Friday, July 13, 2018

Should I Buy THIS Building?

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I received a call from an attorney last week. We recently completed a lease for his law firm and we swap referrals. 

This time the conversation centered around an opportunity with which he had been presented. 

In short, a friend of his is eyeing a building and approached my friend on becoming a partner. 

The counsel I gave the counselor was post worthy – so here goes.

First, compute the potential revenue. In this case, my friend was not going to occupy the building with his business. So, the opportunity will strictly be an investment. Also, the real estate is currently vacant. Considered should be the rent a tenant(s) will pay – not a puffed-up version – but a real true number. Next – how long will it take to lease the space. Finally – what concessions will have to be given to attract a paying customer? Oh yeah, if 100% is every tenant paying every month on time – you might want to figure in a shrink factor of 5-10% in case someone slow pays or stiffs you.

Next, add up the expenses. Biggest in this line of figures is property taxes. Insurance, maintenance, and utilities tag along as well. Don’t forget – the property taxes will rise in accordance with your purchase price. Make sure you take this into consideration.

Now, subtract the expenses from the potential revenue. The difference is a return – also known as a Net Operating Income. However, from this amount you’ll need to make sure you allocate some dollars for a new roof or a blown AC unit – lest you are swiping your Visa Card when your tenant is broiling on a July day.

OK. Now we have realistically modeled our income, subtracted real expenses, and created a reserve for major repairs.

Most would now do some math – return divided by the purchase price. This simple formula allows you to see what your percentage return is for an all-cash purchase – with no loan. In today’s market – this percentage should be 5.5% at a minimum. Frankly, I like 6%+ much better. Because, likely the purchase will be financed and with creeping interest rates – you don’t want the advantage of leverage to be a disadvantage. Said simply, if your borrowing costs exceed the all-cash return – YOUR spendable amount – after you pay the bank - will be much less.

Now, take a reality check. Remember, you have made some assumptions on the market rent and time it will take you to fill the vacancy. Will the deal still make sense if the lease up time is double? What if you can only get 75% of the rent you anticipate? Remember 2008? Yeah. Me too.


It’s the numbers, stupid! Investing in real estate is all about the cold analysis of the deal. Please don’t fall victim to the “but I love it” syndrome. 

Friday, July 6, 2018

Are Commercial Real Estate Brokers Un-necessary?

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Recently - in this space - I opined about commercial real estate technology and whether technology will replace the role of a commercial real estate broker.

If you missed the post, shame on you! But, here's the punchline - Not likely, due to a myriad of reasons.

Today, I endeavor to discuss the function of a commercial real estate broker - in a deal - and to what extent that participation is necessary.

Before we address the question, a bit of background. Most commercial real estate transactions - be they a new lease, a purchase, or a lease renewal in an existing space  - employ two sides - a procuring agent - those representing the buyer or tenant and an owner's agent - those representing the owner of the building. In California, agents are allowed to represent both ends of the transaction - also known as dual agency.

Each side has a purpose.

Tasked with finding a tenant or buyer is the owner's agent. This effort is filled with all manner of marketing initiatives - to brokers and prospects. Sometimes an owner believes he can short-circuit the search for a buyer or tenant by planting a sign on the fornt yard and digitally advertising. Problems arise when the inquiries pour in, tours are required, and a negotiation ensues. OK, an agreement has been reached - now what? Certainly, a broker's role on the seller's side is crucial.

Conversely, a procuring agent's goal is to locate a space for his client - the occupant. If a list of available buildings was easily accessed by a business looking for space - the contribution made by a procuring broker would be lightened - not eliminated but diminished. Residential agents face this challenge as all listed houses are public facing through sites such as Zillow, Realtor.com, and Redfin. A homebuyer can find out what is available with a swipe of an app. The only consumer-facing commercial real estate site is Loopnet. Accuracy of complete availability is limited as there is no governing realty board to create accountability for the submissions. So, a key to the walled garden of commercial real estate availabilities is secured through an agent.

I once heard the reason flight attendants are on board an aircraft during your cross-country flight - is in case of an emergency - not to serve you honey glazed peanuts. A similar set of crash precautions is contributed by the agents in a deal. Problems arise and a skilled practitioner can counsel you through various solutions. We recently guided a seller through a buyer's request for repairs. What started as a high six-figure ask was whittled down to a mid-five-figure take - all because of our web of contractors. Don't ever underestimate the power of a great network when it comes to solving a problem.

So, unfortunately, dear reader, a commercial real estate professional is a necessary evil in a transaction.

Friday, June 29, 2018

Dispute Resolution between Brokers

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Akin to the wild, wild, west, commercial real estate agents are sometimes referred to as cowboys - I'm not certain why - but we are. Maybe it's our entrepreneurial spirit, our freewheeling demeanor, work hard - play hard attitude, or the way in which "we eat what we catch" - a phase associated with commissioned sales professionals.

Regardless, we cowboys sometimes disagree - about a lot of things but most commonly about how we are paid. Fortunately, as commercial brokers, our differences are not settled by squaring apart ten paces at sundown.

When a dispute arises - between agents - we have ways to resolve our complaints - dispute resolution - which is the topic of today's post.

Single biggest on the topic of disputes would be a fee disagreement. My general rule - fee squabbles are easiest avoided by having a clear written understanding at the front end of a deal. Also, transacting with honorable practitioners lessens the risk of a misunderstanding. If there are listings, offers, responses, leases, escrow documents and the like - written agreements are easy. If not, you may find yourself with a problem.

As previously discussed, commercial agents are generally not members of the California Association of Realtors - some certainly are, but typically no. Therefore, we are not Realtors and not subject to the mandatory arbitration and mediation - between agents - as called out in C.A.R. affiliation. However, most commercial brokers are members of the Association of Industrial Commercial Real Estate - AIR CRE. AIR CRE gives agents a platform to settle disputes through mediation, or arbitration.

Commonly, the office in which an agent resides also has - through their independent contractor's agreement - some means of mediating or arbitrating fee fights.

So moving up the DefCon ladder - from least to worst:
First, Professionals would first try to work out their differences among themselves - DefCon - 5
If no resolution can be reached, the issue would be discussed interoffice or intraoffice with managers  - DefCon - 4
Still, no meeting of the minds, a mediation with a single arbitrator would be conducted to smooth the ruffled feathers - DefCon 3
A room full of crossed arms and clenched jaws results in binding arbitration - DefCon 2
Finally, the parties lawyer up and seek to litigate the issue in a court of law - DefCon 1 - today's version of the OK Corral!

In my experience, disputes rarely see the light of day - that of a mediation or arbitration - or worse - a lawsuit. Hands are generally shaken in the privacy of an agent's office.

