Friday, October 21, 2016

Is Time your Friend?

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Time frames vary in commercial real estate transactions. I've witnessed a lease completed in one week with a Fortune 500 occupant - with more counsel than a government litigant, a sizeable sale deal close in two weeks, and a standard industrial lease take over a year to complete.

Commercial real estate brokers try very hard to predict the time necessary to close deals - sometimes we are spot on - and sometimes our predictions run the way of millennium preppers.

So, what are the time killers in a deal and how do we manage the various owner and occupant  time pressures?

Basic transaction structure. A lease or sale deal begins with a search of available buildings and ends with the occupant moving into the building. Between the search and move-in are myriad time hurdles that must be cleared.

The search. Searching is easy in an occupant market as many available buildings are vacant and open for business. The opposite is true in an owner's market. A search can take several weeks longer - especially if some complexity exists in the occupant's requirement - an abundance of power, fenced staging area, a finite geography, an unconventional use of the building, etc. - there just aren't enough available buildings.

The negotiation. Clearly, owners will be much more willing to layer on concessions and respond quickly to offers, if the cobwebs darken the doorway and you're the only occupant they've seen for awhile. Arriving at acceptable deal points can be accomplished rather quickly with an ample of amount of owner motivation. If an owner is convinced he is the only boy at the dance, he may play a bit harder to get - thus delaying his response to your offer.

Deal execution. Will your deal require financing? If yes, plan on an appraisal, an environmental report and sundry other lender time munchers. If you're entering a lease arrangement, what form of lease does the owner prefer and how much legal time will be necessary to insure you are protected and knowledgeable about what you're signing?

Move-in. Will your use of the building require any special city or municipal approvals? If so, plan on weeks until you change your address. Are you able to occupy the building with no construction changes? You just saved yourself a few months by avoiding costly planning, permitting and building improvements.

Color on the examples above. The Fortune 500 company negotiated with a private owner ready to deal on a building ready to lease in a market ripe with availabilities. One week from first tour to signed lease. Sizeable sale deal was purchased by a buyer with money in a tax deferred exchange account with no loan requirement and the seller had all of the due diligence information recent and available. Purchase and Sale agreement was signed and the escrow closed exactly two weeks later. Standard was the industrial lease deal. Extraordinary was the use which required a conditional use permit. One year from signing the lease, the occupant was allowed to move in.

Friday, October 7, 2016

Are you Getting the MOST from your Commercial Real Estate Broker?

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I recently conducted a training session with a collection of commercial real estate brokers. I asked the group how many would agree to market a commercial real estate listing without a signed exclusive arrangement with the owner of the property. No hands were raised.

Next, I polled the group to find out how many would search for a building on their client's behalf without a signed agreement. Every hand shot up.

As I pondered the reason for the difference in direction, it occurred to me.

When we approach an owner of a building and discuss finding a tenant or buyer for the vacancy, we spend our time describing our process in locating the tenant or buyer. Generally, the marketing process includes signage, brochures, mailers, web presence, virtual video tours, entry into the multiple listing services, broker open houses, tours of the property with prospective occupants, receiving offers, vetting potential buyers or tenants, and execution of the sale or lease. These steps are tangible and measurable. Also, we are asking the owner to compensate us if we successfully lease or sell his building - thus the need for the contractual relationship.

Now consider our process when we search for a building - that silence you hear is deafening. You see most commercial real estate brokers don't have a process for searching - just a process for marketing a vacant building. Therefore, when you ask a commercial broker to find you a building, the disconnect occurs - and you are getting shortchanged!

So, how do you get the most out of your commercial real estate broker when searching for a building? I would suggest doing these things.

Interview three brokers. Select the one that can clearly describe the process he will employ to find your new business home. Pay careful attention to the way in which he will send notices to cooperating brokers, review the submittals, preview the alternatives, conduct the tours, request proposals or draft officers, analyze the responses and monitor the escrow or lease phase.

Engage one - in writing. Sign an agreement with the broker of your choice. Stipulate you are engaging him for a period of thirty days with a right to cancel the agreement if you are not satisfied with the results. Let him conduct his process without worrying about waking earlier than his competition and showing you a property he knows few details about. Allow him to WORK for you and find you the very best deal available. Make him a member of your team and heed his advice on procedure.

Enjoy the process. I can assure you'll be pleased with the results. You will also save yourself time, effort and money - and the right home for your business.

Thursday, September 22, 2016

Are You Focused on the Tip of the Iceberg?

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We've all heard the expression, "that is only the tip of the iceberg". Made common when the Titanic met its untimely demise in the frigid North Atlantic, the expression has a commercial real estate application as well.

As occupants of commercial real estate, you focus upon a couple of things - the space and possibly the lease payment or monthly debt service. The space - does the physical space lay out well for your operation? Are there enough private offices for a collaborative work environment? Does the power into the building adequately support all of your machinery and equipment? Can  you afford the monthly payments? If these boxes are darkened, boom! You're golden, right? Maybe not so rapido.

If you focus upon the space and the payments, you only are seeing the "tip" of the iceberg. Akin to the iceberg, more than eighty percent of the transaction's issues are lurking beneath the surface and can destroy your occupancy if not properly anticipated. So what unforeseens are you navigating? Indulge me while I discuss a few.

