3 more ways you can avoid rent increases

If you read my column last week, you learned two key ways to avoid a rental rate increase — know your owner and understand the value of your tenancy.

If the bottom of your birdcage lands the Real Estate section before you read it, here’s a brief recap.

Industrial lease rates have increased a whopping 134% over the past 10 years. Recall, our market for manufacturing and logistics space was awakening from the ether of the 2008-2010 financial reset – err, meltdown and there were bargains galore. Now with the classic increase in demand from pandemic-fueled buying and a pinched supply of available buildings, rates have skyrocketed!

You may be fortunate to rent from an owner who appreciates your worth as a tenant and wants to avoid a costly vacancy if you bolt. If this is your situation and you’re approaching a renewal, count yourself among the lucky. Conversely, if maximizing the monthly income is your landlord’s objective, you could face an increase of double what you’re currently paying.

But, there is hope. Keep in mind these three strategies to stem a spike in monthly payments.

Buy a building

Historically, buying property has been costlier than renting on a pure monthly outlay basis.

Meaning, if we stack a mortgage, allotment for property taxes, insurance and upkeep together, the total will be higher than most leases. Plus, you must come up with a sum to bridge the gap between what a bank will loan and your purchase price, some 10%-25%.

However, this is many times shortsighted when looking at a projection over the life of a company’s occupancy. You see, lease rates escalate over time, generally fixed at 3%-3.5% annually. And, when a term expires, the landlord will bump the number even higher to compensate for the market variance.

Currently, we’re seeing a huge boost in rental rates which eclipses that 3%-3.5% annual escalator. Some find it better to own, finance the buy with fixed debt, thus stabilizing payments and enjoying appreciation and the tax benefits that accrue.

A word of caution. If you enter the buying fray, be prepared. Structure your A-game with proof of a down payment, lender pre-qualification letter, and a well-reasoned story of your desire to buy.

Move to cheaper geography

Once, the Inland parts of SoCal were cheaper, newer and alternatives were plentiful.

If you’re a logistics provider and you look East, this affordability gap is quickly narrowing. However, there are still “deals” to be found. Don’t forget areas just outside the state borders such as Arizona and Nevada. You might even find a business climate that welcomes enterprises with goodies such as tax breaks, employment incentives and fewer regulations.

Do more with less

We toured an operation recently. Occupied was a big chunk of a larger address. Since they leased the space five years ago, several distribution centers had been added to their supply chain, thus lessening their need for the square footage they leased locally.

By trimming their premises by 40% a great building popped up which fit their requirement. Another client of ours took advantage of the relative softness in the office space market and peeled away that portion of the company. Eliminating the people component from their warehouse created several new buildings to consider.

Don’t forget: Your additional capacity might be found if you look up and maximize your stacking. Frequently, a group will believe they are out of space because their floor is consumed. Ignored is the two or three feet in height not used. With the advances of material handling equipment – you can literally use every inch if you narrow your aisles and pile your product high.

More on these later.

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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Seen a dramatic rent increase? Here are ways to avoid them

Lease rates for industrial properties in Southern California continue to rise!

To place this in some context, if your direction as a business owner was to rent a location in 2011 and your operation consumed 100,000 square feet, you could expect to pay around $45,000 per month in rent.

Of course, charges for things like property taxes, insurance and maintenance would have been in addition to the $45K. Those additional charges would have added around $12,500 per month, bringing the total to $57,500 – or 57.5 cents per square foot.

Flash forward to our pandemic-fueled shortage of space these days and comparable buildings lease for $135,000 per month!

For those scoring at home, that’s a 134% increase in 10 years. Or, a 13.4% annual increase. Or as I like to call it, simply nuts!

Am I saying if you rented an address in 2011 and signed a 10-year lease – when your lease expires this year – you can expect your rent to more than double? Yes, You got it.

So, how are businesses able to afford such a whopping spike? Better still, are there strategies you can employ to stem the rent bumps? The answers are, I don’t know and yes. Indulge me as I outline a few ways to lessen the blows of gigantic rent inflation.

Know your owner

The gentleman to whom you send your rent each month falls into the category of investors. Your tenancy is singular or multiple. Unfortunately, if you’re one of many and his buildings are full, your leverage is limited.

