A Commercial Real Estate Buyer Doesn't Care!

Akin to an automobile with a DVD player - a commercial building with certain features may NOT appeal to a buyer.

In fact they don't care, won't pay for the renovation - and maybe worse - will exclude your building from consideration if the betterment exists.

Hmmm, weird you say. I spent a lot of money installing those solar panels in my parking lot. Who cares if the equipment consumes ten spaces - my employees carpool or uber to work. Congratulations! You invested in an upgrade that made your building less desirable - even though you believed the value was enhanced.

So, with that preamble - what other improvements do buyers shun and to which sellers cling - with the expectation of a higher price?

Freeway frontage. Not an improvement per se, but an attribute with which many owners ascribe value. Unless your buyer wants looks from 225,000 cars per day, he will be unwilling to pay. In some cases, freeway visibility is a negative because of noise, debris, and transients that loiter. An exception to this rule is the retailer whose business can benefit from the exposure. Most others don't care.

Signalized corner. Similar to freeway visibility, a signalized corner causes traffic to pause in front of your location - which means your building is on a busy street. Great! but if your business isn't dependent upon destination customers, you just as soon they whisk by. An exception - which could bolster worth - is a property with a higher and better use - i.e. a residential conversion in the future. Now, the signalized intersection creates some benefit and can generate more dollars.

Amount of office space within an industrial building. The amount of office space within a building - especially an industrial building where companies make and ship things - is the biggest merit disconnect between a seller and a buyer. Adding office space to an industrial building is a costly adventure - permitting, construction, timing, new office furniture, etc. - in some cases $75-$100 per square foot. When a seller shells out that amount of money, he expects a return. Unfortunately, rarely does the next guy see any benefit. The layout is wrong, the finishes are outdated, too much shop space is consumed, a second story was created with no elevator, and so on. If a buyer doesn't need the excess office space, he must pay to have it removed or move on to the next building without the problem. Certainly the exception is the black swan that can walk in and use everything without any changes - he will see the benefits and gladly pay.

Assumable financing. Money is cheap and plentiful these days. Lenders are begging qualified folks to borrow. In many cases, a buyer can finance 90% of the purchase at interest rates in the fours. Enter assumable debt. Chances are the assumable debt was written at interest rates higher than present and for less than 90% of the sale price. Thus, a buyer is better served getting a new loan. An exception would be an owner carried loan - especially if the buyer can avoid the costs of an appraisal and loan origination.

5 Considerations When Leasing Commercial Real Estate

I recently authored a post entitled Gotcha Clauses in a Commercial Lease. Wherein, I discussed those nasty sentences in that twelve page tome you were asked to sign - watch out! Today, I'll take a step back and discuss the factors you should consider BEFORE you are ready to ink that commercial real estate lease.

The location. Raise your hand if you have never heard the three most important factors in real estate - location, location, location! Right? But why? Here is why - in no particular order. Your customers may need to find you. May, because some business have zero walk-in or destination customers - others rely upon foot traffic. Access to qualified employees is important for the health of your business. Trucks must deliver your raw materials and transport your finished goods. Employee retention is critical - if you locate out of state, how many will follow? Proximity to your suppliers can save you money. Where do you live? After all, you are the boss. So, location does matter!

The term of the lease. Two common errors I see occupants make are committing to a long term lease when times are frothy or a short term lease when the market is crippled. Business activity fuels a business owner's sense of well being - business is great so I will commit to a ten year lease. Little thought is given to where we are in the cycle, that lease rates are at their all time high, and you would be better served with a five year lease with a five year option. The opposite is true when business bosses are uncertain. Even though landlords are handing out goodies - many opt for a shorter term commitment - three years or fewer.

The leasing entity. Any owner of commercial real estate will require tax returns and financial statements from the corporation, individuals, LLC, or partnership signing the lease. Great! Got those. However, I suggest being preemptive by having your formation documents, information on your previous landlord, bank statements, and history of your company at the ready. Also, give some thought to the reason for the move and why you chose this location. I've witnessed this "story" as the determinant for a tenancy.

The type of owner. A pension fund advisor from New York will view your tenancy differently than a private investor who owns two buildings in Anaheim - and not always more discerning. Speaking "owner" will cause the lease negotiation to proceed swimmingly.

