You may have seen my recent column on going “NUCLEAR.” You see, I channeled Pat Sajak, creating my own Wheel of Fortune. The end result was a foolproof way to analyze the viability of a commercial real estate requirement. I’ll buy a vowel, indeed!
NUCLEAR: Need, Urgency, Catalyst, Loyalty, Expectation, Authority, and Resources – if reasonable considered – all allow buyers, sellers, tenants and commercial real estate professionals to “qualify” their need and proceed to a successful conclusion.
Many contacted me with their own acronyms. One actually from our neighbor, Rudy! I thought them column-worthy. So here it goes!
Our friends own several properties and the rent fuels their livelihood. When considering a buy, he and his wife use the acronym CLIP: Condition, Location, Income and Potential. This simple four-part system touches all the bases.
Condition: The current state of necessary improvements is a very important consideration. Many look at the roof and air conditioning as key components that can require significant investment in the future. However, things such as the parking lot, exterior appearance, plumbing, electrical and the nature of a property’s office improvements are also key.
Location: There are three things that matter in real estate, as we so often hear: Location, location and location. Yes! Even if a parcel is the “ugly duckling” of a premier neighborhood, can it one day be the “black swan”?
Income: Unfortunately, this element falls third in line – it really belongs first but then the letters would spell ICLP, which is not as compelling or easy to remember. But suffice it to say, income is critical!
Where is the rent compared with similar buildings? How sustainable is the stream? Sure, you may be looking at a multi-year lease, but if the tenant is gasping for air, you may have to replace the rent sooner than planned.
Few properly bake-in the true cost to replace a tenancy. Downtime, concessions, commissions and improvements all can diminish your future take and should be considered. Remember the condition? Yeah. You’re now competing with other options in the market. Best be spic and span!
Potential: In addition to the present income, where can you take the property in the future? I refer to this as the exit strategy. Will your family hold on and pass the holding along to your grandkids? Or is the idea to fix it and flip it? Can rents be raised? Will a freshening cause the occupant to renew? Is there excess land from which additional square footage can be added? Maybe the resident is your exit and is a prime candidate to buy. Be quite candid with yourself on this point.
Another really good mnemonic came my way last week. This five-letter assemblage can explain why your building remains vacant. Want to silence the crickets with the sound of commerce? Run through this list.
Market: If you own a vacant suite of offices, you’re faced with the uncertainty of a pandemic economy. Virtual work and stay-at-home orders have created a real dilemma for office occupants. Few know exactly how many square feet they need.
Case in point: Our operation in Orange is tooled for 50 in-house practitioners and staff. We own it, and we don’t want to relocate into a smaller suite. But, the reality is, we don’t presently use all of our space. So, what to do? This conversation is happening in boardrooms throughout the country. So with an office vacancy, the market is not your friend.
Rate: Does the rental rate or purchase price you’re seeking have any resemblance to the current comps? In an up-trending market, you can be bullish yet realistic. If things are going the other way, you easily can “chase the market down” by holding firm.
Building: Is your construction a warehouse with insufficient ceiling height? How about the corresponding loading? An abundance of office space within a building sans the appurtenant employee parking spots or windows to the outside world is not desirable. Finally, an address meant for manufacturing but without proper electricity will be quickly discounted.
Owner: Take a look in the mirror. Are you a good owner – fair dealer, concerned about the repair and maintenance of your properties, a “big picture” proponent who eschews the little stuff, and avoids extracting the last penny in favor of keeping your parcels rented? If you answered no to any – YOU may be the reason your structure is fallow.
Broker: How is your vacancy being marketed? Does your representative play nicely with others or is she egocentric and uncooperative? The commercial real estate community is a small one. We all know each other! Snakes are avoided. Fortunately, they are few! But, the reputation of the person whose sign advertises your offering is paramount.
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at email@example.com or 714.564.7104.
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