Friday, January 20, 2017

This a GOOD Offer - But is it the BEST Offer?

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This is seemingly an easy question to answer, right? You should instantly be able to discern an offer's benefits and whether the offer is a good one.

In practice, the determination of the BEST offer is maybe not as simple as one would believe.

Today, I want to explore the characteristics of a good offer for your commercial real estate and what makes it the BEST offer.

Most sellers of commercial real estate gravitate to the price offered vs. the asking price. If the offer is at asking price, cool! Game on. If the offer fails to reach the asking price expectation, it is summarily discarded. Finally, if the offer eclipses the asking price - silence ensues as a quick determination is made - did you ask too little?

However, the offer with the highest price may not in fact be the best offer. Recently, we received an offer for a project we lease and manage. The buyer planned to tear down the existing buildings and construct multi family. The buyer was prepared to pay a huge number for the real estate - and well above market. The problem was he wouldn't close for eighteen months - no deal!

Terms. Terms vary in a commercial real estate deal. Most contain a contingency period which can consume as few as two weeks to as many as 90 days. Buyers use the contingency time to study the physical aspects, complete a title search, obtain financing and vet the occupants, if any. Two offers at the same price but one with a shorter contingency period is generally preferable.

Number of competing offers. If you have the luxury of multiple competing offers, you should create a grid outlining all of the points contained in this post. Rank the offers based upon all of these factors. The best offer will come shining through.

Nature of the buyer. Will the buyer occupy the real estate or rely upon rents from an occupant as his purchase's justification? Typically, an owner occupant will pay more and focus upon the utility of the real estate for his use.

Source of funds. Has the buyer a cache of cash waiting to be deployed to buy your building? Or, will the buyer rely upon other people's money (OPM) to complete the buy? How about financing? A deal that includes a bank's OK is by nature more time consuming and risky. All of the buyer's AND banker's boxes must be checked in order for the sale to progress.

Buyer's motivation. Why does the buyer want to buy your building? You may be thinking, who cares? He just does. Contained within the answer to this question, however, may be a clue as to whether the sale will close at the agreed upon price and terms.

Contingencies. Mentioned above under the terms paragraph, certain items must be satisfied in order for a sale to occur - title, financing, physical inspection. Caution should be given to conditions outside the normal realm such as conditional use permits, construction of improvements, zone changes, or the sale or lease of another property. If a buyer's purchase is contingent upon any of these conditions, you must carefully weigh the likelihood of waiver - otherwise, what appears to be a great offer might in fact become a failed effort.

As advertised, many factors should be considered to convert a good offer into the BEST offer.

Tuesday, January 17, 2017

#cre Brokers SUCK at This. TUESDAY Traffic Tips

Today I discuss a topic ALL of us can stand to improve because typically we ALL suck at it! This and much more on this week's VIDEO tip for commercial real estate.

Tuesday, January 10, 2017

STOP Saying This! TUESDAY Traffic Tips

STOP Saying This. TUESDAY Traffic Tips. Are you asking your client for permission to fail? If you are saying this, chances are, yes. I discuss this and MUCH more in this week's VIDEO tip.

Friday, January 6, 2017

Six Commercial Real Estate Lessons Learned in 2016

I’m sure many of you reading this post have broken all of your 2017 New Year’s resolutions. That's what a week back to the grind will do for you. What appears to be a good lifestyle change in the fog of December 31st quickly becomes fodder for the refuse once the reality of life kicks in. So, I won't bore you with my resolutions but instead provide you with some commercial real estate lessons I learned last year. 

Lesson one. Commercial real estate is woefully behind our residential counterparts when it comes to technology. Our industry is dominated by old, grey haired men. We haven't embraced technology. Quite the contrary, we shun it. Have you ever attempted to conduct an on line search for a commercial property? Forget about it! The options are limited, clunky, and costly. Plus, to truly gain any knowledge about the offering, you must contact a broker. You'll be lucky to get a returned call. The reason? Our data is differently shared. We aren't bound by boards of Realtors, like our residential brethren. Thus, you need a key to the walled garden -  a commercial broker - to see inside. 

Lesson two. The key to a sustainable source of transactions is your network. Chances are, your network is comprised of three sets of professionals – those upstream from your deals, downstream from your deals, and others unrelated to your business. Build your network with those whom you can trust and refer to them generously Team with your network in creative ways – introduce a contractor to a building owner, give a talk at a trade group, or author an article for an industry publication. In the process, you add tremendous value to your clients and help your network build their business. 

Lesson three. Champion content marketing. Approximately nine of ten searches for commercial properties begin on line. If you refer to Lesson one above, searchers become frustrated as they realize commercial queries aren't as fruitful as residential. Therefore, a digital presence is critical. Rich, helpful, and timely videos, blog posts, and “how to” articles, are the best way to build an on line presence. If folks can’t find you on the web, you're invisible!

Lesson four. As business people, we only have our time and our knowledge to share. If you are generous with both, your life is more meaningful. 

Lesson five. Find a way to focus on your strengths. Every business day contains tasks that expose a weakness – whether it's a lack of technological skill, an aversion to details, or a reluctance to prospect.  Chances are, someone is close by whose strengths are your weakness. A collaboration – blending differing skill sets to affect a positive result – is frequently the answer. 

Lesson six. Don't be afraid to go “old school” – such as: Drop by in person vs calling, avoid an email and mail a handwritten note, or attend a tour of your listing. 

Friday, December 16, 2016

An Improvement Allowance - A Primer

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I recently authored a piece entitled "The Commercial Real Estate is ALMOST Perfect - Now what?". If you missed the missive, no major misstep - you can click the link and get up to speed. One of the excerpts I want to explore today is:

"Once the true cost of the new offices is determined, we now must negotiate who pays - you, the owner, or some combination of you and the owner. Generally, an owner will be reluctant to pay for an improvement that adds value today but may need to be ripped out in the future."

