Friday, December 2, 2016

When Should a Build-to-Suit be Considered

Image Attribution: www.kewrealty.com
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.

Tuesday, November 29, 2016

The SEASONS of #CRE. TUESDAY Traffic Tips





Whether your experiencing the BEST year of your career or the worst, think of your deal flow in terms of seasons. This thought process will put bad years in perspective and allow you to temper the good years. This and so much more on this week's VIDEO tip.

Friday, November 18, 2016

You Own, you're Moving - Now What?

Image Attribution: www.batmananimal.com
Recently, I authored a post wherein I discussed making the ends meet in a commercial real estate deal. You can read the post here if you missed it.

During my discussion, I grazed a topic which today will receive a larger nudge - if you own your building and have elected to relocate, should you lease or sell the vacant building you leave behind?

A move generally is bittersweet - a cause for celebration because an increase in business created the need for more space. Good for you! But, the additional sales spawned another problem - you will create a vacancy. Now what?

In short, the direction you choose in dealing with the excess space and filling the vacancy depends upon several factors. Indulge me while I dissect a few of them.

The structure of your new deal. Are you buying the new building, leasing the new building or leasing the new building with an option to buy the new building at a later date? Chances are, if you desire to own the new spot and don't have a pile of cash lying around, you will need to sell the building you're vacating. Conversely, if your next space will be leased, you may be able to hold on to the old address.

Your desire to be a landlord. Owning and managing a leased building occupied by a company - not your own - comes with a set of headaches - and not necessarily a bottle of aspirin. Some of the painful biggies - who will vet the credit of the new occupant, what if the new guy fails to pay, can you float a lack of rent while you scour the market for a suitable occupant?

Can you afford to lease the existing building? Here is what I mean and how I counsel companies facing this dilemma. The market is the market. Prospective tenants will only pay you a rent figure for your building based upon what has leased recently and what other buildings are demanding in rent. So now you must roll up your sleeves, compute your costs to own the building (mortgage payments, property taxes, insurance, maintenance), add a reasonable return for the equity you have in the building and see where that squares with the market rent. You may believe yours is worth more. Maybe, but are you willing to wait? Remember, waiting is expensive. Lost rent for all the months you wait can never be re-cooped.

Do you require the vacant building's equity to fund the new location? This one is easy. I recently represented a group based in Whittier. So far past the building's capacity was their operation, we practically had to meet in the parking lot. I advised the company to move out, lease a new location with an option to buy, sell the original building and once sold, trade the equity into the new building. Had this company not wanted to own the new location - thus the equity wasn't needed - the advice might have varied and a lease of the relinquished building considered.

Tuesday, November 15, 2016

MOST Overlooked in a #CRE Deal. TUESDAY Traffic Tips







If you're like I am, you frequently overlook this VERY important aspect of a deal. You can't close a sale without it - well you can, but it's risky, you can't affect a lease or give possession to a tenant, a lender won't loan. So what is it? It's insurance! Some changes are occurring in the industry causing premiums to rise. Are you prepared? I discuss this and much more in this week's VIDEO tip.

Thursday, November 10, 2016

Make TIME your Friend. TUESDAY Traffic Tips





Make TIME your Friend. TUESDAY Traffic Tips. You've heard me opine before, we have two things to sell as commercial real estate brokers - time and information. Today, I discuss TIME and a way to make time your #CRE deal's best friend. This and more in this week's VIDEO tip.

Managing an INFLUENCER. TUESDAY Traffic Tips





We've all dealt with them throughout our careers - the INFLUENCER. Not the decision maker, but close, these people can be your staunchest advocate or the largest impediment to making a commercial real estate transaction. Today, I discuss a three step way to make sure the INFLUENCER is your deal's best friend. This and more on this week's VIDEO Tip.

Three #cre Questions. TUESDAY Traffic Tips





With respect to my social media and content marketing, I get asked THREE questions, frequently. Have you made any money with that stuff? How much time do you spend? How do I get started. Today, I discuss three EASY ways to get started in your own content marketing. This and much more on this week's VIDEO tip.