Friday, June 22, 2018

You've Really FOUR Choices with your Commercial Real Estate


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This week, I had the pleasure of advising a family. Held as income properties were two parcels of commercial real estate which had been in the family for years.

As the ownership morphed over time due to succession, the heirs were looking for counsel - thus they contacted me. The conversation which ensued I believed was column-worthy - so here goes.

As a qualifier, these folks are arms-length investors - they reap the rent the buildings generate and do not occupy either building with a business.

So, if you own commercial real estate as an investment, I believe the ownership directions are fourfold:

Continue to own and manage the buildings. Vacancy throughout the term of ownership has been minimal - the family has managed to keep the spaces filled by offering below market rents. This is a great strategy for a long-term hold. Avoided is the origination of a new tenancy which costs time - abated rent and vacancy - and money - tenant improvements and broker fees. In some instances, originating a new lease can consume 25% of the expected rental revenue! Wow. That's a big bite just to nudge a tenant up to a market rate and risk them moving.

The next three scenarios could potentially generate a taxable gain - which is the subject of another column.

Sell the buildings leased. Remember those rents at below market rates we discussed? Yeah. That is the downside of selling the buildings leased. You see, the value is determined by the cash flow produced - less cash flow equals less value. So, if your desire is to maximize your sales price by selling with tenants in your commercial real estate, you should consider moving the rents to market - potentially suffering the vacancy and re-letting. Easy math would analyze the expected increase in the selling price minus the cost to re-rent the buildings if necessary.

Sell the buildings vacant. Your ideal buyer for the real estate may be the tenants the buildings house. Afterall, they are in residence and may dream of owning the space they occupy. Approach them. If you receive "no interest", explain your strategy of allowing their leases to expire and locating an owner occupant to buy the buildings. Their tenor may change. In most cases, an occupant will pay more than an arms-length investor - because occupants look at utility - investors at their returns.

Scrape the buildings and sell the land. Sadly, at some point, the improvements eclipse their useful life and the underlying land is worth more than the land with a building. You'll need to take a look at the necessary upgrades - roof, air conditioning, seismic, parking lot, plumbing, electrical, etc. A review of the costs to bring the building up to "market standards" will help you determine the value of your building improvements - and whether they are worth salvaging.

Friday, June 15, 2018

Four Ways a BUILDING adds to Business Profit

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Your decision to relocate your business was well reasoned. Considered were the operation and growth trajectory. Analyzed was the best deal structure for the company - lease or own. You endured countless tours of the available commercial real estate that met your criteria. Negotiations and paperwork followed - and culminated in the lease or purchase of your new business home.

If you decided to buy - alright! echoed your rejoice when the title officer called with word your "recording was confirmed" - which meant you finally owned a building.

So now that you've moved - can the building make your business more profitable? Humor me as I build a case for profitability - you know - revenues minus expenses.

If you chose to buy a building:

Your "rent" is fixed. Expenses are generally lumped into three broad categories - the cost of sales, operating expenses, and miscellaneous. The amount of rent paid is an operating expense of the business. Whether the "rent" is paid to an alter ego of the company's ownership or paid to an arm's length landlord, matters. If the owner of the building has no relationship to the business ownership - his sole motivation is to collect as much rent as possible. At the expiration of your lease - expect an increase in rent. Conversely, if the occupant and owner are mirrors of one another - a favorable rent can be achieved. If the debt financing the acquisition is at a long-term fixed rate - even better.

Regardless of leasing or buying:

Employees are happier. Pride of ownership in your location causes employees to produce more - because they are happier. A private office, a collaborative work environment, clean lunchroom, ample parking are all intangibles that create a positive work environment.

The operation is more efficient. Lack of space or poor space utilization means you are spending time unproductively. Classically, we see this when products have evacuated the plant and are temporarily stored outside during operating hours. Paid are the people moving the stuff in and out - when they could be producing more goods. Also, by properly maximizing the height of a building, you may be able to occupy fewer square feet - fewer square feet - fewer dollars spent - more money in your hip pocket.

Customers can find you. If you can't be found - you are invisible. The right location with close freeway access can boost your business - just because more customers will flood your doorway.




Friday, June 8, 2018

Do Cap Rates Matter?

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Investors in commercial real estate - folks who rely upon the rent paid by a tenant for their livelihood - use a number of different measures in analyzing their investment.

The most common metric is a capitalization rate or cap rate. Simply stated, a cap rate is the quotient of the yearly net operating income divided by the purchase price.

If a building sports an annual net operating income - the rent minus the expenses - of $100,000 and the building is worth $2,000,000 - the resulting cap rate is 5%. Easy enough.

As you can determine from our example - if the net operating income increases - say to $120,000 - and the purchase price stays static - the cap rate also increases to 6%. However, if the net income stays the same - the purchase price decline to increase the cap rate. Therefore the value and cap rate are inverse of one another - akin to a stock dividend.

Ok. So what? Do cap rates matter? Sure, they do. But only when taken in context and in combination with other criteria such as the cost per square foot of the building, the relationship of the current rents to market rents, the viability of the tenant, the sustainability of the income, and the trends in value. In other words - a cap rate is a still photo. When combined with the features above - it cocoons into a panoramic video.

Cost per square foot. If a parcel of commercial real estate is purchased below the cost to build it - replacement cost - generally a market rent will return a market cap rate. Trouble brews when the cost per square foot far exceeds the cost to produce.

Current vs market rents. Recall, our cap rate is the quotient of the net income divided by the purchase price. But if the rents are well above the current market rents - a distortion in the cap rate occurs.

Viability of the tenant. Market rents, great cap rate, decent price per square foot are all for naught if the tenant defaults. The costs to originate a new lease - downtime carry, abated rent, tenant improvements, broker commissions - are staggering.

Sustainability of the Income. A viable tenant with a multi-year lease spells an income stream that is sustainable.

Value trends. You're comfortable with the rents and their relationship to the market. But are the rent trends up or down trending? You don't want to get stuck with an overmarket rent come renewal time lest you must reduce your return.

Friday, June 1, 2018

Blooper Reel - AKA 8 Most Embarrassing Commercial Real Estate Moments

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Today, I inject some humanity in an otherwise buttoned down industry - commercial real estate brokerage - by sharing a blooper reel.

ALL of these stories actually happened - although only a few happened to me.

I will let you, dear reader, figure out which ones are mine. So, in classic Letterman order - least embarrasing to most - here goes.

So, how much? Many times, commercial real estate professionals speak a different language than their clients. Never is this more apparent than when quoting prices. Brokers talk about a price per square foot - occupants want to know the total price. Hours of preparation end with blushing when you must whip out your calculator and do some math when a client asks, "how much?"

