Friday, March 24, 2023

Is NOW a good time to sell?

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With the uncertainty that permeates the media these days, many may be wondering if now is a good time to sell their commercial real estate. After all, interest rates are roughly double what they were just a year ago, rabid investor appetites have moderated, world turmoil persists and there is in again some rumbling we could recede later this year? Remember, you heard it here first in January - I believe we’ll avoid a recession - but I digress. To the question de jure. Is now a good time to sell? My answer is - it depends. Allow me to expand.
In the universe of sellers there exist three types - equity, non-equity, and distress. Daylight appears between the market price  of a property and any debt owed in an equity situation. The reverse is the case in a non-equity circumstance. However, not all non-equity sellers are in distress and some distress sellers still have equity. 
Equity seller. A property owner with equity views their situation as a “I don’t have to sell”. But. Is their equity earning the type of return it should? I spoke to a private investor last week. He’s owned and operated an industrial property since he bought it in 1998. He owes very little - which means a large pool of equity resides. He’s facing a maturing mortgage. He can refi the underlying debt, pull out some cash and the property will still cash flow - provide income after the mortgage is serviced. But is that the right move? With the rampant appreciation experienced since he acquired the property and only moderate rent growth - the return on his equity is skimpy. When I explained what sort of return could be achieved by selling today and redeploying his equity via a tax deferred exchange - he was intrigued. He can’t sell for early 2022 pricing but won’t have to buy at 2022 pricing either. There is a trade off. Sellers who occupy buildings with their companies generally are guided by business motivations - vs real estate market conditions. Specifically, if more space is needed and the residence will become excess - a selling decision might be made. Because the proceeds will be funneled into the next buy - less emphasis is placed on extracting the highest dollar amount - and more on certainty of close. 
Non-equity seller. Those that purchased in late 2021 and early 2022 with 90% small business administration financing could presently be a non-equity owner. With the price softening this year coupled with maximum leverage from last year - chances are no equity remains. An aggressive loan repayment or a rampant run up in pricing can remedy the imbalance. Given this scenario - I’d suggest holding unless some distress appeared.  
A seller in distress - equity or non-equity. In the non-equity example above, should loan repayment be required, distress emerges. Now this owner may find his only recourse is to sell - at the best price attainable. Certainly, refinancing the debt could be an option but with no equity - lender alternatives will be limited to non-existent. Because this is a forced sale of sorts - market conditions are secondary. The seller must do the best he can under the circumstances. 
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at or 714.564.7104. His website is

Friday, March 17, 2023

Are Sale-Leasebacks still viable?

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Our practice centers around family owned and operated manufacturing and logistics businesses experiencing a transition. Recently, I wrote about common transitions small businesses experience. Included among these were - dissolution of a partnership, sale of a business, acquiring a competitor, or the unfortunate circumstances of the death of a principal, divorce or some other distress within the enterprise.
As reviewed, all of these transitions come with their own brand of commercial real estate solution. As an example, when a competing company is acquired - two cultures must be forged into one - akin to a blended household. As you can appreciate, this can cause some drama. As the operations are morphed - so must the locations from which they occur. Frequently, redundancy is experienced. Specifically, two buildings within the same submarket - where only one is needed. Consequently, one must be jettisoned. 
But, let’s examine the flip side - the seller of the acquired competitor. When the sale of a business happens, the addresses from which the trades are plyed are either owned by the principal selling or leased by said principal. In the circumstance mentioned above where two facilities are within the same geography, two different strategies are employed. If the redundancy is leased and a decision is made to abandon the building - we can sublease, pay double rent until the term boils off, or default - never recommended. If owned - now without an occupant - we can sell the empty building or lease it and hold on or possibly sell the leased location to an investor. 
But how about the chosen building - the one selected to carry forth the business of the company and not deemed excess. Then what? A building owner finds herself in position to assign the lease agreement if appropriate, or sell or lease the building to the acquiring group. 
All of the above scenarios contemplate the moves made AFTER the business sale. But are there maneuvers before such a liquidation? Certainly. And I’ll spend the balance of my words describing one such arrangement - the sale-leaseback. If you’re unfamiliar, a sale-leaseback allows the owner of the location to liquidate the real estate while allowing the occupying company to remain in residence under a long term lease arrangement. 
We were fortunate last year to complete five sale-leasebacks. Four of the five were done in anticipation of a sale of the occupying companies. In one case a principal’s death caused disruption and the need to quickly restructure and liquidate for the heirs - who had no desire to own a company or the real estate it occupied. In the other three - the principal was in his late seventies, had experienced a business downturn from the pandemic, but wanted to capture the appreciation of the real estate today in anticipation of a business sale in a couple of years. 
So, why do this prior to a company’s sale? After all, rent will no longer be received by the seller. In our experience, the reasons that follow are typical. 
A market rent is established from which a company’s value is derived. 
Real estate values ebb and flow. Taking advantage of a hot market can make sense. 
A marketable lease can be structured - with appropriate lease rate, terms, increases, and maintenance responsibilities. 
You may be wondering. Does selling real estate prior to a company sale affect the company buyer pool? It indeed can and this should be carefully considered before such a strategy is completed. How you may wonder? As mentioned above - a buyer with similar locations my view a long term lease as a liability. This occurs frequently when a strategic player emerges - a group in the same industry. 
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at or 714.564.7104. His website is