You see, he may opt to push rents even if a move-out ensues. He’ll simply replace you. Conversely, if your rent is the biggest part of his retirement income, a bit more realism happens. If you relocate – and his music stops – so does his lifestyle. He’ll be more flexible with you to keep you in residence and avoid a costly vacancy.

Know your value

As a tenant, your worth is two-fold.

First, the capitalized income you pay each year determines the dollar amount of the investment. Simply, $100,000 in annual rent – at today’s cap rates of 4.75% suggests $2,105,263 ($100,000/4.75%) – if a sale or refinance was considered.

Why is this important? A bank would lend a percentage of this amount if your owner needed cash. Plus, the market would gladly pay him this figure if a decision was made to cash-in or redeploy the money into another income property.

Second, your tenancy is costly to replace. By this, I mean free rent, downtime, refurbishment, and professional fees are forked over to secure a paying customer.

So, let’s say the title holder of your location believes he can get $100,000 a year if you bolt. You currently pay him $80,000 annually. If he’s correct in his assumption, he can achieve approximately $538,406 if he finds a five-year tenant ($100,000 with a 3% annual rent escalator).

However, if he lays fallow for two months, incentivizes the new group with one month of free time, paints and carpets the offices, and pays a commercial real estate professional 6%, count on an up-front expenditure of $72,303 – ($16,666 for downtime, $8,333 in free rent, $15,000 for a fix-up, and $32,304 in fees).

If we subtract $72,303 from our expected new income stream of $538,406 our net take is $466,103 or $93,220 per year.

Say you’re willing to pay him $90,000. So, he could be slightly better off replacing you. But, if any of his assumptions are wrong – say, he sits four months vs. two, he is better off renewing you at $90,000 annually.

Presumably, you’ve paid on time, taken care of the premises and sent him a Christmas card. Those intangibles have credibility. He may have to chase the new guy to get his rent.

Know your alternatives. Don’t forget. You could buy a building, consider a cheaper area or opt for a shorter lease term.

More on these later.

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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With 2020’s crazy real estate year in mind, what does the rest of 2021 bring?

We now have eclipsed six months of 2021.

Costco already has Christmas decorations displayed alongside the red, white, and blue sheet cakes! But I digress.

Anyway, I thought it would be fun to review what this year has brought and what I see for the balance of 2021. It’s good to periodically clear my consciousness of clutter, so I appreciate your indulgence.

One year ago we got some great news on a deal we were transacting. The due diligence period ended, the buyer waived contingencies and we proceeded to close escrow on July 17, 2020. Boom! Why do I mention this? You see, this offering was originally launched in February 2020. Great timing, eh?

We quickly received an acceptable proposal and put the property under contract, just in time for the nation to hit the pause button. As you would expect, the deal blew up, we waited and re-launched the marketing in June 2020.

Our new chronology proved to be prescient as buying activity had returned with a vengeance. Candidly, the uptick in industrial demand has not stopped. If anything, it’s even more frothy than it was a year ago. But why? Manufacturing and logistics concerns were deemed essential. Replacement parts were needed for anything relating to home or auto.

And because people were stranded at home, they spent hours staring at their computer screens, ordering merchandise. All of these factors caused businesses – who make and ship things – to explode with commerce.

What is taking so long? I had a nice conversation yesterday with a moving and storage company with whom I network. He had just visited a tech company in the Inland Empire that is experiencing a transition. Apparently, a decision has been made to largely work remotely and therefore their former bristling bank of office suites will not be needed. They’ll attempt to find a surrogate to replace their tenancy. This is a classic example of the decisions that will be made by office occupants throughout the balance of 2021.

Now that we have a clearer path forward (until the next speed bump), folks are starting to return to the office — or not. We have a much better picture of exactly how much square footage operations require. But the market upheaval brought on by lockdowns has led to some uncertainty. Decision gridlock ensues. Long-term commitments – such as a multi-year lease renewal – are postponed.

Wayne Gretzky famously opined, “I skate to where the puck is will be, not where it has been.” It’s a popular quote because it vividly illustrates something that everyone wants to do, but may not understand how. You may be wondering what this has to with commercial real estate? Just this: Predicting where lease rates and sale prices will be in the upcoming months is next to impossible! Especially with inventory planned or under construction.

Admittedly, prices will be higher, but how much higher? That huge burden falls to commercial real estate practitioners who have to provide proper guidance to clients. After all, we don’t want to leave shekels on the sideboard. Vacancies are expensive, however.

