winner, authored a book titled Chasing Excellence, Real Life Stories from the Streets. It is available online and in book stores.

So, want to become a legend? Just do those four things. Simple, right?

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. 

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Random real estate thoughts: Strange market days and a reminder to live fully

Well, we are clipping along at warp speed – three months of 2021 in the books. But, occasionally, several issues burden my inbox. Therefore, please consider this column a “spring cleaning” of sorts.

Two recent appearances

Recently, I was honored to sit on a panel of commercial real estate experts and as a guest on a radio show. The cool thing was I never left my garage office. The Institute of Real Estate Management panel was conducted via Zoom and the radio spot over the phone. Coincidentally, both had similar themes: What impact has the pandemic had on commercial real estate?

Of course, the answer depends on CRE genre — industrial, office or retail. The differences between the three are as stark as the Mojave desert. Chances are if your company makes or ships things, you’ve high-fived your employees for a record 2020. Conversely, if you visit a suite of offices, you can bet the tenants are considering how to reduce their square footage, when the workforce will return – if ever – and how to conduct business in a hybrid environment, both virtual and in person.

Shortage of Inventory

Never, in all my years have I seen the shortage of industrial inventory this skimpy. At the same time, vacant regional mall space abounds.

You may be thinking, why not simply convert that vacant Sears store to a logistics hub? Good thought! But, the challenges lie with zoning and the physical plant.

Simply, that behemoth store that formerly housed more Craftsman tools than the Carpenter’s Union once generated monster sales taxes for its city. Warehouses don’t. Plus, modern industrial buildings are equipped with much higher ceilings, so the cost to retrofit would be mammoth.

Prices, prices, prices

The acute lack of available industrial space has caused prices to jump higher than a Gonzaga player at the buzzer. Yeah. Maybe next year, Bruins. But I digress. In one small slice of the Inland Empire East and in a sliver of sizes, we’ve seen was a 12% hop in pricing — in just four months!

My favorite time of year

NCAA Final Four, MLB opening days, Masters golf tourney, the fragrance of Orange blossoms, more daylight. All are experienced this time of year!

Considered: A tournament basketball game is akin to my profession – you lose, you go home. Consolation doesn’t pay the bills. Professional golfers start their year the same way brokers do – at zero earnings with no safety net.

Finally, 162 baseball games over six months is a marathon. Some of our deals are long races as well.

Live, live, live

Three of my close friends have gone home to the Lord in the last 30 days. I’m reminded. This is not a dress rehearsal. It’s caused me to focus on what’s important. I’ve squeezed my loved ones a bit tighter, looked past petty squabbles and choose to live each day as though it may be my last.

Rest In Peace Erik, Kevin, and Mike!

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. 

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Is the grass always greener somewhere else?

Much has been written about businesses vacating California. One “catcher’s mitt” state has even coined the phrase “Texodus” to describe companies bolting California for the Lone Star state.

Catchy indeed.

Another city has erected a mock Statue of Liberty on its strip – “give me your tired, your poor, your huddled masses yearning to breathe free, the wretched refuse of your teeming shore…”. Who knew that would be applicable to enterprises seeking asylum from California in a business-friendly environment?

Finally, governors are racking up frequent flyer miles traveling here to recruit our manufacturing base. The promise of economic incentives, cheaper houses, and smaller tax burdens lure our local operations to consider an out-of-state move.

But is the grass really greener?

Certainly, the decision to move – in addition to the carrots aforementioned – is a complex matrix of workforce availability, quality of life, affordable utilities, access to raw materials, logistics considerations, and to a small extent, the cost and availability of commercial real estate to house the organizations. That small slice – vacant locations – is the subject of this column.

So, I got my Jon Lansner data cap on and examined several metropolitan service areas around the United States. Compared were available Class-A 100,000 square foot (used was a range of 75,000-125,000 square feet) industrial buildings built after 2000. Considered were the existing square footage – both vacant and occupied, number of spaces available, average asking lease and sale prices. Also, a benchmark for SoCal was included. All that was missing was Jon’s trusty spreadsheet.

