Pitfalls of an Limited Liability Company - AKA 3 Horror Stories of LLC Ownership

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In California - the Limited Liability Company or LLC is the most common entity with which commercial real estate is owned. Individuals within an LLC are known as members. Members are governed by an operating agreement which outlines whom within the LLC are authorized to sell, buy, and borrow. Also, percentages of ownership are specified in the case of multiple members. Why an LLC? Because of a multitude tax advantages and liability protection - which are beyond the scope of this column. However, as commercial real estate practitioners we encounter some pretty hairy issues involving LLC ownership.

Waking a Grizzly. Annual fees must be paid to the Franchise Tax Board and tax returns must be filed each year with the state of California. If not, the LLC may be declared inactive. To re-activate an LLC is akin to awakening a hibernating Grizzly. We once experienced an LLC that was formed, owned a parcel of commercial real estate, and was allowed to lapse - for thirty three years! Now the owner wanted to sell but couldn’t. You see the individual - with whom we were dealing - was not the owner because title was vested as the LLC. Therefore - with an inactive LLC - the individual member couldn’t sign a listing engagement, execute a Purchase and Sale Agreement, or transact any business until the past returns were completed and overdue due fees paid. Fortunately, no income had been reported through the LLC - thus no taxes were owed. Therefore, it was a matter of preparing tax returns dating back to 1986 and forking over thirty-three years of filing fees - which now - with interest and penalties - were in the tens of thousands of dollars. Oy vey!

Who’s in the mirror. Frequently, we experience this challenge. An LLC owns a building which is occupied by a business. Even though the entities of ownership may vary - building LLC and business a corporation - the individuals of each entity are synonymous. In a recent case - over time this changed - two of the three members of the building ownership LLC died and the business corporation was sold to the employees. Created was a difference of objectives - the occupying company needed less space or a correspondingly cheap rent. Desired by the LLC - now comprised of four heirs and an original member - was maximum return from the investment. So now what? The LLC sold and the business relocated to a building half the size.

But we are divorced. Sure. But your real estate ownership may not be. In a particularly nasty situation - we were thrust between LLC members - an ex husband and wife. The only remaining joint asset was a piece of commercial real estate once occupied by a business they operated. While still married - the business was sold but the real estate retained - providing a nice cash flow for the couple. When the two divorced - now desired was a sale of the building. Problem was - the divorcees also wanted to defer the taxes which would inure from the sale. The solution was a risky tactic known as a “drop and swap”. Title was changed to tenants-in-common from the LLC. This change in ownership vesting allowed the individual members - divorced husband and wife - to go their own ways. Please seek legal counsel and tax advice before attempting this.

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.com.

Hunters vs Farmers - a Parody

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Commercial real estate professionals must be transactional - they must close deals - to survive. However, the pathway toward those deals can be through the transaction treadmill or through fostering long term relationships with owners and occupants of commercial real estate. Today, I vary a bit through a parody that describes the difference between transactional and relational brokers. I hope you enjoy the comparison.

Once upon a time, in a land far away - before the Internet - there lived a buffalo hunter and a seed farmer. Buffalos were plentiful and slow, and would graze for hours on the grassy plains. Because the flat lands were populated by bountiful bison, the seed farmer found very little land on which to plant, cultivate and harvest his crops. Farming subsisted on small hilly plots here and there - unsuitable for grazing. 

Buffalo hunting was easy. These herbivores were huge and habitual. The hunter - without much skill or effort - in a couple of hours - could "harvest" all of the meat, hide, and hooves he and his family could handle. Others were attracted to the bounty. Times were good to be a buffalo hunter! Eventually, the hunting became more difficult, the hunters outnumbered the hunted and buffalo became extinct. Now what?

As the hairy hunted's haunts - the grassy plains - became less populated by the buffalos, the seed farmer found acres of fertile soil from which to extract the Earth's green goodness - crops. Although the growing cycle was long, the work tedious, the benefits and payback uncertain, the seed farmer continued to plant. When the Earth's bonanza was broadcast - the seed farmer was overwhelmed. Seeds beget seeds, the output grew (sorry) and the farmer was able to feed his family forever. 

