Friday, July 25, 2014

Reasons that you SHOULDN'T own #CRE

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I received a call today from an old client of my advancing years, many of my clients are "old" clients. The question that he posed was "should I buy the building that I occupy?" My response to him was simple...I don't believe so.

You may be scratching your head about now...this guy sells buildings for a living...why would he recommend that someone NOT buy a building?

Indulge me for a moment while we hear from our sponsors...

I provide Location Advice to owners and to occupants of industrial buildings in Southern California...AKA, I sell and lease commercial real estate for a living and have since 1984. I have sold and leased hundreds of thousands of square feet over the well as, talked a few folks out of buying or leasing. This qualifies me as some sort of an expert...if I can only remember why...

OK, so back to buying a building.

The reasons, that I used to form my recommendation not to buy today, were:

His age: My client is 58. Certainly not ready for the old folks home but closer to retirement than not. Unless he were to pay cash for the building, the loan would not be fully retired until well after he is.

The time in the market cycle: We are at the top. Unless the hold was for another twenty years, I doubt the building will be worth more than it is today.

The physical amenities of the building: Old, tired, and needing some stuff (similar to his broker)...roof, HVAC, parking lot, etc. Under his lease arrangement, and superior brokerage advice :), the current owner is responsible for all of these expenses.

His exit strategy for the business. He plans to sell the company that occupies the leased building within five years. When asked if he would want to own the building vacant...his answer was no.

As I thought about the reasons that this client should avoid purchasing and opt for leasing, other reasons (for not buying) popped into my greying head:

If you are a publicly traded company: Depreciation becomes an issue as it reduces earnings...bad for share prices.

If you expect to outgrow your location within 3-5 years: You will then face a liquidity event...either leasing or selling the building that you just purchased...and outgrew.

If the location that you occupy is a commodity: Meaning plentiful in the bulk distribution space. The more of this space in the market, the cheaper it will be to lease.

If the company (your company) that occupies the building you're buying is less than three years old: Chances are the company has not established a profit pattern and may find it difficult to obtain financing.

If your company has a pressing need for operating capital: The last place your want your money if you need it for hiring, equipment, and growing the business in in an illiquid asset such as a building.

If the debt service on the building you're considering buying exceeds NNN market rents by 20%: The tax benefits will never make this purchase worthwhile...and you can't count on appreciation to bail you out...think 2008.

I really believe that my client appreciated the candor...after all, that is how he became an old client.

Friday, July 18, 2014

Help your #CRE building escape from the Island of Misfit Toys

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Last week I wrote about the Island of Misfit Toys and drew the analogy of a misfit commercial real estate building...under the title Does your #CRE building belong on the Island of Misfit Toys?

If you missed the post (shame on you!) and want to read it you can click here. Today I want to provide some advice on escaping from the Island...but first the obligatories...

I provide Location Advice to owners and occupants of industrial buildings...AKA I sell and lease commercial real estate for a living and have since 1984. I have planned many escape routes for misfits during my time. This qualifies me as some sort of an expert...If I can ONLY remember why...

As discussed, the misfits generally fall into three categories...although some misfits are not limited to just one of the three. The categories are function, pricing, and transaction structure. I will provide real world examples of some escapes that I have engineered.

The issue: We represented the owners of a 35,000 square foot portion of a larger building. The space had 14-18' clearance (low for the market), no truck hi loading (virtually all occupants this size require this), no outside storage yard and VERY obsolete interior improvements. The owner was unwilling to invest any dollars into refurbishment, but fortunately owned the building free and clear (could lease the space at an aggressive lease rate). Because the space was part of a larger building (and business park), the space couldn't be separately sold or optioned...therefore we were limited to finding a tenant.
The escape: After marketing the space for nine months...with no tenant...the owner was prepared to fire us. The owner did, as a parting gesture, mention that he was willing to make an aggressive deal...but wouldn't define aggressive. We believed that our biggest issue was the lack of any outside storage. So here is what we did. We assumed that a typical 25,000 square foot space (with an outside yard) would lease for $12,000 per month. We then marketed our 35,000 space (without an outside yard) as a 25,000 square foot space with a 10,000 indoor storage yard... and told all of the cooperating brokers that inquired that we believed the deal was around $12,000 per month. VOILA...leased to a diversified well company that stored large lengths of pipe...and needed 25,000 square feet with outside storage. The company had looked at our space...ruled it out...but came back when we re-calibrated.

The issue: We were marketing a 25,000 square foot building with too much office, low warehouse clearance, and a tough geographic location for $120 per square foot (the best buildings in the market were selling for $100 per square foot). The owner owned the building free and clear and would consider financing the building for the right buyer.
The escape: After refusing to sell the building to three separate buyers (with market financing) at $90 per square foot, we convinced the owner to pretend he had sold the building for $90 per square foot and carried the paper at 6%. He was fine with the amount of money he received from the loan payments but was hung up on the price. We then convinced the owner to sell the building at $120 per square foot and finance the purchase...not at 6% but at an extrapolated monthly number from the previous scenario ($90 at 6%). The owner and occupant were delighted!