An alarming situation. Two brokers showed up early to preview a building. Carefully dialed was the lock-box code. Once inside, the agents realized there was no electricity As they stumbled around in the dark pretending to clear the rooms akin to a SEAL team, their spines stiffened and bowels trembled when they heard - FREEZE, hands up. Apparently, the only ones who knew there was a silent alarm - yep, two of Anaheim's finest.

Reply to ALL. A vendor was railing against an office for not updating their listings through a series of terse emails. Finally, one of the professionals responded to his manger - "how long are we going to put up with this clown?" You guessed it - the clown received the "reply to all".

You rang. An owner was telephonically expressing his dissatisfaction with an agent's marketing efforts - rather loudly. Relief was a button away as the front desk announced another caller was holding. Dissatisfied was asked to stand-by. The holding caller was engaged and received an earful - problem was dissatisfied received the earful - ooops!

Will the real buyer please stand up? As a couple of listing agents anxiously awaited the arrival of a buyer - many panhandlers approached. Concerned were the brokers. After all, would the buyer discount the offering because of the number of transients in the area? Their dismay heightened as another bum approached - except this time, he happened to be the buyer!

Lock-out. One of the first lessons a young agent learns is to twist the deadbolt when exiting a building - especially when viewing the fenced staging area - lest you lock yourself and client outside. One new broker missed the tutorial. While touring a new high rise, he managed to lock himself and his prospect on the eighth story balcony. As no other tenants were in residence and cell phones in those days lived in a car console - surprised was the passerby who heard the screams yet earned twenty bucks for springing the embarrassed broker.

Excuse me, you own it? Many swings and no hits describes a professional who had attempted countless times to appeal to a buyer. Finally, the broker was convinced he had sourced THE DEAL that would end the batting slump. You can imagine the pink face that resulted when the buyer responded - "uhh, we own that building and are trying to sell it."

A door to nowhere. A brand new German automobile was used as a tour guide of a newly constructed industrial building. As the prospects un-belted and prepared to walk the property - the proud driver encouraged them to say put. He would motor around inside the building so they could view the improvements in luxury. The tour went well. Unfortunately, the exit - through an elevated door this time - resulted in a face plant for the Benz - which from that point forward sported a "Dock-Hi" vanity plate.

Friday, May 25, 2018

Will Commercial Brokers be Replaced by Technology?

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Much has been written about disruption in the commercial real estate industry. Millions of dollars have been invested to eliminate our role in a transaction.

So, the question I explore today is "will we be replaced by technology?" My simply opinion is - not in the immediate future. Please indulge me while I share my reasoning.

Reasons why not:
Commercial real estate is not a commodity. Unlike a share of stock - ETrade or Schwab, a hotel room - Priceline, a simple will or LLC - Legal Zoom, or even an auto insurance policy - Geico - no two parcels of commercial real estate are the same. You could have two industrial buildings with similar square footage in the same city that have far differing values. A long term, under-market lease can cause a declination in worth. Boost the electrical service into a building and you can sell for more.

Commercial real estate firms share data differently. We provide information on our listings to data aggregators such as CoStar, Catylist, the Association of Commercial Real Estate, and Loopnet. Subscriptions to these services then bake our listings into a broker searchable format. But, the only consumer facing service is Loopnet. If you've ever tried to perform a search in Loopnet - you have quickly become frustrated as commercial searches pale in comparison to residential searches. Residential firms are contractually bound to share their data with a realty board - who then aggregates the data and allows consumers to view and download available information.

Commercial real estate transactions are complex. Standardizing a sale or lease is challenging as there are so many variables to consider - contingency periods, financing, tenancy, city permitting, title issues, tenant improvements, environmental evaluation. Ten-X has done a decent job automating the marketing and execution process of a sale - but still require a listing broker be involved. I am unaware of a service that has automated lease marketing - leases account for approximately 75% of all commercial real estate deals.

Technology has nibbled at the edges. Never have the steps involved in a deal changed. Commercial real estate professionals must source, find, qualify, control, execute, bill and receive payment. Many of the technological gems we see help us "execute" deals or automate our "sourcing" - but don't seek to extract us. Regardless of technology - ours remains a hyper local industry - where local knowledge is golden.

Reasons so:
Billions of dollars are at stake. The company who cracks the code to the walled garden - figures out a way to eliminate brokers - will rake in billions. Costar revolutionized the way in which brokers search for property. Once precluded from doing deals in other locales - because we didn't have access to the available inventory - we can now trade around the world. Loopnet has give a portal - albeit a small one - to consumers of our listings. Ten-X, formerly Auction.com piloted the disposition of hundreds of distressed or bank owned assets through their auction platform.

Look at our residential counterparts. Many of the tasks residential realtors once provided can now be performed without the assistance of an agent. Not too long ago, you had to call or email to get details on available houses. Now if you are curious about that new sign across the street? Just Google the address or visit Realtor.com and voila - information abounds. A house shopper can practically conduct 100% of the research necessary - analyze the neighborhood, check on the schools, review recently sold properties, see what else is available, tour the interior virtually - before engaging an agent.

Friday, May 18, 2018

Five BIGGEST Mistakes Owner Occupants Make

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If you own commercial real estate you either occupy the buildings with your company - owner occupant - or you rely upon the rent paid by a tenant - investor. I have clients that are both owner occupants and investors - they own the building from which their company operates AND they own additional commercial real estate which is leased and provides a nice income to supplement their day job.

With that differentiation as a benchmark, I want to describe the biggest mistakes I've seen owner occupants make.

Not having a current lease agreement. Generally, an entity owns the building and a related entity occupies the space. In the case of an owner occupant, the two entities may be tied by a common individual - Allen C. Buchanan, LLC owns the building and Allen C. Buchanan Company is the resident. Cool. Many times - because Allen, LLC is collecting rent from Allen Company - no official lease exists. After all, money is going from the left pocket to the right - no need to have that in writing. The fun begins when something happens to the individual and now his heirs must piece together the understanding. I actually witnessed a manufacturing company be forced to move when the heirs smelled dollars and no lease had been executed.

Over improving. You know that house down the street from you that is larger than the lot will allow? Yeah. We have the same with industrial real estate. When the physical space will no longer allow for growth - adding employees or machinery - many owner occupants add square footage to their building through second stories or production mezzanines. If a building was not designed to have an upstairs and one was added  anyway - the resulting product becomes difficult to sell.

Not fully utilizing. The opposite of over improving is not fully utilizing the space that exists. Frequently, a re-work of the manufacturing flow or warehouse racking will find much needed and under-utilized space.

