Friday, August 30, 2013

#CRE glossary, commonly used commercial real estate terms

I provide Location Advice to owners and occupants of industrial buildings in Southern California. Commercial real estate language is second nature to practitioners but may be a bit foreign to occupants negotiating their first lease or purchase. This post is designed to provide a "one stop glossary" for those terms most commonly used in "the trade". These definitions are in layman's terms are are not meant to be "legal definitions". Think of this post as a Rosetta Stone of CRE.
NNN: Also called "Triple Net" refers to the way property taxes, property insurance, and maintenance of the foundation roof and walls are paid by the tenant. Generally, these sums are paid as due and are "net" of the base addition to...but in some cases the owner will collect a monthly estimate of the annual expenses in addition to the base rent.
Modified Net: Similar to NNN but one or two of the "Ns" are included in the base rent.
Gross: Property taxes, property insurance, and maintenance of the foundation, roof and walls, and other maintenance of the property are included in the base rent. Gross lease rates are generally higher than NNN lease rates.
Industrial Gross: Similar to "Gross" but the tenant is generally responsible for some property maintenance in addition to the base rent. These leases include a "base year".
Modified Gross: MG, Property taxes, maintenance of the foundation, roof and walls, property insurance, or other maintenance of the property are paid in addition to the base rent.
Full Service Gross: FSG, Generally an "office" term and refers to the Gross expenses plus janitorial and utilities included in the base year. These leases have an "expense stop" and a "base year" for expenses.
Expense Stop: Used in a FSG lease. The expenses of the base year (first full year of the lease) are calculated and the tenant pays increases above this "stop".
Base year: Used in FSG, MG, and Industrial Gross leases. The first full year of the lease. The tenant pays increases in expenses over the base year.
Lessor: owner
Lessee: Tenant. Entity that leases or rents the location
SubLessor: Tenant
SubLessee: SubTenant
Master Lessor: Property owner
CAM: Common Area Maintenance and is generally in addition to the base rent and commonly found in MG, or Industrial Gross leases
TIs: Tenant Improvements
Bumps: Increases in the base rent that occur throughout the term of a lease
COLA: COst of Living Adjustment
ROFR: Right of First Refusal...a tenant's right to buy the property in the event an acceptable offer (from another party) is received by the owner.
ROFO: Right of First Offer...the tenant's right to submit an offer in the event an owner decides to sell the property.
Option to Renew: A tenant's right to extend the term of the lease at pre-negotiated points.
Option to Purchase: A tenant's right to purchase the property at pre-negotiated points.
LOI: Letter of Intent...expresses, in a non-binding fashion, the occupant's desire to lease or purchase the property.
Due Diligence: A period of time negotiated in a purchase and sale agreement for the purpose of studying the property to determine its suitability for financing, occupancy, title, etc.
Loan contingency: A period of time used for securing financing.
Prelim: A Preliminary Title Report which outlines matters of, ownership, recorded easements, liens, etc.
Free Rent: A period of a lease that is "rent free".
Abated Rent: Similar to Free Rent but in the event of tenant default, an owner can sue for repayment of abated rent.
NOI: Net Operating Income...the rent on the property less any expenses stated on a annualized basis.
Cap Rate: The NOI divided by the purchase price.
Congratulations! You now can "speak commercial real estate".