So, if you press – which can cause a delayed occupancy – is the expense worth it? During this time I generally recommend pricing on a to-be-determined basis, which unfortunately is a bit of a cop-out. Occupants like to negotiate from an established ask vs. “you tell us what it’s worth” to you.

Let’s do this again next January – the predictions, not the pandemic – and see how accurate we were, shall we?

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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Sublease or buyout? Each scenario is messy for tenants

Situations change rapidly in California’s business climate. What happens when a business needs to pivot, quickly?

Recently, I wrote of the ways in which you can extract yourself or your company from a lease obligation.

As a quick recap: Leases are contracts that allow occupancy for a certain period of time (term) and for consideration (rent). As an inducement for your tenancy, an owner (landlord) may offer some goodies – free or abated rent, an allowance to fix up the place or the right to extend your lease or buy the premises (options). In return, you agree to pay on time, stay the full period of the lease and take care of the building. Easy, right? Not so fast.

Sometimes circumstances arise whereby the agreement must be tweaked. In the extreme, a dramatic decrease in revenue leads to bankruptcy. Conversely, an uptick in sales could cause the need for more space. If a competitor is acquired or if the operation is sold, another shift occurs. Now, you have redundancy — too many facilities serving the same purpose. What to do with your leases?

Remedies abound. You can sublease the building, buy out, allow the term to expire, reject the lease through bankruptcy or default. Clearly, the last two are not recommended as there are legal consequences, but they are a way clear.

Most opt for one or a combination of the first three, sublease, buyout or term out. But what are the differences and when should they be used? Please allow me to dive a bit deeper.

Sublease

Simply put, in a sublease you locate a surrogate — a group to replace you.

But, don’t forget, there may not be another “you” readily available. Did your operation lease the first building you toured? Probably not. You considered multiple locations until you found the perfect fit of lease rate, landlord motivation, amenities, concessions and term. Now, you are the landlord and must meet the nuances of tenants in the market. All, while having little flexibility.

Your goal is to get out with as little downtime and expense as possible. Remember, your rent and term are known. Where is that rate compared with comparable availabilities – above, below or right at market? If you’re below, count yourself fortunate! You’ve something to offer.

So, how do you deal with an enterprise seeking a three-year lease when you’ve committed to 10. Plus, you’ve consumed the inducements. By that, I mean your free rent burned off or the new carpet is old now. To compete, you may have to consider offering some giveaways.

Subleases are messy! I’ve found the most success when the rent is below market, a lengthy term remains (such as 5 years, plus), and the building is in pristine condition.

Buy-out

An owner of commercial real estate spends significant dollars to originate your occupancy. First, he sat vacant while his agent marketed the availability and searched for a tenant, all while continuing to pay the bank and operating expenses.

Secondly, that free or abated rent is another cost. Third, painting the offices and adding new flooring isn’t cheap.

Finally, he paid professionals to negotiate the lease. All told, an owner will outlay 15-25% of the lease term’s rent in origination costs! He then recoups the expense over the term.

Therefore, if you approach your landlord with the question: “What’s it going to take to let me walk?” He will surely account for all of the above.

Generally, tenants find the price too steep and opt for another avenue. But, I’ve encountered situations where buyouts make sense. Typically, a spread exists between the stated rent and the current market. A mid-term of 2-3 years remains. And little cleanup is necessary.

Term. Clearly, is the easiest, but it’s seldom used. Why you might ask? Because the ends rarely meet.

Sure, if you could time your company’s demise with the expiration of your tenancy, boom! Problem solved. Unfortunately, the dangling participle of the term generally must be severed.

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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California lawmakers eye shuttered malls, big box retail stores for new housing

By ADAM BEAM | The Associated Press

SACRAMENTO  — California state lawmakers are grappling with a particularly 21st-century problem: What to do with the growing number of shopping malls and big box retail stores left empty by consumers shifting their purchases to the web.

A possible answer in crowded California cities is to build housing on these sites, which already have ample parking and are close to existing neighborhoods.

But local zoning laws often don’t allow housing at these locations. Changing the zoning is such a hassle that many developers don’t bother trying. And it’s often not worth it for local governments to change the designations. They would prefer to find new retailers because sales taxes produce more revenue than residential property taxes.

