Friday, April 28, 2017

Buying Commercial Real Estate – The Mechanics

Your reasons for buying commercial real estate may vary. Currently, your business home is rented and you’ve decided now is the time to buy a building and become your own landlord. 

Or, a portion of your income is received from the rent generated by a commercial real estate asset and you’ve decided to buy another building. 

Regardless of your reasons for buying, the mechanics of the transaction are similar. Today’s post is focused upon the process most buyers undertake to buy commercial real estate.

Search. Chances are you will engage a commercial real estate professional to expose you to the market and the current availabilities that fit your search criteria. In these days of short supply, plan on this taking a bit more time than you anticipate. As we’ve recently discussed, commercial searches are more challenging than residential because information on commercial availabilities, comps, and data are not readily available on-line. You will need a tour guide with a key to the walled garden in order to see most of what’s out there.

Negotiation. Once you select the building you want to pursue, a round of negotiations ensues. Because we are steeped in an owner’s market, it’s common for there to be multiple suitors that result in multiple offers. Sellers want certainty. The highest offer, but with a questionable buyer, will often lose out to a solid buyer with a lender pre-qualification letter or better still, no financing contingency. The more convincing your need for the purchase and your ability to communicate your story will bode well for your success.

Contingent Escrow. The agreed upon terms are memorialized in a Purchase and Sale Agreement. A signed PSA along with your deposit is forwarded to a neutral holding company (escrow) for processing. Once escrow is in receipt of the documents and deposit, your contingency period begins. These periods can range from a minimum of 30 days to as many as 90 days. During this time, your deposit is generally refundable if you change your mind or find something untoward with the purchase. Use this time wisely to secure your financing, check title, perform a physical inspection of the building, make sure the soil is clean, review all of the tenant leases if any, take a look at the contracts for services such as landscaping, make a visit to the city to make sure there are no issues with your use of the building. If you encounter an issue, you will need to notice the escrow company, seller and seller’s broker. There are some remedies available to you to resolve problems. We will leave those remedies to another column, however.

Perfected Escrow. Now you’ve checked all the boxes – your loan is approved, the city will welcome your business with open arms, and you cannot wait to close. After you waive your contingencies and prior to close, your deposit is non-refundable. You can still walk away if you change your mind – but at a cost. Perfected escrow periods precede the close and typically last two weeks to thirty days. During this time, the banks is preparing loan documents for your signature, the seller is signing and notarizing the grant deed, and assignment of leases are being prepared for the transfer. Don’t forget to put insurance in place for your new building.

Close. You sign an estimated closing statement. Money then flows into escrow from you and your lender. The grant deed is recorded and voila, you own a building! Now the heavy lifting of moving your operation commences.

Tuesday, April 25, 2017

It's not ALL about the Market. TUESDAY Traffic Tips

I believe we would all agree the way to repeat business from your clients - aside from doing a great job for them - is to stay top of mind and relevant. Today, I discuss a great way to do those things. This and much more on this week's VIDEO tip for commercial real estate professionals.

It's not ALL about the Market. TUESDAY Traffic Tips.

Tuesday, April 18, 2017

Your Deal has ISSUES! TUESDAY Traffic Tips

Whether you've been around 20 minutes or 20 years, you know transactions encounter problems - they have issues! Today, I discuss a simple way to insure you are positioned to solve ANY problem that arises. This and much more on this week's VIDEO tip for commercial real estate professionals.

Your Deal has ISSUES! TUESDAY Traffic Tips

Friday, April 14, 2017

Are 1031 Exchanges a GONER?

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One of the first questions we are asked by owners of commercial real estate contemplating a sale of their building – what will we do with the money? 

You see, upon the sale of a commercial real estate asset – an office building, industrial plant, retail strip center, apartment complex, unimproved land, etc. – the tax man is seated at your dinner table.  In fact, several tax men – state and federal – want a taste. 

Briefly, this “taste” can consume close to half of the sale proceeds once capital gains taxes, depreciation recapture, affordable care act percentage, and state taxes are deducted. Ouch! That's a big bite.

So, you may be asking – why would anyone sell if faced with half the sale proceeds going bye bye? Good question. Enter the 1031 tax deferred exchange. 

