You Own, you're Moving - Now What?

Recently, I authored a post wherein I discussed making the ends meet in a commercial real estate deal. You can read the post here if you missed it.

During my discussion, I grazed a topic which today will receive a larger nudge - if you own your building and have elected to relocate, should you lease or sell the vacant building you leave behind?

A move generally is bittersweet - a cause for celebration because an increase in business created the need for more space. Good for you! But, the additional sales spawned another problem - you will create a vacancy. Now what?

In short, the direction you choose in dealing with the excess space and filling the vacancy depends upon several factors. Indulge me while I dissect a few of them.

The structure of your new deal. Are you buying the new building, leasing the new building or leasing the new building with an option to buy the new building at a later date? Chances are, if you desire to own the new spot and don't have a pile of cash lying around, you will need to sell the building you're vacating. Conversely, if your next space will be leased, you may be able to hold on to the old address.

Your desire to be a landlord. Owning and managing a leased building occupied by a company - not your own - comes with a set of headaches - and not necessarily a bottle of aspirin. Some of the painful biggies - who will vet the credit of the new occupant, what if the new guy fails to pay, can you float a lack of rent while you scour the market for a suitable occupant?

Can you afford to lease the existing building? Here is what I mean and how I counsel companies facing this dilemma. The market is the market. Prospective tenants will only pay you a rent figure for your building based upon what has leased recently and what other buildings are demanding in rent. So now you must roll up your sleeves, compute your costs to own the building (mortgage payments, property taxes, insurance, maintenance), add a reasonable return for the equity you have in the building and see where that squares with the market rent. You may believe yours is worth more. Maybe, but are you willing to wait? Remember, waiting is expensive. Lost rent for all the months you wait can never be re-cooped.

Do you require the vacant building's equity to fund the new location? This one is easy. I recently represented a group based in Whittier. So far past the building's capacity was their operation, we practically had to meet in the parking lot. I advised the company to move out, lease a new location with an option to buy, sell the original building and once sold, trade the equity into the new building. Had this company not wanted to own the new location - thus the equity wasn't needed - the advice might have varied and a lease of the relinquished building considered.

The good ole days in #CRE...circa 1985...AKA where is my Delorean?

I am pleased to say that I just closed the sale of an industrial building in 30 days! My guy waived contingencies in two weeks...including city approval of his use and operation, secured financing from his savings and loan at 9.5%, and will move in next week!...this post from 1985!

Man, those were the days...am I sounding old?

I have to admit I got a bit jaded this week as I attended yet another seminar on AB 1103...California's weak attempt to benchmark energy uses across commercial real estate sectors. I pondered how the "deal process" has morphed in the last thirty years. More on that in a moment.

As a disclaimer, I provide Location Advice to owners and occupants of industrial buildings in Southern California...AKA, I sell and lease commercial real estate for a living and have since 1984. As I have sold or leased hundreds of industrial buildings over four decades...and can compare the differences...I am qualified as an expert...if I can only remember why...

So back to the deal environment and how the process has changed in the past thirty years...

Thanks to the regulatory environment that ALL California real estate brokers must adhere to these days, the number of newly minted legal professionals, the Savings and Loan industry imploding, three ugly recessions...1991-93, 2000-2001, and 2008-2009 , changes in the property tax laws (prop 13), gross imbalances of revenue intake and outflow in our cities, etc., our sprint to closing a commercial real estate deal has many new "hurdles" to hump...and many new costs to bear. By the way, ALL of these have surfaced in the last three decades.

Non binding Letters of Intent: A binding offer has evolved into a "we will consider if we want to but only if the consideration will not adversely affect anyone or if it does we can change our mind...and only a lease or a PSA will bind us unless we have a great lawyer and we didn't really mean it and can get a judge to see it our way..."

Phase I, II, and III environmental reports: These broke on the scene in the mid 1980s and add $2500-??? depending upon the phase and extent of enviro contamination (including regional issues). Like leaving home without an American Express card...lenders won't lend without them.

AQMD credits: Frankly, I still don't understand these. If I ever do business with a company needing a spray booth of any sort, I immediately refer them to my expert.

Title 24: HVAC calcs that affect any new office space construction...just wait...this is about to ramp  up to a whole new level thanks to AB 1103.

Seismic upgrades: I get this. We don't want a building falling into a heap when the Earth moves.

Appraisal review boards: Banks and/or brokers used to have a say in the appraiser they chose...that was abused, values sky rocketed...unjustifiably...we now cannot provide any input and neither can the lender as they must follow the recommendations of the appraisal review board. If you get a bad appraisal (less than value)...prepare for a war.

Natural Hazard Disclosures: We need to protect California's business operators from the threat of a flood...mind you Southern California gets approximately 9 inches of rain a year...Texas can get that in two hours...

Americans with Disabilities Act: Once again, I get this one. The problem is no one seems to understand what is required, who is responsible, and what it costs...and oh yeah, no one polices this at the city level...hmmm.

Conditional Use Permits: Visit the counter at a city, check the zoning, is the use permitted?...cool!...ummm, not so fast I recently visited my fair city of Orange, California, checked the zoning, the use was permitted in the zone..and was told I needed a CUP...which costs $3-$5000 and 120 days. Why? because the city was considering changing the zoning in the future and the use wouldn't comply with the new zoning.

High pile storage permits: You can't just rent a building, stack your stuff and do business. You must now comply with the type of stuff you store, in what quantity, at what height, etc. Have your fire consultant's number on speed dial!

Racking permits: About a $10,000 price tag and a 30 day lead time...

Occupancy permits: You can't just move in and operate your business...even if you're an approved use in the zone...and doing everything to code.

UL machinery ratings: Gotta have the tag OR you gotta get one...to the tune of $2500 per machine

AB 1103: The new law enacted in in the mid 2000s...but yet to be fully implemented (because no one understands how to implement it) seemingly has a good purpose...to reduce energy consumption...until you read the fine print. Energy companies are under a mandate to produce 33% of their consumables by the year 2016...now one understands that the energy lobbies are pushing the regs down to the end user.

A buyer of an industrial building is now forced to engage a specialized consultant to advise them on all of the above...some are lender requirements...ala, enviro reports...at a significant cost, BTW!

So what are the takeaways assuming you don't have a Delorean and a wild haired professor with a time machine?

• Understand what is required...and the timing of each requirement
• Properly prepare owners and occupants so that expectations are managed
• Have several consultants in your database that you can refer to your owners and occupants.