Searching for new prey, the buffalo hunter happened upon acres of cultivation and decided to become a seed farmer - how tough could it be, right? After all, he was a mighty buffalo hunter. Unfortunately, the buffalo hunter failed at farming. The hunting chops he possessed - sitting around and shooting a large animal - didn't translate well to the skills required for seed farming - patience, perseverance, nurturing, tilling and harvesting.

The buffalo hunter eventually was forced to sell fax machines. Hmmm, how many of those are around today.

So, can you guess which one has a transactional focus vs building relationships?

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.com.

Are New Industrial Buildings too Expensive? Look Beneath Them for the Answer.

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Vacant land - needed for construction of manufacturing and warehouse structures - hardly exists in our area. Why, you may ask? Years of robust demand have encouraged developers to snap up every inch to construct new buildings.

Your average vacant industrial parcel - if you could find it - weighs in at over $65 per square foot or $2,831,000 an acre! Wow. To add some context - when I entered the commercial real estate fray during Reagan’s administration - entire buildings could be purchased for cheaper.

Within recent years, the majority of new industrial development locally, has begun with a campus of aging improvements. Take the Boeing campus in Anaheim, the Beckman location in Fullerton, or the ITT Cannon site in Santa Ana. Yep. All were former homes to massive amounts of aerospace, integrated circuit, or medical device manufacturing employment. Over time - as market demand shifted and the ways in which these plants were used - obsolescence occurred. Opportunities for a re-tool of the parcels emerged and shiny new developments were born.

Rarely in Orange County do we find an industrial building with extra land. As discussed in a previous column, a greater price for a building will be paid by a developer or an occupant if extra land exists. One such example occurred this year along the La Palma corridor in Anaheim as a developer paid top dollar for an existing Fry’s Electronic’s store with - you guessed it - extra land.

However, I must define "extra". We use the term excess and surplus interchangeably - even though we shouldn't - to describe extra land. You see, if the extra land doesn't serve the use contained, yet cannot be separated and sold, the land is actually surplus land. In this instance, an occupant who had a large outside storage need would ante up. If the surplus could house additional building square footage - voila! Fry’s offered both! Slated for a “last mile” facility where rows of Prime vans can be parked - yet with the ability to expand square footage if needed - this was a win win aquisition. However, in the absence of these two circumstances, no increase - because fronting cash for future advantage is costly. Conversely, if the extra land was excess - I can separate it and sell it - eureka!

A developer will analyze a land purchase based upon the density of new buildings he can achieve. Simply, if he can get one square foot of improved industrial structures to every two square feet of land - he’s golden. Also known as coverage ratio - 50% is very good for a project of manufacturing or warehouse buildings. Once coverage is determined - a model can be created which suggests the economic viability of the project. Said another way - can money be made from the investment required? Sadly, the answer is often no - which causes builders to consider other product types - such as apartments. Ever wonder why Jamboree south of the 405 or the area surrounding Angel Stadium is consumed with multi family structures? That’s the reason. Land is worth more under high rise residential than used as a base for a warehouse.

So, to the question. Are new industrial buildings too expensive? With 98 of every 100 occupied and very cheap money - we still have a ways to the top. Plus, with land prices, city pushback, and construction costs increasing - don’t plan on much new supply. Big demand - short supply. Sounds like even higher prices are headed our way.

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.com.

5 Random Commercial Real Estate Thoughts

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Occasionally it is healthy to purge the inbox - in a manner of speaking - and share with you some happenings in the world of commercial real estate. As Jim Barksdale cleverly stated - “'If we have data, let's look at data. If all we have are opinions, let's go with mine.” We’ll, here you go - a bit of both - data and opinions.

