Commercial real estate was business as usual with no recessionary storm clouds massing on the horizon. The drought was behind us, too, as we continued a relatively wet winter. Local sports teams were finishing strong. What was ahead? The opening of Marvel Land – Avenger’s Campus at Disney’s California Adventure. Summer vacations, kids starting their spring semesters, anticipating graduations. June weddings. Breaks in the work schedule to celebrate birthdays, anniversaries and national holidays.
Yep, that was our view of things to come back in January 2020.
But, in the ensuing gestation period, 2020 has eclipsed any year in recorded history for weirdness! Pandemic, 208,000 deaths, worst economic recession since the 1930s, upheaval in the streets, absence of civility in our public discourse, hurricanes, wildfires …
And just as we believed we’ve seen it all … BOOM! Our president and first lady and a host of their close encounters have been stricken by the hidden enemy – COVID-19. I’m not certain 2020 can get any crazier!
So, is 2020 somehow metaphorical for commercial real estate transactions? Maybe! Indulge me while I develop the conversation a bit more.
An unexpected turn
Purchasing commercial real estate for your business remains a great way to build legacy wealth for your family. I speak with many closely-held company owners who’ve created an entity to own their acquisition and then leased the purchased real estate to their corporate operation.
Some boast their locations are now worth more than the companies they host. Occasionally, I encounter the opposite – akin to the start of 2020 and what followed.
Take, for instance, the aerospace manufacturing group that tooled parts for jetliners. Things were peachy and operating from an owned location. Revenue was growing; the facility met their needs; commercial real estate was appreciating; many were employed; life was grand — until it wasn’t.
You see, although the owner of the business and real estate were similar, they were not a mirror image. Upon the untimely death of the founding patriarch, all manner of chaos ensued. Unbeknownst to the business operator – the son – title to their company site had been deeded to seven factions with disparate goals. Some wanted money, others needed money, while still others realized absent the building – where would operations continue?
Things got very ugly.
I’m pleased to report the aerospace firm is happily domiciled in a leased location and the building was sold. Oh, and that 2020 will end happily as well.
It really boils down to risk. Our president contracted the virus. Many test positive yet are asymptomatic. Was it a blatant disregard of safety protocols – masks, distancing, sanitizing – by a purported germophobe or simply a random occurrence? The arguments on either side are as numerous as viruses in a petri dish.
Suffice it to say – risks were taken. It may end badly. We pray not. Are there ways to minimize risk? Of course! Stay home, follow the guidelines, avoid human contact. Done. Sadly, many adopt a riskier approach – much like driving in and out of the fast lane on the 405 and exceeding the speed limit all while eschewing a safety belt – you’re increasing the odds of a catastrophic outcome.
How to avoid risk
Buy a building – at a safe social distance, no less – at cheaper than market comparable sales – for cash – no loans.
Plan to occupy it with your business. If you don’t own a company that can pay you rent – forget about buying commercial real estate. If you divest yourself of the company – sell the building as well.
Pay the taxes. Bank the profit. Done!
I’ve just described 3% of commercial real estate owners. The remaining 97% tend to take a bit more risk – albeit for a potentially greater return. Tantamount to playing Twister in a tsunami, the risk doesn’t have to affect life, limb or the pursuit of happiness – although some invest that way.
Examples of “going without a mask” in commercial real estate might be: borrowing more than the property is worth; buying an unsustainable income stream; investing in a special purpose building. You may end up just fine. Then again, you may have to quarantine for 14 days and hope for the best.
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at firstname.lastname@example.org or 714.564.7104.
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