However, with a stubborn housing shortage pushing prices to all-time highs, state lawmakers are moving to pass new laws to get around those barriers.

A bill that cleared the state Senate last week would let developers build houses on most commercial sites without changing the zoning. Another proposal would pay local governments to change the zoning to let developers build affordable housing.

“There has always been an incentive to chase retail and a disincentive to build housing,” said Sen. Anthony Portantino, a Los Angeles-area Democrat who authored the bill to pay local governments. “There is more dormant and vacant retail than ever.”

  • This Thursday, May 27, 2021, photo shows the closed Sears in Buena Park Mall in Buena Park, Calif. California state lawmakers are grappling with a particularly 21st-century problem: What to do with the growing number of shopping malls and big-box retail stores left empty by consumers shifting their purchases to the web. A possible answer in crowded California cities is to build housing on these sites, which already have ample parking and are close to existing neighborhoods. (AP Photo/Damian Dovarganes)

  • This Thursday, May 27, 2021, photo shows the closed Sears in Buena Park Mall in Buena Park, Calif. California state lawmakers are grappling with a particularly 21st-century problem: What to do with the growing number of shopping malls and big-box retail stores left empty by consumers shifting their purchases to the web. A possible answer in crowded California cities is to build housing on these sites, which already have ample parking and are close to existing neighborhoods. (AP Photo/Damian Dovarganes)

  • This Thursday, May 27, 2021, photo shows an empty shopping cart in an empty parking lot at the closed Sears in Buena Park Mall in Buena Park, Calif. California state lawmakers are grappling with a particularly 21st-century problem: What to do with the growing number of shopping malls and big-box retail stores left empty by consumers shifting their purchases to the web. A possible answer in crowded California cities is to build housing on these sites, which already have ample parking and are close to existing neighborhoods. Even before the pandemic, big-box retail stores struggled to adapt as more people began buying things online. In 2019, after purchasing Sears and Kmart, Transformco closed 96 stores across the country, 29 in California. (AP Photo/Damian Dovarganes)

  • This Thursday, May 27, 2021, photo shows the closed Sears in Buena Park Mall in Buena Park, Calif. California state lawmakers are grappling with a particularly 21st-century problem: What to do with the growing number of shopping malls and big-box retail stores left empty by consumers shifting their purchases to the web. A possible answer in crowded California cities is to build housing on these sites, which already have ample parking and are close to existing neighborhoods. (AP Photo/Damian Dovarganes)

  • This Thursday, May 27, 2021, photo shows the closed Sears in Buena Park Mall in Buena Park, Calif. California state lawmakers are grappling with a particularly 21st-century problem: What to do with the growing number of shopping malls and big-box retail stores left empty by consumers shifting their purchases to the web. A possible answer in crowded California cities is to build housing on these sites, which already have ample parking and are close to existing neighborhoods. (AP Photo/Damian Dovarganes)

  • This Thursday, May 27, 2021, photo shows the closed Sears in Buena Park Mall in Buena Park, Calif. California state lawmakers are grappling with a particularly 21st-century problem: What to do with the growing number of shopping malls and big-box retail stores left empty by consumers shifting their purchases to the web. A possible answer in crowded California cities is to build housing on these sites, which already have ample parking and are close to existing neighborhoods. Even before the pandemic, big-box retail stores struggled to adapt as more people began buying things online. In 2019, after purchasing Sears and Kmart, Transformco closed 96 stores across the country, 29 in California. (AP Photo/Damian Dovarganes)

  • This Thursday, May 27, 2021, photo shows the closed Sears in Buena Park Mall in Buena Park, Calif. California state lawmakers are grappling with a particularly 21st-century problem: What to do with the growing number of shopping malls and big-box retail stores left empty by consumers shifting their purchases to the web. A possible answer in crowded California cities is to build housing on these sites, which already have ample parking and are close to existing neighborhoods. (AP Photo/Damian Dovarganes)

  • This Thursday, May 27, 2021, photo shows the closed Sears in Buena Park Mall in Buena Park, Calif. California state lawmakers are grappling with a particularly 21st-century problem: What to do with the growing number of shopping malls and big-box retail stores left empty by consumers shifting their purchases to the web. A possible answer in crowded California cities is to build housing on these sites, which already have ample parking and are close to existing neighborhoods. Even before the pandemic, big-box retail stores struggled to adapt as more people began buying things online. In 2019, after purchasing Sears and Kmart, Transformco closed 96 stores across the country, 29 in California. (AP Photo/Damian Dovarganes)

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If successful, it’s believed California would be the first state to allow multi-family housing on commercial sites statewide, said Eric Phillips, vice president of policy and legislation for the California chapter of the American Planning Association. Developers who use the law still would have to obey locally approved design standards. But Phillips said the law would limit local governments’ ability to reject the projects.

