Friday, October 13, 2017

REASONS Your Commercial Real Estate ISN'T Selling

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I've opined for months that Southern California is immersed in a seller's market - there are many more buyers in the market than sellers - advantage sellers!

Today, however, I want to discuss WHY your commercial real estate isn't selling.

After all, with more buyers around than sellers, you should be flush with offers  - folks clamoring to buy your building - but nothing - crickets! So what's up?

Below, are my reasons why your building isn't in the sold category.

Your building is over priced. As we've discussed, asking prices are tricky. Hopefully you've looked at recently closed sales, compared those to what is currently available, checked the trends - up or down trending, and finally placed your building under careful scrutiny to determine its value. Great. You've established an asking price. However, if the asking price has no basis in fact - comps or avails to support it - your building will sit. Oh, you'll get tons of inquiries - there are not a lot of available buildings - but no one will want to tour. Or worse, offer on your commercial real estate.

Your building lacks a key amenity. If you own a space with challenged loading, a logistics building with low ceilings, a manufacturing location with insufficient power, a service depot without an outside storage area for trucks - congratulations! Your building lacks a key amenity. Some of these issues can be solved with dollars - others cannot.

You are un-realistic in your expectations. If you have received a number of showings - with no offers - chances are there is a problem. You are likely overpriced or your building lacks a key amenity. With this market intel, if you continue to believe your kitty is the cutest in the contest and refuse to consider others may be cuter - your expectations are out of whack with the market.

There are use restrictions. We toured a building recently with a prospective buyer. Our guy liked the possibilities because there was a large outside staging and storage area - a key requirement of his occupancy. As we were completing our pre-proposal research, we discovered the area in question was unusable for the purposes our client intended. Furthermore, there was a giant easement running through the middle of the yard. Ooops. No deal here.

Your representative is un-cooperative. I'm honored to work in an industry with so many highly skilled professionals. However, on occasion we encounter a rogue element who sees the real estate brokerage business as a way to pad his bank account vs working in the best interest of his seller. If your activity is waning - it could be your representative is not doing what's necessary to ply nicely with others.

Friday, October 6, 2017

The Downside of a FAST Growing company - Where would Amazon go?

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The genesis of this post came from two sources. First, a very well written article in the New York Times entitled: Amazon Plans Second Headquarters, Opening a Bidding War Among Cities. Secondly, from my Orange County Register editor who posed the question, "where would Amazon locate if they chose Orange County?"

Clearly, Amazon's footprint in the Seattle area is massive - around 80,000 folks draw a paycheck and consumed is about 20% of the available prime office space in the city - roughly equivalent to 8,000,000 square feet of space! Imagine the chaos created if Amazon were to vacate even half of that occupied space - incredible.

For the HQ2, Amazon's plan would include 50,000 new hires and a facility to house them. Close to an international airport, skilled labor, affordable housing, access to mass transit, fiber optic capabilities, and a business friendly environment are all on Amazon's checklist - with all the appurtenant goodies states like Texas seem willing to dole out - tax breaks, free land, employee relocation expenses, no state income taxes, cameo with the governor, etc. 

Although many of the checklist items can be found in the OC - labor, airport, fiber - California has shunned economic incentives with the abolition of redevelopment districts and enterprise zones. Gone are the halcyon days of California cities writing a check for the promise of future sales tax and incremental property tax revenue increases - the proverbial "I scratch your back" scenario. 

So, where would Amazon go in the highly unlikely event the OC was in the running? Well, it depends. On what, you ask? On the type of facility they are seeking. It appears the new headquarters would house a number of engineers and skilled labor - therefore a facility much like Broadcom abandoned when they were recently acquired. 50,000 employees at 100 square feet each would require around 5,000,000 square feet of office or flex industrial space - like those that litter the Irvine Spectrum. A quick search yielded approximately zero existing - occupied or vacant - buildings that could garner that amount of footage in the county. Therefore, someone would have to build the building for Amazon to occupy. If we stacked the building with two stories, this new construction would require close to 100 buildable acres - roughly the size of the old Boeing campus in Anaheim, an eighth of the Great Park or around half the size of Angel Stadium - parking and field. Probably ain't happening. 