The vibe. How quickly did you receive a response to your lease offer? What additional information were you required to provide from your initial offering package? What do other tenants in the building have to say about the owner - yes! you should talk to a few of them. The answers to these questions will provide a glimpse of your future as a tenant.

4 Random Commercial Real Estate Leasing Thoughts

Today, I decided it would be fun to regurgitate a few random thoughts as they pertain to LEASING commercial real estate.

As we have discussed before, leasing is a big part of our daily activity - unlike our residential counterparts. We, as commercial real estate professionals help occupants find space to lease or buy.

Typically, leases account for 70-75% of our deal volume - sales the balance.

We differ from our residential counterparts. Our fees are based on a percentage of the deal's total consideration - purchase price or the amount of rent paid over the term of the lease. Generally, commercial leases run 3-10 years - so the amount of rent payments negotiated is a significant sum. Whereas, residential leases are month-to-month or a year maximum. Consequently, the potential fees on a residential lease - because the term is much shorter - make it unprofitable for residential agents to pursue.

Subleases are a pain. A sublease is necessary when an occupant no longer needs the building - for myriad reasons - yet has a term of lease remaining. The owner of the building still wants his rent. So, the occupant resorts to finding a substitute - a subtenant - to move in and assume the rent payments. Differences in uses, credit, number of players, and changing market conditions all create the pain in a sublease transaction.

Credit requirements of a property owner. At a minimum, the owner will look at the total amount of the lease - let's assume $10,000 per month for sixty months or $600,000. The owner is leasing an occupant the building in return for $600,000 in rent payments. Therefore, the owner is extending the occupant $600,000 of credit - so to speak. Carefully scrutinized is the occupant's ability to repay the $600,000 - through an analysis of the business's sales and credit history.

Process. Searching for a space to lease is similar to searching for a building to buy. The similarities: Facility requirements are discussed - loading, power, amount of office space, warehouse ceiling height, etc., geographical areas are considered, a list of alternatives is toured and a candidate is chosen. Now, the differences occur. A sale deal will proceed to a negotiation, an agreement, an escrow, due diligence and closing - approximately 60-90 days. But, a lease will involve a negotiation and a lease - much quicker - fewer than 30 days, in most cases.

If ever we can assist you in leasing or buying a building, please call us at 714.564.7104 or email us at abuchanan@lee-associates.com.

Commercial Real Estate Sale Leasebacks - the DOWNSIDE

I've advised a number of my clients recently to consider selling their commercial real estate and striking a three to ten year lease with the investor that buys it. A few have listened.

This structure, in our parlance, is known as a sale leaseback. Different than a straight lease and not a short term lease that accommodates a purchase, a sale leaseback allows an owner occupant the chance to sell at today's high prices and remain in the building - albeit as a tenant - and avoid a move.

It's a slick arrangement when the correct motivations are involved. I wrote about those reasons in a past post. You can read about it here. 

Today, I want to spend a moment and discuss the downside of a sale leaseback.

The message it sends to the market. When a sale leaseback is listed and marketed for sale, the questions from buyers range from - "why is he selling?" to "is his company leaking at the gills and needs cash to survive? Generally, there is a story. Its critical to understand the story, why a seller is selling, and how the current financials present.

I will just pay more rent. Value is determined by taking the rent your company is willing to pay and packaging the rent as a return on investment. Simply, if your company can afford to pay $10,000 per month or $120,000 per year and the return is 5% - your building is worth $2,400,000. Easy, yes? Now the fun begins. Where is $10,000 per month in relation to what other comparable buildings achieve in rent? It's either above, below, or at par. Par or below - you're golden. Above and you're scrambling. You see, an investor looks at the worse case scenario - you spit the hook after a year, can't pay the rent - or worse file bankruptcy - and he's stuck with a building he can't rent for the same amount you were paying.

You strap your operating company. If you own your building and times get tough, you can adjust the rent your company pays you - after all, you are the owner AND the tenant. Once you inject an arm's length investor into the mix - that flexibility evaporates. You are now bound to a lease. If you don't pay, you may get evicted.

There are tax consequences. As we've discussed, selling appreciated commercial real estate comes with a heavy tax consequence - unless you employ a tax deferred exchange. Yes, you free your equity, but at a significant cost - in some cases up to 35%.