Keeping the building when the operating company is sold. I wrote about this in a recent column entitled "Be Careful If You Sell Your Business and Wind up the Landlord of a Vacant Building". Inherent in this issue is the belief that if you sell the business and the business buyer is prepared to continue leasing the building - you are golden. Weighing your options - sell the building or keep the building - revolves around this question - would I want to own the building if it was vacant?

Using the real estate as an ATM. Frequently, banks view real estate as better collateral than other business assets - goodwill, account receivables, inventory, equipment. Observed are cases where the amount of money owned against a location are far in excess of the sale value. Maybe not an issue unless you are forced to sell the building.

Friday, May 11, 2018

No Response to Your Offer - Now What?

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One of the most frustrating things we encounter as commercial real estate professionals - and you as a buyer of commercial real estate - is a "no response." Zilch, nada, zero, crickets, anyone - Bueller?, all describe that sinking feeling you suffer when an offer is made and hours or days pass with no feedback.

Believe me, buyers, we feel your pain as a "no response" is much more difficult to explain than a quick "no thank you!"

A great deal of emotion is expended deciding to pursue a property. When  met with nothing - the agony of defeat looms large.

So, why, you may ask, is my offer not receiving the red carpet welcome you believe it deserves? Indulge me as I proffer a few hypotheticals.

Your offer may not be very good. Many times, these days, asking prices make no sense are are not based on a real view of the market - I refer to these as arbitrary owners. Your well intentioned, researched and comp based offer may just not be enough to move the seller needle.

Competing offers may be in play. If a deal is priced right and there is no "hair", multiple offers prevail - and in some cases at above asking price. Occasionally, a seller will wait until he has several offers and then respond to one or all with a "best and final" request.

Seller decision making may be convoluted. Frequently, a commercial property is owned with an entity with multiple owners - thus decision makers. Allow a disagreement in direction to occur within the ownership ranks and - you guessed it - gridlock.

Something entirely un-related may have occurred. A death, extended vacation, business set back, a new lender requirement will cause a seller to re-think his strategy and delay a response.

Your offer may be too good. If a seller receives a full price offer immediately after listing - with limited contingencies, all cash, and a quick close - something curious occurs. Sellers may believe they've priced their offering too low and delay responding until a review of comps and availabilities can occur.

The seller may not have a destination for the money. As I have previously opined, sales of commercial real estate can create large tax liabilities. Tax burdens can be deferred with a 1031 exchange but if the seller is un-prepared for this shock - if I can't find anything to buy, I owe how much?- your offer may languish.

The seller may not have a place to move. Our market is encumbered with the lowest number of vacant buildings in history. Similar to not having a place to deploy the sale proceeds, if the owner occupant cannot find a place to move his business - a quick response is fantasy.

Friday, May 4, 2018

3 Purchase and Sale Agreement Pitfalls

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You’ve found the ideal building to house your business. Convinced are you that you’ve negotiated a fair deal with the seller as armed with your lender pre-qualification letter you volleyed until match point. 

Now, the seller has served, into your court, an agreement - eleven pages of single spaced boiler plate - which requires your signature to proceed. And to think - this all started with a handshake.

Ok. So now what? Well, you’ve several options. You can simply scan the document and locate the deal points - price, contingency, closing time frame, etc, sign away and figure the rest will take care of itself - not recommended.

Or, you can employ a real estate attorney to scour the document and craft language which will benefit only you to the detriment of the seller - also not recommended.

Or, you can seek advice from your agent - which will generally be met with a disclaimer about his inability to provide legal counsel because he’s not qualified.

Recommended, therefore, would be a combination of the three - scan for deal points, ask your agent what areas should concern you as the buyer, and then seek legal counsel for those specific areas.

Let’s spend a few minutes and discuss some points that generally get negotiated in a commercial real estate purchase and sale agreement. As a back drop, I will assume you’ve been asked to sign a standard purchase and sale agreement - most commonly the AIR CRE form.

Representations and Warranties. This section - more than any - gets the most attorney play. Seller counsel will argue his client is representing nothing - not even the address is correct. I jest, of course, but barely. Buyer counsel would have the seller warrant all current and future faults - forever. Once again, hyperbole. Central here - the seller has authority to enter the agreement, perform the duties of seller, and transfer title.

“As Is” Purchase. Generally, this clause gets misunderstood. Sellers believe they are selling the premises with all faults and that the buyer MUST accept the condition of the building in its present condition. Buyers see this clause and worry about a latent issue. Reality is, most deals contain a contingency period. During this time a buyer is able to study all aspects of the real estate and approach the seller if something untoward is discovered. The “as is” typically refers to a buyer relying upon its own investigation and not relying upon a seller representation.

Waiver of Contingencies. If, during a contingency period, a buyer discovers a “show stopper” - a roof in need of repair, an easement that diagonals the parcel, an appraisal that is short of value - he may disapprove the condition. Remedies range from cancellation and full deposit refund to seller agreement to mend the issue. Commonly, these objections must be done in a time frame and should notify all parties in writing.

So, use this framework to prevent getting aced out of your agreement negotiation.

Friday, April 27, 2018

How to AVOID Rent Increases

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Last week, the subject of the post was "Are YOU prepared for a commercial real estate rent increase?" Listed were the reasons which would cause your rent to rise this year - increases in operating expenses, pre-set rent increases throughout your lease term, the sale of your building, and the expiration and renewal of an existing lease.

If your situation mirrors any of the preceding and you are facing a rent re-set this year, prepare for a shock as we have witnessed a dramatic escalation in lease rates throughout Orange county.

Today, I want to spend a minute and discuss some strategies you can employ to AVOID rent increases.

Audit Operating expenses. As previously discussed, op-exes include everything from property taxes to landscape maintenance. You pay these expenses in addition to your base rent if you signed a triple net lease and these charges are included in your base rent if you are obligated to a gross lease. Generally, landlords budget for these expenses annually in October and November. Come January 1, you get an estimate of these charges included with your rent invoice. You typically have the right to audit these expenses and your landlord is obligated to provide back up. As property taxes are the biggest component of operating expenses - and they will rise significantly if the building is sold - try and negotiate some protection from tax increases in the event of a sale. Most landlords will balk at this request. However, maybe your owner will limit the increase with a "not to exceed" clause - which can help.

Monitor pre-set increases throughout your term. If your lease contains annual bumps - which most commercial real estate leases do these days - take a look at your base rent. Do you pay operating expenses in addition to or included in your base amount? A simple format change to how these mandatory increases are applied can save you thousands. A base rent increase should apply ONLY to the base rent and not to the operating expenses. Remember op-exes increase on their own. Don't place yourself in the situation of a double whammy.