Lets go a different route. Amazon has constructed 77 warehouse buildings around the nation since 2005. A number of others were either planned or under construction and Amazon became the occupant. Generally, the buildings are 750,000-1,000,000 square feet apiece. To put that figure in context, we are describing 25 football fields - under one roof - plus, the appurtenant parking and circulation around the building - or another 10-25 football fields. The only vacant building in Orange County that could house an operation such as that would be the former JC Penneys building in Buena Park. But, there is an issue - the ceilings are too low for Amazon's proprietary procurement system. Ooops!

Have fun in Dallas, Amazon. Go Cowboys!

Friday, September 29, 2017

The DOWNSIDE of an Up Commercial Real Estate Market

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Someone wise once opined, it's a great time to sell commercial real estate - but not a great time to buy commercial real estate. A market needs an ample supply of buyers, sellers, and lenders - all operating independently yet in concert to function properly. If an imbalance exists - too few sellers for the buyers in the market or a shortage of free flowing capital - the picture is shaded in favor of the scarce. Currently, our industrial market is up trending - great for sellers, tough for buyers. Below are a few of the downsides of an up market.

Available buildings are in short supply. Vacancy on industrial buildings is the lowest its been since - well ever! We state our vacancy as 2% - 2 of every 100 buildings are available. However, if we dissect this figure, we discover that the true vacancy - buildings without an occupant - is closer to 1/2%. You see, if a building is marketed for sale or lease while still occupied, it is counted as available. If the availability is dependent upon the occupant finding new quarters - good luck - it may not ever be vacant.

Sellers are over zealous. It seems that every deal sets a new record and is completed at a price higher than the previous deal. This robust activity causes sellers to be quite bullish. Recently, I submitted an offer to a seller whose property is not on the market. He has indicated, however, that for the right price, he would sell. Our offer contained the "right price" but now the seller believes values have eclipsed his right price and he has a new right price. Upward we go.

Normal negotiations are impossible. Because available buildings are in short supply and sellers are over zealous - conducting a traditional give and take dialogue is difficult - close to impossible. Unless a buyer is willing to step up and accept the offering per the seller's terms and conditions, another buyer comes along who will. I've witnessed several instances recently where buyers miss out and are forced to conduct another search for their new business home.

Establishing values is tricky. As commercial real estate professionals, we are tasked with recommending values to sellers based upon recently completed transactions and currently available buildings. In an up market, a wide gap exists between the recent deals and the ones available for sale. The intangible - which makes establishing values tricky - is how close to the gap the next round of closed deals will be. Also, appraisers go nuts. Buyers and sellers agree to a price that cannot be justified by closed sales. An appraiser must then interpolate a value using a secret matrix of appraiser magic.

Lenders are a bit goosey. Commercial real estate lenders sense our values are near the top. A loan misstep could cause an uneasy time if prices adjust downward and the amount owed exceeds the market value. Currently, foreclosure activity is practically non-existent - but the skeletons of 2009-2011 still haunt many lenders. Proceed with caution appears to be the credo of many who loan money on commercial real estate.

Friday, September 22, 2017

Summer's OVER. Commercial Real Estate Considerations

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Summer's over although the heat didn't get the memo. Kids are back to school. Disneyland is navigable again, The Orange Street Fair is distant memory, and folks are back to work with an eye toward wrapping up their commercial real estate requirements before the holidays - which will be here before you know it. If you venture into some stores - you might believe the holidays are next week!

So, what commercial real estate considerations should you make with four months left in 2017?

Plan for 2018. If you have a landlord - and don't own your location, chances are your owner is busy calculating the operating expenses on your building. After all, in January of next year you will receive a bill for the projected property taxes, property insurance, and common area maintenance charges for 2018. Generally, owners break these into monthly payments and reconcile the over or under payments the following year. This time a year is also a good period to reflect on your business for next year and your potential space needs. If you anticipate any major changes in the square footage you occupy, use this time of year to anticipate and react.