There are circumstances in which an owner will in fact write a check, as a concession, for improvements to a space - in the case of a building in shell condition, or if the building is in need of some updating and the owner prefers to throw a wad of cash at the problem vs. doing it himself.

What follows are some issues to understand before you negotiate changes to the space.

What is it. By definition, an improvement allowance is a sum of money the owner of a building will invest in improvements to his building. These improvements could be new offices, new flooring, paint for the offices or warehouse area, expanded electrical circuitry, or truck door enhancements such as load levelers.

Turn Key vs an allowance. In a turn-key situation, you are requesting your new layout be entirely created by the owner of the building without a cost to you, the occupant. An allowance conversely, is a fixed amount of money the owner will spend on your layout with no guarantee the sum will cover the entire cost. If an allowance is all you can muster, make sure you understand the true cost of your improvement with adequate wiggle room in case of a surprise.

Not all deals. Understand that not all transactions will offer an allowance for improvements. We frequently see this in industrial deals. An owner will possibly freshen the offices with a coat of paint and some new flooring but will be unwilling to do much more.

What an owner will pay. Generally, an owner will pay for "general purpose" improvements - those that will be re-usable by future tenants.

Ways an allowance is paid, when and how. The best for you, the occupant is to have the owner provide a turn-key allowance as a concession. He produces your layout with no cost to you other than your timely rent payments throughout the term of your lease. The worst for you, the occupant, would be a complete repayment, with interest, of the improvement dollars the owner invests in the building.

SNDA. If a substantial investment is needed to shape your space into habitable form, make sure the lease you sign includes a Subordination, Non-Disturbance, and Attornment provision. Simply put, this clause will protect your investment and tenancy if your owner loses his building - your business home - through  foreclosure.

Management fee. One of the "gotchas" that exist within an allowance is the owner's right to charge you a fee for managing the process of building your improvements. Let's say the owner will invest $100,000 to mold your arrangement. Your construction costs $100,000. You're golden! Oops, the owner is charging you $5000 to oversee the construction. Now, your new arrangement is tipping the scales at $105,000 - guess who pays the $5000? Yep! The one reading this.

Tuesday, December 13, 2016

Go #cre OLD SCHOOL! TUESDAY Traffic Tips

Little things matter a lot! Today, I explain a few ways to go "old school" and boost your relationships with clients and your fellow brokers. Thanks to Mike Wolfe, Steve Deverian, and Michael Fine of our Ontario office for the inspiration of today's VIDEO tip.

Friday, December 2, 2016

When Should a Build-to-Suit be Considered

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We just sold a building located out of the state of California. Our client is an investor who purchased the Texas building to affect a tax deferred exchange.

Cash flow, ease of management, and the multi year lease had appeal to the buyer. For the next 10+ years, our client will enjoy clipping the coupons of rent payments. 

The building is leased long term to a Fortune 500 company. A build-to-suit was accomplished for the tenant four years ago.

So, what is a build-to-suit and when should one be considered? I believe one or more of the following circumstances would dictate building new versus buying or leasing an existing building.

Lack of availability. Industrial vacancy in Orange County, California is the lowest in history. 98 of every 100 manufacturing and warehouse buildings are occupied. If your company needs to grow into a larger building, chances are you'll be hard pressed to find one. The lack of available buildings should suggest a good climate for a build-to-suit. The trouble is - there is very little undeveloped land in the county. Even if you wanted to build a building, no vacant land exists to accommodate the build. In the case of the Texas building above, there were NO vacant buildings within the desired city - but a surplus of affordable, available, buildable land sites. Thus, the choices were - build or consider another city.

Special purpose building. This is similar to the circumstance of "lack of availability" yet very different. If you are patient, and occupied buildings are present in your market, eventually one will lay fallow, create a vacancy, and need a new occupant. A special purpose building contains features that don't exist in the market - a warehouse with 40' ceilings, or a building with acres of excess land for outside storage, maybe one constructed to store highly combustible or explosive contents. Our Texas building required tow of these - VERY high ceilings and acres of excess land for expansion and trailer storage.

A unique deal structure. Recently, a grocery distributor required a class A constructed warehouse building in a size that didn't exist in the city they desired. Additionally, the occupant wanted to own but couldn't afford to purchase land, build the building and carry the debt on a building under construction they couldn't occupy until completion. The solution was to interject a developer who purchased the land, built the building, leased the building to the grocery distributor and granted the occupant an option to buy the building once completed.

But, be wary of the following issues.

Lotsa lead time. Few if any occupants can predict their space needs two to two and one half years in advance of a move. However, you must allow this much time to complete a build-to-suit.

Complete understanding of the mechanics. The basic structure is - land is owned or purchased, new construction is planned and permitted, building is built, new construction is occupied. Easy, right? Yes, if you own the land, already have the plans drawn and permitted, have a bucket of cash to spend on the construction, and don't need the building for several months. Complexity is added with each un-checked box.

Financeability. You need to understand how the financing of a build-to-suit works. I could write an entire post on this subject, however, some of the highlights are - vacant land will generally need to be purchased for cash, a construction loan will precede the permanent loan, a couple of appraisals may be needed, land owners won't allow their loan (if seller carried) to be junior to a construction loan - are you yet confused? Exactly - not a simple transaction!

Understanding you will pay more. I discussed this in detail in a previous post entitled Build CRE and They will Come - Seven Reasons they Won't. I would encourage you to take a look at the reasons you will pay more to occupy a new build vs. an existing building. In short the reasons are - land prices, soft costs, entitlements, time value of money, financing, economies of scale, and market forces.