5 Things to Do in January 2021

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Well. Here we go! 2021. A new babe of a year with tremendous promise, an abundance - hopefully - and a clear path to success. Today, I want to spend a moment and discuss with you some things to focus upon this month so that your commercial real estate is in synch with your other priorities. 

Your lease. As an occupant of commercial real estate, your tenancy falls into one of two categories. You either lease from a related party - known as an owner occupied space. Or, the rents checks are sent to an unrelated entity - you have no ownership in the building. Hmmm. So, if the owner and occupant are synonymous - why would a lease be necessary? After all, rent flows from one pocket - the occupant, to the other - the owner. Essentially the same. Strongly encouraged is that you have a written agreement between the parties. Sure. As the owner and occupant - the terms and conditions of your lease - rate, number of years, etc. - can be flexible. But, make sure you have one. With an unrelated owner, a signed lease is paramount! So, I’d encourage you to locate a copy, scan it into digital form and save it where you can readily access the document. When does the term expire? If 2021 - you’ve some decisions to make. Are there extension provisions - options to renew, rights of first refusal, rights of first offer included? Most have time windows from which to be exercised. Finally, schedule a ZOOM or face-to-face   with the owner of your building. Annually, it’s great to discuss your company’s plans, concerns, and any latent issue relating to your premises. 

Insurance coverages. I must admit - to the delight of my friends in the insurance trade - I’m really unprepared to discuss insurance matters. Suffice to say, your coverage generally is annually renewable and should be carefully reviewed each year to insure - sorry - the lease requirements are met. 

Property taxes. These increase annually by a minimum of 2%. Regardless the form of your lease - payment is your responsibility. Typically, Gross leases bake in the amount but you pay increases and Triple Net leases bill you as due. Was your business address sold last year? If so, expect a little surprise in the form of an invoice. 
 
Common area maintenance charges. The cost of operating a parcel of commercial real estate - exclusive of property taxes and insurances - are sometimes lumped together as common area maintenance expenses - also known as CAM charges. Landscape maintenance, parking lot sweeping, property management, trash, common area unities, etc. are the likely categories. If your owner bills for these monthly - you probably got an estimate last year and the new billings start this year. Reconciliation should follow. If something appears mysterious - ask for back up. 
 
Building systems. Winter is a great time to check your air conditioning before the warm months hit us. HVAC contractors are not as slammed either. You’ll also want to check on your warehouse fire protection. Certifications are required each year and a more robust certification every five years. Who mows the grass and trims the trees? A review of price and services could be in order. 
 
Loans. Owned and occupied real estate that carry debt are subject to lender covenants, potential interest rate adjustments, maturity dates, balloon payments, and pre-payment penalties. See “Your Lease”. Located should be all loan documents with physical and digital copies. Is a refinance in your future? Might want to assemble tax returns, balance sheets, statements of income and expenses for the company and personally. 
 
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. His website is allencbuchanan.blogspot.com.

Random Thoughts to Begin 2021

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Happy New Year, dear readers! With 2020 firmly in the rear view mirror and my “prediction column” completed a few weeks ago - today, my thoughts are random. Why limit the topics? So here are a few of the tidbits echoing in my dome. 
The Pandemic brought into focus a reality for me. As commercial real estate practitioners we have two things to share - our time and our information! Make them count. Working remotely - and without a commute - allowed me to find a couple of hours each day for productive activities. 

Our time. Each of us has the same amount of time - 24 hours a day, 365 days per year for a total of 8544 hours - to ply our trade. Don’t forget, we must eat, sleep, hang out with our families and enjoy some leisure activities. If you’re like most of us, your labor is compressed into 8-12 hours every day. Tenure in the business is not a predictor. Many veteran CRE pros spend over half their days brokering commercial real estate. But, certainly, if you’re new to the business - plan on starting early and staying late. I personally start my day with a 4:30 wake up! The key is HOW your time is spent because once it’s gone - you don’t get any more. So, I would suggest computing your hourly worth. Simply set a revenue goal for next year, compute how many hours you plan to work and do some math. You’ll arrive at a figure. Surprising, huh? Now. Only spend time on tasks that will return that hourly wage. If your hourly is $200 and filing brochures consumes your day - hmmm. Conversely, calling owners of 100,000 sf buildings and getting to know them - pays the wage. Learn to be quite stingy with your hours and invest them wisely. 
 