Parking lot, cooling and heating, roof. As mentioned in a previous column, now is a wonderful time to have that roof checked before the rains of winter come deluging down. You should have a really good idea how your cooling is working - as its worked overtime in August - but what about the heating? Fire it up and correct any problems. Many owners deal with parking lot issues - such as spalling, pot holes, and re surfacing in early fall. The rains are a couple of months away and these hot dry conditions are ideal for parking lot repairs.

You've still time to make a deal. We've four months left until we chorus auld lang syne. Plenty of time to search, negotiate, and sign a lease. If you're direction leans more toward owning, plan to be in escrow in two weeks - otherwise, I'm afraid the buzzer may sound before you close.

Great time of year for marketing. Contrary to our residential counterparts who experience their busiest in the spring and summer, our busy season starts now! So, if you are a seller, put that building up for sale and take advantage of the year end activity.

SBA runs out of money - theoretically. Another reason to secure that deal now - the Small Business Association gets a new burst of funds to loan every October. If we have any government shut downs or budget shenanigans, and your loan is not in the approval queue, an SBA loan can get delayed. If your loan isn't approved before October - you could be vulnerable. Speak with your loan professional and insure your loan is on track and not subject to delays caused by a budgeting hiccup.

Friday, September 15, 2017

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

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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.

Friday, September 8, 2017

4 Ways to WIN a Commercial Real Estate Deal

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The commercial real estate market in Southern California is as competitive as I've ever seen it. And, by the way, email didn't exist when I started in the business - so, that's a long time.

In a classic economic sense, an imbalance exists. We have too many buyers chasing too few availabilities - akin to a giant game of musical chairs - someone will be left standing when the music stops.

So, how should you position yourself and your company to win when the right opportunity comes along? Allow me to discuss a few ways.

Financial qualification. Your bank will gladly loan you money to buy a building - they've told you so. But, have you allowed your lender to peruse your current financial statements and tax returns? You are best served securing a pre-qualification letter. But, not just any pre-qual letter - one that included a complete review of your current financial snapshot.

Remove any contingencies. Do you have a property to sell before you buy? If so, your deal may be overlooked for another that is ready to go. Does the occupancy for which you plan to use the building conform to the zoning? If not, plan on 6-9 months of city approvals - once again, you lose because a compatible use will avoid the lengthy approval process. Is the source of your down payment liquid? Are the members of your team in place - legal, architect, contractor, CPA? Any unchecked box here could result in your loss.

React swiftly. In order to quickly mobilize, you must have a ready source of new and off-market availabilites. Our residential counterparts have made on-line searches easy for you - we commercial agents have not. Therefore, you will need to team with a commercial real estate professional to search. Sure, you can check Loopnet, but the reliability of the data is suspect. Regardless, your professional should create alerts for new buildings which match your requirement. When you get the call - regardless how late on a Friday - REACT!

Don't TELL your story, SELL your story. Recently, we competed against four other offers for a building. We believed our buyer could pay the highest price and perform. We encouraged our buyer to offer at the asking price with a very quick close and a limited amount of due diligence time - our buyer complied. Now the task was to prove our buyer's credibility. We did so in person vs an email that could get overlooked - in effect, we sold our story. Our strategy worked and our buyer won the deal.

Thursday, September 7, 2017

How to Finance Commercial Real Estate THURSDAY Thoughts for Commercial...

Today on THURSDAY Thoughts for Commercial Real Estate, I discuss the ways a typical buyer finances a commercial real estate purchase. I discuss this and much more on this edition on THURSDAY Thoughts.

How to Finance Commercial Real Estate THURSDAY Thoughts for Commercial...

Today on THURSDAY Thoughts for Commercial Real Estate, I discuss the ways a typical buyer finances a commercial real estate purchase. I discuss this and much more on this edition on THURSDAY Thoughts.

Friday, September 1, 2017

A Commercial Real Estate Deal is Really 3 Negotiations

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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.

Thursday, August 24, 2017

BIGGEST Mistake Occupants Make THURSDAY Thoughts for Commercial Real Es...

Please take a look at my current video which discusses the BIGGEST mistake commercial real estate occupants make when considering a relocation. I discuss this and MUCH more on this week's VIDEO.

