In 2003, when California was in a world of hurt with worker's comp rates, employers leaving the state, driver's licenses for illegals (which all lead to Governor Gray Davis being terminated by the Terminator), we saw a huge amount of sale/leaseback activity from national corporate occupants.
Aquatics-Lasco Bathware, Akzo Nobel, Johnson Controls, Smurfit Stone, Parker Hannifin, Illinois Tool Works, Limbach...and many others sold manufacturing locations in Southern California and leased them back from the owners. Why, you may be wondering? Provide me your forbearance, while we hear from our sponsor, and I will explain my views...
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. I have been involved with many of the deals listed above which should qualify me as an expert of sorts...if I can only remember...
The two main reasons in 2003-2005 that many national (multi location) companies sold their locations and leased back, were real estate values and the business climate in Southern California. By selling the locations when the market was at its value peak and leasing back for a three to five year time frame, the companies maxed the real estate equity and could decide at the lease expiration whether to stay in California or consolidate into another location. Some stayed, but many left.
In my opinion, another perfect storm is approaching that could portend another round of sale/leasebacks...this time from closely held owners of real estate.
So, what are the reasons that a company should consider a sale/leaseback?
Values: Commercial real estate values have eclipsed all time highs in Southern California and there is a real imbalance between available properties and demand for available properties...AKA an owner's market.
Equity is needed for business expansion: When a bank won't loan money to an expanding business and there is equity in the company's real estate, a sale and lease back can provide much needed expansion capital...at today's capitalization rate...and avoid moving the company out of the location.
An acquisition: I was just asked to prepare a broker opinion of value for a company that acquired another. Along with the business purchase was the real estate that housed the operation. The company is not in the real estate business and leases their other locations. A sale/leaseback would allow the company to sell the real estate, take the proceeds and defray the acquisition cost and leave the operating unit in tact in the real estate with a lease.
A business transition within five years: If a business and location owner foresees a sale of the business within the next five years, now could be a great time to dispose of the real estate (while values are high) and lease back. The business sale (in five years) then would not be encumbered by the location. Certainly, if the new owner of the business wants to remain in the location, a lease with the new building owner can be affected.
A flight to quality: I worked with a national company a few years ago that sold and leased back for five years. Their belief was that values had peaked and their desire was for a more upscale location within five years. The structure allowed the company to achieve its goals. By the way, the company couldn't have planned the timing ANY better...a sale in 2005 (high for sales) and a new lease in 2010 (low for leases)...BINGO!
Friday, September 12, 2014
Friday, June 27, 2014
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?
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.
Saturday, January 18, 2014
Five #CRE secrets...your broker won't tell you
The reason this subject is painful is because I LOVE our industry...most everything about it...the people, the pace, the financial rewards, the freedom and flexibility...and most of all...helping business owners achieve their dreams with commercial real estate.
However, I have witnessed...as we all have... some practices that are scary and self serving which I will discuss below.
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. I have dealt with hundreds of CRE practioners, trained new associates, and operated within the industry for thirty years...there is some expertise bubbling below the surface that I want to un-cork.
In a Letterman-tonian format...here goes!
I believe you could avoid a move if you did a few things differently: We are paid to move companies and fill spaces or through companies relocating into those spaces. I wrote about this last week...moving sucks...it is expensive, disruptive and rarely achieves the efficiency that is sought. Do you and your client a favor...discuss ways that a move can be AVOIDED...first...before striking out to find a new location.
I don't believe that buying a building is in your company's best interest: $$$ Dollar signs cloud our judgement here! We make so much more selling vs leasing. If someone tells us that they want to buy...very few of us will challenge that desire...even if we know that buying might be counter productive.
I have not fully researched a building before we tour: This drives me CRAZY! So many in our industry will not preview a location before touring...maybe because of the above?...you got me, they will not discuss the owner's motivation with the listing broker, will not check on zoning, etc. An inordinate amount of time is wasted! Hint: Don't take a client through a building that you have not previewed...you will save yourself a lot of agony and improve your professionalism.
I have made touring your property as difficult as possible: Vacant buildings used to be sooo easy to tour...we all had a lock box key that fit the standard lock box and our industry used the lox boxes universally. If you could not reach the listing broker, you could simply drive by the building...if it was vacant, the likelihood was high that a lock box was on the front door...bitchin! You could preview, take your client through...all very painlessly. The world has changed! We now must call for touring instructions...which vary by broker. Many listing brokers insist upon meeting us at the building to preview and to tour...a royal pain in the ass! NET, NET cooperation is discouraged. Hint: Candidly, the opposite approach should be taken...MAKE IT EASY!...your owners will benefit!
Your property is dramatically over priced: Some CRE brokers will inflate the asking price of a listing! Shock..the horror, the humanities! This practice probably bugs me the most...I get that we want to achieve the most $$$ for our owners...but please...is that 1960s vintage, low clear, under powered piece of junk worth more than a class A, beautifully appointed, well located alternative...c'mon.
Hint: Level with your owner. Explain that his expectations are out of line with the market and that a higher than reasonable asking price will actually deter any interest and cause the property to sit...maybe for months.
OK...rant rage over. You get the idea. Please do us all a favor... don't be that guy...
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