Friday, May 2, 2014

Unintended consequences of #CRE deals...AKA I didn't think about that!

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You wake up in the morning and trip on your daughter's ballet shoes that you left in the hallway the night before....because you left them there vs. waking her and putting them in her closet.

You have a few too many adult beverages and forget where you parked...a good thing! You must take a cab home.

You renege on an invitation from friends...feigning illness...and someone tags you on Facebook having dinner with your wife...and you obviously are feeling fine. Your friends see the post.

All of the above are unintended consequences of actions that we take...some good, some not so good, some DEVASTING! So exactly what does this have to do with commercial real estate? Let me attempt to explain.

As a disclaimer, I provide Location Advice to owners and occupants of industrial buildings in southern California...AKA, I lease and sell commercial real estate for a living and have since 1984...which makes me some sort of an expert...if I can only remember!

I have encountered several situations recently of the unintended consequences of an action taken by an owner or an occupant...which now cause the inability of the owner to lease or sell his building OR an occupant to find suitable space.

A few of the choice ones:

An owner leases a space to a national company...and then agrees to an ominous lease clause which precludes the owner from leasing additional space in the building to certain uses...OUCH!

An occupant signs a ten year lease in the peak...I mean they rang the bell after the lease was done...and now is paying 150% of the going market rents...and he has four more years left until he can move or renegotiate...PAINFUL!

An owner completes a five year lease at below market rents and realizes he must refinance his property during the "down" time...HMMM...

An occupant buys a building and his business outgrows the space two years later...UNBELIEVABLE!

So now what?

Before agreeing to a clause that places limitations on adjacent uses, carefully consider the possibility that the adjacent space may never be leased as the universe of potential occupants has been reduced by the limitation. Is the company's (with the exclusion rights) tenancy that critical?

Wow! This one smacks of someone looking out for his fee and not the best interest of the occupant. If you are not looking forward...and advising accordingly, you are seriously setting up you client for some painful years of overpaying! 

Before ANY lease is executed, consider the next five years, the maturity of any existing financing and the termination of the lease with respect to that maturity. This situation could have potentially been avoided by a different rent structure of free rent vs. a cheap effective deal.

A true dereliction of duty here! See "looking out for a fee". OK, maybe this circumstance was unforeseen...but if you sell an occupant a building that is in a rapid growth curve, you have sadly mis-represented him. Please understand the buying motivation and ask the appropriate questions...not just accept that the occupant "wants to buy".

Consider, very carefully, the consequences...intended and unintended...of your actions. Your daughter's ballet teacher will thank you!

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