That’s why some local leaders oppose the bill, arguing it undermines their authority.

“City leaders have the requisite local knowledge to discern when and which sites are appropriate for repurposing and which are not,” wrote Mike Griffiths, member of the Torrance City Council and founder of California Cities for Local Control, a group of 427 mayors and council members.

It’s a familiar battle in California. While nearly everyone agrees there is an affordable housing shortage, state and local leaders face different political pressures that often derail ambitious proposals. Last year, a bill that would have overridden local zoning laws to let developers build small apartment buildings in neighborhoods reserved for single-family homes died in the state Senate.

Sen. Anna Caballero, a Democrat from Salinas and author of this year’s zoning proposal, said her bill is not a mandate. Developers could choose to use the bill or not. The Senate approved the measure 32-2, sending it to the state Assembly for consideration.

“It’s always a challenge when you’re trying to do affordable housing, because there are entrenched interests that don’t want to negotiate and compromise, and we’re working really hard to try to break through that,” she said. “I’m trying to give maximum flexibility to local government because the more that you start telling them how they have to do it, the harder it becomes for them to actually do it.”

Even before the pandemic, big-box retail stores were struggling to adapt as more people began buying things online. In 2019, after purchasing Sears and Kmart, Transformco closed 96 stores across the country — including 29 in California.

The pandemic, of course, accelerated this trend, prompting major retailers like J.C. Penney, Neiman Marcus and J. Crew to file for bankruptcy protection. An analysis by the investment firm UBS shows online shopping will grow to 25% of all retail sales by 2025. The analysis predicted that up to 100,000 stores across the country could close.

Local governments and developers in California are already trying to redevelop some retail sites. In Salinas, a city of about 150,000 people near the Monterey Peninsula, city officials are working to rezone a closed Kmart. In San Francisco, developers recently announced plans to build nearly 3,000 homes in the parking lot that surrounds Stonestown Mall — a sprawling, 40-acre site that has lost some anchor retail tenants in recent years.

Still, the idea of repurposing shopping centers has divided labor unions and affordable housing advocates, putting one of the Democratic Party’s core base of supporters against backers of one of their top policy goals.

Housing advocates love the idea, but they don’t like how Democrats want to do it. Both proposals in the Legislature would require developers to use a “skilled and trained” workforce to build the housing. That means a certain percentage of workers must either be enrolled or have completed a state-approved apprenticeship program.

Developers have said while there are plenty of trained workers available in areas like San Francisco and Los Angeles, those workers are scarce in more rural parts of the state, potentially delaying projects in those areas.

California needs to build about 180,000 new housing units per year to keep up with demand, according to the state’s latest housing assessment. But it’s only managed about 80,000 per year for the past decade. That’s one reason the state’s median sales price for single-family homes hit a record high $758,990 in March.

“At a time when we’re trying to increase production, we don’t believe we should be limiting who can do the work,” said Ray Pearl, executive director of the California Housing Consortium, a group that includes affordable housing developers.

Robbie Hunter, president of the State Building and Construction Trades Council of California, dismissed that argument as just greedy developers trying to maximize their profits.

He said there is no construction project in California that has been delayed because of a lack of workers, adding: “We man every job.”

“When there is a demand for workers, we rise with the demand,” Hunter said.

Labor unions appear to be winning. A bill in the state Assembly that did not initially require a “skilled and trained” workforce stalled in committee because it did not have enough support.

___

The legislation is SB 6 and SB 15.

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Got more space than needed? Tips to wiggle out of a lease

Recently, we represented a tenant in a successful lease transaction.

The new location offers ample space and amenities for years to come and is one of four occupied by the company. So, now we’ve been approached by this client to review their other three buildings.