Los Angeles County: 6,431,024 square feet existing and under construction with 35 buildings available; average asking lease rates $1.03 psf; average asking sale price $357 psf.

Orange County: 1,707,949 square feet existing and under construction with three buildings available; average asking lease rates $.93 psf; average asking sale price $$296 psf.

Inland Empire east and west: 7,099,294 square feet existing and under construction with 10 buildings available; average asking lease rates $.66 psf; average asking sale price $170 psf.

Las Vegas: 1,888,928 square feet existing and under construction with six buildings available; average asking lease rates $.74 psf; average asking sale price $260 psf.

Salt Lake City: 2,576,011 square feet existing and under construction with 10 buildings available; average asking lease rates $.57 psf; average asking sale price $150 psf.

Denver,: 4,139,989 square feet existing and under construction with 31 buildings available; average asking lease rates $.73 psfl average asking sale price $162 psf.

Chicago: 9,810,710 square feet existing and under construction with 28 buildings available; average asking lease rates $.52 psf; average asking sale price $99 psf.

Columbus, Ohio; 792,518 square feet existing and under construction with four buildings available; average asking lease rates $.54 psf; average asking sale price $105 psf.

Nashville, Tennessee: 1,555,186 square feet existing and under construction with seven buildings available; average asking lease rates $.62 psf; average asking sale price $94 psf.

Dallas Fort Worth, Texas: 11,749,896 square feet existing and under construction with 53 buildings available; average asking lease rates $.48 psf; average asking sale price $90 psf.

Houston: 9,695,070 square feet existing and under construction with 41 buildings available; average asking lease rates $.58 psf; average asking sale price $84 psf

Atlanta: 5,464,511 square feet existing and under construction with 15 buildings available; average asking lease rates $.50 psf; average asking sale price $90 psf.

Jacksonville, Fla: 452,611 square feet existing and under construction with one building available; average asking lease rates $.30 psf; average asking sale price $73 psf.

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. 

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4 ways to keep your office spaces vacant

Occasionally, I transact office deals even though my specialty is industrial — manufacturing and logistics warehouses.

Differences between the two commercial real estate genres are minimal yet vast.

Recently, a client requirement thrust me into the world of office leasing. You see, we fulfilled a need with a long-term agreement on a new warehouse building. An amazing space was procured with all of the modern amenities – except for one – enough office space to house the employees.

We encountered an owner unwilling to construct more offices. Why? Because the dollars needed to build wouldn’t yield an adequate return. Plus, once our guy vacates, the next occupant won’t find value. Solution? Find a suite of offices close by. Easy, right? Well, not so fast.

My expectation? We would find acute motivation and many viable choices. We’d just experienced a year of pandemic lockdowns, working from home and throttled demand for office space.

As we ventured into the market, I was amazed by the voracious pursuit of our tenancy. Wow! Compared with skimpy industrial avails and colleagues who don’t return calls, office space alternatives abound.

Akin to an episode of “The Batchelor,” we suddenly had 10 proposals and five more warming up in the pen. A red rose was the only thing missing!

But, as we toured the options, each had its negatives. The good news is, I believe a couple of the spots could work. However, those didn’t provide great column fodder.

So here it goes. Here are four ways to ensure your space remains VACANT.

As is: “Just take the space as it sits and we will discount the rent.” Good in theory, bad in reality. Moving a staff into a new location carries infinite variables, time constraints and pitfalls. Layer in some construction and an occupant will vapor lock. If you lined up 100 office tenants, one to two would be willing to undertake a refurbishment. The savings rarely offset the aggravation. Solution: Spend some money. Put the suite in move-in condition.

Tuppence: One of the stops was a scene from Mary Poppins. As we entered, a flock of pigeons massed the doorway. Feed the birds, indeed! Two thoughts occurred to me. “Man, this space has been empty a LONG time and how is the owner ever going to remove the months of guano?” Solution: Owners might want to visit their vacancies a bit more often. After all, it’s only tuppence!