Since 1921, tax deferred exchanges have allowed owners of income producing real property to defer the taxes a sale would create. Through a widely used mechanism, the seller may purchase a “like kind” income property and defer the gain. 

The process is fairly simple so long as certain rules are followed – a period of time is allowed to identify and purchase the new property or properties, a middleman called a qualified intermediary must affect the exchange, and you must spend an equal or greater amount of the property you sold. Easy, right? In fact it is, and thousands of small businesses and investors employ the strategy each year. 

A tremendous amount of transactional volume is created which results in a great economic driver. Benefiting from tax deferred exchanges – in addition to small businesses and investors – is a cadre of brokers, escrow holders, qualified intermediaries, title companies, accountants, attorneys, contractors, lenders, building inspectors, environmental engineers to name a few. I once calculated, approximately sixty people touch a transaction of this sort. Amazing!

Storm clouds are starting to rumble on the horizon, however. Several proposals now massing in the sub committees of Congress, include an elimination or a drastic gutting of 1031 tax deferred exchanges. I can hear the collective cries of – Noooo! But, it could really happen. As suddenly as a clap of thunder, these umbrellas of tax deferral and drivers of economic activity could be gone.

What can be done? Let your elected officials hear from you. You might even invite them to dinner. 

Tuesday, April 4, 2017

100% of you have DEALT with this. TUESDAY Traffic Tips

You've done your best. You've made a great presentation. You forward a standard agreement for your prospect to sign. And then, those dreaded words - I'll have my attorney review it and get back to you. Boom. Buzz kill. Is the prospect REALLY concerned about the legal ease or is there something else? I discuss this and much more on this week's VIDEO tip for commercial real estate professionals.

100% of you have DEALT with this. TUESDAY Traffic Tips

Friday, March 31, 2017

Your Rent is Above Market - Now What?

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Recently, I've encountered several situations involving an occupant paying an over market rental rate. The occupant's desire is to remain in the building and renew their lease. But, there is a problem. Storm clouds are rumbling on the horizon and a face off between owner and occupant is quickly approaching. So now what?

First, let's first determine how the over market rent occurred?

Leases originated before the financial meltdown of 2008 were inked at the prevailing market rents. These rents were at a high water mark.

Most, if not all of the leases, contained annual rent escalators which increased the rates over the term of the lease. Shortly after the crash of 2008-2009, market rates plummeted.

So hypothetically, if the lease an occupant signed in 2008 was a five year lease, gold! When renewal time rolled around in 2013, occupants were pleasantly surprised the market had moved in their favor and now rates were cheaper than they were paying. In many circumstances, owners gladly renewed occupants at reduced rates to insure the owner's cash flow would continue - albeit at smaller amounts.

However, if the term of lease was seven to ten years - the opposite is true. Occupants have paid rent in excess of market rates for the term of their lease AND now face renewal in an over heated rental market. Ouch!

Owners, who were anxious to renew leases at cheaper rates in 2013-2014 are now quite bullish and unwilling to budge on the renewal rate they demand. The resulting tug o' war between owner and occupant plays out something like this:

Owners point to the vacancy for industrial buildings in Orange County - 98 of every 100 are occupied - and a better spot will be hard to find. Oh by the way, rents are increasing as evidenced by the recent lease comparables.

Occupants quickly counter with the fact they have faithfully paid an above market rent for the term of their lease and consequently deserve a break - in the form of a rent reduction.

Owners return the argument by reminding their occupant of the cost, disruption, and inefficiency of moving.

Occupants respond with the owner's cost of originating a new lease - down time with no rent, free rent with a new occupant, potential upgrades required by the new tenant, real estate fees.

Now a stand-off akin to wild west saloon gun slingers ensues.

The man who draws first generally wins.

Tuesday, March 21, 2017

Today, I Need your HELP, Please. TUESDAY Traffic Tips

I really need your collective wisdom, today. How frequently should you follow up with a prospect? We generally follow up in the manner we believe is appropriate. But how much is TOO much? If you will kindly leave a comment, I will feature some of your answers next week. This and much more on this week's VIDEO tip for commercial real estate brokers.

Today, I Need your HELP, Please. TUESDAY Traffic Tips