Don't sign long term leases when the market is robust. This seems so simple yet I see this mistake made quite frequently. When real estate values are frothy, business normally is as well. Compelled by confidence, business owners commit to long term leases during these times - rents at market highs with high increase pre-sets will cause you to gasp if the rent market adjusts. A better strategy is to negotiate extension options - you can stay long term if you desire but you're committing for a shorter term up front. If the rent market adjusts, you are now in a position to combat a large increase in your rent.

Friday, April 20, 2018

Are YOU Prepared for a Rent Increase?

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You've opted to lease your business location - which means every month you pay rent to a landlord. Several considerations led you to the decision to lease versus own your building. We will leave the lease versus own conversation for another day.

Today, my goal is to discuss the dynamics that will cause your rent to increase - sometimes dramatically! Hopefully, the topics discussed here will prepare you for the call that your rent will soon balloon.

When a commercial real estate lease originates, the number of years - term, rent amount, rent increases, concessions - such as abated rent, building improvements and the like are spelled out in the document you and the landlord sign.

As the term of your commercial real estate lease can dictate increases in your rent, a brief explanation about length of leases is important to review.

Depending on the size of your space, lease terms range from month-to-month to ten+ years. A smaller space - fewer than 5000 square feet - normally means a shorter term - fewer than two years. Why, you may ask? Tenants that occupy small blocks of space are frequently start-up companies without the benefit of years of financial history. In some cases, these businesses are a payment risk. Landlords counter this risk by limiting the lease term - the overall amount of rent to which a tenant is obligated. Additionally, growth trajectory is tough to quantify with a new enterprise. Therefore, these operators are reluctant to commit long term lest they outgrow their digs.

With term explanation as a back drop, there are several other factors can cause rents to rise. I've ordered these from least to greatest:

Increases in operating expenses. Operating expenses include charges for property taxes, insurance on the building, common area maintenance - landscape, trash, utilities, parking lot sweeping, a share of capital expenses - a new roof or air conditioner, and in some cases property management. All of these charges are either baked into your base rent - a gross lease, or are paid for in addition to your base rent - a NNN lease. Unless your agreement specifies otherwise, as these expenses increase over the term of your lease - yep - your rent increases.

Pre-set increases throughout the term. Leases today typically carry annual increases in the base rent of 3%-4%. Gone are the days where the amount of rent paid each year increased by the change that occurs in the Consumer Price Index. Even though three to four percent annually seems steep compared with inflation - please understand, commercial lease rates have increased approximately 70% since 2009 - a staggering 8% a year! So, if you signed a ten year lease in 2009 with annual escalators of 2.5%, prepare for a bit of a jolt next year.

The sale of your building. The largest operating expense is property taxes. Recall, these are paid as a part of your base rent or in addition to your base rent. Annually billed at one percent of the assessed value of the real estate, property taxes can increase a maximum of two percent per year - unless - the building is sold for more than the assessed value. And then, WHAM! You are stuck with a huge bill.

The expiration and renewal of an existing lease. The coup de grace these days. Many leases expire and are slated for renewal - as our volume of leasing hit a peak in 2010-2013. A seven year lease originated in 2010 expired last year as did a five year lease commenced in 2012. Shock and awe are mild adjectives to describe tenant reactions to their landlord renewal proposals. Met with a limited amount of available buildings, many tenants have been forced to swallow hard and accept that their rent might increase 30-40%! Ouch!

Next week, I will discuss some strategies for limiting your rent increases - so stay tuned, faithful readers!

Friday, April 13, 2018

Would you Own your Commercial Real Estate - If Vacant?

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Frequently, if you operate a small business, owning your location can make a great deal of sense. 

Generally, it works like this - you form a Limited Liability Company personally. The LLC then buys the commercial real estate. Your business signs a lease with the LLC. Therefore, you pay rent to yourself. Brilliant! 

Ownership allows you to fix your location costs - the purchase is financed with fixed rate debt for a period of time. The occupant is under your control - after all it is your company. Personally benefited are you from the location's appreciation - if any. Finally, there are some potential tax benefits individually. Awesome!

Now, let's add a dimension which many small business owners are facing these days - someone approaches you and offers to buy your business. 

When you consider selling the business that occupies your real estate - even if the purchaser of your business signs a lease with your LLC - the question you should ask is: would I want to own this location if it were vacant? Business changes, motivation varies, locations depreciate. At the end of your tenant's lease you may be faced with a costly vacancy. 

Remember, when you are the occupant and the owner, the dynamic is different than being the owner but not the occupant. You are now an investor who must compete with many other investors for your tenant's occupancy. The cost of originating a new lease is staggering - in some cases 20-25% of your lease income. Are you prepared for that potential risk? If the answer is no, then there are steps you can take to minimize the risk of owning a vacant building. 

First, analyze your location's monthly carrying costs - debt service, taxes, insurance, common area maintenance, miscellaneous maintenance, etc. You should maintain a 9-12 month cash reserve of this total amount. 

Secondly, determine how marketable the vacant building is. A commercial real estate professional familiar with the current market can provide this for you. How many vacant buildings similar to yours exist? What is the current appetite - including market time - for such a location? What is the current vacancy rate for facilities such as yours? - like yours specifically - not a market wide vacancy of all locations. How special purpose is your space? 

Third, determine what the lease income is worth to an arm's length investor. This amount less any debt owed against the location and less any closing costs of sale and net of any taxes determines the proceeds that can be deployed into an alternate non-real estate investment. If you choose to invest in another income property, the gain may be tax deferred if the new purchase meets certain criteria. You may be wondering why you would sell one piece of real estate only to buy another? The simple answer is to lessen the risk. By selling a special purpose single tenant location and investing in a general purpose multi tenant location, the management is greater but the downside is more  manageable - akin to selling stock in a single company and buying a mutual fund of many companies.

Friday, April 6, 2018

A SHORT Term Commercial Real Estate Need - Now What?

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One of your largest customers has requested you stock some of their products. Problem is, the customer cannot commit to you for a long duration.

Or, your wife has given an ultimatum - the business you run from the guest bedroom must be relocated to a permanent location - one without Mickey Mouse murals. But, you don't know how big the business will grow and your are reluctant to lock-in a term lease for a location.

Or, you have made the decision to discontinue your warehouse operation and run it through another channel.

Or, you notch a huge manufacturing contract which will require you to free up building space to employ another machine - but the contract expires the end of the year.

All of the above situations translate into a short term need for space. You, the business owner must take that short term need for space and marry the need with an available building. I've written ad nauseam about the shortage of space - we are now at historic vacancy lows with estimates in the 1% vacancy range. So when you trot out your short term requirement - less than one year - you are met with a reluctance to consider the proposal by owners. In this robust environment - with lease rates near the top - owners are interested in securing long term tenants - three years plus. So, what's a mother to do?