Friday, March 10, 2023

CRE Brokers Defined

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I delivered a presentation to a sales team of material handling specialists last week. Why you may wonder? I would share with you two reasons. First, I’ve transacted nineteen deals with the president since 2009 all over the western United States - we’ve grown together. This was one way of giving back to an organization that’s
  been very kind to me. Secondly, we work closely with their sales team in assisting us execute deals. The better they understand our world - we both benefit. 
Some of you reading this column are commercial real estate practitioners. Others of you own or lease commercial real estate and pick up tidbits along the way. Still others  may be considering the field as a career or a way to supplement your income. Regardless, of your vantage point, I believe you’ll find value in todays topic. 
Let’s center the column on three of the four topics discussed - CRE brokers defined, how we’re paid, why you should care. 
CRE brokers defined. Said simply, commercial real estate brokers assist owners and occupants of commercial real estate in finding buyers or tenants for vacant buildings in the case of owners, or finding a place to relocate in the case of occupants. Commercial real estate companies are generally local, regional, national, or global, determined by the reach of their brokerage. These firms service a geography through their network of agents. Additionally, most firms find their agents on either or both sides of the transaction - representing the owner and/or the occupant. “Dual representation” describes an agent on both sides of the deal and is a much larger subject I’ll reserve for another day. However, there are companies who specialize in tenant or buyer rep. As a service provider seeking relationships with us - all of these elements are important to understand. 
How we’re paid. Full commission, no salaries or bonuses and only when we transact. Yep. We can spend days, weeks, months or years on initiatives that never pay us. Unlike those with salaries or hourly service providers such as CPAs or attorneys - our profession “eats what it grows” so they say. 
So what, you may be wondering. We enter through the C suite in many cases deal with the president, CEO, CFO, or the COO. This gives commercial real estate practitioners a view from the top, as opposed to some service providers who must begin with a warehouse manager, or a purchasing agent. Because we start in the C-Suite, our engagement is recommended from the boss, and in most instances we don’t have to compete.
We are the arbiters of change. Generally, the involvement of a commercial real estate broker is preceded by some sort of a transition. Whether it’s a death, a divorce, a massive debt that must be repaid, some distress, a dissolution of a partnership, or a disposition of the company - our job is to assist a company navigating these transitions. 
We are upstream from most relocation decisions. By this I mean, we must network with trusted advisers, so that we are in proper position once a transition occurs. Business attorneys, CPAs, commercial, insurance, brokers, investment, bankers, business, bankers, and wealth advisors are all professions. That will see a transaction before we do. But, we are in front of all those that must rely upon a transaction to occur such as contractors, escrow, agents, architects, and the like. 
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at or 714.564.7104. His website is

Friday, March 3, 2023

Advice if you’re considering selling your leased building

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Occasionally, I’m asked how I get column inspiration. For me it’s a combination of reporting on macro trends in our industrial real estate market, advice I give my clients, issues that have arisen in transactions, and happenings with the business owners I counsel. Sometimes, a column idea falls from the sky - which happened today.
Allow me to set the stage. I received an email from a client who recently relocated his business to a smaller leased location. The previous business address is owned. Upon my client’s vacation of the premises - he leased it to a neighbor. His plans - near term - are to move to a bordering state. Continuing to OEM real estate in California would create a undo tax burden on the income received vs selling the California asset and redeploying the proceeds into a leased building in a tax friendlier state. This, his motivation to sell. My client asked what considerations should be given for the framework of the lease agreement - allowing marketability and security. 
Below is the advice I offered. 
The lease should reflect a market lease rate - or as close as you can get. Value is a return on this rent. Consider swapping a couple of months free to get a higher rent figure. 
Build in sufficient annual rent increases. Most are written with 4% annual bumps these days
All “purchase rights” - options, rights of first refusal, rights of first offer should be eliminated. 
Make sure the tenant is responsible for all property tax increases when the property is reassessed after sale. 
The AIR Single Tenant Net Lease is widely used to document the deal. It’s common and most investors are familiar. 
Most investors want a relatively new roof and hvac units. Under a NNN lease, your tenant is responsible for maintenance and repair of these items but replacement is the owner’s responsibility - which can then be billed to the tenant monthly over twelve years. So, consider replacing these before sale. 
These days a five year lease is a minimum. 7-10 is much better - especially if you have the 4% kickers. 
Finally, credit of the tenant is huge. You’ll want to have two years of P and Ls, balance sheets, and corporate tax returns on hand. I’d see if you could get the principals to personally guarantee the lease to add a layer of security. 
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at or 714.564.7104. His website is