Mis-direction. Please be informed when entering your favorite supermarket these days. Petition gatherers are out in force with all manner of messaging about Proposition 13. Few I’ve encountered get it right. One initiative has qualified - garnered the necessary signatures - and will be on the ballot next November - The California Schools and Local Community Funding Act. Also know as the split roll initiative - if passed, will assess commercial and industrial real estate differently than residential and agriculturally zoned property. The pen wielders want your John Henry for a re-write of the already qualified initiative plus another that would allow homeowners over 55 to transfer their property tax basis to a new purchase.

Prime time. Ever head out to the Inland Empire - maybe to pick apples at Oak Glen or catch a flight from an airport that allows Uber to drop you off at - not near - the terminal? As you’re gazing at the San Bernardinos in front of you - you catch a glimpse of the famous Amazon logo. What is that anyway? But, I digress. Do you wonder if Amazon owns or leases those massive concrete card houses? Generally, they are leased. Why, you may ask - with more green than an AOC proposal - would Amazon waste money on rent? Three reasons. Their space needs are fluid, depreciation on balance sheets dampens earnings, and a plethora of property owners clamor to host their tenancy - and build accordingly.

Highway to the danger zone. Many sellers of commercial real estate employ the IRS tax code chapter 1031 to defer capital gains on the sale of an appreciated parcel of commercial real estate. Certain rules apply - you must identify the property(s) you intend to buy on or before 45 days from the sale, like kind must be purchased, you’re obliged to spend as much as the sale’s price - including debt, and all must be done on or before 180 days - almost. This time of year is the “danger zone”. A commonly overlooked provision is you must purchase the replacement property(s) in 180 days. True. Unless the following April 15th is sooner. So if you close after October 15 and before December 31 you only get the benefit of 180 days if you file an extension of your next year’s tax return. Complicated? Yes. Please seek counsel from your tax professional.

Eeney, meeney, miny, moe. What is the most sought after commercial real estate asset class these days? The travails of retail thread the airwaves. Office space is costly to re-tenant. Sure, appetite for industrial - manufacturing and logistics space - is ravenous. But, demand is highest for religious facilities - churches.

What happens in Vegas...Another conference season is squarely in the books culminating with our company Summit in Las Vegas last month. SIOR, CCIM, Core-net, and NAIOP all host soirées this time of the season. You’ll know when you see a bunch of old white guys in suits “networking” at the popular watering holes. So, what’s up? The “Amazon” factor disrupting retail and supply chain logistics, generally robust industrial activity nationwide, the slog of bringing new inventory to market, and whispers of a recession.

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.com.

Baseball and Commercial Real Estate - 5 Similarities

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Well, another World Series is in the books but not without some history. At no time since the Fall Classic was begun with matinees has a team not won a game at home - EVER! Don’t count on a repeat. Teams wearing white uniforms have such an advantage - especially if the previous series was clinched early. Pitching rotations are front loaded, local crowds are rapid, and the final AB belongs to the home sluggers. Anyway, congrats to the Nats for a remarkable season! To face elimination five times yet hoist the Commissioner’s trophy is one for the ages. Reminds me a bit of 2002 when our Angels emerged from the Wild Card spot to clinch. I had the privilege that year to attend game six and seven - Epic! But more on that later.

So what’s any of this to do with commercial real estate? Indulge me while I recount a few similarities.

It’s a LONG season. Commencing in early April or late March - the big league regular season spans six months and 162 games. If a team advances to the playoffs - tack on another thirty days and potentially twenty more games. Consumed is the end of winter, all of spring and summer, and part of fall. It’s common for a commercial real estate sale to languish as well. Several of my deals this year originated with a contact over ten years ago. No need yet - but a commitment to keep in touch. Plus, once a requirement is identified - plan on another few months to execute. Literally - babies are born and learn to walk quicker than the gestation of some transactions.

