Friday, August 4, 2017

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

Image Attribution: www.express.co.uk
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

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

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
Thoughts



Friday, July 7, 2017

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

Image Attribution: www.latitudeco.com
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

https://youtu.be/7jZsVBCeI80



What to SHOW first? TUESDAY Traffic Tips

Friday, June 23, 2017

5 Reasons NOT to Sell your Commercial Real Estate

Image Attribution: www.1800bizbroker.com
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

Image Attribution: www.entrepreneur.com
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

Image Attribution: www.crowdstreet.com
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

Image Attribution:www.icdam.com
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?

Image Attribution: www.AvenueRealtyGroup.com
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?

Image Attribution: www.emeraldhs.com
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?

Image Attribution: www.whatroseknows.com
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.

Tuesday, March 14, 2017

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

Tuesday, March 7, 2017

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.

Friday, March 3, 2017

5 Things that Happen after the Listing is Signed?


Image Attribution: www.cbtherealestatecentre.com
You've conducted an exhaustive search for the correct commercial real estate professional to help you find a tenant or a buyer for your vacant building.

Three interviews, seven pin striped suits, and countless shiny pages of pitch books later, you've made a decision. You've signed an agreement and soon, prospects will be traipsing through your vacant space - hopefully.

Today, I want to outline what happens after the listing agreement is signed.

Marketing collateral. A brochure highlighting the building's features is created. Generally, these brochures are html'd into a format that can be easily transmitted electronically for "broker blasts". Certainly, a pdf of the brochure can be forwarded to inquiring parties. Postcards provide a nice respite from the myriad emails we receive. Snail mail still works! Especially if the postcard has a great image of the building prominently displayed. We are starting to see websites (I can hear my resi friends chuckling) for each available building and password secure document vaults for mission critical documents such as leases, reports, financials and others.

Multiple listing service entry. As discussed in previous missives, our MLS services are walled gardens. Only practicing brokers have the key. However, we do submit the listing data to CoStar, ILS, The Smith Guide, Loopnet, AIR, and Xceligent. The information is readily available to agents in the market.

Signage. Once upon a time, if you didn't have an available sign in front of your vacancy, you were invisible - as prospects drove around and wrote down phone numbers. Today, you must have two signs - one painted and planted in front of your building and also a digital sign as 90% of all searches start on line.

Advanced notice. We like to send the agents in our office and the local tenants or owners an advanced notice of the availability. Akin to the "coming soon" in resi parlance, our advanced notice alerts the market to coming attraction.

Marketing process. Ok. Let the games begin! In our experience, a cooperative effort works best - meaning broaden the net with social media, video, and email. Deal with all inquiries fairly and timely. Show up for the tours. If the offering is correctly priced, laden with amenities, and owned by a reasonable decision maker, the task should be smooth and speedy. Any variance will test your skill.

Tuesday, February 28, 2017

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

Tuesday, February 21, 2017

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

Friday, February 17, 2017

Hidden Costs in a Commercial Real Estate Lease

Image Attribution: www.surepayroll.com
That commercial building you just leased has some hidden costs that make sneak up and bite you - akin to a rattlesnake lurking in the bushes.

The bite may not be as painful as a snakes but certainly more wallet draining.

So what are these costs and more importantly how can you limit the costs in your next commercial real estate lease.

Let's dive in, shall we?

Type of lease. Take a look at the lease you signed. Across the top should be a reference to the type of lease - generally Net, Triple Net, Gross, Full Service Gross. Each has a unique mechanism for handling expenses and who is responsible. By the way, these expenses are in addition to your base rent. As an example in most NNN leases, you, as the occupant, are responsible for all the costs in addition to your base rent. In a gross lease, the landlord typically maintains, repairs, and replaces the roof - but most other expenses are yours - they just inflate your base rent.

Base rent increases. The base rent you negotiated generally is only for the first year. Typically, in succeeding years your rent will be increased by some escalator. These days we see 3-4% annual increases in the base rent. When times aren't as robust, owners are willing to negotiate a base rent that doesn't tick up throughout the term.

Abated rent. If you were successful in convincing your landlord to concede some months of base rent as an incentive for your tenancy, good for you! Just know if should fail to fulfill your obligation for the full term, you may be liable for repayment of the abated rent. As an occupant, changing the word "abated" to "free" may limit your repayment exposure.

Operating expenses. Property taxes, insurance on the building, maintenance of the foundation, roof, and walls fall into the category of operating expenses. As the tenant, you are responsible for paying these expenses - in addition to your base rent - when they are due or reimbursing the owner for these expenses. Some owners prefer to estimate these expenses for the upcoming year and then bill you monthly for the costs. Great. However, if the owner over estimates the costs, you've a refund coming. The opposite is true if he mis-calcs the other way - you owe. Be aware, these expenses increase over the term of your lease. Owners typically are afforded the right to annually "pass through" these increases to you . A major one to avoid is the increase in property taxes as the result of a sale.

Common area maintenance. Sometimes referred to as C.A.M. charges, these nasty little costs are for mowing the grass, watering the bushes, trimming the trees, sweeping the parking lot, emptying the trash bin and powering the lights outside. If you lease a location within a business park with multiple tenants, plan on this charge adding several hundred dollars a month to your rent.

Repairs and maintenance. The heating, air conditioning, warehouse sprinkler system, plumbing, and roof (if a NNN lease) are all yours to maintain and repair. So what happens if one of these systems needs a full replacement? That can be significant bucks! Generally, the owner must replace it if the cost to repair it exceeds a certain percentage. However, the owner may bill you for the replacement over a period of years.

Liability insurance. The cost of insuring the building against fire and destruction is billed to you as the tenant. You must also carry a level of liability, contents, and loss of rent coverage.

Avoid these expenses. Unfortunately, I'm not privy to a way to completely avoid the expenses - however, you can be aware they exist and put safeguards in your lease to limit your exposure. One suggestion - ask that your C.A.M. charges be capped at a certain annual increase. Another suggestion - negotiate property tax increases, in the event of a sale, be limited to a certain percentage. Finally, before you sign the lease, ask for a complete accounting of ALL the expenses in addition to your base rent.


Tuesday, February 14, 2017

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

Tuesday, February 7, 2017

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.

Friday, February 3, 2017

Can Commercial Real Estate Affect your Company's VALUE?

Image Attribution: www.kerrypostel.com
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.

Tuesday, January 24, 2017

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

Friday, January 20, 2017

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

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

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

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

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

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

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

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

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

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

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

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

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

Tuesday, January 17, 2017

#cre Brokers SUCK at This. TUESDAY Traffic Tips





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

Tuesday, January 10, 2017

STOP Saying This! TUESDAY Traffic Tips





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

Friday, January 6, 2017

Six Commercial Real Estate Lessons Learned in 2016

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

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

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

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

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

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

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