Keep your ENTITY Viable. THURSDAY Commercial Real Estate Thoughts

Recently, I was engaged by a property owner to sell his property in Southern California.

We discovered the LLC that owned the buildings was suspended by the Franchise
Tax Board. After some weeks and thousands of dollars, we revived the LLC and
were able to close our sale. DON'T let this happen to you!

Keep your ENTITY Viable. THURSDAY Commercial Real Estate
Thoughts

What will Cause these INFLATED Commercial Real Estate Prices to Drop?

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At their very essence, commercial real estate values are a result of the price a ready willing and able buyer, with reasonable motivation, will pay and a ready willing and able seller will accept. Easy enough.

Let's layer in some complexity, however, as the previous statements assume the ready willing and able buyer will write a check for the purchase. In reality, most buyers seek financing for their buy - which sets in place an approval process from a lender.

Typically, lenders - short of Aunt Mabel who taps her trust fund for you - will require an appraisal - regardless of the size of the down payment. Hmmm, so if the ready willing and able buyer and seller agree to a price and the lender's appraisal doesn't conform, the transaction has an issue? Yes. Absent another buyer, willing to assume the previous buyer's agreed upon price - without a lender this time - the seller must reduce his price, the buyer must inject additional cash to bridge the gap or something in between. So, the first cause of a drop in pricing would be - the property won't appraise. 

But, what are some other reasons?

A spike in interest rates. An obvious result of an increase in borrowing costs, would be higher payments. Higher payments - fewer buyer's can qualify for financing - fewer buyers, less competition - a drop. But, a spike in interest rates could also cause business activity to decline. The resulting lack of business could place less pressure on a company's need for space. Demand for space subsides - fewer buyers - Boom! prices drop.

The Black Swan event. Transactions occur when prices are increasing or when they are falling. When prices are on the up, sellers win. Buyers score when the reverse happens. Uncertainty - I'm not doing anything until this is resolved - is a result of the Black Swan event such as a war, a collapse of student loan repayment, terrorist attacks on our soil, foreign leaders who launch a missile, a government shutdown, or a county bankruptcy - as we experienced in 1994 in Orange County.

New inventory. We've been awaiting the building spree of new buildings for quite awhile. Yes. We have added some new buildings, but we have also seen many others demolished in favor of high rise apartments. In short, for myriad reasons - which will be left for another rant - the supply of newly constructed commercial real estate has not kept pace with the demand.

Buyers say enough is enough. Recently, we accepted an assignment to help a buyer find a new home for his business. When we commenced our touring of the available choices - the buyer was disappointed at the lack and of the quality of available buildings - plus the asking prices were jarring. Flash forward, asking prices have now hopped another 15%. Our tour last week was met with, "wow! how have asking prices increased that much in fewer than two months?" It dawned on me. If buyers refuse to pay the prices - which is unlikely - prices will drop.

Its akin to a giant game of musical chairs. This era of crazy money paying outrageous prices for commercial real estate WILL stop - we just know when.

What to SHOW first? TUESDAY Traffic Tips

Is the order in which you show buildings important? I discuss this and much more on this week's VIDEO tip for commercial real estate professionals.



Bonus. How to PREPARE for a building tour

https://youtu.be/7jZsVBCeI80



What to SHOW first? TUESDAY Traffic Tips

5 Reasons NOT to Sell your Commercial Real Estate

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So often, folks in my profession are focused upon the reasons TO do something - like sell your commercial real estate. After all, we make our living selling and leasing buildings.

However, sometimes there are compelling reasons to NOT sell your commercial real estate. Today, I would enjoy sharing a few of those reasons with you.

No transition. As we recently discussed, a sale decision is generally preceded by a transition of some sort - such as selling the business that occupies your commercial real estate. If you no longer own the "tenant", the occupying business, you may prefer to not be a landlord - thus your motivation to sell. However, in the absence of a transition, why sell?

Tax consequences. The sale of your commercial real estate will create punitive taxes that must be paid or deferred. In some cases, the tax man will claim 35-45% of your sale proceeds. Some sellers analyze the after tax proceeds of a sale and determine selling is not a viable option.