Is Green Day performing? No kidding. At our first visit, I flashed back to a former address where I worked in the 1990s. Complete with burgundy and grey carpet squares, black aluminum door frames, parabolic light lenses and privates large enough for a Pentium processor and loads of paper files. I truly expected to be awakened as September ended.  (For those not scoring at home, that’s was a hit by the band Green Day – but I digress.)

However, the good outweighed the bad here and this one emerged as the front runner. Solution: A quick coat of paint and eliminating the carpet in favor of a tripod with flooring choices would have cinched it.

Someone didn’t get the memo. If the tenant occupying the space you’re touring isn’t aware they are moving… Yeah, that’s uncomfortable. Especially since no one met us at the building to explain the situation and buffer the stares. At least the layout there was decent.

So, if your desire is a vacancy, simply follow these four steps. Don’t spend any refurbishment money, never visit your suites, leave any potential to the imagination, and don’t require a representative to attend tours. Guaranteed success!

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104.

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When will crazy pricing in real estate end?

Never have we seen such staggering prices being paid these days. And, never is a long time!

So, when will prices return to normal? And what is normal? Bear with me as we dissect the topic.

Think of prices as a conveyor belt or a motorized sidewalk, like the ones at giant airports. You hop on at a point and continue to ride. But, it’s a continuous loop. Those who entered early, say in 2010, have seen massive appreciation in the value of their purchase. If you jumped into the fray last year, we shall see. But it all starts with pricing — the basis or starting point of your buy.

Commercial real estate, whether it’s retail, office or industrial, carries with it a number. As brokers, we typically talk in terms of prices per square foot. Sure, owners and occupants also might consider these figures, but they are most frequently concerned with the total.

As an aside, early in my career, I prepared for a tour of leasing alternatives. I carefully memorized all of the lease rates. When the client asked what amount was to be paid monthly, I sheepishly deferred to my HP 12-C calculator for the answer.

To add some context, 50,000 square foot industrial buildings were plentiful in 2010 for well under $5 million  (or $100 per square foot for you brokers out there). Sure, in the bowels of SoCal, you might be thinking. Nope, I’m talking Anaheim. A decade ago, just along the stretch of East La Palma between Kraemer and Imperial there were 12 such properties. Now? You’d be lucky to find one for under $15 million!

You might be wondering. What’s causing the astronomical rise?

Certainly, cheap money is a culprit. You see, when an occupant can borrow 90% of the purchase price from the Small Business Administration and have the first six months of payments forgiven, tremendous buying power is unleashed. Couple that with an obscenely low supply of buildings to buy and voila — the perfect storm of appreciation.

Next, returns on capital are puny. Even though we’ve seen an uptick of 10-year Treasury yields this week, 1.6% is still anemic. Wild stock market gyrations spook investors, too. Commercial real estate becomes a safe haven. As these well-heeled groups compete – once again – for skimpy availabilities, the upward march continues.

Companies who can’t or choose not to buy are forced to rent. A similar competition ensues for vacant lease alternatives, which are rare. As an example, if your goal is to lease a new, 100,000-square-foot spot in north Orange County, you have ONE choice and construction is not complete.

In the past, when pricing got crazy, you could head east to the Inland Empire. Now, even the IE is no bargain. We represent a well-qualified -commerce outfit looking to buy 200,000 square feet. Recently, we pursued a site under construction. Our full-price offer was countered with a higher number, an unwillingness to allow a financing contingency and an enormous non-refundable deposit request. Next!

So, to the question. When will this insanity end? The answer is: when one or all of the aforementioned scenarios shift. We’d need something cataclysmic to occur to return to a normal 5%-6% vacancy – such as a pandemic. Wait, we already had one. Hmmmm …

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104.