Friday, February 24, 2023

Five downsides of owning your building

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Recently, I’ve spent time with three business owners who made a decision to own the building from which their companies operate. The benefits are myriad including - stability of rent the enterprise pays, appreciation, depreciation, and pride of ownership. But our conversations focused on a downside of ownership - rent subsidy and the impact this can have on the value of the company. Therefore, I endeavored to consider other disadvantages of ownership - which is the subject of this column. Let’s start with rent subsidy and its impact on a company’s value.
Rent subsidy. Some would opine this is actually a benefit - the ability to charge the occupant a low monthly payment. Yes. In fact, one of the reasons to own a building that houses your operation is to keep the rent steady and avoid the ebbs and flows from a series of three to seven year leases. But, in my three conversations - the price an investor would pay for the company was affected. You see, all of the entrepreneurs are approaching an age where “what’s next” creeps into their consciousness. Many times this means a sale of the business. But if one of the cost elements - rent - is understated and the business can’t afford to mark said rent to market - the enterprise value suffers. 
No agreements. Frequently, an entity is created to own the real estate and another to own the business. Typically, synonymy exists between the two. Although the real estate ownership may be Allen C. Buchanan, LLC and the operating company Allen C. Buchanan, Inc.  with a common ownership - they are two separate companies with tax reporting, business licensing, regulatory and state registration requirements. Since one “owner” receives payment from the other and the “owners” have the same underpinning individual - seldom are proper lease agreements forged between the two. This lack of documentation can be particularly painful if an owner dies and her estate must now attempt to assemble paperwork justifying rent.  
Maintenance. If an occupant leases space from an unrelated landlord and not one with an interest in the company - strict language as to maintenance, repair, and replacements of the buildings systems is contained in a lease agreement between the two parties. Sans such an arrangement, maintenance of the roof occasionally becomes an afterthought. No big deal unless a sale with a leaseback of the premises is considered - in which case the buyer of the real estate will want an airtight roof and functioning air conditioning. 
Lack of flexibility. If a company’s capacity outstrips the physical plant of a building - ownership of real estate may inhibit growth. Should this need for additional space occur in a down market, uprooting from one building to another will be complicated. If financing requires the building be occupied by the business - as many SBA loans do - a real quandary arises. Sure. A move may occur and the former location leased or sold but it’s more complicated than simply moving at the end of a lease. 
Equity is bridled. With the amount of appreciation which has occurred in industrial properties in SoCal - many owners are sitting in mountains of equity which if tapped could be used to hire employees, buy machinery or inventory, acquire a competitor or expand out of state. But unless the real estate is sold or refinanced - the equity just sits idle providing the rent subsidy as described above and a smaller return to the owner than an alternative investment. 

 Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at or 714.564.7104. His website is


