Ways to navigate an owner's market

I provide Location Advice to owners and occupants of industrial buildings in Southern California. Occupants in Southern California have enjoyed a five year occupant market...multiple buildings available to fit the search criteria, "once in a lifetime" owner motivation, no competition, myriad concessions (free rent, moving allowances, broker bonuses, etc.). Well as the old Bob Dylan tune lyrically opines "the times they are a changing'".  We are firmly entrenched in an owner's market! Today, I will discuss ways that you, as an occupant, can navigate an owner's market.

Start early: As discussed in an earlier post, there are five very distinct reasons that companies relocate. I would encourage you to read the post that discusses these reasons. For this post, we will assume that your company has made the decision to relocate. How early should you start considering your alternatives? I believe the correct answer is 12-18 months prior to the projected move date. This is typically tied to a lease expiration. You may be thinking, "so many factors will change in that time frame"...you are correct. One thing that won't change (in your favor), however, is the CRE market.
 

Know where you stand: You should have a very good idea of the market forces...available properties, recent sale or lease comparables, leasing concessions (if any), financing rates and terms (which lenders are the most aggressive), tax law changes on the horizon that could affect buying, selling and leasing motivation (this was huge at the end of 2012), how your current lease terms relate to the market, what extension rights does your lease document contain...options, first rights, etc. Think "fall back" here. You may be wondering..."wow! that's a lot of stuff!" You are correct, but knowing where you stand and what options are available to you will save you a huge amount of aggravation when it's time to negotiate.

Engage good help: So how do you determine exactly "where you stand?" Some of the information is available to you by reviewing your lease, meeting with your banker, or accumulating those annoying broker mailers that you receive daily. I would suggest that you engage a competent location advisor to help you analyze where you stand and what options are available to you. The right CRE practitioner can educate you on the current market conditions.
 

Be prepared: Assemble all of your financial data for easy access. If you are leasing a new location, the landlord will want to review at least two years of financial data both personally and corporately...that's right, personally. Most owners today are seeking lease security...and they can get it... which means personal guarantees of lease obligations. If your desire is to purchase a  location, I would suggest getting your company pre-qualified for financing. A previous post discussed how to accomplish this. When the right alternative presents itself, you will be ready to react to the owners request for financial information (or submit this with the offer to lease) or present your "pre-qual" letter with your offer to purchase.

 

Examine ALL of your options: Do you really need to move? I know that the premise of this post is that a decision has been made to move...but have you truly exhausted all of the ways to utilize your location more efficiently? Please carefully consider all of the ways to avoid moving as contained in this previous post. Believe me, it's brutal out there. If you can avoid the agony of an owner's market...DO IT!
 

Be realistic: OK, so you you've started early, you know where you stand, you have engaged a great advisor, you are prepared...AND you understand ALL of your options...now what? Please be realistic OR you stand to be bitterly disappointed. The smorgasbord of available properties has closed, the waterfall spigot of lease concessions has run dry, and the desperation asking prices are now closer to 2007 pricing. Remember, this location provides a functional hub for your operation...period! Find the most suitable, functional location that is available today and make it work. You may have to add offices, upgrade the sprinkler system, add a loading door, upgrade the power service, survive without a storage yard, expand your geographical search area, etc. Compromise will expand your available alternatives.
 

Shorten the downside: If you are buying and the mortgage, property taxes, insurance, and maintenance on the purchase exceed 115% of the market lease rates...consider leasing. The exception to this rule is if you plan to own the real estate forever and the real estate will meet your company's needs forever...see where I'm going here? The last thing you want on your books is an overpriced, illiquid asset that doesn't function for your business. You will have to sell the location for a loss or rent the location and provide a subsidy. Don't lock yourself into a long term lease if you believe the rate you are paying is above market. Remember that most leases have escalation clauses. This rent will increase over the term. Shortening the term can shorten the downside.

Good luck out there! Owners are "licking their collective chops". Don't be "raw meat".