Hours of mundanity are sprinkled with moments of ecstasy. Baseball games can be akin to a large dose of Sominex! Wake me up when something happens. Runner on base - no outs? Just how many times is the pitcher going to look him back? Endless foul balls, throws to first, and strikeouts cause even the most die-hard fan to yawn. But just when you least expect it - Howie Kendrick goes yard and folks - we have a game. You can be cruising along with a commercial real estate deal and WHAM! Problem! I’ll never forget this time of year in 2008. We were rolling toward our best year ever when the financial world ended. Values plummeted in a matter of days, lenders froze, and a cacophony of commercial real estate carnage convened. However, few things are sweeter than a closing. If touching ‘em all is similar - put me in coach! I’m ready to play.

Fundamentals are critical. “Amateurs practice until they get it right. Professionals practice until they can’t get it wrong.” Never, was this saying - credited to George W. Loomis - more prescient. Big league pros in both baseball and CRE rehearse ad nauseam.

Plays at the plate are common. Few plays in the bigs are more exciting than a call at the plate! With a runner rounding third, barreling toward home and the right fielder firing in the rock - all manner of chaos ensues. Vision is blurred and time stands still as “blue” considers the outcome. Safe! Or Out! Verdict delivered. No appeal - well not always - will be rendered. Just last week we had a sale approaching the closing table. Buyer, seller, and lender were poised. Ooops. Title glitch. Is our deal going to be safe or out? Fortunately, we had a friendly umpire - who saw things our way. Deal done.

It ain’t over til it’s OVER. A moment in the 2002 series - Angels v Giants - occurred in game six. The game was a must win for the Halos as they were down three games to two and facing elimination. Late, with a five run lead, Dusty Baker - manager of the Giants and former Dodger player - lifted his starter in favor of his closer. Problem was - he gave the game ball to the starter as if to say - congrats! Break out the bubbly. Hmmm. That inning - an inspired Angel squad propelled by the Rally Monkey and legions of Spirit Sticks - forged a miraculous comeback and we were headed to a game seven! Yep - wasn’t quite over. Too many in our trade place sales in the “win” column before they actually close. A mentor of mine told me long ago - “ the deal isn’t done until the broker gets paid!” Contrary to Dusty’s premature celebration - keep the champagne on ice until closing is confirmed.

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.com.

Three Ways to FAIL as a Commercial Real Estate Professional

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The airways and media channels are clogged with ways to succeed. Seven habits of successful people, characteristics of top producers, Three ways to own your tomorrow in ninety days - just by doing this!

Well, I wanted to write a success column of a different sort - an anti success column . I guess, by default, if you don’t do the things that will cause you to fail - you will succeed - but I digress. I can assure you this, if self destruction is your goal, follow this simple three step plan, and you'll be outta the biz in no time flat - guaranteed! 

So, here, in no particular order is my failure recipe.

Calling owners of exclusively listed properties. When I got in the business - before Alaska was a state - well almost - the one thing you didn't do was contact an owner of a listed property - period. If you are a member of the Association of Industrial Real Estate or the Society of Industrial and Office Realtors - you are bound to a code of ethics. Over time this rule softened somewhat and it was acceptable to call a national multi property owner, if, you weren't calling about a specifically listed property - but were simply calling to yack about the general market conditions. This is still a slippery slope. 

Look, here's the bottom line, if you get the reputation of an owner schmoozer, you run the risk of losing your largest source of potential business - the cooperation of other brokers. They won't trust you, share info with you, and will talk about you at open houses. We had a particularly nasty fellow in our area. He was notorious about soliciting owners of listed properties. Needless to say he was a bit unpopular with the fellows. We showed up an an open house one day - not his, BTW, only to find marketing flyers of HIS buildings plastered in the open building - and HE didn't plaster them! Somebody got EVEN! Classic! 

Not specializing. Take a look at the folks that kill it. They are specialists! Some like to know everything in a given geography. Others enjoy a product type - manufacturing, high rise office, big box retail. Maybe your thing is a specific industry - food production, law firms, or apparel distribution. One of our top guys only does national home health care facilities. A generalist must do two things to succeed - which are expensive and time consuming. He must learn a new market and new processes every deal! Here’s what I mean. Let’s say your specialty is manufacturing buildings between 20,000-75,000 square feet in the city of Anaheim. If someone asks - “how’s the market?” - your response will be focused on deals, activity, movement, and availability. If you’re a generalist - you’ll respond - “quite robust!” - which effective communicates nothing of value.