Seller Accepts an Unsolicited Commercial Real Estate Offer - 5 Reasons Why

Recently, I penned a post entitled "Should I Accept an Unsolicited Offer for my Commercial Real Estate".

If you missed the post, you can quickly catch up by clicking here. 

The conclusion? - a resounding no. It is my firm belief, a seller can achieve a higher price by putting the market forces of buyers competing to work.

OK. Got it? Then why would any seller accept an unsolicited offer for their commercial real estate? In my opinion, the reason is contained within the list below.

Seller is desperate. More is owed than the property is worth. A lender has called a loan against the real estate. The operating company housed in the building filed bankruptcy. All could lead a seller to be desperate. If the property is marketed, the desperation becomes public - disclosed, discussed, and baked into the offering prices. Such desperation can also carry a tight time frame which won't allow a normal marketing process to be conducted.

Seller wants to avoid disruption. An owner occupant is concerned by the business interruption a marketing process will create. After all, folks will want to tour - during normal working hours when you are making and shipping things. Tours - unless very carefully controlled - distract employees and add a layer of suspicion by those working in the building. If a seller has not told his employees he is selling the building - you don't want them to find out from someone walking by their office.

The sale is a part of a bigger sale. Frequently, the sale of your commercial real estate is coupled with a sale of the business that occupies the premises. Because two sales are involved, the commercial real estate sale may pale in importance to the business sale. In such an instance, a marketing process for the building is jettisoned in favor of the business deal.

Seller is unsophisticated. Rarely is this the case. With access to on line research and countless commercial real estate professionals at the ready, most owners of commercial real estate are quite knowledgeable about the market and property values. However, in limited circumstances - and out of convenience - a seller may react emotionally to an unsolicited offer and accept it without testing the market.

The unsolicited price offered cannot be bettered in the market. I've seen this happen recently. Precautions must be made, however. You must be crystal clear with a seller - based upon what we are seeing in the market - recent sales, current avails, investor motivation, etc. - what is before you is as good as a marketing effort will produce - and without all of the appurtenant disruption a marketing process will create.

A Commercial Real Estate Deal is Really 3 Negotiations

As if one negotiation is not enough, we in the commercial real estate profession insist upon three separate negotiations for every deal. Why you may ask? Let me spend a moment and give you my take.

Negotiation One - The proposal. Once upon a time and not too long ago, a buyer's expression of interest to buy a property from a seller took the form of a binding offer - the deposit receipt and escrow instructions. Outlined were the price, escrow period, loan amounts, representations and warranties requested of the seller, and a period for due diligence and closing. The buyer signed the offer, deposited a good faith deposit with the broker and hoped his representative could convince the seller to make a deal under acceptable terms and conditions. Created, were all sorts of problems with this structure. Few buyers took the time to review the document they were signing. Misunderstandings occurred. Buyers changed their minds. Sellers decided not to sell. The impact of the sale weren't properly vetted. Buyers made commitments to move which backfired when the deals were not closed. Litigation ensued. Quite a mess. What evolved was the non binding letter of intent. Most negotiations now originate with such a letter.

Negotiation Two - The purchase and sale agreement. Because the first negotiation is via a non-binding letter, the agreed upon terms and conditions - such as the price -  must be placed in a document that will commit the parties to accomplish certain things - such as opening an escrow, notarizing grant deeds, delivering clear title to the property, representing the seller is authorized to sell, etc. Ample time is given to the buyer and seller to comment on the specific language of the agreement and request changes - another negotiation. Once the binding purchase and sale agreement is signed by the buyer and seller, a period of buyer due diligence commences. During this period of time, the buyer arranges financing, checks out the physical aspects of the building - roof, fire suppression system, plumbing, electrical, heating and air conditioning, reviews the title to make sure no matters are looming, checks out the condition of the soil for potential environmental contamination, and visits with the city to insure the buyer's proposed use for the building is allowed - quite a bit to accomplish in a 30-45 day period.

Negotiation Three - The end of due diligence. Presumably, the buyer has completed all of their inspections, the lender has approved the loan, title is clean and ready to be transferred and the deal can safely move toward closing - ooops, not so fast. Invariably, something is uncovered in the due diligence period that surprises the buyer and causes another round of negotiations. These surprises can be as simple as a roof repair and as complex as an environmental clean-up. Sometimes, the issues can be fixed with a dollar credit from the seller to the buyer. However, sometimes the problems are more systemic and can result in a cancelled transaction.