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3 ‘transcendent’ figures in commercial real estate

Last Wednesday I agreed to an early meeting, in person, no less. On the drive back, I tuned into my favorite radio talk station, KABC 790. It was there I sadly learned of Rush Limbaugh’s passing.

I must admit, rarely did I listen. As a matter of fact, I can’t recall the last time. But, his brand saved AM radio and created a whole genre of content – conservative talk.

Many of the stalwarts in the industry today have Limbaugh to thank – including the two gents – Armstrong and Getty – to whom I was listening. Limbaugh transcended his craft. Meaning? Everyone knew him, even if you weren’t a fan. Michael Jordan, Arnold Palmer, Muhammad Ali, Vince Lombardi, Oprah Winfrey, Billy Graham and Stephen Spielberg all shared a similar impact on their professions.

Even if you never watched golf or consumed a lemonade iced-tea, you recognize Arnold Palmer. Transcendent figures do that – become household names.

You may be wondering, what does this have to do with commercial real estate? Only this: Our trade has similar figures who’ve broken the shackles of normal and transformed our industry. Allow me to introduce you to a few. Wait, you probably already know them.

Roger Staubach, founder of The Staubach Co., U.S. Naval Academy grad, Heisman Trophy winner, multiple Super Bowl titles with the Dallas Cowboys. Thanks for that, Roger! You made this young man – a lifelong Cowboy fan – very happy in the 1970s.

When Staubach retired from the NFL, his focus turned to commercial real estate. He moonlighted in brokerage during the off-season with the Henry S. Miller Co. While there, he observed a need. Corporate tenants were lacking representation.

During those days, owners of commercial real estate engaged brokers to market their assets and locate occupants to fill their spaces. But, who was the tenant’s advocate? Generally, it was a hybrid agent who did landlord and lessee work.

Staubach ’s company forged the tenant rep concept whereby his company’s only clients were the occupiers of office and industrial buildings. Contractors, space planners, architects, attorneys, project managers and moving companies were all components of Staubach’s offering. When you hired Staubach to secure a location, all of those service providers were part of the deal — at no cost. He revolutionized the way in which corporate occupants were represented. Staubach was sold to Jones Lang LaSalle in 2008 for $613 million. How’s that for timing?

Andrew C. Florance, founder, director, president and CEO of CoStar Group Inc. Through CoStar, Florance pioneered the concept of commercial real estate firms outsourcing research functions to a third-party information provider, combining the operational efficiencies of a computer-based information system with the more thorough, standardized and higher quality property information produced by the industry’s first independent research organization.”

From experience, CoStar is the best in its class, and we rely on its data daily. CoStar is the gold standard when it comes to tasks such as sourcing available inventory, researching ownership, and reviewing market trends.

Bill Lee, founder of Lee & Associates Commercial Real Estate Services. Lee was a top producer at Grubb & Ellis in the 1970s. His observation was that there was no intraoffice cooperation. An agent within the office had zero incentive to work with his fellow agent. Quite the contrary, in many cases the agent would “pocket” the information so that he could “double end” the deal with his own buyer. Lee wondered if there was a way to create intraoffice cooperation through a sharing of commissions and profit.

Lee and four of his Grubb & Ellis friends started Lee & Associates in 1979. The theory was simple but revolutionary: Create a system that would reward profitability and encourage cooperation. Each of the original “partners” was free to broker deals in any area, call on any client they chose (as long as another Lee agent didn’t have an existing relationship) and the agents were encouraged to share with each other.

Profit was divided at the end of the year and apportioned to each partner according to his contribution. The resulting “splits” exceeded anything in the industry then and now. Lee & Associates’ “principals” (as we are now called) enjoy the best splits in the industry. The firm is now the largest broker-owned company in the U.S. boasting over 60 offices globally.

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104.

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Relocation a business? FOCUS when making a real estate deal

If you read my columns regularly, you know how much I like acronyms! I’ve written real estate tips that include NUCLEAR, MR BOB, and even one from my friend and neighbor, Rudy, called CLIP.

