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.

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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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L.A. County brother and sister arrested, accused in real estate scam tied to fraudulent listings and sales

LOS ANGELES — A Southern California brother-and-sister team were arrested Tuesday on federal charges alleging they orchestrated a $6 million real estate fraud scam in which they listed homes without the owners’ consent and collected money from multiple would-be buyers for each of the not-for-sale homes.

Adolfo Schoneke, 43, of Torrance, and Bianca Gonzalez, also known as Blanca Schoneke, 38, of Walnut, each pleaded not guilty Tuesday to a nine-count indictment unsealed after their arrests.

If convicted of seven counts of wire fraud and one count each of conspiracy and aggravated identity theft, Schoneke and Gonzalez each would face up to 162 years in federal prison, according to the U.S. Attorney’s Office.

A June 1 trial date was set. Both defendants will remain in custody at least until detention hearings scheduled Friday for Schoneke and next Tuesday for Gonzalez.

According to the indictment, Schoneke and Gonzalez, with the help of co-conspirators, operated real estate and escrow companies based in Cerritos, La Palma and Long Beach under a variety of names, including MCR and West Coast.

The indictment alleges Schoneke and Gonzalez found properties that they would list — even though many, in fact, were not for sale, and they did not have authority to list them for sale — and then marketed the properties as short sales providing opportunities for purchases at below-market prices.

Using other people’s broker’s licenses, Schoneke and Gonzalez allegedly listed the properties on real estate websites such as the Multiple Listing Service. In some cases, the indictment alleges, the homes were marketed through open houses that co-conspirators were able to host after tricking homeowners into allowing their homes to be used.

As part of the alleged scheme, the co-conspirators accepted multiple offers for each of the not-for-sale properties, hiding this fact from the victims and instead leading each of the victims to believe that his or her offer was the only one accepted, according to federal prosecutors.

The co-conspirators allegedly were able to string along the victims — sometimes for years — by telling them closings were being delayed because lenders needed to approve the purported short sales.

The indictment also alleges that Schoneke and Gonzalez directed office workers to open bank accounts in the office workers’ names. Those accounts were used to receive down payments on the homes and other payments from victims who were convinced to transfer the full “purchase price” to these bank accounts after receiving forged short sale approval letters, prosecutors allege.

Schoneke and Gonzalez also allegedly directed the office workers to withdraw large amounts of cash from those accounts and give it to them — a procedure that allowed the defendants to take possession of the fraud proceeds while hiding their involvement in the scheme.

Investigators estimate that several hundred victims collectively lost more than $6 million.

Read more about L.A. County brother and sister arrested, accused in real estate scam tied to fraudulent listings and sales This post was shared via Orange County Register’s RSS Feed. Orange County Shredding Service

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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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How to reconcile those pesky operating expenses

Today, we venture into the weeds to discuss an event that occurs this time of year.

Nope. Not Chinese New Year – which is cool, by the way.

Instead, we’ll discuss reconciling operating expenses including common area maintenance charges. Fun stuff – huh?

Generally, reconciling expenses proceeds with commercial tenants who do not own their building. Leases, rental agreements or contracts typically outline things such as base rent, commencement, expiration, rental increases and responsibility for mowing the grass and fixing a leaky roof. It’s very important you – or someone within your group – to understand how each of these cost categories is handled.

Typically, leases call for the tenant to pay for expenses related to the operation. If a company occupies a suite of offices, most likely the tenant executed a “full service gross” lease. Similar to other gross leases, an FSG lease lays out a rate inclusive of rent, property taxes, insurance for the premises and general exterior maintenance. What is unique to this arrangement is a charge for utilities and janitorial services which are baked into the monthly check you write.

If you consider a high-rise building with many enterprises, there is often a “pro-rata” sharing agreement for electricity, water, trash and the crew that vacuums the conference room after hours. It would be impractical to contract separately for these services, so most owners don’t. Most will include an “expense stop.” Simply, any of the above is billed to the tenant.

Industrial landlords take a slightly different approach to re-capture costs.

As an occupant of a manufacturing, warehouse, or service building – the tenant’s lease is likely a triple net or an industrial gross lease. The main difference here? Rent with a NNN lease excludes operating expenses from the monthly payment whereas an industrial gross lease lumps them together.

Am I saying no expenses are passed along in a NNN arrangement? Quite the contrary. They are invoiced as they occur or annualized and collected monthly.

So, how does this all play out for tenants?

Each year between October and December, commercial real estate owners budget for the next year. They take into account line items such as rent, property taxes, insurance, and yes, common area expenses like parking lot sweeping, trash collection, landscape maintenance and system repairs.