Information. CoStar, LoopNet, Reonomy, ProspectNow, Catylist, and other data aggregators have commoditized CRE data. Doubt what I say? I can open my CoStarGo app and pull a list of availabilities anywhere in the US. A quick review of comps and I am familiar with values. Is ownership mostly institutional? Reonomy and ProspectNow detail the answer. You may be wondering - where does the broker fit in? Exactly! What differentiates is the analysis of the data and the ”story” of the deals in the area. Only an agent, entrenched in the market, can recite this detail and add real value to owners and occupants. So, master your command of the data! Learn the trends, become conversant with prices, know every building, understand the drivers, meet the influencers. Dominate your geography and become the resident expert. Through specialization - product type, geographical area, square footage, or business genre - can you achieve this level of competence. 
 
If you learn to master your data and manage your time you can enjoy a long successful career!
 
Goal setting. I invested in professional coaching in 2018 and have continued. The results have been transformational! As I write this column - I’m also completing a comprehensive look at 2020. What worked, what didn’t and why. This reflection will morph into 3-5 SMART goals for 2021. If you’re unfamiliar with SMART goals - as you know, I love acronyms - the letters abbreviate Specific, Measurable, Actionable, Realistic, and Timetable. Thank you Michael Hyatt! I generally mix in a benchmark as well. After all, you must understand where you are today. 
 
Let’s make 2021 our BEST year yet! 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. His website is allencbuchanan.blogspot.com.

6 Credit Enhancements

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Merry Christmas and Happy Holidays to you and yours, dear readers! With 2020 rounding third and heading for home - left in my stocking were some transactions that require a nudge in security. We generally see such enhancement requests in lease transactions although one of our lumps of coal is a sale. A review of our solutions is the subject of today’s missive - so buckle up.

As previously discussed, a lease deal is an extension of credit from the owner of the real estate to the occupant. Simply, a landlord will calculate the total consideration of the agreement by multiplying the monthly rent plus annual increases for the term of the lease. If our monthly rent is $30,000 with 3% yearly escalators over a five year span - promised is approximately $2,000,000. Don’t forget to layer in the cost of rent concessions, tenant improvements, brokerage fees, and the like. For our example, we’ll assume these add-ons escalate our amount by 10% - another $200,000. So, our title holder wants to be assured the new tenant can fulfill a $2,200,000 obligation. If after reviewing the financial information provided, a doubt exists - expect the lessor to push for an enhancement. The form and format can morph. Below are some ideas. 

Personal guarantee. Frequently the tenant is a corporation. The C or S version has is a legal unit with underlying owners. Depending upon the complexity of the corporation, the ownership may be an individual or a number of shareholders. In the case of the former, a simple understanding the individuals are responsible if the corporation defaults can shore up performance. Sans a tangible individual - like in the case of a publicly traded group - personal guarantees aren’t feasible. 

Additional security deposits. Quite easily. Typical upon lease execution - rent for the first month and a sum equal to the last is deposited with the owner of the building. Sure. Some lease language allows the security deposit to cover abnormal premise wear and tear - but the primary purpose is to insure timely rent payments. Increasing this amount two or three fold can give some parcel owners a reason to say yes. 

Letters of credit. Good in theory - tough in practice. In essence, requested is an amount of future borrowing sufficient to stem the bleeding. But, if the tenant is sketchy - encumbering their ability to seek financing is difficult. I’ve seen this requirement spook occupants. 