Acronyms and their sister, mnemonic devices, got me through school somewhat unscathed as they train your mind to remember lists and/or a process. So, today, yes, you get another one.

Proper attribution must be given to my business coach, Rod Santomassimo of the Massimo Group for this sequence. If you’d like to learn more, he’s written a great book entitled Knowing Isn’t Doing – Don’t Kid Yourself. If you’re facing a commercial real estate decision — specifically a relocation — I’d suggest you run down the list and ask yourself a few questions. In other words FOCUS!

F is for facts. Your current location as an owner or an occupant of commercial real estate contains a set of knowns – facts. You been at your location for a period of time. You lease. You own, etc. Layer in such things as the expiration of your rental agreement or a loan maturity. Consider the drivers of your business and how those may have changed. Was a competitor acquired? Did you add employees or machinery since you moved in? At this point, you may already have a direction. Humor me. Work yourself through the balance of the exercise. Sometimes results will vary.

O is for opportunity. Let’s now carefully delve into what’s working with the building, and importantly, what’s not. Examples of what’s working could be your customers know where you are, freeway frontage provides free advertising, or the lease rate you negotiated is 20% below the market rates. However, if the spot causes your employees to park down the street or if your warehouse must be completely unloaded and reloaded so folks can work, you’ve got problems.

You may also want to give some reflection to the motivators when you leased or bought the real estate. Was the market on fire and you took what you could get with the promise of re-evaluation?

C is for consequences. You’ll need to do some math here. Consider in dollars and cents what happens if you do nothing vs. something. We recently counseled a logistics company that was considering converting a leased premise to an owned one with a lot more space. Clearly, the new digs were going to cost a great deal more. However, the downside of staying put and continuing to lease would cripple their ability to grow their business. The loss of revenue – by standing pat – was enormous.

U is for understanding. Now you know your situation, have analyzed what’s working or not and have calculated the monetary impact of your options. All that remains is a road map. Proceed to the next step.

S is for solutions. As the solution is column-worthy itself, you’ll have to tune in next week for some suggestions.

So, please don’t lose FOCUS this week until we meet again.

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104.

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6 non-starters for commercial real estate deals

Commercial real estate transactions, akin to a dance, take two to tango.

In the case of a lease, the tenant and landlord are often called lessee and lessor. When a building purchase is considered, a buyer and seller square off. Customary in both is a negotiation that precedes an agreement – a lease document or purchase and sale contract.

Outlined in most negotiations is a set of deal points – price, term, concessions and the like. Generally, both sides of the aisle have representation – a commercial real estate professional or a real estate attorney.

Depending on the dollar consideration, both vocations may be employed. Frequently, a general outline is submitted by brokers and agreed to by both parties, then attorneys fine tune the language. When a deal takes flight it’s a beautiful thing. But, there are some requests that prevent liftoff.

A few of these “Houston, we have a problem” moments are listed below.

Termination clauses. Occasionally in a lease arrangement – especially with major corporations – an “opt-out” provision is requested. Simply, these give a tenant the right to terminate their lease prior to expiration. Flexibility – in case the space is outgrown or exceeds capacity – generally is the reason. But these wreak havoc on the back and forth. You see, an owner expects a flow of income for several years. Rate, concessions, and motivation are reflected. If this stream can be interrupted, landlords view the worst case and react accordingly. A five-year lease with a termination after three really is a three-year commitment.

Options to buy. Options benefit the occupant. Period. Terribly one-sided and limiting, many owners simply refuse to consider them. You see, if the titleholder grants an option to buy, he’s locked in. Sure, he can sell to someone else, but the new buyer must honor the option. It’s murky. Softer solutions exist. Rights of First Refusal or Rights of First Offer are examples.

Special purpose tenant improvements. If you’re looking for a landlord to fund your freezer cooler space, add a clean room, or double the number of private offices – expect some reluctance. Typically, dollars invested to modify a building are viewed for their reuse. An owner considers how valuable the adds will be to future residents and responds accordingly.

