Friday, April 11, 2014

Contrarian (?) choices I've made in my #CRE life...and before!

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So from that title, you may be wondering, what the heck does that have to do with Location Advice or commercial real estate? Well, I must have piqued your interest somewhat or you wouldn't be reading this far.

Actually, I believe that the decisions or choices we make in our lives have a great deal to do with commercial real estate...indulge me...and let me see if I can explain.

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...which makes me some sort of an expert...if I can only remember why...

Decisions are made...either from circumstances or active choices...and shape our personalities, our health, our mental well being, our social lives, and personal, and ultimately our success.

I recently made two decisions...the outcomes as yet unproven...but made with the expectation that they will be good, life changing, choices. I'll discuss these in a bit.

One of the decisions prompted Howard Kline to feature me on his CREradio program on April 18th...let's hope it will be a Good Friday! You can tune in and listen if you wish. My conversation with Howard, caused me to reflect upon other decisions that I have made through the years.

So in no particular order, here are the best decisions/choices I have made in my #CRE life...and before.

Choosing to follow Jesus: As my mom received a cancer diagnosis in 1970...before people survived a cancer diagnosis...I dedicated my life to Jesus Christ. I am pleased to say that mom just celebrated her 81st birthday.

No alcohol consumption: I often tell friends that I consumed enough alcohol in my first thirty years of life to last me for a lifetime. This was a VERY tough choice because commercial real estate is VERY social...dinners, lunches (I still remember when you drank a bunch at lunch...think Mad Men), golf tournaments. I drank the way I do most other things...full bore. I realized (fortunately before anything devastating occurred) that if I kept consuming the way I was going, I'd end up pickled, dead, divorced or all of the above!

Moving to California: My friends and family in Arkansas truly believed that I had lost my mind. Why move to "granola land"? (the land of fruits...their word not mine..., flakes, and nuts). what they failed to appreciate was the entrepreneuarial environment, the "can do" attitude, and the WEATHER!

Marrying my soulmate: My bride of 34 years and I fell in love in the spring of our senior year at the University of Arkansas...the worst possible our college days were numbered, I had a job in California, and marriage was in neither of our plans...we were JUST too young!...or so we thought. I boarded the plane to California without a commitment and realized as soon as I touched down that I better remedy that quickly OR the future would be much darker. I am happy Carla said yes!

Becoming debt free: After nearly going broke in the first economic downturn of my commercial real estate career, we realized that folks in our profession better not promise future income and also better have a lot of "meat stored" for the winter. This approach allowed us to create the stability and longevity needed to succeed as a #CRE pro.

Becoming a #CRE broker: The plan was for me to take over the family biz...soft drink bottling. I therefore geared my college studies and first job with that goal in mind...except I got married and fell in love with California...not sure my Dad ever forgave me:). I soon learned that travel and moving are the two bookends of upward mobility in the consumer good's field...of which neither had an appeal...oh, and I learned that I am my best boss. I had to find a profession that would be local, self managed, and with a financial incentive...commercial real estate...VOILA! But, man was it scary to turn in that company car, company credit card, steady...err...ANY salary, benefits...ALL for a CHANCE to sell an industrial building.

Choosing Lee and Associates: When I started with Lee in 1984, we had 2 offices and 35 associates. I was associate number 15 in the Orange office. We now have 50 offices and over 800 associates. I wrote about the unique structure that makes our company special. However, what convinced me to join the company was the way it felt...just felt like a great place to start a commercial real estate career. Thirty years later, the feeling hasn't changed...except I am now one of the "old" dudes!

Actively using Social Media: I started using social media because our three kids did. They were all three away at school and it was a good way to communicate. We all know millenials communicate differently. I soon realized that virtually no one in the CRE trade used the media effectively sans Coy Davidson and Duke Long. I am not sure I do it as effectively as they, but I surely wouldn't trade the relationships I've made through social media.