Friday, February 17, 2023

Artificial Intelligence and Commercial Real Estate

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The new rage is Chat GPT - a free research project by Microsoft purportedly is making a huge investment in the technology. Unfamiliar? Ask a question or make a request and it spits out a string of text which some would consider column worthy. What in fact is column worthy is the potential impact machine learning can have on our industry and the ways in which agents will use it. Let’s face it. For content creators this can be a game changer. As an example, I asked Chat to write five tweets on the state of the industrial market in Orange County. Fifteen seconds later - here’s what I got:
1.   "Orange County's industrial market sees strong demand with low vacancy rates and rising rental prices. #industrialrealestate #OrangeCounty"
2.   "E-commerce growth drives demand for industrial space in Orange County, leading to new developments and expansions. #ecommerce #OrangeCounty"
3.   "Orange County's transportation infrastructure, skilled workforce, and proximity to LA make it a prime location for industrial companies. #OrangeCounty"
4.   "Orange County's industrial market continues to attract investors and companies looking for a strategic West Coast presence. #investment #OrangeCounty"
5.   "Orange County's industrial sector sees a surge in creative office conversions, appealing to tech and creative companies. #creativeofficespace #OrangeCounty"
Next, I asked Chat to opine on the effect of AB2011 on housing. The stream of data flooded through with this:
“AB 2011 is a California state bill (Assembly Bill 2011) that went into effect on January 1, 2022 and aims to increase housing affordability by providing funding for affordable housing projects through the creation of a new tax credit program. The bill's impact on housing is to increase the availability of affordable housing units by providing incentives for developers to build and preserve affordable housing. This is expected to address the state's housing affordability crisis and help low- and moderate-income families access safe and affordable housing.”
Finally, my column on Proposition ULA and the changes in transfer taxes created quite a stir among my readers. I asked Chat to have a go:
“I'm sorry, but I don't have information about a specific "Proposition ULA." It's possible that you may have misspelled the name or that it refers to a local or regional initiative that is not well-known. To obtain more accurate information, I recommend checking local news sources, government websites, or consulting with a local expert or professional.” 
Based on this - I might still have a role as a contributing columnist. 
My immediate reaction to all of this was attribution, plagiarism, commercial use of the data and so on. I’ll leave this to those much smarter than I. But it’s pretty cool and gives a glimpse into the future of content creation. 
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at or 714.564.7104. His website is

Friday, February 10, 2023

The Trades

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Today takes on a personal note from several perspectives. First, on my industrial deals, I’ve worked with general contractors and their sub contractors for over four decades. Secondly, my neighbor Rudy - my biggest fan and occasional column critic - made a great living working for Arciero Brothers. Their specialty was concrete work for massive tilt ups, multi family buildings and office towers. Rudy managed projects for them until his retirement. And finally, my wife and I are on the home stretch of completing a remodel of our house - a much needed freshening of a forty year old structure. Freshening is a bit like saying - some moisture recently - to describe the deluge of rain we’ve received this month in California. Yeah. We took the exterior down to the studs and replaced aging siding, drafty windows and cracking doors. We added square footage and remodeled interior finishes. The end result is amazing - but oh what a journey! Rudy suggested I write a column about the contractors - trades - that brought the completion forward. Jobs such as ours - tiny in comparison to the construction of a project of new logistics buildings - employs so many people. Allow me to elaborate.

Let’s take one of the new developments in the Inland Empire as an example. First, a land owner must be willing to sell. Then a developer must be willing to buy. Their dance is choreographed by folks in my profession - commercial real estate brokers. Generally, both seller and buyer have representation.
Once the points of the transaction are hammered out, an attorney or two enters the fray to insure the writings match the letter of intent and any verbal agreements.

A fully signed contract now transfers to an escrow company for execution. Title is involved to issue a preliminary report of things such as loans, liens, and easements affecting the ground.

So far, I’ve counted four professions in addition to a buyer and seller who’ve touched this deal - and it’s just underway.

Architects, soils engineers, civil and structural engineers, environmental people, city personnel in planning, building, police, fire, and council members all have a part in the opening acts. Six more professions and city employees are involved and the property hasn’t changed hands.
Someone must be willing to finance said project during its acquisition, construction, and hold period if leased. Loan brokers, banks, insurance companies, and lenders complete the encumbrances. Another profession gets a taste.

Once escrow closes, entitlements are completed and a building permit is issued. Now the fun begins as our project can go vertical. A general contractor is engaged to build and he deploys legions of sub-contractors including concrete, electricians, plumbers, carpenters, structural steel erectors, crane drivers, pavement, glass, roofers, heating ventilating and air conditioning, framers, drywall, landscapers, flooring, and many more. The number of jobs created by just one new industrial project is in the dozens. And that’s just one example.

Imagine the number of families supported by new construction. Thousands! And I’ve not mentioned the trades needed for day to day repairs and installations.

By the way, these are good jobs - capable of options for those employed such as saving for retirement, purchasing homes, sending their kids to great schools, and sponsoring awesome vacations. Many are unaware of the career opportunities available in the trades. It seems some believe college and management positions are the way. Certainly nothing against that path as it rings a familiar tone. But, you’ll know I’m right next time you need a plumber on Sunday or that faulty breaker trips. The helpless feeling of “whatever it costs - just restore my electricity” will resound. We once were a society that built stuff and lauded those who swung the hammers. I for one would enjoy a return to those days.

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at or 714.564.7104. His website is