THURSDAY Thoughts for Commercial Real Estate

Friday, August 18, 2017

The DOWNSIDE of an Off-Market Commercial Real Estate Deal

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As recently discussed, our commercial real estate market these days is heavily weighted toward sellers – akin to a boxing mismatch, buyers are outclassed and must muscle up to counter the punches thrown by a market favoring seller. 

If a seller lists his commercial real estate for sale, prices it fairly – or even unfairly in some cases – and assuming the building has good amenities, a ring full of buyers crowds his corner – with gloves full of cash – shortly after the first bell.

We, as the trainers – AKA, the buyer’s representatives – set out to find a fairer fight. We contact owners of commercial real estate and ask them if they would consider selling to our buyers. In rare instances, we find a willing seller which creates an “off-market” deal. Great! But, what are the problems with such a transaction? I propose we spend a moment and discuss the downside.

The seller has no advocate. Generally, a seller engages a broker to represent him. Incumbent upon a seller’s rep are the duty to place a seller’s interest above those of the broker. Included in the representation is a pre sale conversation involving a review of the current market conditions, an outline of a comprehensive marketing plan for attracting the highest purchase price in the least amount of time, candid discussions about the tax impact of selling, agreeing upon the touring protocol, and disclosing the selling plans to employees who occupy the building. In an “off market” transaction, none of these confabs occur and the seller potentially enters the deal uneducated about the process. Without a seller advocate, the buyer enters the ring with an advantage. Good for the buyer. Bad for the seller. Generally, the seller figures out he is not benefited by the lack of representation. In this market, a seller’s rep will counsel his client on the importance of running a process to find the BEST buyer – rarely the outcome of an off-market deal. I recently witnessed an off-market transaction that yielded a price for the seller 30% below the prevailing values. Ouch!

No vetting has occurred. Unresolved title issues such as tax liens, un-recorded easements, or loans against the property have not been investigated. Systems – the roof, fire suppression, and heating ventilating and air conditioning, have not been inspected. The tax impact of a sale has not been calculated. Are there any pre payment penalties that must be addressed prior to closing? Any and all of these issues can cause a knock out which means the bell rings on your commercial real estate deal and you are not the winner.

Friday, August 4, 2017

Is it Better to OVERPAY for Commercial Real Estate or Pay the Taxes?

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You've sold your commercial real estate. Proper steps have been taken to funnel the sale proceeds into a qualified intermediary as the first step to perfecting a tax deferred exchange - a way to buy more commercial real estate and defer the tax obligation. 

A careful review of buildings available for sale has given you the sense the market is over-heated. You are concerned you may overpay for a building - pay more than the building will be worth in future years - after all, its a great time to sell but not a great time to buy. 

So, is it better to overpay today and risk the building declining in value or simply pay the taxes - which as previously discussed could amount to 35% of your take. 

One thing is certain. If you don't buy commercial real estate and perfect your exchange - you WILL pay the taxes. Let's use a hypothetical amount of $2,000,000 as the sale price for the property you sold. By the time you layer in federal, state, and Affordable Care Act taxes, your tax bill will approach $700,000.

The overpay is not as certain.

If you are considering replacing your $2,000,000 sale with a $3,000,000 buy and you overpay, your $3,000,000 must decline to $2,300,000 - a market adjustment of almost 25% -  for the offset to equal your certain tax liability. We witnessed the market decline by over 25% in 2009-2010. But, now our values are back and have exceeded our previous 2007 highs by 30%. Plus, three things have changed since the lows of 2009-2010 – new construction hasn’t and will never match demand, thousands of square feet of industrial inventory have been scraped in favor of multifamily development – thus a lower base, and 98 of every 100 buildings are occupied - the lowest vacancy in history.
One way to compensate for an overpay is with a long term lease – a bridge greater than five years. Commercial real estate values tend to ebb and flow over seven to ten years. I have a client who made a lease in 2008 - at the top. Through the term, market lease rates dipped. It's now renewal time and the lease rates are back to the top.  

Still not convinced? If you believe you are overpaying – would it make sense to overpay for a perfect building vs over paying for an building with challenges? My experience is good buildings stay leased.  A challenged building – even in good times – will have leasing issues.