Entity guarantee. Multi-layered corporations create operating companies akin to the layers of an orange. Once you peel back the skin - where’s the fruit. Sought by a holder of commercial real estate? The company signing the lease needs to own the assets - cash - capable of paying the rent. If not, a hollow barrel exists. Try drinking from said barrel. Yep. Nothing there. We’ve solved this in the past by requiring a parent corporation to sign. Just make sure the parent has chops. If not you’ll have an empty guaranteeing an empty. 
 
Reduction in concessions. Generally, we see two types of tenant requests. One of those is free or abated rent and the other is above standard office improvements. In the first case, lessening the amount of free rent requested can solve the problem. Maybe - vs a free month - two half months can be substituted. Or, placing the abatement in the later years. With tenant improvements -  two issues exist. There is a cost associated with producing the over standard build out. Plus, if the tenant doesn’t live out the lease term, the owner is faced with above standard goodies which may not have appeal.
 
Other solutions. Maybe pre-pay some months of rent. A well funded startup with adequate capital reserves but a short time in business will find this palatable. Consider a 
shorter term. In our illustration above - going from five years to a three year term and a two year option to extend may be all you need to do. 
 
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. His website is allencbuchanan.blogspot.com.

6 Non-Starters for Commercial Real Estate Deals

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Commercial real estate transactions, akin to a dance, take two to tango. In the case of a lease - opposite are the tenant and landlord sometimes called Lessee and Lessor. When a building purchase is considered, a buyer and seller square off. Customary in both is a negotiation which precedes the agreement - a lease document or purchase and sale contract. Outlined in most negotiations is a set of deal points - price, term, concessions and the like. Generally, both sides of the aisle have representation - a commercial real estate professional or a real estate attorney. Depending upon the dollar consideration, both vocations may be employed. Frequently, a general outline is submitted by brokers and agreed to to by both parties and then attorneys fine tune the language. When a deal takes flight - it’s a beautiful thing. But, there are some requests which prevent lift-off. A few of these “Houston, we have a problem” are listed below. 

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

Options to buy. Options benefit the occupant. Period. Terribly one sided and limiting - many owners simply refuse to consider them. You see, if the title holder grants an option to buy, he’s locked in. Sure. He can sell to someone else, but the new buyer must honor the option. It’s murky. Softer solutions exist. Rights of First Refusal or Rights of First Offer are examples. 
 
Special purpose tenant improvements. If you’re looking to a landlord to fund your freezer cooler space, add a clean room, or double the amount of private offices - expect some reluctance. Typically, dollars invested to modify a building are viewed for their reuse. An owner considers how valuable the adds will be to future residents and responds accordingly. 

No financing contingency. We sold a property earlier this year for the income it produced. Our buyer was a well-heeled investor with ready cash to deploy. He will not occupy the building but will own it and reap the returns. His offer did not require a loan - therefore his performance was not conditioned on a lender nod. However, most buyers who plan to house their business within the premises need some time to get funding. A seller unwilling to allow this contingency may force a buyer to look elsewhere. 
 
Closing extensions. A seller planning to re-invest the proceeds through a tax deferred exchange has strict timeframes to follow once the sale consummates - 45 days to identify within a 180 day completion. Therefore, we occasionally see extension requests. If closing is delayed, the clock remains at zero until the deal is done - thus giving the seller “free time” to find a replacement property. Buyers are in peril, however, as loan commitments or operational needs dictate their timing.  

Lengthy contingency periods. Sellers seek certainty of close. Extended uncertainty will kill most transactions. A great example occurs when a buyer contemplates a use change - like converting industrial to residential. Municipalities have something to say and they say things quite deliberately. It’s not uncommon for the rezoning - if needed - to eclipse 18 months. An awful lot can change in that period. Consequently, few sellers are willing to “tie up” their property on a maybe. 
 
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.blogspot.com.

Subleases - What Causes Them?

