What does April Fool’s day signal?

Today is April Fool’s day. I wish I had a pithy prank to put forth however the reservoir is dry when it comes to when it that. However, with the dawning of spring, the crack of the opening baseball bat, Easter, the Masters golf tournament, and the NCAA final four - spring has officially sprung and the first quarter of 2023 is officially in the books. As I wrote about last week, there are some things to behold with respect to the economy for the balance of 2023 - however, today I will focus upon what you should have accomplished in the first quarter of this year. Don’t despair. If you didn’t get it done, there’s still time.
 
Review all of your lease agreements. Now would be a great time to put your hands on a fully executed copy of your lease and any extensions. Make sure all are signed by both parties. You don’t want to be scrambling around during a critical date with a half executed document. This is best done at the end of a year with a careful eye toward any upcoming expirations, options to extend, rent increases, options to purchase, etc. But what if you occupy a building you own. Should you have a lease agreement with your operating company? Absolutely! I could write an entire column on the horrors of handshake agreements between related entities.
 
Taxes. Normally, corporate returns should have been filed on March 15 and personal by April 15. But this year, thanks to our deluge, we get to sleep in until October 15th. Check with your tax professional as situations may vary. If your attempting to perfect a tax deferred exchange - according to PR Newswire - “The IRS has extended the 45-day and 180-day 1031 exchange deadlines for eligible taxpayers. Those who qualify will now have an extended General Postponement date of October 16, 2023 to find a replacement property and close on their 1031 exchange transaction.”
 
Reconciliation of your common area maintenance expenses. Your landlord may lump all of your operating expenses into an annual amount and bill you on a monthly basis. Normally, budgeting for this occurs in October so that invoicing may commence in January. Taken into account are things such as property taxes, insurance and maintenance. If you pay too much or too little during a calendar year - the amounts are reconciled in the first quarter. If you’ve not received a reconciliation - I’d suggest phoning your owner.
 
Make sure all of your entities are active. A good time to check this is during tax time. But since the window for taxes has moved - make sure you’ve paid the state for those corporate filings. Check on business licenses as well. We represented a seller a few years ago who hadn’t paid his LLC filing fees for 28 years! You can imagine the drama and expense to reactivate his entity so that we could transact.
 
Take a look at all of the physical elements of your commercial real estate. Now that the rain has - hopefully - subsided until fall - your roof may need more than a seasonal patch. With the crunch of repairs causing roofers sleepless nights - you may actually be able to hire one. Now is a great time to check on your air conditioning as the hot months will be here soon. The sump pump on your truck well got a good workout last quarter. Make sure he’s up for the next soaking.
 
Plans for the balance of the year. Is a move in your future? With industrial vacancies still at historic lows - don’t wait until ninety days prior to expiration to commence the search. Most will agree a year to eighteen months is appropriate for a proper search, negotiation, fit out and relocation. 
 
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.blogspot.com.
 

A Conversation with a Private Investor

Investors in commercial real estate come in different shapes and sizes. Recall, I define an investor as one who relies upon the rent an occupant pays for her livelihood. All investors - institutional, public, or private have in common this requirement - a paying tenant. You may be wondering. Do investors ever buy a vacant building? Sure. But trust me. They understand the time and expense necessary to originate a tenancy. If they miscalculate - there goes the return on their invested dollars. And this loss can never be recouped.
 
Recently, we were engaged to assist a private investor redeploy proceeds from the sale of another piece of commercial real estate. He’s deferring the gain through use of a 1031 exchange. If you’re unfamiliar with an exchange - here’s a brief description. A seller transacts. The proceeds are placed with a qualified intermediary. Time starts. Replacement(s) must be identified within 45 days and purchased the earlier of 180 days from close or the filing date of next years tax return. An equal amount of dollars and debt must be spent on a like kind income property(s). If orchestrated correctly, the income taxes on the gain are deferred. Simple. But, please consult your tax, accounting and real estate professionals before undertaking.
 
Last week, we toured a couple of alternatives and I believed our conversation was column worthy.
 
While his sale property was in escrow, we spent a couple of meetings discussing his qualifications for the buy. What emerged was a desire to acquire a single or dual tenant industrial building with a triple net lease. The return should be north of 4.5%, and should provide a reasonable remaining lease term. Credit of the tenant is important and the rent being paid should be at or below market.
 
First on our list was a single tenant property that could be divided once the tenant vacates. Currently, the building is occupied by the owner who is moving out of state. Because his new business home is not yet completed, he is looking for a short term lease back of a year to 18 months.
 
After the first property visit we looked at option number two. The occupant of the building was once owned by the owner of the building. We frequently see this when a business owner decides it’s time to cash in the chips but sees merit in retaining ownership of the real estate. In this case - it’s now time for the owner of the real estate to move her money into a more tax friendly state - therefore her motivation to sell. Encountered was an operation that has a significant amount of money invested in the infrastructure of the building and 4 1/2 years remaining on their term of lease. Located in an emerging area - but not quite mature - one could sense we were pioneering a bit.
 
So here’s what our client had to say about both alternatives.
 
He really likes the first building we looked at although he understands an amount of money for re-tenanting the building must be considered. After all, this will be addressed in early 2024. Our client was concerned that the owner of the building has time until his new building is completed and therefore might not be terribly motivated. Additionally, the owner had unrealistic expectations of the property’s worth especially based upon the economic storm clouds we see massing on the horizon of inflation, rate increases and the threat of inflation. He’ll offer, but at well less than the ask.
 
On to the wild, wild west. We discovered the owner of this building would like to carry a loan. If favorable terms can be negotiated, this could actually be a win. Because the property is located in a developing area, the term of lease becomes critically important. Insufficient are the 4 1/2 years that remain. Consequently, we will ask to have a longer-term deliver to us upon the close of escrow.
 
Ok, nets cast. Time to harvest the bounty of investor interest.

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.blogspot.com.