Thursday, July 27, 2017

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

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:
Potential misfire
Loan underwriting
Physical inspection
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:

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

Friday, July 21, 2017

A Shortage of Commercial Real Estate - But Why?

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Supply and demand. A basic economic principle first discussed in the seventeenth century by scholars such as John Locke, Sir James Steuart and Adam Smith.

This Adam Smithian see-saw has broad implications in the commercial real estate market. If supply exceeds demand, a buyer's market ensues. Conversely, sellers win when demand exceeds supply.

Currently, Southern California is engulfed in a seller's market largely because of this imbalance between available buildings - supply, and businesses looking to expand - demand.

Seldom discussed, however, are the reasons such an imbalance exists. The reasons, dear readers, are the subject of today's post.

Lack of new construction. An spate of new construction would in fact cause the supply of available inventory to increase - resulting in a parity of demand and supply. But akin to fighting a wildfire with a water pistol, the thirst for supply will not be completely quenched with new construction. So with this shortage of supply, why haven't we seen more building? The reasons are simple. Southern California has a lack of undeveloped land. Virtually all of the new construction we've seen in recent years has started with a site containing obsolete buildings that were razed to accommodate the new construction. New construction is expensive. Land prices are a huge component of new construction - in some cases measuring half the cost - especially since the land includes old buildings that need demolition. The entitlement process is challenging. Cities and counties locally have extensive regulatory requirements in place which add months to the construction time of a new development.

A re-purposing to housing. Many, many thousands of industrial square feet have been retired in favor of high rise apartments and condominiums. Doubt what I say? Just take a look at the area surrounding Anaheim Stadium or John Wayne Airport. Formerly, those areas were home to local manufacturing and logistics businesses. Now gracing the skyline are three and four story buildings under construction that will provide much needed housing to stem another shortage - but at the expense of buildings where people worked and products are made and shipped.

Money is cheap. Companies can invest 10% of the purchase price of a building, finance the balance with a loan through the Small Business Administration, and with Eisenhower era interest rates, enjoy a payment that closely approximates a lease payment - but while owning. A multitude of companies have taken advantage of this structure and the abundance of capital.

When will our markets return to normal - if you can define normal? Unfortunately, my crystal ball is as murky as the SoCal sky on a June morning.

Thursday, July 13, 2017

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

Friday, July 7, 2017

What will Cause these INFLATED Commercial Real Estate Prices to Drop?

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At their very essence, commercial real estate values are a result of the price a ready willing and able buyer, with reasonable motivation, will pay and a ready willing and able seller will accept. Easy enough.

Let's layer in some complexity, however, as the previous statements assume the ready willing and able buyer will write a check for the purchase. In reality, most buyers seek financing for their buy - which sets in place an approval process from a lender.

Typically, lenders - short of Aunt Mabel who taps her trust fund for you - will require an appraisal - regardless of the size of the down payment. Hmmm, so if the ready willing and able buyer and seller agree to a price and the lender's appraisal doesn't conform, the transaction has an issue? Yes. Absent another buyer, willing to assume the previous buyer's agreed upon price - without a lender this time - the seller must reduce his price, the buyer must inject additional cash to bridge the gap or something in between. So, the first cause of a drop in pricing would be - the property won't appraise. 

But, what are some other reasons?

A spike in interest rates. An obvious result of an increase in borrowing costs, would be higher payments. Higher payments - fewer buyer's can qualify for financing - fewer buyers, less competition - a drop. But, a spike in interest rates could also cause business activity to decline. The resulting lack of business could place less pressure on a company's need for space. Demand for space subsides - fewer buyers - Boom! prices drop.

The Black Swan event. Transactions occur when prices are increasing or when they are falling. When prices are on the up, sellers win. Buyers score when the reverse happens. Uncertainty - I'm not doing anything until this is resolved - is a result of the Black Swan event such as a war, a collapse of student loan repayment, terrorist attacks on our soil, foreign leaders who launch a missile, a government shutdown, or a county bankruptcy - as we experienced in 1994 in Orange County.

New inventory. We've been awaiting the building spree of new buildings for quite awhile. Yes. We have added some new buildings, but we have also seen many others demolished in favor of high rise apartments. In short, for myriad reasons - which will be left for another rant - the supply of newly constructed commercial real estate has not kept pace with the demand.