 



The Yin and Yang of Moving

I provide Location Advice to owners and occupants of industrial buildings in Southern California. Generally this location advice involves a move of some sort. Today, I want to discuss the relocation of an occupant from an owner's point of view AND from an occupant's point of view. Recently, I wrote about the cost to originate a lease from an owner's perspective. You can read that post by clicking here. The net result, using the assumptions contained in that post, was that a new lease will cost the owner 20-25% of his future cash flow.

As the market in SoCal has tightened, and occupants have fewer alternatives, I believe the origination cost will trend toward the lower end of this range...primarily because buildings are selling and leasing quicker AND concessions are less plentiful...but re-tenanting a building is expensive. From an owner's perspective, it is far easier (and cheaper) to retain a tenant than find a new one...The Yin.

So what about an occupant relocating to a new industrial building or office suite? How much does a move cost? Simply stated, it depends...an artful dodge but there are sooo many factors involved, that the cost is tough to quantify. I will, however, endeavor to identify some of the major areas involved in the move...stay tuned.

A recent move into a 28,000 square foot building by a light manufacturing company cost approximately $100,000. Approximately 10 medium sized machines were relocated along with inventory, racking, and approximately 3000 square feet of office space and 20 employees.

Machinery-number of machines, size, weight, calibration (or recalibration), electrical hook-ups, UL rating, etc. One of my clients received a surprise when relocating machinery that was not UL rated...even though the machinery was new and had the European equivalence of a UL rating. The city my client moved to required my client to UL rate the machinery at a cost of $7500.

Special Purpose Improvements- Office space, paint booths, electrical distribution, freezer/cooler space, food processing space, racking, conveyor lines, clarifiers, etc. In Southern California, relocating a paint spray booth requires several approvals...Air Quality Management District and city. If you plan to stack over 12 feet...check the sprinkler calc...you may be in for a surprise!

Licensing-business licenses,  ISO certifications, spray booth emissions credits, racking permits, building permits, certificates of occupancy...all may be required.

Office-Any new office space will require building permits...which take time...which is money.

Infrastructure-Plumbing, sewer, water, electricity, Internet, cabling. One of my clients re-located into an office space that had inadequate Internet connectivity. We fortunately did our diligence, were aware of the issue, and were able to negotiate an allowance from the owner to cover an upgrade.

Physical move-According to Ron Larrieu of Penn Corporate Relocation Services, moving the contents of an office space can cost approximately $50 per employee or $1-$2 psf. This cost can be added to the cost of moving the "shop space" which includes the above items.

Miscellaneous-business cards, stationary, note pads, promo items, social media, websites, employee disruption, business interruption...all costs that need to be considered.

From an occupant's perspective, it is is far easier and cheaper to renegotiate an existing lease or remodel an owned location than to relocate...The Yang

My advice to you if you are considering a move:

Read my recent post entitled we have outgrown our location but don't want to move.

Analyze your re-location alternatives carefully...number of buildings on the market, pricing, concessions, etc.

Engage a professional relocation specialist such as Penn Corporate Relocation Services to analyze your location and provide a moving budget

Financing a Commercial Building Purchase

I provide Location Advice for owners and for occupants of industrial buildings in Southern California. I recently authored a post entitled The Buying Motivation. I would encourage you to read this post before you consider purchasing a location as there are some factors to consider prior to making a large investment such as this. We will now assume that your company meets the criteria necessary to consider buying a building and must now figure out how to finance it. There are several ways to finance the purchase of a location...conventional, private party, seller financing or SBA financing. This post will discuss SBA financing in great detail as this form of financing is used by a large percentage of buyers who purchase commercial real estate in Southern California. I have enlisted the help of my friend and colleague, Mark Rozelle of Rozelle Financial to assist me in the explanation. You can contact Mark directly, by clicking on his name or company name. You will be redirected to Mark's email address and company website. Discussed will be a history of SBA financing, types of SBA financing, eligibility requirements, business qualifications for SBA financing, and the process of obtaining SBA financing for the purchase of a location.