Transaction structure:
The issue: We represented an occupant that was selling his existing location and purchasing a new location...great deal all around...BUT, they wanted to defer their gain from their existing location into the new location. Their occupancy of the existing location was preventing the sale of the existing location. They also couldn't move out because of the deferral desire...hmmm?
The escape: We located an owner that was willing to lease our client their building with an option to buy. This deal structure allowed our client to move out of their existing location (making it more marketable) and exercise the option to buy the new location once the existing location was sold. Win, Win, Win!

There is an escape for every misfit if you are patient, creative, and have control of your clients. All of the above were even done without an elf that wants to be a dentist!

Friday, July 11, 2014

Does your #CRE building belong on the Island of Misfit Toys?

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One of my favorite movies, around Christmas, growing up in Arkansas was Rudolph the Red Nosed Reindeer. I'm not sure why...other than SW Arkansas rarely got any snow, I was a rather gullible kid, and I assumed that ALL reindeer could fly and talk...go figure. One of the most memorable scenes in the movie for me was the Island of the Misfit Toys.

As I pondered our industrial building vacancy in Southern California recently, the comparison dawned on me. Our vacancy is VERY similar to the Island of the Misfit Toys. Granted we don't have Charlie in the box, an elf that wants to be a dentist or a red nosed reindeer...BUT we do have some odd balls vacancies. Indulge me a moment and let me expand my thought process.

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 experienced many, many, screwball buildings...have even leased and sold a few. This makes me some sort of an expert...if I can only remember why...

So back to the island. Our industrial vacancy is at historic lows. Currently 97 of every 100 buildings are occupied. WOW! So of the remaining 3 misfits that aren't...what's up?

In my opinion the misfits fall into three categories...function, pricing, and transaction structure.

Function: A building with 22' warehouse clearance in a 30' market, a building with a 90' truck turning radius, a building over 20,000 square feet without dock hi loading, a building with 50% office build-out and only enough parking to accommodate 1/2 of the employees, a building without an outside yard or staging area, a building with inadequate power for a manufacturing occupant, a building with an inadequate sprinkler system for high piled storage.

Pricing: This one is easy. A functionally obsolete building that is attempting to achieve functional building pricing OR new state of the art buildings with cutting edge pricing.

Transaction Structure: All of the activity in your size range are sale deals and you only want to lease your building OR you can't afford to meet the market because of your carrying costs OR the ownership can't agree on a direction or can't move quickly enough to capture a deal OR an occupant who has vacated the space, is trying to sublease the space but doesn't have any money for tenant improvements, fees, or other concessions.

 If you ever find yourself on the island with an owner of a misfit or are touring an occupant through the island, take solace in the movie points out, there is ALWAYS a home for every misfit toy...regardless of the just need to be patient. A red nosed reindeer is bound to come along!

Thursday, July 3, 2014

Declare your #CRE Independence!

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Imagine for a moment a national platform for commercial real estate practitioners where profiles could be shared, market data exchanged, topical issues discussed, transaction needs advertised, closed deals celebrated, successes trumpeted...all for the sum total of FREE and accessed from anywhere, anytime, and from any, desk top, or hybrid. Sound too good to be true? Well, not only is it true but it is GREAT!

Say hello to theBrokerList...Linda Day Harrison's labor of love.

I first encountered theBrokerList via Twitter last summer. Linda was kindly re-tweeting my stuff and it became apparent that I needed to further investigate this thing called theBrokerList.

What I found was amazing...the profiles, the market data, the timely blog posts with topical discussions, the open forum to encourage brokers to make deals...and oh yes, with the kindest helpful attitude of anyone in the #CRE space (sorry for the pun)!

The one question that I'm asked frequently...other than do you make any money with that social media "how do I get started with social media?".

Simple...sign up for theBrokerList. If you become an active contributor, don't be surprised if Linda pays you a visit when traveling to a city near yours. Yep, it happened to me! You can read about it here.

Linda has become a friend, a confidant, a strategic partner, and a wonderful resource for creating, curating, and distributing commercial real estate content. Thanks, Friend!

The image to the left was taken by Linda's intern, Dana Peterlin. This was a "tweet up" arranged by Linda and included Howard Kline, CRE Radio and Chris Barbeiri of Building Blocks CRE. We even made a Tuesday Traffic Tip about our little soire.

We all make New Year's Resolutions. Make a half year resolution this year (now) and sign up for theBrokerList! Did I mention that it is FREE?