No place to move. Southern California has the lowest vacancy of available industrial buildings ever! 98 of every 100 buildings are occupied with very little turnover. If you sell the building that houses your business, where will you move the business?

A very low basis. Remember the tax consequences we examined above? The taxes are generated by the difference in the current selling price and the price you paid - know as your gain. If you purchased your commercial real estate many years ago, chances are your basis is low. If you're fortunate to own your building with no debt - even better! The resulting occupancy costs for a tenant are also low. In the halcyon days, you reap the rewards. When things are a bit tougher, you can afford to lease your building for less because you have no mortgage payments.

An irreplaceable location. Akin to an ocean front cottage, certain commercial properties enjoy locations that cannot be replaced. This could be a main boulevard frontage, proximity to amenities  - hotels, restaurants, or entertainment, favorable zoning, special purpose improvements for your business - ISO 9001 certifications, certain use permits, or an abundance of electricity.

What DON'T You Like? TUESDAY Traffic Tips

Recently, a vendor cold called me. I took the call. Nice enough. When I explained I was pleased with my current provider, an opportunity was missed. I discuss this and much more on this week's VIDEO tip for commercial real estate professionals.



What DON'T You Like? TUESDAY Traffic Tips

PRIOR to Selling Commercial Real Estate - DO These 5 Things

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You've made a decision to sell your commercial real estate. Congratulations!

Reasons vary from seller to seller but generally involve a transition – a change in the market, the sale of a business that occupies the building, business growth that out strips the capacity, a loan that is due, an ownership squabble, or gravitation toward another investment. 

Regardless of your selling motivation, most sellers focus on the commercial real estate’s value as the central motivation. OK. I get it. However, before exposing your building to the market, I would recommend you consider the five things below.

Title search. A title company such as First American or Fidelity will typically open a title order for you – preliminary commitment or “prelim’ - for free in the hopes of insuring the title upon sale. Contained within the multi page document are exceptions or conditions to be met prior to a change in ownership. Easements, loans, tax liens, mechanics liens, leases, and the nature of the building’s ownership – LLC, individuals, family trust, etc. - are all detailed. You're interested in understanding any issue that could prevent a sale – such as a suspended LLC or an unsatisfied tax lien.

Building Inspection. Some sellers allow a buyer to become more acquainted with the physical issues of their commercial real estate - such as the condition of the roof, remaining life of the air conditioning and heating, un-permitted improvements, or parking lot paving. I believe a seller should invest in a pre-sale inspection, take a look at the recommendations and price accordingly.

Environmental survey. If your buyer borrows money, most lenders will require a phase I environmental assessment as standard loan processing. Why, you may ask, should you invest money in a similar report? Fair question. The easy answer is to know, with certainty, your property is environmentally clean and will pass lender scrutiny. You might also save a bit of time if the buyer’s lender can “rely’ upon the report and avoid duplication.

Evaluate loans. Back to the Title Report. Are any loans recorded against your property that have been paid in full? If so, they shouldn't appear on your report. Typically, this means the satisfied loan has not be reconveyed correctly. If the loans on title are in fact still active, carefully evaluate any pre-payment penalties that must be incurred if you sell the property.

Tax consequences. The time to understand how big a tax bite a sale will create is prior to placing the building on the market. Remember, several taxing agencies are standing in line, hands outstretched waiting to be fed. Included are the IRS – capital gains and depreciation recapture, Franchise Tax Board, and the Affordable Care Act. Your situation may vary and there are ways to defer your tax bill, however, please spend some time with your CPA and know how much will be left if you choose to pay the taxes.

Do YOU Have a Back Channel? TUESDAY Traffic Tips

Back channels have been demonized lately in the media as aides and advisors to our President allegedly sought ways to contact foreign governments through secret means. Today, I discuss back channels Ana why they are CRITICAL to our success as commercial real estate professionals. This and more on this week's VIDEO.



Do YOU Have a Back Channel? TUESDAY Traffic Tips