Ignoring your pipeline. Too often, we get so wrapped up in the execution of the deal, that we postpone, ignore, or stop prospecting - ENTIRELY! Picture a large diesel truck motoring down the 405. He's rolling! You don't see him stopping - unless some moron is traveling 55 in the fast lane. He's got momentum. For him to stop, start over and get that big rig cranking takes time and fuel - AKA, money. He avoids this whenever he can. Think about your commercial real estate practice in the same way. If you must start over, to fill your deal flow, you squander precious MO. The true professionals employ a machine that runs 24/7/365. Through mail, social media, signs, and follow up calls - their focus is upon finding and winning vs. simply fulfilling. Sure. I get it. What’s the point of finding new if you don’t close the old? But, trust me - getting ramped up is slow and painful.

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.com.

Old Guys Rule - With Technology - 5 Ways

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We've all seen the T-Shirts - "Old Guys Rule" a cute way of reminding our society that if you were born before MTV, you are not irrelevant! Quite the contrary - you might actually still have a voice! I’m often mentioned as one who has captured social media as an integral part of marketing my commercial real estate brand. Others nationally include Howard Kline, Coy Davidson, Duke Long, Linda Day Harrison, and Barbi Reuter. Locally, folks such as Randy Mason, Andrew Bermudez, Justin Smith, and Sean Ward light it up. Most of us are of the age - we remember flat front pants - the first time they were popular!

I like to refer to this chapter of my life (I'm 62, BTW) as the "sir stage". This precedes the “he’s old - who cares” stage! If you doubt that the "sir stage" exists, take this test. If you share my chronology, see how many people refer to you as "sir" the next time you shop (Amazon doesn't count), eat out, or go to the car-wash. If you have a fade haircut (under 35), how do you respond to a customer or client that is over fifty? I'll wager that you call him "sir" - even if you don't hail from Georgia - where "sir" is mandatory - regardless of age.

So, just how is it that OLD GUYS RULE with Technology? Simple!

We lived and worked BEFORE technology was affordable. I've said this many times, in this space, but technology makes things sooo much easier than the old ways of doing things. The preparation of a survey of available properties for an occupant tour used to take a week, now it takes thirty seconds - and the survey is in the client's inbox in one minute. Before, the only way to see a building was to visit it in person. Now, with the click of an app, a virtual tour is created. And, need a signature? Instantly you have it with DocuSign.

We know MORE PEOPLE than you do. The sheer number of folks we know creates a hurdle that is solved by the use of technology - how do you stay in contact? Easy - Facebook, Twitter, Blogs, Pinterest, Instagram, YouTube. Reunions these days are populated by the folks online and off. The online people spend little time catching up - social media allows an image roll of our lives. We can get to today without recapping the past.

We understand what SCARES people about technology. All of us OLD GUYS who have ventured onto the dark side of technology understand some are afraid of the new reality. An example of this happened to me the other day as I listened to some grey hairs kapitzing about Twitter - “yeah, I don't use it and I don't believe my clients use it either". You can imagine the raised eyebrows, when I recounted the number of engagements Twitter had created for me. Because we understand the FEAR, we can empathize with credibility.

We are not afraid to call someone. OLD GUYS know that you gotta get a meeting (real or virtual) if you wanna make a deal - and we are not afraid to take an ONLINE relationship OFFLINE. Not so long ago - our business required a call, a fax, or mail to make contact. We learned how to do this. Before the days of swipe left - you actually had to dial a real person.

We are concerned about LEGACY. Blogs, videos, shared images, ALL are great ways to deposit our knowledge for the future. I can actually see my grandkids watching a Tuesday Traffic Tip (my video series) or reading an archive of the OC Register someday and replying - my GrandDad was the MAN!

Yep! And it's SIR to you sonny boy.

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.com.