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Penning this in the final month of 2020 - my thoughts consider 2021 and what might be coming. I suspect, a tremendous amount of “shadow space” better known as subleases will fill the landscape of office and retail availabilities next year as occupants adjust to the realities of the pandemic economy. Sure. We could also see industrial overruns - but for very different reasons. 

A bit of context to begin. Commercial real estate is occupied by the building’s owner, also known as an owner occupant or by an entity unrelated to the title holder - a tenant. In the case of the latter, a contract exists. Leases, rental agreements, or the like state the terms of the relationship - monthly amount paid, number of years, responsibility for maintenance, and who pays the property taxes and building insurance. When a change occurs during the term of the lease - causing a shift in the real estate requirement - one result is sublease space. 

So, with that general background, allow me to explain excess square footage and specifically what causes it with office spaces, retail storefronts, and industrial boxes. 

In our first example, let’s take your local attorney’s office. Generally, these counselors lease their spaces. Ok. Some take advantage of the benefits of owning their locations...but play along with me. Assume at the beginning of 2021; three years remained on a five year lease the firm signed in 2019. Once “stay at home” orders took effect in mid-March - the group found itself with most of its practitioners working from home - and loving it! Now, that marble floored and mahogany paneled boardroom is rarely used. The plethora of private offices - which are typical - now lay fallow. However, rent payments are still owed. Decision time. Is the under utilization permanent - meaning a need for a smaller footprint? Or, will full staffing exist soon? In the former - you have the classic need to find an occupant willing to morph into the vacant seats and fulfill the law firm’s remaining obligation - a sublease. 

Another situation - which floods the sublease market - is observed at virtually - sorry - every regional mall, power center, strip, and freestanding big box retailer in SoCal. Pier One, Steinmart, Bed Bath and Beyond, JC Penney, Brooks Brothers, Forever 21 and other name brand outlets all took their lumps this year. Many shut their doors for good. Others are surviving - but just barely. In every business failure, leases must be considered. Some are abandoned through bankruptcy courts. Select ones leave vast, vacant, dark holes where vitality previously existed. Low cost providers such as Tuesday Morning take over. Although, for how long? Creative solutions emerge such as the Union Marketplace in Tustin’s District - a former Border’s Book Store. There, the larger space was chopped into smaller experiential retailers. But suffice to say - leases must be consumed. 

Finally, industrial buildings. You know, those concrete behemoths which house a variety of manufacturing, warehousing, and service concerns. A very different dynamic will create vacancy in 2021 - companies outgrowing their spaces. With the spate of on-line shopping - ECom providers cannot keep enough stock on hand. Food producers are slammed. Any company manufacturing repair and replacement parts is thriving. Try getting a plumber out to fix a leaky toilet at your home or business - good luck! One of our clients distributes mufflers. With the number of folks staying home and extra $$ piling up because they can’t go to Disneyland or the movies - yep. They’re fixing their cars. A building conversation faces them next year. They’ve eclipsed their capacity. Another is also an automotive distributor. Recently, their demand was so great they opted to double their square footage and find someone to sublease the building they vacated. 

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. His website is allencbuchanan.blogspot.com.

What to Expect in 2021

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Wow! December. With Christmas lights festooning the neighborhood - we are reminded 2020 is almost history! 2021 is a mere 30 days hence. What can we expect of the commercial real estate landscape next year? Someone famous once opined - “well, they’re only predictions, but they’re all mine.” So please bear with me as I get my Nostradamus on.

Bullish industrial owners. We represent an importer. Warehoused are goods they distribute. He’s slammed for space - thus our engagement to find more. Recently our full priced offer was met with a reluctance - by the owner - to grant a financing contingency. I’ve seen this with investment properties - but never with owner occupied real estate. You see, time is needed for a lender to nod yay or nay. Very few occupants have idle cash sitting in an account awaiting a purchase.

Shorter leases. Until the aroma of economic uncertainly ceases to waft, expect occupants to seek commitments of fewer years than before. Ten year leases will become five and so on.