Please consider these options:

A third party logistics provider. Also known as a 3PL, these operators specialize in short term logistics and warehouse needs. Generally, their services are billed by the pallet and include handling in and out, storage, inventory, bonding, and can be cancelled or changed when your logistics needs change. 3PLs have become increasingly popular with the advent of e-commerce. So, if that customer demands you stock some of his products locally or your find yourself in need of additional space in your building - consider outsourcing to a 3PL.

An executive suite. Executive suites are a popular way to move a home based business from a bedroom to a boardroom. Akin to many small fish swimming together to appear larger, executive suite operators lease large blocks of space in high rise or mid rise office buildings and then sublease smaller portions on a short term basis. An arriving client sees a full floor of space - even though you only occupy one room. Included in your rent typically is a charge for reception, conference, kitchen, and in some cases phone and internet. Leases can be crafted as short or long term and generally you can expand or contract as needed.

A co-working space. Similar to an executive suite but vastly different, co-working space became popular in densely populated areas where independent workers could arrive, plug-in, and work along side other professionals without the need to commit long term. Generally, a monthly fee is assessed which allows you access to any of the co-working spaces available in the network. We-work has taken this concept globally. For a flat rate each month, you can reserve conference rooms or offices anywhere We-work has a location. We recently met a client from New York in a We-work space in downtown Los Angeles. A bit more professional than meeting in a coffee shop or a hotel suite, a co-working space can solve a short term need in a seamless manner.

Short term need? Don't despair. You have alternatives.

Friday, March 30, 2018

The VALUE of a Great Network - 4 Examples

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Recently - in this space - I opined as to the reasons to hire a commercial real estate broker to guide your building search or your disposition of a parcel of commercial real estate. Number one on the list was the value of a commercial real estate broker's network.

Today, I want to discuss this reason a bit more in depth - the VALUE of a great commercial real estate network.

We all understand how contacts in the field of construction, architecture, title, escrow, and lending are important to the success of a transaction - they all play an integral role - and in some cases a deal can't happen without their function. However, the true value of a great network reveals itself when there is a problem that must be solved in order to advance a sale.

Indulge me while I recant a few recent examples.

Fire sprinkler consultant. The height with which goods are stacked in a warehouse is governed by fire codes - the more flammable the commodity, the shorter the stack - unless an upgraded sprinkler system is employed. As a potential occupant of an industrial warehouse, it's incumbent upon you to make sure you can store your goods at an acceptable height. After all, you pay for the floor area of a building - not the cube space. Floor area efficiency by racking to the rafters. Therefore, a stacking analysis is the role a fire sprinkler consultant.

A land use attorney. Last year we sold a building adjacent to a sister building. Both were owned and occupied by the same owner occupant. Desired was to sell one of the sisters but continue to occupy both. Problem was, the owner had installed solar panels - that powered one of the buildings - on both parcels. Consequently, we required an easement be drawn outlining the area in question. Enter our land use attorney who was familiar with the process and drafted the easement.

A specialty building. Occasionally, I am asked to market a specialty building - a restaurant, a church, a school - or to assist such an operation find a suitable location. My network includes several individuals whose focus is the specialty building - a church, restaurant, or school. One of my contacts in Los Angeles only sells restaurant properties and assists restaurants in their search for space. A very easy hand off occurs when I can face a client - and with certainty - tout my contact's expertise.

A project manager. Moving a complex manufacturing operation is a task. Frequently, the occupant is best served hiring a project manager to execute the move. Generally, project managers offer their services akin to a menu - you can choose one of more services ranging from the planning and implementation of the move to installing your computers to assisting with permitting your tenant improvements.





Friday, March 23, 2018

The Intersection of Retail and Industrial Commercial Real Estate

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As frequenters of this column will attest, commercial real estate comes in many forms - most commonly office, industrial, and retail.

Office space  is primarily occupied by firms that provide a service - doctors, lawyers, CPA's, real estate agents, wealth advisers, insurance brokers.

Industrial buildings are tenanted by companies that make and ship things.

Finally, retail is housed in locations where folks go to consume products or be entertained - stores, restaurants, movie theaters, and malls.

Unions between genres of commercial real estate aren't without precedent. The computer boom in the early to mid 1980s morphed industrial and office space into a new sub category known as flex or research and development space.

Much has been written lately about a new intersection - that of industrial and retail - and the benefits and challenges such a marriage has engendered. Because today's consumer buys differently than those of us born when Eisenhower was President, traditional retail has been forced to change - or be docketed into the bankruptcy courts. Once upon a time, you visited a retailer or several and your ability to buy was based upon the stock on hand on the sales floor or in the small storeroom in back. Today's retail outlets are tantamount to a showroom where products are displayed but not necessarily purchased. Now, commonly, once you've seen the item, you search for the product online - sometimes in the showroom - find it, place the order, pay with PayPal, and a package arrives on your doorstep within days - or hours. What's not seen from your LCD screen is the procurement process of warehousing, sourcing, order picking, shipping, and delivery - historically an industrial function. Mammoth warehouses have sprung up in the Inland areas of Southern California - where the "back-end" of your purchase occurs. No longer is your purchase dependent upon the stock on hand - its always available!

So will we see large "big box" retailers converted into industrial procurement centers? Or, will industrial occupants find a way to open in shuttered mall space? We've certainly seen some recent examples with the likes of Living Spaces Furniture, IKEA, Bass Pro Shops and others. A Costco is simply a warehouse where products are sold. Challenges abound, however - with zoning, configuration, amenities, and locations. Cities, dependent upon the sales tax revenues retailers generate, will weigh in as well.

Stay tuned. We will see where the intersection takes us!


Friday, March 16, 2018

Auctioning Commercial Real Estate - UPDATE

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As a seller of commercial real estate your considerations are many but filter down to two primary concerns - selling for the highest price in the shortest period of time.

Selling for the most money results from a bevy of buyers beating a path to your property - with pockets full of pennies - willing to pay you promptly.

Closing quickly - shortest period of time - involves choosing the RIGHT buyer from the pool of potential purchasers.

OK, you say. How do I insure I check both boxes - selling for the most dollars possible and in the shortest period of time? Answer. Consider auctioning your commercial real estate!

Recently, I wrote about the auction process. If you want to read what I had to say, click here.

Drawn was the following conclusion:

"Auctioning is something to consider if you are selling a partially or fully leased commercial building. Your commercial real estate will be exposed to the broadest market. If your goal is to sell your commercial real estate to an owner occupant, auctioning is not the best avenue - currently. But, stay tuned. The process will evolve and is worthy of a look in the future."

