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!