Buyers say enough is enough. Recently, we accepted an assignment to help a buyer find a new home for his business. When we commenced our touring of the available choices - the buyer was disappointed at the lack and of the quality of available buildings - plus the asking prices were jarring. Flash forward, asking prices have now hopped another 15%. Our tour last week was met with, "wow! how have asking prices increased that much in fewer than two months?" It dawned on me. If buyers refuse to pay the prices - which is unlikely - prices will drop.

Its akin to a giant game of musical chairs. This era of crazy money paying outrageous prices for commercial real estate WILL stop - we just know when.

Tuesday, June 27, 2017

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

What to SHOW first? TUESDAY Traffic Tips

Friday, June 23, 2017

5 Reasons NOT to Sell your Commercial Real Estate

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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.

Tuesday, June 20, 2017

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

Friday, June 9, 2017

PRIOR to Selling Commercial Real Estate - DO These 5 Things

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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.

Thursday, June 8, 2017

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

Friday, May 26, 2017

6 Random Commercial Real Estate Thoughts on TODAY'S Market

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Today, I thought it would be fun to dissect my current workload and discuss a few random thoughts on commercial real estate that have dominated my psyche for the past few days.

Maybe, in the process of reading this, you, my faithful readers, may learn something and alter your direction to avoid a costly mistake.

Lease rates continue to astonish! Historically, an increase in lease rates trails the increase in sales prices during a market recovery. Our plunge from the peak of 2007 was swift and deep. We lost 40-50% of our values in a period of six months to a year. Many of us wondered if the commercial real estate market would EVER recover. We started to see a real pop in selling prices after the tax law changes of 2012. 2013-2015 were monster years for selling price appreciation. We all knew lease rates would soon follow. But, WOW! If you told me class A industrial lease rates would approach $1.00 per square foot by 2017, I would have questioned your sanity. Surprise. We have not lost our marbles. We are there!

Will these sale prices ever plateau? After the dramatic selling price increases in 2013-2015, many in our industry predicted a leveling in 2016. However, selling prices have pushed past 2007 highs and now are eclipsing 2016. When will the end come? My guess is once money becomes less affordable or we experience a dramatic global black swan event, selling prices will plateau and even soften. Exacerbating the problem, however, is a frighteningly low vacancy of available buildings for sale or lease.

Can you ask too much? I used to believe so. Not anymore. Recently, we performed a broker opinion of value for a fifty year old manufacturing building whose best days were during the Nixon administration. Our estimate was X. The seller insisted upon X plus 50%. We settled on X plus 40%. As we drove away with the signed engagement, I wondered how on earth we would justify the asking price. Twenty inquiries, three tours in three hours, two full price all cash offers with exceptionally quick closes later, I'm a believer. You cannot ask too much.

Demand for old, obsolete buildings. Old, obsolete industrial buildings once were shunned in favor of their newer more glamorous contemporaries. With the shortage of available buildings, these ugly ducklings are becoming white swans. Demand is back and historic prices are being achieved!

Good housekeeping is a must! Make sure your paperwork is in order. Your leases should be up-to-date. All entity tax returns and filing fees should be paid. Sprinkler certifications, and maintenance of the roof and air conditioning needs to be accomplished. If you have added square footage to your building or new offices, make sure your building permits are easily accessible. Please don't wait until you're under contract to sell your building to discover something crucial is missing.

A burning question. How will cities and counties in California handle the execution of proposition 64 which legalized recreational cannabis? Cities and counties have until January 2018 to decide and we will have to wait and see, but many operators are ignoring the illegality of the growing and sale of recreational cannabis. See "demand for old, obsolete buildings".

Tuesday, May 16, 2017

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.

Thursday, May 11, 2017

5 Hidden Land Mines in Commercial Real Estate Deals

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Land mines are generally buried beneath the surface so that the unwary happens upon them and before they can react, BOOM! A significant amount of damage is inflicted upon the unsuspecting.

Similar "land mines" can exist within a commercial real estate deal. Although bodily injury may be avoided, the fall out created is nonetheless painful. Its important to recognize where these land mines might be hiding.