You see, an acquisition of a competitor is in the works. Thus, there could be a redundancy of capacity very shortly. Our counsel to them was column-worthy. So, we mashed up an old column on the subject along with an update on the new information.

If you find yourself in any of the following scenarios, consider your alternatives:

Your company was just bought and the operation will be rolled into another location.

Or, you’ve outstripped the capacity of your facilities but have time remaining on an existing lease.

Or, you have decided to shutter the operation and outsource the manufacturing to Texas but your lease expires a year from now.

Or, you decide to take advantage of historically low interest rates and buy a building, but there is that landlord who wants to receive her rent for the next two years.

ALL of these situations and more can cause the need for lease termination. But, just how do you accomplish this?

First, ask yourself these questions:

How much time remains on your lease? If the term remaining on your lease is less than two years, be prepared for the owner to use the remaining term as “free” marketing time. The owner has the luxury of rent payments while searching for a replacement tenant or buyer.

What type of entity owns your location? A private individual may be a bit more flexible than an institutional owner such as a pension fund adviser or a REIT (real estate investment trust).

Where is your rental rate in relation to the current market? If it’s an above-market rate, plan on subsidizing payments on the remaining term, if a replacement tenant can be found. If your rate is below market, the remaining term could provide a good alternative for a fast-growing company concerned about a long-term lease.

Does your lease allow fo assignment or subleasing? (Most do.) Rarely is there a removal of your obligation, however. This means that if you sublease or assign the remaining term, you may still be liable for the payment of rent if the sub-tenant defaults.

If you are moving to a bigger space, what is the rent amount monthly? If you are doubling or tripling in size, one month of rent in the old building could be a fraction of the monthly rent in the new location. IE: Old rent is $5,000 per month. New rent is $15,000 per month. There are nine months of term remaining in the old digs or $45,000. If you negotiate three months of rent abatement in the new unit, you avoid a double payment.

How long would your building take to lease? Any competent commercial real estate broker can answer this for you. The answer to this question will have a bearing on a lease buyout.

Can some portion of the operation stay through the term? I just sold a building to a company with 15 months remaining on a lease term. Rather than try to sublease the space or negotiate a buyout, my client elected to open another related operation in the space.

Are any of your neighbors crowded and in need of square footage? A fast-growing neighbor can consume your space with a moment’s notice – and thank you!

Once these answers are clearly understood, you have some options:

Negotiate a buyout: I generally will suggest an occupant call his owner and discuss the reason the space is no longer needed. I suggest the occupant ask the owner if she would consider a buyout of the remaining term and if so, for how much?

Depending on an up-trending or down-trending market, the owner response will vary. Assuming 12 to 18 months of term remain, an owner will generally compute the marketing time to find a new tenant, lease concessions (free rent and improvements), brokerage fees, and the variance of the current rental rate to market. All of these factors form the basis of a buyout offer.

Sublease or assign the space: If more than two years remain on your lease and unless you are dramatically below market, most owners will not consider a buyout of the remaining obligation. You then must find a replacement tenant to live out the remainder of your lease term. You can either do this yourself, hire a commercial real estate professional or ask the owner to do it.

Cease payment: I have NEVER recommended this but it is an alternative.

Live out the term: In the example above, my client loved the old location so he created a business operation to house the space and live out the remaining term.

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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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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12 indicted in alleged Southern California ‘green’ loan and mortgage fraud scheme

LOS ANGELES — A dozen people have been indicted in connection with an alleged mortgage fraud and “green” loan scheme that operated throughout Southern California and resulted in losses of about $15 million, the California Attorney General’s Office announced Wednesday.

The 133-count grand jury indictment, handed up April 26, alleges that the crimes occurred in Los Angeles, Riverside and Ventura counties.

The indictment charges the defendants with a variety of counts, including conspiracy, mortgage fraud, grand theft, identity theft, forgery, filing a false or forged document and money laundering.

The defendants allegedly exploited the Yrgene Energy Fund and Renew Funding, companies that provide funding to licensed contractors for energy- efficient home improvements for homeowners, and used false identities to get mortgage loans from conventional banks and hard money lenders, according to the Attorney General’s Office.

“The allegations against these defendants charge a pattern of disregard for the law and willingness to go as far as stealing the identities of the deceased just to further their scheme,” California Attorney General Rob Bonta said in a statement announcing the charges. “Our office will seek to hold these defendants accountable for their alleged actions.”