Friday, August 23, 2013

A #CRE career? Things to consider


I provide Location Advice to owners and occupants of industrial buildings in Southern California...AKA...I am a commercial real estate broker and have been since 1984...all with the same firm, Lee and Associates and all in the same area of specialty and geography! I believe that qualifies me as some sort of an expert on the industry...and I have the grey hair to prove it!
Recently a Twitter colleague of mine, Barbi Reuter tweeted the following question, "Who has sites to recommend to educate a recent college grad on the #CRE brokerage biz to see if it's a good fit?"
As I digitally fumbled around trying to help Barbi, I realized that the question was blog worthy.
Certainly Duke Long's popular post is available to remind us how old school guys (like me) attack the business. There are Quora answers to specific questions that folks have posed about a career in CRE. But, nothing I found would qualify as the advice you would give your kid sister, nephew, or spawn if asked about what you do, why you do it and what advice would you give them if they wanted to get started. Ready or not...that missing advice, Barbi. I will frame the advice into five areas of conversation...What, why, common traits, pitfalls and considerations...something extra.
What we do: Quite simply, we benefit financially (often quite handsomely) from change. That change occurs when an occupant moves from point A to point B and leases or purchases a location. We can also benefit from a static change in the terms of a lease if the occupant stays in their present location and renews a lease. 
Why we do it: To have the freedom to make as much money as we want without territory barriers, bosses, or constraints upon who we prospect as clients. Many of us enjoy the entrepreneurial spirit of the business and the ability to help and advise entrepreneurs.
Common traits: I have found that most successful CRE brokers are self motivated, disciplined, thrive on competition, and connect well with people...notice outgoing wasn't included? I have witnessed several very successful yet introverted CRE brokers who have the other traits and thrive.
Pitfalls: No salary, no benefits (medical, retirement, vacation, etc.) No safety net (you fail...look in the mirror), you "eat what you kill", you are the owner, CFO, COO, marketing director, chief engineer, janitor, etc...of your practice. You better be good at ALL aspects of the business OR work in a team of people that are.
Considerations: Carefully consider four things...a specialty (retail, office, industrial, multi family, land, investments on the owner or occupant side or both), a geography (are there opportunities to represent occupants, owners, developers, investors, etc. The more of these, the better), a mentor (who will teach you the business and how well do you relate), and your personal financial staying power (plan on not making ANY money for eighteen months). I specifically didn't mention a company because "that depends". If you are 30 years old, formerly employed in site selection for Walmart and want to do retail tenant rep work in Austin, Texas the answer is different than a recent college grad looking for her first job as an office owner and occupant rep in north Orange County, California.
Something extra: What would I have done differently? I would have focused early in my career on more owner relationships. Owners hire you to find occupants through "listings", listings create a market presence, a market presence creates a demand and an expertise, the expertise grows with time. With listings you have control of one side of the transaction and can use that control to seek occupant requirements.
Easy next step: My time with Procter and Gamble taught me to always provide an "easy next step" here goes. Select a social media channel of your liking. Do a quick search of #CRE in twitter, "Commercial Real Estate" in LinkedIn, YouTube or Google and "LISTEN". Learn the lingo and become familiar with the conversations taking place. You will be well on your way!
So there you have it! They are all opinions, but they are all mine!

Friday, August 16, 2013

All #CRE industrial buildings are created equal...aren't they?

I provide Location Advice to owners and occupants of industrial buildings in Southern California. Today's post deals with the features that define the different types of industrial buildings. If you are a CRE practitioner, no need to read could have written this post. However, if you are an occupant or a service provider, continue reading. There are three main categories of industrial buildings...manufacturing, distribution warehouses, and flex. So how do I know which category appeals to the genre of industrial occupant? Continue reading and I will draw the distinctions.

Manufacturing Buildings: VIDEO Manufacturing buildings are locations...generally constructed of concrete, concrete block or metal...where products are made, stored and shipped. The raw materials of the manufacturing process are generally stored on site (many times in an outside storage yard so as to not poach inside floor space) as well  as the machinery that makes the products and the employees that operate the machinery and support the manufacturing process. These buildings can be "freestanding" or parts of a larger building but typically have greater power feeds into the building, 10-30% of the total square footage in office space, ground level loading doors vs truck high loading doors (some may have both), fenced outside storage areas, and a warehouse clearance of 14-24' under beam in the warehouse/plant area. Because these locations have more office space typically, they also have more parking spaces...a minimum of 2 parking spaces per 1000 square feet of building. Manufacturers can generally operate in a lower cube building because their plant is consumed with machinery and raw materials vs finished goods waiting to be shipped. Most products are made and shipped within as not to inventory a large amount of finished goods. A distribution warehouse as described below will typically not fit a manufacturing requirement however some distributors may be able to occupy a manufacturing building especially if the building is equipped with ground level AND truck high loading.

More important...power, office space, outside yard storage space
Less important...loading, warehouse clear height

Distribution Warehouses: VIDEO Distribution warehouse buildings are locations...generally made of concrete (because of the wall height)...where products are staged, stored, and shipped. Generally no manufacturing or assembly is done on site. Consequently, fewer support staff and no raw materials are housed on site. Distribution warehouses require truck high loading, warehouse clearance of a minimum of 24' and truck turning radiuses of 130' or more. The ideal set up for a distribution warehouse is a rectangular building with "cross dock" loading so that the point from stored goods to loading doors is minimized. Because these buildings typically house fewer employees, the premium on office space and parking is lessened. These buildings generally have a parking ratio of 1 parking space per 1000 square foot of building space.