History of SBA Financing: Mark explained that small businesses have been given a huge boost by the federal government through the Small Business Administration’s SBA loan programs.  These loans are almost always the best choice for a business owner when he/she wants to buy a commercial building, buy another business or capitalize the business with long term working capital.  In the most recent government fiscal year over $30 billion in SBA loans were approved.  These loans were split almost equally between the two SBA loan programs known by their government code section:  504 and 7(a). SBA loans are designed to help businesses be more successful.  By requiring smaller down payments to purchase real estate, they leave more cash to be invested into a business.  By offering lower interest rates, they help a company’s cash flow.  By financing business acquisitions when banks shy away, they keep small businesses active and growing. By providing permanent working capital they help businesses keep up with growth opportunities. The program is very efficient and tightly regulated to make sure that every tax payer dollar used by the program goes to help a company that needs it.

Types of SBA Financing: Mark identified the SBA as the only source of commercial real estate loans that require as little as 10% down.  Non-SBA loans usually require 25% down. When buying real estate, borrowers can also finance the tenant improvements and renovation of the building at up to 90% of the appraised value. The most important requirement to keep in mind is that the buyer’s business must occupy 51% of the building. Special purpose properties can only be financed to 85%.

Most real estate buyers prefer the SBA 504 loan program. This program provides for very low and long term fixed rates.  In this program a bank provides a 50% loan in first position and the SBA provides a direct loan in second position for 40% through a non-profit agency called a CDC.  The SBA loan is a 20 year fixed rate loan.  Bonds are sold every month to fund these loans, and the price on those bonds determines the rate.  Recently rates have been below 4.5%. The first TD loan differs in terms from one bank to another with the best rates generally tracking slightly above the SBA. The SBA has a prepayment penalty that declines over the first ten years, and bank loans often have penalties for the first five years or longer.

Alternatively, the SBA 7(a) program can be used to purchase real estate. With this program a bank provides a 90% loan and the SBA gives the bank insurance against a default.  These loans are generally adjustable, but a few banks offer fixed rate 7(a) loans. The loan fees are quite a bit higher and a lien may be required on your residence or other property. A prepay penalty that disappears after three years may make these loans the best choice for buyers anticipating a short term hold.

SBA 7(a) loans can be used to refinance certain real estate loans and other business debts.  Some rules apply to make sure the limited SBA funds are not used up on refinances. The loans being refinanced must have unreasonable terms, such as a balloon due soon or extremely high interest rates. 

Eligibility Requirements: According to Mark the SBA has a large rulebook that defines which companies can borrower through the SBA program.  These rules make sure that companies are not too large, too speculative, too passive or morally questionable.  This rulebook is available on line. You may access the rulebook by clicking here.  Since it is a PDF document, you can do key word searches for topics of interest.

Most businesses are eligible, but here is a list of some of the businesses that cannot borrow through the SBA:  non-profits, lenders, life insurance companies, foreign businesses, religious institutions, political institutions, businesses that exclude individuals and highly speculative businesses.  Many franchises are eligible, but some are not. Most individuals are eligible, but the following are not:  those who have neither US citizenship nor permanent residency status, those with liquid resources that are too great (generally more than the cost of the building for real estate loans), those who have defaulted on government loans previously and those with certain criminal convictions.  Mark can speak confidentially with you about your situation and advise about your personal eligibility.

Business Qualifications for SBA Financing: Mark continued by stating that businesses must be small to qualify.  There are two different standards for this determination.  For 504 loans businesses must have a net worth below $15 million and a two-year average after tax profit of under $5,000,000.  Some exceptions apply to these levels.  For 7(a) loans and as an alternative measure for 504 loans, the government has established a separate definition of small for each type of business based on either the number of employees or gross revenues.  In general, companies exceed the definition of small when they have a dominant market share in their industry.  The government doesn’t want to promote monopolies.  Very few businesses that seek SBA loans exceed the size standards. You can contact Mark to discuss your situation and confirm your company’s eligibility.

The Process: Mark cautioned that SBA real estate loans generally require a 45 to 60 day escrow, but if tenant improvements are extensive, more time may be needed.  These loans can also be used to build a new building, in which case the escrow cannot close till the construction drawings are complete and approved. There are several approvals and third party reports such as environmental and appraisal must be completed prior to funding.

Please visit the Rozelle Financial website for additional information or to apply for an SBA loan. You can also reach Mark by phone at 714.710.9400 or email mark@rozellefinancial.com.