Clarity in the office market. I suspect by this time next year - the runway will be clear and office occupants will have a direction - up or down. As previously mentioned, uncertainty is a killer for any business trying to gauge a need for space. But, as we are seeing in retail storefronts with their downward trajectory - at least we can plan.

Low interest rates. The Biden administration will most likely be gridlocked by a Republican senate. With the house near balanced, a Democrat in the White House and a red senate - expect the Federal Reserve to keep interest rates low. Our ten year treasuries - a bellwether for commercial real estate loans - are expected to wallow at historic bottoms as well.

Burgeoning ECommerce. If the Buchanan household is any indication - internet ordering and “just in time shipments” to your door will continue with a vengeance. Recently, we purchased a new mattress on-line. The next day, two beefy gentlemen ushered it into our upstairs master suite. Will someone kindly develop a box compactor for home use? Something between the kitchen trash masher and the ones in Albertson’s storeroom would be awesome. There’s your million dollar business idea for 2021! You’re welcome.

Continued safety protocols. As the pandemic blossomed in March, predicted were temperature checkpoints, masks, hand washing stations, and distancing. Actually, it was not terribly futuristic. Observed was what other countries were employing. I am startled how quickly we adapted, however. Akin to airline changes post 9.11 - we can’t simply attend a concert, eat in a restaurant, or shop without a face covering. Shocking. Although, expect more in 2021.

An innovative technological offering? Commercial real estate is rarely disrupted by something shiny and new. CoStar - in the mid 1990’s was probably the last big thing. With CoStar’s acquisition of Ten-X this year - we could see a more robust platform from which to transact. At the site’s disposal now is available inventory, what’s recently sold, and an auction template. Hmmm. Where do brokers fit in? But, look no further than our residential counterparts to get a glimpse. Matterport tours, consumer facing available inventory, and accurate internet loan processing lessen the need for “buy-side” representatives.

Scant industrial vacancy. I see nothing on our immediate horizon that would cause industrial availability to rise. The drivers of increased square footage could be new construction. Nope. Not enough vacant land in the OC to stem demand. Plus, it takes an eternity to get a new development entitled. Business failures - probably not. We’ve just endured the greatest health crises in 100 years and many industries thrived. Exodus out of state. Maybe. We’ve definitely seen some movement. However, our local businesses are largely private. They’re your neighbors with a rich history and deep rooted residency in SoCal. A financial meltdown. Yeah. That could do it. 2009 again. I certainly hope not.

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. His website is allencbuchanan.blogspot.com.

Building Still Vacant? Ask MR BOB!

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You may have consumed my recent column on the acronym N.U.C.L.E.A.R. wherein a discussion took place. You see, I channeled Pat Sajak to create my own Wheel of Fortune. Provided was a fool proof way to analyze the viability of a commercial real estate requirement. I’ll buy a vowel, indeed! The Need, Urgency, Catalyst, Loyalty, Expectation, Authority, and Resources - if reasonable considered - 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 goes!

Our friends own several properties from which the rent fuels their livelihood. When considering a buy, he and his wife use the acronym C.L.I.P. Condition, Location, Income, and Potential. This simple four quarter system touches all the bases.

Condition. The current repair of the 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. Often opined - there are three things that matter in real estate - 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 belongs first - so that the letters spell something. Otherwise the acronym would be I.C.L.P. - not as compelling or easy to remember. But suffice it to say, the Income is critical! Where is the rent compared to 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. Finally. In addition the 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 nemonic 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 which is tooled for 50 in-house practitioners and staff. We own. 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 board rooms throughout the country. So with an office vacancy - the market is not your friend.

Rate. Does the rental rate or purchase price you’re asking 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 contruction 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. Finally. 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 - read. We all know each other! Snakes are avoided. Fortunately, they are few, fortunately! 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 abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.blogspot.com.