The two decisions I've made recently that are yet unproven:
Consuming a plant based processed food, no meat: Just seemed like the correct approach for Carla and me. Not on any soap boxes...or milk cartons...just a lifestyle choice by a couple of fifty somethings to insure that we'll be able to keep up with our grand-kids...when we have some!

Hiring a marketing associate: Feels right. Probably overdue. Risky? Please tune in to CREradio on Friday April 18th and give me your take.

Friday, April 4, 2014

#CRE lease termination...DON'T DO THIS!

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I experienced a situation yesterday that I believe is worth sharing.

The gross mishandling of an issue (not by me fortunately) nearly caused a fairly sizable...and for the owner to crater.

Luckily, we were able to salvage the transaction...not because we were concerned about getting paid...but because if this deal didn't happen, the owner's ability to refinance a maturing loan would have been greatly diminished...errr, WOODENA  HAPPENED!

The issue revolved around an existing lease term, a Fortune 500 tenant that had vacated the space and was continuing to pay rent on the vacant space, and a new tenant that we procured that needed the space ASAP...BUYOUT central!

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 believe that qualifies me as some sort of an expert...if I can remember why...

OK, the quick down and dirty...
  • January 2014, approximately 15 months remained on a lease term with a Fortune 500 company
  • The tenant approached the property manager regarding a buyout of the remaining term of lease
  • The tenant offered $.60 on the dollar
  • Property manager asked the owner and us what to do
  • We advised the owner to NOT take the buyout because we were uncertain what a new deal would cost...tenant improvements, free rent, down time, commissions...etc. We had a Fortune 500 company on the hook that we believed wouldn't default so the income stream was why not use the time to market the space and if someone came along we could discuss a buyout...a WIN WIN for the owner.
  • We proceeded down that path 
Flash forward...
  • We procured a tenant (through "world class" brokerage, BTW)
  • We commenced negotiations
  • We reached agreement subject to a successful termination of the Fortune 500 tenant's lease
  • We computed (to the best of our ability) the cost of the new deal with an estimate of construction costs for the tenant improvements, free rent, commissions, and transition time
  • We arrived at a buyout amount range that would allow the vacating Fortune 500 tenant to terminate the remaining term of the lease, and the owner to use the buyout money to fund the costs of the new deal 
Perfect, right...uh, not so fast.

What happened next should curl the hair (if you still have any) of any owner, broker, or competent property manager.

Without prompting (quite the contrary, we asked them to do the opposite), the property manager contacted the Fortune 500 tenant...told them we had secured a new tenant that wanted their space in 30 days, gave the Fortune 500 tenant notice that we needed the space by the end of April...Oh, and by the way...can we please discuss the buyout of the remaining lease term?

ARE YOU EFFING (sorry Duke) KIDDING ME? The earth movement you felt a week ago was not an earthquake but was our owner reacting...not pretty! The owner was livid but his "lividity" was about to be ramped up to DEFCON 5 the next day guessed it...when the Fortune 500 tenant's buyout was discussed, the Fortune 500 basically said to pound sand! Our negotiating leverage was lost. The deal now was in serious jeopardy because the Fortune 500 tenant threatened to simply "ride out" the term and not consider an early termination and buyout.

After some colorful language, a serious scolding by the owner (of the property manager...not us), and the owner in essence telling the property manager that the issue better get resolved or...

I am pleased to report that we convinced the Fortune 500 company (we got lucky, frankly) to terminate early, and provide a reasonable buyout which will allow the owner (albeit not as effectively as anticipated) to complete the deal and refinance his property.

So what can we take away if you rep an owner in a similar situation?
  • Compute the dollar amount of the remaining lease term
  • Liberally calculate the cost of a new deal (I realize you'll make assumptions)
  • The cost of a new deal, with some wiggle room, forms the amount of the buyout
  • Decipher the reliability of the remaining income stream (remember, the tenant has vacated)
  • Advise accordingly...if the income is stable (as in our deal), don't buyout.
  • Manage the buyout process yourself...don't rely on the property manager!