More important...loading, warehouse clear height, truck turning radius
Less space, parking, power, outside yard storage

Flex (or Flexible): VIDEO The personal computer boom of the early/mid-1980s gave birth to a new industry and consequently a new type of industrial building...the flex building...formerly referred to a Research and Development building. Since computer companies housed a large number of employees, the typical industrial building didn't contain enough office space or enough parking for additional office to be added. Developers of R and D buildings created the "mezzanine second story" which enabled a smaller lot to accommodate a larger building. The silicon valley in Northern California and the Irvine Spectrum in Irvine, California is populated with flex buildings. These buildings are locations...generally made of concrete and glass because they are modern, that house a high technology manufacturing or assembly function and a large employee, accounting, purchasing, sales, sales support, customer service, etc. Parking, power and office percentage and layout are the important features with these buildings. These buildings are generally parked with 3 or 4 spaces per 1000 square feet of building and in some cases can accommodate a use that requires 100% office. Less important are loading, clear height in the warehouse and outside yard storage.

More space, parking, power
Less important...outside yard storage, loading, warehouse clear height.

The world is built on exceptions. True with locations as well. You may have some of the characteristics of all of the above in your location and it functions just fine. The above are true in the "classic" definition of the building types.

Friday, August 9, 2013

"How to" develop profitable relationships with #CRE brokers

I provide Location Advice to owners and occupants of industrial buildings in Southern California.

I previously wrote about all of the economic activity that just one commercial real estate transaction can generate. You can refresh your recollection by clicking here. In heck of a lot of people are employed including, escrow, title, environmental engineers, architects, lenders, contractors, material handling, office furniture, IT, phone systems, moving and storage, security...the list is endless. Let's say that you are in one of these professions, you realize that CRE brokers can be a great referral source for you, and you are unsure how to approach us so that you can be a part of the "mother lode" of referrals. This post is designed to help you forge great relationships with CRE brokers. I will comment in four areas: Who we are, How we are paid, Why you should care, and some easy action items.

Who we are: CRE brokers...notice I said brokers...we are not Realtors (we are not typically a member of the National Association of Realtors)...that is generally a residential designation. Most of us bristle (inside) when we are referred to as Realtors. CRE brokers generally work under a broker's license for a national, regional, local or independent firm. The nationals include CBRE, Cushman and Wakefield, Jones Lang LaSalle, etc. Some of the more renowned regionals (even though some have a national platform) are Lee and Associates, Colliers, Newmark Grubb Frank, etc. The locals and independents vary by geography. Some of the good ones in SoCal are Voit, Daum, and Ashwill Associates. Most of the above are "full service"...meaning we as companies transact ALL types of commercial, industrial, retail, land, and investments. All of the above represent owner's AND occupants...not just occupants as some "tenant rep firms do. The most notable tenant rep firms are DTZ, Studley and Cresa which only represent occupants and take on no owner assignments. Depending on what trade or service you provide, you may benefit in concentrating your efforts on one or more of these companies, specialty, and locale.

How we are paid: No salaries here, ma'am. We are commissioned only, 1099 (most of us), independent contractors who only "eat what we kill". We are paid in one of three ways on the owner or occupant side of the transaction. A move that results in a sale, a move that results in a lease, or a lease renewal...that's it! Our fees are based on a percentage of the consideration (lease rate x square footage x term x % or sale price x %). These fees are generally shared equally by the owner rep's company and the occupant rep's company...and the net fee that flows to the individual practitioner varies by company. I have focused upon the "brokerage" revenue in this illustration with full disclosure that some firms have other revenue sources through property management, construction management, etc.

Why you should care: First, we enter the transaction at the owner or C-level where many service providers or trades deal with individuals far removed from the decision maker. Our referrals are to the boss. Second, we have tons of great data that we will share (once we get to know you) including available buildings, comps, etc. Third, owner's hire us to lease or sell buildings...we are at the leading edge of the transaction. Fourth, occupants hire us to find them buildings to lease or buy and move into. We are at EVERY stage of the transaction when our clients are asking us..."do you know a good_______?" Fifth, we know about other companies that are moving. If we have listings, the marketplace of companies moving around is available to us. Lastly, as my friend James Wilcox of Raymond Handling Solutions so eloquently opined...we are the arbiters of change. Remember, change must occur for us to get paid. We are watching, listening and if successful, arbitrating that change.

Easy next steps: Get to know us... through knowledge of our networks, social media, referrals by another service provider, attending our events, "fishing" where we "fish". Collaborate with us...Invite us to a meeting with one of your clients, introduce us, share our information (including this blog if you are so moved). Do something for us that we can't or won't do...ever offer to pass out fliers of one of our listings to your customers? Good way to do something we can't do. Finally, Learn what we look for and ask for. You can watch this short video if you are curious why companies relocate OR read the post which discusses reasons companies move.

We are real humans just like you. We can't wait to do business with you!

Friday, August 2, 2013

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" 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 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".