What might also be considered? Is a vacancy anticipated? Are lease term extensions expected? They’ll also review the current year. Were expenses properly predicted or dramatically overstated? Next, will the gardener charge us more next year? Have insurance coverages been impacted by a hurricane in South Texas?

We know property taxes will increase by 2% unless a change of ownership occurred. Once calculated, a projection of next year, along with those budgeted expenses, is forwarded to the tenant.

You may be wondering, what happens if the owner collected too much money? This is where the February reconciliation begins.

Akin to sending Uncle Sam too many tax dollars, if you paid too much, expect a bonus from the landlord. Conversely, an underpayment will foster a note that you owe more. Please understand, a tenant has full rights to request backup information on items for which the owner seeks payment. A typical scenario would be a request for documentation outlining why wind in Texas would affect a California insurance premium. Or why did tree trimming cost so much?

Finally, the “more on this in a moment” promise. Delve into the terms: base year and expense stops highlighted in full service gross and industrial gross leases. Simply, these clauses limit the amount of common area expenses the owner can recover.

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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Commercial vacancy is nil, so what’s an antsy occupant to do?

A couple of weeks ago, I wrote about a system for analyzing an investment property, commercial lease, or potential building purchase.

I used the acronym FOCUS, and I deferred our conversation on the S, the solution step as it was column worthy all by itself. As you may recall, FOCUS stands for Facts, Opportunity, Consequence, Understanding and Solutions.

Solutions may splinter into several directions. However, they generally fall into one of three categories: do nothing, do something or defer a decision. Simply, if you’ve sold an income property, have used the FOCUS approach to determine your next move, and are to the solution step, you may choose to pay the gains (do nothing), purchase another asset (do something), or wait (defer).

As you approach an expiring lease, the process could suggest you renew the lease (do nothing), relocate to a new address (do something), or allow the contract to expire and hope your owner doesn’t force you to vacate. By the way, with today’s obscenely low vacancies, I’d not suggest doing this.

A lessee considering a purchase could opt to renew the leased premises (do nothing), pull the trigger on the buy (do something), or wait until the nutty prices level (defer).

Unfortunately, solutions are rarely as straight forward as outlined above.

Using our income property sale situation, we first spend hours of analysis before finding a solution. Doing nothing and paying the taxes owed appears simple. But, when you consider Uncle Sam and cousin Gavin will clip an enormous chunk of your profit, this may pale in comparison to another route.

Doing something – by affecting a tax-deferred purchase and buying another parcel comes with myriad complexities. First, you must decide to do this before your sale closes. Next, there are finite time frames guiding your acquisition. And don’t forget, uou MUST find something!

Sellers are bullish. The pool of suitable offerings is limited. As Tom Petty crooned – “the waiting is the hardest part.” Deferring a decision – if you sell an income property – forces you into the “do nothing” mode. If you close without designating your desire to exchange, you lose the option. A fat tax bill awaits.

Now, let’s take the example of an expiring lease. Sure, you could elect to find a new spot. In effect “do something.” But the thinking behind the decision warrants some dissection.

Frequently we meet with a tenant and hear, “once our lease expires, we will DEFINITELY RELOCATE!” But, these days the majority of occupants don’t. After careful consideration, most realize renewing an existing lease has many benefits – an expensive move is avoided, disruption is nullified and downtime is erased.

The industrial real estate market suffers from an acute lack of available spaces. In some size ranges, our vacancy is zero! Your intention to upgrade into a newer facility might be met with very limited choices and costly ones at that. Finally, some just cannot pivot into a new address. Generally, we see such motivators as custom improvements, special permitting or an irreplaceable area.

A direction to purchase your business’ home and pay rent to yourself is a sound plan — sometimes. Doing nothing means you’ll stay, continue to rent and run your business with little change. Hopping into a purchase – doing something – would require you to survey the market, get yourself approved for financing or tap your piggy bank and execute a transaction.

Don’t forget to look into the “true cost of ownership” by adding up mortgage payments, property taxes, insurance and some little things like maintenance. It’s generally much cheaper to lease. Oh yeah, don’t forget: the down payment isn’t free – even if it’s in a liquid account.

You could choose to hire, invest in machinery or open a new market with the cash. In some cases, these alternate investments yield bigger returns than buying a building. Deferring until our pricing settles could make sense.

My opinion is we’re long overdue for a correction. But, so far, even a pandemic hasn’t stalled the upward march.

Sometimes FOCUSing on the solution is tough!

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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