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You
may have consumed my recent column on the acronym N.U.C.L.E.A.R. wherein
a discussion took place. You see, I channeled Pat Sajak to create my own Wheel
of Fortune. Provided was a fool proof way to analyze the viability of a
commercial real estate requirement. I’ll buy a vowel, indeed! The Need,
Urgency, Catalyst, Loyalty, Expectation, Authority, and Resources - if
reasonable considered - allow buyers, sellers, tenants, and commercial real
estate professionals to “qualify” their need and proceed to a successful
conclusion. Many contacted me with their own acronyms. One actually from our
neighbor, Rudy! I thought them column worthy. So here goes!
Our
friends own several properties from which the rent fuels their livelihood. When
considering a buy, he and his wife use the acronym C.L.I.P. Condition,
Location, Income, and Potential. This simple four quarter system touches all
the bases.
Condition. The current repair of the improvements is a very important
consideration. Many look at the roof and air conditioning as key components
that can require significant investment in the future. However, things such as
the parking lot, exterior appearance, plumbing, electrical, and the nature of a
property’s office improvements are also key.
Location. Often opined - there are three things that matter in real
estate - Location, Location, and Location. Yes! Even if a parcel is the “ugly
duckling” of a premier neighborhood - can it one day be the “black swan”?
Income. Unfortunately, this element falls third in line - it
belongs first - so that the letters spell something. Otherwise the acronym
would be I.C.L.P. - not as compelling or easy to remember. But suffice it to
say, the Income is critical! Where is the rent compared to similar
buildings? How sustainable is the stream? Sure. You may be looking at a
multi-year lease - but if the tenant is gasping for air - you may have to
replace the rent sooner than planned. Few properly bake-in the true cost to
replace a tenancy. Downtime, concessions, commissions, and improvements all can
diminish your future take and should be considered. Remember the condition?
Yeah. You’re now competing with other options in the market. Best be spic and
span!
Potential. Finally. In addition the the present income - where can
you take the property in the future? I refer to this as the exit strategy. Will
your family hold on and pass the holding along to your grandkids? Or is the
idea to fix it and flip it? Can rents be raised? Will a freshening cause the
occupant to renew? Is there excess land from which additional square footage
can be added? Maybe the resident is your exit and is a prime candidate to buy.
Be quite candid with yourself on this point.
Another
really good nemonic came my way last week. This five letter assemblage can
explain why your building remains vacant. Want to silence the crickets with the
sound of commerce? Run through this list.
Market. If you own a vacant suite of offices - you’re faced with
the uncertainty of a Pandemic economy. Virtual work and stay at home orders
have created a real dilemma for office occupants. Few know exactly how many
square feet they need. Case in point. Our operation in Orange which is tooled
for 50 in-house practitioners and staff. We own. We don’t want to relocate into
a smaller suite. But, the reality is we don’t presently use all of our space.
So, what to do? This conversation is happening in board rooms throughout the
country. So with an office vacancy - the market is not your friend.
Rate. Does the rental rate or purchase price you’re asking have
any resemblance to the current COMPS? In an up-trending market, you can be
bullish - yet realistic. If things are going the other way you easily can
“chase the market down” by holding firm.
Building. Is your contruction a warehouse with insufficient ceiling
height? How about the corresponding loading? An abundance of office space
within a building sans the appurtenant employee parking spots or windows to the
outside world is not desirable. Finally, an address meant for manufacturing but
without proper electricity will be quickly discounted.
Owner. Take a look in the mirror. Are you a good owner - fair
dealer, concerned about the repair and maintenance of your properties, a “big
picture” proponent who eschews the little stuff, and avoids extracting the last
penny in favor of keeping your parcels rented. If you answered no to any - YOU
may be the reason your structure is fallow.
Broker. Finally. How is your vacancy being marketed? Does your
representative play nicely with others or is she egocentric and uncooperative.
The commercial real estate community is a small one - read. We all know each
other! Snakes are avoided. Fortunately, they are few, fortunately! But, the
reputation of the person whose sign advertises your offering is paramount.
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.blogspot.com.