The process has in fact evolved as Ten-X, the nation's largest commercial real estate auction company, now caters to all genre of sellers - lenders who have foreclosed, equity owners whose properties have income, and equity owners whose property will be sold vacant. Ten-X still offers their live bid platform but have expanded their program to include the managed bid and offer select, alternatives. 

Conventionally, if a seller wanted to sell, he engaged a commercial real estate broker and listed the property. The broker - through his marketing channels - publicized the offering to potential buyers and cooperating brokers, conducted tours, solicited and fielded offers, negotiated the terms, entered escrow - and assuming all was as advertised - closed. If all went well - and the property had few warts - the process generally could be accomplished in 90-150 days. 

Now, a seller can engage Ten-X and a broker to market his commercial real estate for sale. No additional cost is borne by the seller as Ten-X charges the buyer a transaction fee of 1.5%-5% depending upon the platform chosen - managed bid, offer select or live bid. 

How does a seller benefit from this arrangement? The widest possible net is cast for potential buyers - competition is created - and the highest possible price is achieved. With the Ten-X platform, certainty of close is established. Buyers are carefully vetted and hefty penalties ensue if the buyer fails to perform. So, you sell for the most money in the shortest period of time. 

Friday, March 9, 2018

How Will a Split Roll Affect California Commercial Real Estate?

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Split roll. Not a term with which you are familiar? A brief primer. Split roll refers to a different treatment of property taxes for residential vs commercial real estate.

Since the enactment of Proposition 13 in 1978, California property owners have enjoyed a program which assesses property values annually in July - commercial and residential, multiplies that assessment amount by 1% and sends a property owner a bill in October. Your percentage may vary slightly as municipalities are able to add to your property tax bill for such things as local utilities, and bond payments incurred for the costs of streets, curbs, gutters, and storm drains - also known as a mello roos assessment.

The first installment for the first half of California's fiscal year - July 1 through December 31 are due in November and late in December. The second installment for the second half of California's fiscal year - January 1 through June 30 are due in February and late in April. I remember these property tax due dates by employing the mnemonic device No Darn Fooling Around. Property taxes cannot increase by more than two percent annually unless the commercial building or residence trades hands - which triggers an assessment based upon the sale amount. If a building or house has not sold in twenty years, the resulting property tax an owner pays is substantially less than that house across the street that transacted last year. Some say this isn't fair - for there to be such a wide disparity.

Currently, there is conversation among our state legislators to "split the tax roll" and bill residential property owners differently than commercial real estate owners. If you own a house, the current prop 13 rules would remain. Own a manufacturing building - your property taxes are going to increase. The theory? Businesses can afford to pay more and many commercial property owners benefit from very low assessed values compared to current commercial real estate values.

Simply stated, here is the problem with a split roll, in this author's opinion. Commercial real estate is owned by folks who occupy the buildings with their businesses or by investors whose livelihood relies upon rents paid by tenants. Businesses - whether owner occupants or tenants -  create jobs, produce and sell goods and services at a profit, hopefully. Jobs are created and goods and services are produced at a cost - which includes the rent paid by an occupant. Therefore, if business property taxes go up, who bears that expense? Yep. The consumer of those goods and services - you and I. Alternatively, a business leaves California for the cheaper tax environs of Texas or Nevada. Neither scenario sounds terribly promising for the business atmosphere in the Golden State.


Friday, March 2, 2018

3 Random Commercial Real Estate Thoughts

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Every few months, I purge my mental inbox with a post such as this - including random thoughts from my daily commercial real estate profession. I hope you appreciate the randomness.

Cannabis - California's growth industry? California voters legalized recreational cannabis sales in November 2016 via Proposition 64. Medicinal cannabis has been legal in California since 1996. However, in Orange County, Santa Ana is the only city to enact a plan to create dispensaries for the legal sale and distribution - medicinal in 2015 and recreational this year. Included in Proposition 64 was a sunrise on the law for January 1, 2018. Basically, the state said - OK, recreational pot is now legal statewide but cities, counties, municipalities; you figure out how to regulate the sales through local zoning oversight. Hmmm. An interesting conundrum has resulted - it's legal but only a few dispensaries in Santa Ana can legally sell it. Oh by the way, cannabis is still illegal federally. So, things such as banking and small business association loans for plant and equipment acquisition - all under federal purview - are prohibited. Plus, the current administration is adopting a more aggressive stance on the enforcement of the federal law than previous administrations.

We have plenty of room - NOT. The new tax law should be great for businesses! Pass-through corporations such as LLCs and Sub S corporations will reap gains from the 20% tax deduction and streamlined write-offs for equipment. Bigger companies will benefit from the reduction in corporate tax rates from 35% to 21%. Businesses should grow - bolstered by the positive consumer confidence and robust stock market. Great, right? Unfortunately, our commercial real estate inventory cannot handle the expansion! Demand has outstripped supply for several years leaving a severe shortage of industrial space. The solution? Move out of state, figure out a way to produce more within existing physical plants, or charge more. Rents are already out of sight. What we need is good recession to stabilize our space demand - just kidding - sort of.

Almost three years. February 2018 marks three years for this columnist and my weekly contributions - hopefully they've not been weakly. I've reaped great joy meeting some of you, assisting you with your commercial real estate questions, reading your criticism, and actually representing a few of with your building requirements.

Onward for 2018!



Friday, February 23, 2018

Buyer's WILL Pay for these Commercial Real Estate Features

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Last week, in this space, I discussed the amenities contained within your commercial real estate that do not "move the meter" with buyers - AKA, buyers don't care and won't pay a premium for the benefit.

You may wonder - are there, in fact, features that will create a greater worth for the real estate?

Absolutely!

In no particular order they are:

Extra land. Generally, a greater price will be paid if extra land exists. In our congested county, extra land is a rarity. However, I must define "extra". We use the term excess and surplus interchangeably - even though we shouldn't - to describe extra land. You see, if the extra land doesn't serve the use contained, but cannot be separated and sold, the land is actually surplus land. In this instance, an occupant who had a large outside storage need would ante up. If the surplus could house additional building square footage - voila! In the absence of these two circumstances, no increase - because fronting cash for future advantage is costly. Conversely, if the extra land was excess - I can separate it and sell it - eureka!

Warehouse ceiling height. Rents and sales prices are quoted in floor area square footage. Ignored is the cube space that exists in a warehouse. I wrote about that here.  In effect, if the warehouse ceilings are higher than what's normally found in the market - an occupant can stack their goods higher and benefit from space for which they aren't being charged.

Loading doors that allow large trucks. Large trucks cannot make deliveries to a warehouse door that is lower than the truck bed - without a lot of excess material handling. Therefore, buildings equipped with "truck high loading doors" are valuable. If the warehouse ceiling also allows high stacking - you've got a duo in higher demand than Batman and Robin!