So, let's discuss the most common land mines you will encounter when buying or selling a building.

Environmental. Generally, buying a building includes borrowing money. An environmental assessment will be a part of your loan approval. Unseen, but lurking under the soli may be environmental contamination. An examination of current and previous uses of the building along with a review of local and regional conditions is undertaken to determine if any sub surface testing is recommended. If there is cause for concern, soil borings are collected, tested and a course of action pursued. Based upon the findings, your deal may be delayed or completely derailed. 

Entity status. Typically, ownership of commercial real estate is vested in an entity other than an individual. Most common among ownership entities is the limited liability company, or LLC. In order for the LLC to conduct business - i.e. sell real estate - the entity must be active in the state in which the entity operates. All tax returns must be current, and taxes - if any - paid. The entity must pay its annual filing fees. And, a statement of information must be on record with the state. If any of these boxes are unchecked, the entity may be suspended. A laborious process to revive the LLC must be undertaken. Searching in Corporation Wiki or the Secretary of State should tell you the status of your entity. 

Loan re-conveyance. When a loan is paid in full, a re-conveyance is necessary. Otherwise, the loan balance will still be recorded against the property. Owners incorrectly assume once the loan is paid, they are done. Wrong. Re-conveyances are easy to accomplish at the time the loan is satisfied. Not so easy if attempted years later. 

Clouds on Title. Mechanics liens, tax liens, Lis pendens - nasty little critters that prevent a seller from deeding property. Frequently, sellers of commercial real estate are clueless about matters affecting the title of their property. Before considering selling a building, its best to order a preliminary title report and have your title officer review it with you. 

Insurance. Your purchase will require insurance. Get your insurance professionals working on binding a policy early in your escrow. If you wait until you're at the closing table, the process will screech to a halt until this condition is fulfilled. 

Tuesday, May 9, 2017

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

Tuesday, May 2, 2017

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

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

Friday, March 17, 2017

You Goofed! Now What?

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I love the Academy Awards!  At a minimum, my wife and I try to see all the movies nominated for best picture. We can then watch the awards show with some anticipation and knowledge of the nominees.

We, like many of you, watched in agony two weeks ago as the wrong movie was announced as best picture.

The chaos that ensued made for great TV but one couldn't help but feel a pang of remorse for the producers of La La Land while feeling stoked that Moonlight was the winner. We witnessed a view from the pinnacle of accomplishment to the depths of despair in seconds. Wow!

So what, you may ask, does this have to do with commercial real estate? Only this. Sometimes, we just goof. We try very hard each day to do our best, represent our clients, market our listings, and cooperate with our fellow brokers. With these good intentions, things can still go awry. Case in point, last week, I missed a meeting because I failed to open a piece of mail that specified the date and time. Oops!

What is one to do when the inevitable goof occurs?

Own it. How many times do we blame others or fail to take full and complete responsibility for our actions? I've found it's best to simply own the goof - admit you made a mistake. Say these words - "I made an error and I take full responsibility."

Make no excuse. No one cares if you were stuck in traffic, didn't open your mail, forgot the meeting, or your dog ate your only marketing brochure. The net effect is the goof happened. How and why it happened becomes irrelevant - and only weakens a sincere apology.

Apologize profusely. A good apology. I'm sorry that I missed the meeting. You must have felt as though I didn't care about your issue. In the future I will make sure to be early. A bad apology. I'm sorry if what I did made you angry. However, you should have called and emailed in addition to sending me the letter with the meeting time - ummm, no.

Take steps to insure you don't repeat the mistake. In my case, I'm not great at opening mail. I find mail mostly junk and anything of importance generally arrives via a different medium - email, text, call, social media, etc. I've now committed to visiting my mailbox once a day, reviewing the contents, and responding to the important things. Seems like a no brainer, right?

Forgive yourself and move on. You've owned it, made no excuses, apologized, and taken steps to insure you don't repeat the error. Ok. Done. Move on. Please don't wallow in the fact that you goofed. After all,  someone wise once opined - "to err is human, to forgive is divine". I believe that even applies to forgiving ourselves.