The ownership of the building. Let's assume your operation requires a substantial capital investment by the owner of the building - you need offices built, a loading door added, or the power upgraded - does the owner have the money to accomplish this for you? If your heart is set on owning the building you're considering and the owner wants only to lease it, how will you overcome this obstacle? Finally, is the owner someone with whom you want to do business? A quick survey of the owner's tenants will tell you much about how the owner operates his properties.

Lease agreement. Generally, commercial real estate leases have "gotcha clauses". Who pays for the roof if it needs replacing? What happens if the operating expenses on the building increase? If your building owner's lender forecloses, is your lease terminated? Does the rent schedule have annual escalators? All of these issues should be fully investigated and understood before you sign on the dotted line.

Market conditions. You've heard owners are motivated these days and the market is dying to give you several months of abated rent. Or, you drive down any industrial street only to be greeted by multiple marketing signs advertising availability - there must be tons of space available, right? How many other occupants are competing to buy or lease your dream space? It's best to know where you stand before opening negotiations with a building owner.

Occupancy requirements. Your plans of opening for operation can be splintered like a ship's hull if you don't consider the city's requirements for your use of the building. A quick on-line search for zoning and allowable uses should give you an idea of any potential hurdles.

Your credit worthiness. All building owners look at tenancy and credit worthiness differently. A private owner may only care timely rent payments. A real estate investment trust may concern itself with your audited financial statement. Regardless, arm yourself with the knowledge of your space's owner and view of credit.

Tuesday, September 20, 2016

Are you a #cre Sales Person or Advisor. TUESDAY Traffic Tips

Are you a #cre Sales Person or Advisor. TUESDAY Traffic Tips. Today, I discuss a change in thinking. Are you selling or advising? The way in which you describe your service will help you gain control of those difficult clients. This and much more on this week's VIDEO Tip.

Tuesday, September 13, 2016

WHEN to Deliver Bad #cre News. TUESDAY Traffic Tips

Recently, I discussed HOW to deliver bad commercial real estate news. If you missed the tip, you can see it here. Today, I discuss an equally important topic, the WHEN to deliver the news. This and much more on this week's VIDEO Tip.

Friday, September 2, 2016

The Tip of the #CRE Iceberg. TUESDAY Traffic Tips.

The Tip of the #CRE Iceberg. TUESDAY Traffic Tips. Today I discuss a disconnect that occurs with occupants of commercial real estate. Ever been on a tour, found the perfect space (or so you believe) only to have the deal fail to materialize? This is what I refer to as the tip of the iceberg. This and much more on this week's VIDEO tip for commercial real estate brokers.

What is an OCCUPANT Premium?

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Also referred to as a user premium, an occupant premium is the price an occupier of commercial real estate will pay compared to a commercial real estate investor.

As both occupiers and investors "invest" in the commercial real estate, the distinction I draw here is an occupier owns the building - owner occupant - and operates a business from the building versus an investor who owns the building, doesn't occupy it, and relies upon the rent paid by a tenant to underpin his investment.

Historically, owner occupants pay more for commercial real estate than investors - in some cases 20-25% more. So why would that be the case? I believe the following factors motivate the pricing difference.

Financing. Generally, a buyer of commercial real estate that will occupy the building has more options with which to finance his purchase. He can employ conventional bank financing which requires a 20-25% down payment, a 90% loan through the Federal government - Small Business Association loan, or private funding through friends and family. Typically, investors must rely upon debt with much lower loans to value - 60-70% - which means much more cash invested. Certainly, there are well heeled investors who can stroke a check for the entire purchase without the need for financing but these investors want a "deal" for tying up cash. OK, you may ask, why does the cost and availability of money motivate a buyer to pay more? The easy answer - payments. If money is cheaper, the resulting payment will be cheaper. An owner occupant can pay more because they can frequently borrow more.

Assumptions. An investor buys an income stream - a leased building - which is generated through a tenant paying rent. Assumptions must be made as to the sustainability of the income, whether the income is above or below the current market lease rates, and the likelihood the tenant will remain in the building after his lease expires. If an investor believes he will suffer a vacancy because the tenant can't pay the rent or believes the tenant will vacate at the end of his lease, he must hedge his purchase by paying less for the building. Because an occupant buyer is the "tenant", all of these costly assumptions are avoided.

Return on investment. The way in which an owner occupant views a return on investment is varied from the investor. An owner occupant takes a look at the payment his loan creates, adds the operating expenses (property taxes, insurance, and maintenance) and compares the total payment to a comparable market rent. If the total payment is within a reasonable range - doesn't exceed the market rents by 20% - boom! He's in. A much more complicated analysis is performed by the investor. What is the income? If the income is above market, he discounts it. How much can I borrow based upon the income - or discounted income? Now, the income must provide a sufficient return for the risk being taken by the investor - around 5-6%.

Utility. The way in which the building currently is or will be occupied is of little consequence to the investor. His concern is the marketability of the building if it becomes vacant. How long will it lay fallow? Will the building's features appeal to a wide range of prospective tenants? Can I cause the income stream to increase over time? An owner occupant views the building akin to the purchase of a machine or the addition of a key employee - will the building allow my business to grow? If so, the cost of the real estate is a cost of doing business.