Fenced outside staging or storage areas. A typical manufacturer can benefit from outside storage of raw materials or finished goods. Logistics companies enjoy fenced and secured parking for their trailers. If your building has either, plan on jacking up that asking price.

Heavy electrical service. Much is involved with upgrading an electrical service into an industrial building - permitting, capacity, SCE studies, cost, time delays. If you own a building that has survived the agony of adding power, congratulations! This is a feature that will sell!

Fiber optic feeds. Many of the buildings in Orange County were built before the digital age. Consequently, few of them are wired for today's mass use of on-line commerce. Akin to the description of heavy electrical service additions, adding fiber suffers the same challenges and the same appreciation if the hurdles have been crossed.

Friday, February 16, 2018

Seller Won't Close - Now What?

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Commercial real estate transactions are contractual - buyer and seller both agree to do something in return for consideration - something of value. So, what happens if the seller decides arbitrarily that he doesn't want to complete the deal? As I am not an attorney, I will not delve into the legality of such a position but rather explore the situation as a layman.

A normally motivated buyer and seller will negotiate a purchase price, enter an agreement which outlines the contingency period and closing date, deliver the signed agreement and an earnest money deposit to escrow and proceed.

Occasionally, the deal hits a snag. Generally, we see said "snags" on the buyer's side as the buyer discovers something untoward in his investigation of the property - air conditioners that don't condition, a roof that leaks, a percolating fuel tank, higher expenses than expected, an appraisal less than the agreed upon price, or some other nuisance. The good news is the buyer is protected if the "snag" is discovered during his contingency (due diligence) period. Typically, the buyer requests a price reduction from the seller or simply cancels the deal if the buyer perceives the problem is too big too fix with money. Certainly, the buyer has the option to look past the snag and proceed - but few do so. Once the buyer has satisfied himself, he waives contingencies, allows his earnest money to be non-refundable and marches toward the close of escrow. The buyer can still cancel, but simply loses his deposit.

Once a seller has agreed to sell, however, and the buyer completes his side of the deal, the seller doesn't have an escape hatch - lest he encounters a specific performance action by the buyer.

I've witnessed a couple of sellers, in my years in the trenches, who refuse to close. Most frequently, its a ploy to extract some blood from the brokers. A high stakes game of poker ensues - he who blinks first loses. One seller in particular did refuse to close and convinced the buyer to allow him to cancel the deal for a small monetary settlement - rare but it does happen. Fortunately, in that case, the buyer was an investor - a buyer relying upon the rent not a buyer planning to occupy the building for his company. Consequently, aside from some wasted time and money, the buyer wasn't harmed.

Friday, February 9, 2018

Is YOUR Commercial Real Estate Buyer FOR REAL?

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These days, multiple offers on well priced, conveniently located commercial real estate are the norm. Unlike the doldrums of a down market where the activity is tantamount to a cricket concert - activity is robust!

So, how do you filter the noise of multiple offers and settle upon the RIGHT buyer - the first go around? That dear readers, is the subject of this week's post.

Watch how the buyer acts. I've observed buyer behavior for many years. The way in which a prospective buyer behaves in a negotiation will speak volumes about the way in which he will behave once you strike a deal. Specifically, the speed with which a buyer responds to requests for information and counter proposals is a great indicator of motivation. If you monitor motivation throughout the transaction, you are less likely to be surprised by your buyer's actions.

Is the buyer on-time? If he's late to a showing - chances are the buyer is not concerned with timely performance. Not a big deal with a tour - missing a signing deadline is another story.

What is the buyer's story. If your buyer is a neighboring company whose employees park in your lot because his parking lot is filled with inventory - chances are the buyer is out of space and needs your building for growth. Conversely, a buyer moving up in size three or four fold could portend a problem with cash flow and financing. Understanding "why your building vs. another" is a solid indicator of  what's to come.

What's the buyer done in preparation. Has the buyer's broker blown your guy up with inquiries, requests to tour, and probing questions? When the buyer submitted his proposal, was it accompanied with a lender pre-qualification letter? How many times did the buyer look at your building before submitting his offer? Once again, these are things that suggest motivation and encouraging buyer behavior. If you receive an offer and the offeror has not seen the property - it happens - run away. The offer is not based upon a working knowledge of the facts.

Does the buyer need that "something" your building has. As we discussed in a previous post, there are items for which a buyer will pay a premium - excess land, good cube height in the warehouse, ample loading, modern architecture or remodeled offices, heavy electrical power. Discerning the "something" your building has and matching that to a buyer's requirement can predict a successful transaction - the buyer needs what you have and will pay to own it.


Friday, February 2, 2018

Commercial Real Estate is a SOCIAL Business - Or is it?

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My industry is in the proverbial dark ages when it comes to marketing through social media! Compared to our residential counterparts - who kill it with social media - we limp along under the illusion that "social" just isn't for folks who own or lease commercial real estate. Wow, how wrong we are!

So why are we so 80's you may ask? In no particular order, here are some of the reasons.

Age plays a part. The average age of a commercial real estate broker is 57. Crowded with gray haired men, commercial real estate sales evolved from predominantly family owned brokerages with names such as Daum, Cushman, Collins, Lee, Ashwill, Burke, and others. As the majority of business in the old days was fostered via relationships and referrals - and somewhat stuffily, BTW - the old generation of commercial real estate brokers farmed new opportunities on the golf course, the bar or the steak house. You called, mailed, or placed an ad when you had a new listing. If you used a computer in the eighties and nineties, you were the source of water cooler humor - as no leads will come out of that machine young man - you get out there and cold call! Industry bias toward technology has now traveled a couple of generations to present day practice. Many new agents are trained the same way we were in the eighties - get out there and make relationships!

We approach it wrong. Social media marketing isn't like taking an ad in the Orange County Register - although many approach it that way. The Register has a broad circulation and appeals to those in the market for goods and services. If you are shopping for commercial real estate, great! You see the ad, call the broker, make a deal, done! Consequently, when Facebook, Twitter, Linked In, YouTube, Instagram came along we pushed our same old message of "here is my listing - buy my stuff." Missed in this method is the way folks transact these days. Sure, there are still buyers who are in the market, see an ad, and buy. Most, however, search the web for informational content - such as "how-to" articles, videos, or images and are pulled toward a service provider. If you are the agent providing the "help" you are sought as the expert. Critically important is this digital footprint so you can be found on-line.

When will it change. Given the nature of our business - maybe never. Commercial real estate is largely relational and our transactions are tough to standardize. However, as one who's used social medial content quite effectively to meet new prospects and close deals, I believe the current generation will adopt strategies to use social media marketing the right way. Just remember, like face to face networking, social takes time and places an emphasis on gaining through giving.