Should You Lease or Own a Commercial Building with Allen Bu...

How do you know if you should Lease or Own a Commercial Building for your business needs?

The economy is growing, rents are rising, and commercial real estate space is more difficult to find. 

So what questions should you answer to know if you should lease or own a commercial building for your business needs ?

Allen Buchanan is a principal with Lee & Associates in Orange County, CA and a true commercial real estate pro. He has specialized in industrial space sales and leasing since 1984 and provides the following tips for business owners considering purchasing a commercial building. 

Questions to ask before buying commercial real estate

Market
Where is the market in the cycle? Commercial real estate is very cyclical. It is important to consider what is the current state of the market. Is space plentiful or limited? Are capital markets willing to lend with favorable terms? Is there an expected growing demand for space like you need?


Who are You?
What type of company is yours? What are the space needs for your business? Do you expect to outgrow your space in the next three years? Are you making money? A lender will look for a favorable track record including, have you been in business for at least five years? 

If you are stable, have a proven track record, and anticipate the continuation of your business and have the time to benefit from long term appreciation, buying might fit be for you.

What are the Steps to Buying Commercial Real Estate?
If you have been in business for a while, you likely have received numerous calls from commercial real estate brokers. If you are thinking about buying, interview a couple of theses brokers and find out if they can potentially be a resource for the time it takes to find a property.

Find out if you are eligible for financing. The commercial real estate broker can point you to a potential lender. Typically SBA loans and brokers provide some 

How long will it take? To be successful, you should plan on one to two years before you are moving into a new property. The lengthy process includes:
Search
Potential misfire
Loan underwriting
Physical inspection
Appraisal
Build out
Permitted usage question and answer with city

What are the Benefits to Ownership? 
Long term, for the right situation, you can benefit significantly through:
Appreciation: rent increases and demand will push the value of the building up over time. Provided you have the time, this is a huge opportunity.
Depreciation: for the owner of the building, the purchase price or the structure can be expensed over 39.5 years.
Cost stability: when you own a building, you can more easily control the cost of space for your business needs.


For more goto:
www.allencbuchanan.com
https://www.youtube.com/user/abuchana...

ROOF Issues. Who pays?

Summer is a great time to consider an annual roof maintenance before the rainy season is upon us. Are you aware who is responsible for your roof maintenance? How about the repair of your roof? What if the roof needs replacing? If you own and occupy your commercial real estate, you are responsible for all three. But, what if you are a tenant? Knowing these things could save you thousands of dollars. I discuss this and much more on this week's edition of THURSDAY Thoughts for your commercial real estate.

ROOF Issues. THURSDAY Commercial Real Estate Thoughts

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 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

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

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

Seller STILL Unrealstic? Try This. TUESDAY Traffic Tips

Last week we discussed UN-REALISTIC sellers and allowing the market to be the bad guy. You've now done that and the seller REMAINS unrealistic. So, what should you do? Really, it boils down to one of a couple of options. I discuss this and much more on this week's VIDEO for commercial real estate professionals.



Seller STILL Unrealistic? Try This. TUESDAY Traffic Tips.

An UNREALISTIC Seller - Now What? TUESDAY Traffic Tips

We've all had them. I've one now. So what should you do? Not take the assignment? Try to convince him his asking price is ridiculous? Today, I discuss unrealistic sellers and a way to get them to see the light. This and much more on this week's VIDEO tip for commercial real estate professionals.



An UNREALISTIC Seller - Now What? TUESDAY Traffic Tips

Use THIS to Solve ALL the Deal's Problems. TUESDAY Traffic Tips

Very early in my career I received some advice from one of my mentors, Paul Earnhart. The advice went something like this - solve all the deal problems or you won't get paid. So how do we know just how far to go in solving a deal's issues? I discuss this and much more in this weeks VIDEO TIP for commercial real estate professionals.



Use THIS to Solve ALL the Deal's Problems. TUESDAY Traffic Tips

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.

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.

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

Are 1031 Exchanges a GONER?

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. 

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

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

They are TOPS for a reason! TUESDAY Traffic Tips

Ever noticed how you play better when paired with better players? Get to know em. They are the top producers in your field, your office, your profession. If you will adopt this simple strategy, you can take your brokerage business to the next level. This and much more on this week's VIDEO tip for commercial real estate professionals.