Those named in the indictment are: Tamara Dadyan, 39, Richard Ayvazyan, 42, Artur Ayvazyan, 41, Grigor Tatoian, 50, Andranik Petrosyan, 46, Arshak Bartoumian, 48, Artashes Martirosyan, 43, Lilit Malyan, 39, Lubia Carrillo, 41, Rosa Zarate, 49, Estephanie Reynoso, 31, and Vanessa Bell, 60.

Eleven of the defendants have pleaded not guilty, with Malyan due back in a downtown Los Angeles courtroom for arraignment May 18.

The case stemmed from a multi-year investigation by the Los Angeles Police Department, with assistance from the Federal Housing Finance Agency, Office of Inspector General.

The attorney general lauded the two agencies for “their work to put an end to an extensive, six-year fraud scheme that resulted in the theft of an estimated $15 million.”

“If you were a victim or have information please call 213-486-6979,” said a tweet from LAPD Capt. Lillian Carranza.

Read more about 12 indicted in alleged Southern California ‘green’ loan and mortgage fraud scheme This post was shared via Orange County Register’s RSS Feed

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Do buyers stand a chance in this heated real estate market?

I read with great interest last week, Leslie Eskildsen’s column on a relatively new residential listing class known as Registered Status.

If your unfamiliar – as was I – here are the Clif notes. A seller hires a broker to sell his house by executing an agreement. Twelve choices are given – among them – active, coming soon or registered. If “registered” is chosen, the broker may share the information with agents employed beneath the broker’s license – but not with the Multiple Listing Service.

Read: Cooperation is eliminated and the pool of potential purchasers is pruned to those represented by the broker. In today’s robust seller’s arena, buyers are more plentiful than houses available for sale. The transaction occurs free of hassle, multiple tours and myriad proposals. Do sellers leave shekels on the counter? Maybe. But that’s the seller’s prerogative. Wow!

OK. You may be wondering what any of this has to do with commercial real estate as that’s my forte. Indulge me as I relate a few similarities.

The residential market typically precedes commercial by nine to 18 months. If you’re curious about the future landscape for commercial real estate, just watch what’s happening residentially.

In 2007, residential sales plummeted due to the sub-prime mortgage meltdown. CRE didn’t feel the pinch until late 2008. Social media marketing took root with residential agents well before any of us used Facebook, Instagram, YouTube or Twitter to broadcast our listings. Will “registered status” become a thing with our inventory? My prediction is yes!

A type of registered status already exists. Some brokers already employ a form of registered status marketing. Here’s an example: If a seller engages me to peddle a freestanding 10,000 square foot manufacturing property in Anaheim, I can generate 10 offers with 10 phone calls.

A recent land sale we made was preceded by a select “invitation to offer.” The competition was fierce and the resulting comp set the new high price. If you have a buyer for a leased industrial building in the Inland Empire, and the offering is listed, chances are there is no fee for the buyer’s side.

Buyers are at an extreme disadvantage. Akin to a season of “The Bachelor,” sellers have their pick of qualified purchasers and may present the rose to anyone they choose. It’s quite common for avails to hit the market un-priced. We are given “guidance” as to the seller’s expectations. Plus, water in the Mojave is more plentiful than buildings to buy.

All of these factors have pushed pricing up 32% since October 2020! If something hits the market – you must take the Gretzky approach. Skate to where you believe the puck will be.

The traditional deal structure also is waning. It used to be — before this crazy activity — a buyer could expect to receive a reasonable time to secure financing, clear title and inspect the roof for leaks – all while under no obligation to close if something untoward was discovered. Now? Forget it. You’re lucky to get any time to conduct due diligence – without money at risk.

Buyer reps MUST innovate. If your business is representing buyers or tenants, you must manage your client’s expectations. In a recent round of talks, we offered a number 13% higher than the last market sale, non-refundable money on day one and no financing contingency.

We didn’t get a counter! Why? Even though our deal was not conditioned upon us getting a loan, we still needed financing. Confusing? Yes. But we were willing to risk it – and with a large sum of money as the assurance to the seller. In effect, we were told, “Show us the money”! Prove the funds in a liquid account equal to the purchase price or no deal.

In the darkest days of 2009-2011, sellers were at a disadvantage. Not anymore!

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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