No financing contingency. We sold a property earlier this year for the income it produced. Our buyer was a well-heeled investor with ready cash to deploy. He will not occupy the building but will own it and reap the returns. His offer did not require a loan – therefore his performance was not conditioned on a lender nod. However, most buyers who plan to house their business within the premises need some time to get funding. A seller unwilling to allow this contingency may force a buyer to look elsewhere.

Closing extensions. A seller planning to re-invest the proceeds through a tax-deferred exchange has strict timeframes to follow once the sale consummates – 45 days to identify within a 180-day completion. Therefore, we occasionally see extension requests. If closing is delayed, the clock remains at zero until the deal is done – thus giving the seller “free time” to find a replacement property. Buyers are in peril, however, as loan commitments or operational needs dictate their timing.

Lengthy contingency periods. Sellers seek the certainty of a close. Extended uncertainty will kill most transactions. A great example occurs when a buyer contemplates a use change – like converting industrial to residential. Municipalities have something to say and they say things quite deliberately. It’s not uncommon for the rezoning – if needed – to eclipse 18 months. An awful lot can change in that period. Consequently, few sellers are willing to “tie up” their property on a maybe.

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104.

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Relocation advice for transitioning companies

In various columns, I’ve described several changes that occur during the life of a family operated business – specifically, manufacturing and logistics interests. These outfits are owned by your neighbors next door and employ millions around the United States.

Business transitions include acquiring a competitor, the death of a matriarch, exponential growth, loss of a key customer, sale of the operating unit via stock or asset purchase, or a move out-of-state. Sadly, it could also be the end of the road because of a changing market.

Last week, I met with three such companies all of which were experiencing a change. Below is the commercial real estate advice I gave them. You see, whenever a transition occurs, a commercial real estate requirement soon follows.

Better returns out-of-state

In 2014, a family-owned aerospace tooling entity was sold and the real estate that housed the company retained. A couple of years later, it was time to sell the buildings. Of concern was the new business owner ran the day-to-day differently. Could the rent be replaced if the group bolted?

The real estate was quickly sold and three investments were bought through a tax-deferred exchange. Then, as 2020 dawned, a decision to sell was made on one of three 2016 buys. After all, activity was robust, pricing was at an all-time high, and the going belief was higher returns and reduced taxes could be garnered out of California. Meanwhile, all of the partners had vacated the Golden State.

In addition, there was uncertainty with near-term rollover of half the tenancy. And if that wasn’t enough, after launching in February and just in time to receive a great offer, the novel coronavirus ravaged the national economy! The buyer paused and then canceled.

After the buyer exited due to all of the uncertainty, guidance was sought on which direction was best. We were able to provide clarity, create best in class collateral and re-launch the offering. The closing happened on time! The net proceeds of the sale allowed a 1031 tax-deferred exchange into properties in tax-friendly states and with a greater overall return and reduction of risk. The last of the four upleg purchases closed this week.

Structuring for the future

Maybe one of my favorite stories of owner-occupied commercial real estate enjoyed a new chapter this week.

Two of my dear manufacturing clients bought their business property in 1995. In the ensuing 25 years, exponential appreciation had occurred. By their admission, the address was worth three times the value of the business it housed.

Finally, a suitor for the company had gained favor, and a sale of the assets may occur soon. The terms and conditions of the leaseback are critical. Potential investors for their real estate holdings will look at the lease rate in comparison to the market, the length of the lease, and the maintenance expected of the owner.

Even if there is no interest in spinning the parcel today, these issues need discussion.

Everyone is agreeable – until they aren’t

One of my clients was approached by his neighbor. They struck a handshake deal. Unfortunately, the agreed-upon rate, term of lease, and extension rights don’t provide my client with a lot of latitude. He’s bound to dealing with the expanding neighbor if he wants or has to sell – at a pre-determined price and time.

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104.

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