They are TOPS for a reason! TUESDAY Traffic Tips

Opposites ATTRACT. TUESDAY Traffic Tips.

Today's tip was hatched from a conversation with my friend Natalie Wagner from our Santa Barbara office. Thanks to Natalie! We tend to target too large and prospect too small.  We should do just the opposite. This and much more on this week's VIDEO tip for commercial real estate professionals.



Opposites ATTRACT. TUESDAY Traffic Tips.

STOP Giving Advice. TUESDAY Traffic Tips

Say what? This from a guy who makes a point of advising us every week. What's up? Today, I discuss a VERY important part of the advice you give and more importantly, when it's requested. This and much more on this week's VIDEO TIP for commercial real estate professionals.

STOP Giving Advice. TUESDAY Traffic Tips

90% of you DON'T do this. TUESDAY Traffic Tips

Today, thanks to my friend David Mudge from Lee Riverside and Rod Santomassimo of the Massimo Group, I discuss a subject that nine of ten brokers fail to do. This and much more in this week's VIDEO Tip for commercial real estate professionals.



90% of you DON'T do this. TUESDAY Traffic Tips

Are you in a DEAL Hole? TUESDAY Traffic Tips

The TV streaming industry refers to a "show hole" - that sinking feeling you get when you've binge watched every episode of Breaking Bad and you wonder what will consume you viewing time. We experience a similar sinking feeling when we near the end of our pipeline - "deal hole". Today, I discuss a remedy for "deal hole". This and much more on this week's VIDEO tip

Should you CONFIRM Appointments? TUESDAY Traffic Tips

No brainer, right? YES, you should. We must manage our time wisely. However, is there something you're missing? Are you giving folks an excuse to cancel your meeting? I discuss this and the California RSVP on this week's VIDEO Tip.

Can Commercial Real Estate Affect your Company's VALUE?

In a word, YES! But since it’s a New Year and I've a few more words, let's examine specifically how, shall we?

Your business falls into one of several broad categories – retail, manufacturing, warehouse and distribution, or service.

 

Each business has specific needs for a location – some can be managed from your home office and garage while others require thousands of square feet of commercial space from which to operate. A retail business must rely on visibility or stores nearby to attract customers.

 

Depending upon where your company falls in this spectrum, dictates your facility costs.  

One of the biggest facility costs is rent – that sum you stroke each month to yourself, if you own, or your landlord, if you lease.

 

We can layer in utilities, licensing, compliance, improvement costs, and location operating expenses such as property taxes and insurance.

 

Don't forget to add in an amount for the gardener and trash man.

 

All of these costs comprise a line item of profit reduction.

Speaking of profit, your businesses worth is a multiple of said profit. A potential buyer, of your business, will analyze the Earnings (profit) Before Interest Taxes and Amortization also known as EBITA. Then, depending upon the buyer’s appetite to acquire your business, the multiple will vary and thus the value will ebb and flow.

Generally, business buyers are either attracted to your business to expand their own – known as a strategic buyer or looking for a “value add” opportunity  – referred to as a private equity buyer. If the strategic buyer has local facilities, your commercial real estate will be viewed as a hindrance – they have space and don't need more. Conversely, a short term lease at below market rents will repel that value seeking private equity firm – because their facility costs will increase in the near term and reduce the business earnings.

Recently, I've witnessed commercial real estate crater two business sales – one a merger and the other an acquisition. In the former, a printing operation seeking a strategic partner, found resistance to the long term over market rent on their production facility. Every buyer looking to merge or acquire was faced with a costly surplus of buildings – an insurmountable challenge. In the latter example, a buyer walked away because the lease for the business was set to expire next month, the rent was half of the market rent, and the landlord was unwilling to re-write a new lease with the buyer. Boom. Deal over.

Today, I go Activist. TUESDAY Traffic Tips

No, not with pink kitty caps, but just as important to our industry. 1031 tax deferred exchanges are VITAL to the commercial real estate business. Today, I solicit your help in writing your D.C.
elected officials to let them  know your stance on this most critical topic. IPX 1031 exchange has made it easy for you. Just click on the link and you will be led to a portal to write your representatives. This and much more on this week's VIDEO tip.

www.ipx1031.com

#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.

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.

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.